Aspectos monetarios y financieros

[lectorhinfluyente1984]

http://www.zerohedge.com/news/2015-06-07/thats-uncanny-102-years-later-wall-street-turned-out-just-man-predicted

[lectorhinfluyente1984]

http://www.project-syndicate.org/commentary/rethinking-inflation-targeting-price-stability-by-axel-weber-1-2015-06

ZURICH – Over the last two decades, inflation targeting has become the predominant monetary-policy framework. It has been essentially (though not explicitly) adopted by major central banks, including the US Federal Reserve, the European Central Bank, and the Swiss National Bank. But the 2008 global economic crisis, from which the world has yet to recover fully, has cast serious doubt on this approach.

The Bank for International Settlements has long argued that pure inflation targeting is not compatible with financial stability. It does not take into account the financial cycle, and thus produces excessively expansionary and asymmetric monetary policy. Moreover, a major argument in favor of inflation targeting – that it has contributed to a decline in inflation since the early 1990s – is questionable, at best. Disinflation actually began in the early 1980s – well before inflation targeting was invented – thanks to the concerted efforts of then-US Federal Reserve Board Chair Paul Volcker. And, from the 1990s on, globalization – in particular, China’s integration into the world economy – has probably been the main reason for the decline in global inflationary pressure.

A more recent indication that inflation targeting has not caused the disinflation seen since the 1990s is the unsuccessful effort by a growing number of central banks to reflate their economies. If central banks are unable to increase inflation, it stands to reason that they may not have been instrumental in reducing it.

The fact is that the original objective of central banks was not consumer-price stability; consumer-price indices did not even exist when most of them were founded. Central banks were established to provide war financing to governments. Later, their mission was expanded to include the role of lender of last resort. It was not until the excessive inflation of the 1970s that central banks discovered – or, in a sense, rediscovered – the desirability of keeping the value of money stable.

But how to measure the value of money? One approach centers on prices, with the consumer price index appearing to be the most obvious indicator. The problem is that the relationship between the money supply (which ultimately determines the value of money) and prices is an unstable one.
For starters, the lag time between changes in the money supply and price movements is long, variable, and unpredictable. Given this, targeting consumer prices in the next 2-3 years will not guarantee that the value of money remains stable in the long term.

Moreover, different methods of collecting consumer prices yield different results, depending on how housing costs are treated and the hedonic adjustment applied. In short, monetary policy has been shaped by an imprecise, small, and shrinking subset of prices that exhibits long and variable lags vis-à-vis changes in the money supply.

Unfortunately, monetary policymakers’ effort to operationalize the objective of ensuring that the value of money remains stable has taken on a life of its own. Today’s economics textbooks assume that a primary objective of central banks is to stabilize consumer prices, rather than the value of money.

Furthermore, economists now understand inflation as a rise in consumer prices, not as a decline in the value of money resulting from an excessive increase in the money supply. Making matters worse, central banks routinely deny responsibility for any prices other than consumer prices, ignoring that the value of money is reflected in all prices, including commodities, real estate, stocks, bonds, and, perhaps most important, exchange rates.

In short, while price stabilization through inflation targeting is a commendable objective, central banks’ narrow focus on consumer prices – within a relatively short time frame, no less – is inadequate to achieve it. This was highlighted by the surge in many countries’ housing prices in the run-up to the 2008 financial crisis, the steep decline in asset and commodity prices immediately after Lehman Brothers collapsed, the return to asset-price inflation since then, and recent large currency fluctuations. All are inconsistent with a stable value of money.

Central banks’ exclusive focus on consumer prices may even be counterproductive. By undermining the efficient allocation of capital and fostering mal-investment, CPI-focused monetary policy is distorting economic structures, blocking growth-enhancing creative destruction, creating moral hazard, and sowing the seeds for future instability in the value of money.

Within a complex and constantly evolving economy, a simplistic inflation-targeting framework will not stabilize the value of money. Only an equally complex and highly adaptable monetary-policy approach – one that emphasizes risk management and reliance on policymakers’ judgment, rather than a clear-cut formula – can do that. Such an approach would be less predictable and eliminate forward guidance, thereby discouraging excessive risk-taking and reducing moral hazard.

History hints at what a stability-oriented framework could look like. In the last quarter of the twentieth century, many central banks used intermediate targets, including monetary aggregates. Such targets could potentially be applied to credit, interest rates, exchange rates, asset and commodity prices, risk premiums, and/or intermediate-goods prices.

Short-term consumer-price stability does not guarantee economic, financial, or monetary stability. It is time for central banks to accept this fact and adopt a comprehensive, long-term monetary-policy approach – even if it means that, in the short term, consumer-price inflation deviates from what is currently understood as “price stability.” Temporary fluctuations in a narrow and imprecisely measured CPI are a small price to pay to secure the long-term stability of money.

"Hace diez años, Alemania era el enfermo de Europa"

[lectorhinfluyente1984]

http://www.zerohedge.com/news/2015-06-09/warren-buffet-economy-part-1-why-its-days-are-numbered

[lectorhinfluyente1984]

BABY PETROYUAN IS BORN

Two topics we’ve deemed critically important to a thorough understanding of both global finance and the shifting geopolitical landscape are the death of the petrodollar and the idea of yuan hegemony.

Last November, in “How The Petrodollar Quietly Died And No One Noticed,” we said the following about the slow motion demise of the system that has served to perpetuate decades of dollar dominance:

Two years ago, in hushed tones at first, then ever louder, the financial world began discussing that which shall never be discussed in polite company - the end of the system that according to many has framed and facilitated the US Dollar's reserve currency status: the Petrodollar, or the world in which oil export countries would recycle the dollars they received in exchange for their oil exports, by purchasing more USD-denominated assets, boosting the financial strength of the reserve currency, leading to even higher asset prices and even more USD-denominated purchases, and so forth, in a virtuous (especially if one held US-denominated assets and printed US currency) loop.

Falling crude prices served to accelerate the petrodollar’s demise and in 2014, OPEC nations drained liquidity from financial markets for the first time in nearly two decades:

By Goldman’s estimates, a new oil price “equilibrium” (i.e. a sustained downturn) could result in a net petrodollar drain of $24 billion per month on the way to nearly $900 billion in total by 2018. The implications, BofAML notes, are far reaching: "...the end of the Petrodollar recycling chain is said to impact everything from Russian geopolitics, to global capital market liquidity, to safe-haven demand for Treasurys, to social tensions in developing nations, to the Fed's exit strategy.”

Shifting to the idea of yuan hegemony, China is aggressively pushing its Silk Road Fund and Asian Infrastructure Investment Bank.

The $40 billion Silk Road Fund is backed by China’s FX reserves, the Export-Import Bank of China, and China Development Bank and seeks to increase ROIC for Chinese SOEs by investing in infrastructure projects across the developing world, while the $50 billion AIIB is funded by 57 founding member countries (the US and Japan have not joined) and will serve to upend traditionally dominant multilateral institutions which have failed to respond to the rising influence and economic clout of their EM membership. China will push for the yuan to play a prominent role in the settlement of AIIB transactions and may look to establish special reserves in both the AIIB and Silk Road fund to issue yuan-denominated loans.

Back in early November, SWIFT data showed that 15 new countries had joined a list of nations settling more than 10% of their trade deals with China in yuan. "This is a good sign for [yuan] adoption rates and internationalisation. In particular, Canada's [yuan] usage for payments, which has increased greatly over this period, is very interesting since we have not seen strong adoption of the [yuan] from North America to date,” Astrid Thorsen, Swift's head of business intelligence said.

Earlier that month, China and Russia indicated that going forward, more trade between the two countries would be settled in yuan. From Reuters, last November:

Russia and China intend to increase the amount of trade settled in the yuan, President Vladimir Putin said in remarks that would be welcomed by Chinese authorities who want the currency to be used more widely around the world.
 
Spurred on by their often testy relations with the United States, Russia and China have long advocated reducing the role of the dollar in international trade.
 
Curtailing the dollar's influence fits well with China's ambitions to increase the influence of the yuan and eventually turn it into a global reserve currency. With 32 percent of its $4 trillion foreign exchange reserves invested in U.S. government debt, China wants to curb investment risks in dollar.
 
The quest to limit the dollar’s dominance became more urgent for Moscow this year when U.S. and European governments imposed sanctions on Russia over its support for separatist rebels in Ukraine.

"As part of our cooperation with this country (China), we intend to use national currencies in mutual transactions.The initial deals for rouble and yuan are taking place. I want to note that we are ready to expand these opportunities in (our) energy resources trade," Putin said at the time, suggesting that going forward, Russia may look to settle sales of oil in yuan.

Sure enough, Gazprom has confirmed that since the beginning of the year, all oil sales to China have been settled in renminbi. From FT:

Russia’s third-largest oil producer, is now settling all of its crude sales to China in renminbi, in the most clear sign yet that western sanctions have driven an increase in the use of the Chinese currency by Russian companies.
 
Russian executives have talked up the possibility of a shift from the US dollar to renminbi as the Kremlin launched a “pivot to Asia” foreign policy partly in response to the western sanctions against Moscow over its intervention in Ukraine, but until now there has been little clarity over how much trade is being settled in the Chinese currency.
 
Gazprom Neft, the oil arm of state gas giant Gazprom, said on Friday that since the start of 2015 it had been selling in renminbi all of its oil for export down the East Siberia Pacific Ocean pipeline to China.
 
Russian companies’ crude exports were largely settled in dollars until the summer of last year, when the US and Europe imposed sanctions on the Russian energy sector over the Ukraine crisis...
 
Gazprom Neft responded more rapidly than most, with Alexander Dyukov, chief executive, announcing in April last year that the company had secured agreement from 95 per cent of its customers to settle transactions in euros rather than dollars, should the need to do so arise.
 
Mr Dyukov later said the company had started selling oil for export in roubles and renminbi, but he did not specify whether the sales were significant in scale.
 
According to Gazprom Neft’s first-quarter results issued last month, the East Siberian Pacific Ocean pipeline accounted for 37.2 per cent of the company’s crude oil exports of 1.6m tonnes in the three months to March 31.
With that, the "PetroYuan" has officially been born and while FT notes that "other Russian energy groups have been more reluctant to drop the dollar for settlement of oil sales," the fact that Russian producers are now openly considering a shift at the same time that officials in the US and Europe are openly discussing stepped up economic sanctions suggests renminbi settlements may become more commonplace going forward.

To understand why and to what extent this is significant in the current environment, consider the following from WSJ:



To summarize: Western economic sanctions on Russia have pushed domestic oil producers to settle crude exports to China in yuan just as Russian oil is rising as a percentage of total Chinese crude imports. Meanwhile, the collapse in crude prices led to the first net outflow of petrodollars from financial markets in 18 years, and if Goldman's projections prove correct, the net supply of petrodollars could fall by nearly $900 billion over the next three years. All of this comes as China is making a concerted push to settle loans from its newly-created infrastructure funds in renminbi.

Putting it all together, the PetroYuan represents the intersection of a dying petrodollar and an ascendant renminbi.

http://www.zerohedge.com/news/2015-06-09/petroyuan-born-gazprom-now-settling-all-crude-sales-china-renminbi

[lectorhinfluyente1984]

http://www.zerohedge.com/news/2015-06-09/how-measure-risk

What Risk Really Means

In [my] book, I argued against the purported identity between volatility and risk. Volatility is the academic’s choice for defining and measuring risk. I think this is the case largely because volatility is quantifiable and thus usable in the calculations and models of modern finance theory. In the book I called it “machinable,” and there is no substitute for the purposes of the calculations.

However, while volatility is quantifiable and machinable – and can be an indicator or symptom of riskiness and even a specific form of risk – I think it falls far short as “the” definition of investment risk. In thinking about risk, we want to identify the thing that investors worry about and thus demand compensation for bearing. I don’t think most investors fear volatility. In fact, I’ve never heard anyone say, “The prospective return isn’t high enough to warrant bearing all that volatility.” What they fear is the possibility of permanent loss.

Permanent loss is very different from volatility or fluctuation. A downward fluctuation – which by definition is temporary – doesn’t present a big problem if the investor is able to hold on and come out the other side. A permanent loss – from which there won’t be a rebound – can occur for either of two reasons: (a) an otherwise-temporary dip is locked in when the investor sells during a downswing – whether because of a loss of conviction; requirements stemming from his timeframe; financial exigency; or emotional pressures, or (b) the investment itself is unable to recover for fundamental reasons. We can ride out volatility, but we never get a chance to undo a permanent loss.

Of course, the problem with defining risk as the possibility of permanent loss is that it lacks the very thing volatility offers: quantifiability. The probability of loss is no more measurable than the probability of rain. It can be modeled, and it can be estimated (and by experts pretty well), but it cannot be known.

If you accept that the underlying processes affecting economics, business and market psychology are less than 100% dependable, as seems obvious, then it follows that the future isn’t knowable. In that case, risk can be nothing more than the subject of estimation – Keynes’s “intuition or direct judgment” – and certainly not reliably quantified.

*  *  *

The Unknowable Future

It seems most people in the prediction business think the future is knowable, and all they have to do is be among the ones who know it. Alternatively, they may understand (consciously or unconsciously) that it’s not knowable but believe they have to act as if it is in order to make a living as an economist or investment manager.

On the other hand, I’m solidly convinced the future isn’t knowable. I side with John Kenneth Galbraith who said, “We have two classes of forecasters: Those who don’t know – and those who don’t know they don’t know.”

...

Given the near-infinite number of factors that influence developments, the great deal of randomness present, and the weakness of the linkages, it’s my solid belief that future events cannot be predicted with any consistency. In particular, predictions of important divergences from trends and norms can’t be made with anything approaching the accuracy required for them to be helpful.

*  *  *

Coping with the Unknowable Future

Here’s the essential conundrum: investing requires us to decide how to position a portfolio for future developments, but the future isn’t knowable.

Taken to slightly greater detail:

1. Investing requires the taking of positions that will be affected by future developments.
2. The existence of negative possibilities surrounding those future developments presents risk.
3. Intelligent investors pursue prospective returns that they think compensate them for bearing the risk of negative future developments.
4. But future developments are unpredictable.

How can investors deal with the limitations on their ability to know the future? The answer lies in the fact that not being able to know the future doesn’t mean we can’t deal with it. It’s one thing to know what’s going to happen and something very different to have a feeling for the range of possible outcomes and the likelihood of each one happening. Saying we can’t do the former doesn’t mean we can’t do the latter.

The information we’re able to estimate – the list of events that might happen and how likely each one is – can be used to construct a probability distribution. Key point number one in this memo is that the future should be viewed not as a fixed outcome that’s destined to happen and capable of being predicted, but as a range of possibilities and, hopefully on the basis of insight into their respective likelihoods, as a probability distribution.

There’s little I believe in more than Albert Einstein’s observation: “Not everything that counts can be counted, and not everything that can be counted counts.” I’d rather have an order-of-magnitude approximation of risk from an expert than a precise figure from a highly educated statistician who knows less about the underlying investments. British philosopher and logician Carveth Read put it this way: “It is better to be vaguely right than exactly wrong.”

We can’t know what will happen. We can know something about the possible outcomes (and how likely they are). People who have more insight into these things than others are likely to make superior investors. As I said in the last paragraph of The Most Important Thing:

Only investors with unusual insight can regularly divine the probability distribution that governs future events and sense when the potential returns compensate for the risks that lurk in the distribution’s negative left-hand tail.

In other words, in order to achieve superior results, an investor must be able – with some regularity – to find asymmetries: instances when the upside potential exceeds the downside risk. That’s what successful investing is all about.

*  *  *

Thinking in Terms of Diverse Outcomes

It’s the indeterminate nature of future events that creates investment risk. It goes without saying that if we knew everything that was going to happen, there wouldn’t be any risk.

...

To oversimplify, investors in a given company may have an expectation that if A happens, that’ll make B happen, and if C and D also happen, then the result will be E. Factor A may be the pace at which a new product finds an audience. That will determine factor B, the growth of sales. If A is positive, B should be positive. Then if C (the cost of raw materials) is on target, earnings should grow as expected, and if D (investors’ valuation of the earnings) also meets expectations, the result should be a rising share price, giving us the return we seek (E).

We may have a sense for the probability distributions governing future developments, and thus a feeling for the likely outcome regarding each of developments A through E. The problem is that for each of these, there can be lots of outcomes other than the ones we consider most likely. The possibility of less-good outcomes is the source of risk. That leads me to key point number two, as expressed by Elroy Dimson, a professor at the London Business School: “Risk means more things can happen than will happen.” This brief, pithy sentence contains a great deal of wisdom.

People who rely heavily on forecasts seem to think there’s only one possibility, meaning risk can be eliminated if they just figure out which one it is. The rest of us know many possibilities exist today, and it’s not knowable which of them will occur. Further, things are subject to change, meaning there will be new possibilities tomorrow. This uncertainty as to which of the possibilities will occur is the source of risk in investing.

*  *  *

Even a Probability Distribution Isn’t Enough

I’ve stressed the importance of viewing the future as a probability distribution rather than a single predetermined outcome. It’s still essential to bear in mind key point number three: Knowing the probabilities doesn’t mean you know what’s going to happen. For example, all good backgammon players know the probabilities governing throws of two dice. They know there are 36 possible outcomes, and that six of them add up to the number seven (1-6, 2-5, 3-4, 4-3, 5-2 and 6-1). Thus the chance of throwing a seven on any toss is 6 in 36, or 16.7%. There’s absolutely no doubt about that. But even though we know the probability of each number, we’re far from knowing what number will come up on a given roll.

Backgammon players are usually quite happy to make a move that will enable them to win unless the opponent rolls twelve, since only one combination of the dice will produce it: 6-6. The probability of rolling twelve is thus only 1 in 36, or less than 3%. But twelve does come up from time to time, and the people it turns into losers end up complaining about having done the “right” thing but lost. As my friend Bruce Newberg says, “There’s a big difference between probability and outcome.” Unlikely things happen – and likely things fail to happen – all the time. Probabilities are likelihoods and very far from certainties.

It’s true with dice, and it’s true in investing . . . and not a bad start toward conveying the essence of risk. Think again about the quote above from Elroy Dimson: “Risk means more things can happen than will happen.” I find it particularly helpful to invert Dimson’s observation for key point number four: Even though many things can happen, only one will.

...

I always say I have no interest in being a skydiver who’s successful 95% of the time.

...

Investment performance (like life in general) is a lot like choosing a lottery winner by pulling one ticket from a bowlful. The process through which the winning ticket is chosen can be influenced by physical processes, and also by randomness. But it never amounts to anything but one ticket picked from among many. Superior investors have a better sense for what’s in the bowl, and thus for whether it’s worth buying a ticket in a lottery. But even they don’t know for sure which one will be chosen. Lesser investors have less of a sense for the probability distribution and for whether the likelihood of winning the prize compensates for the risk that the cost of the ticket will be lost.

*  *  *

Risk and Return

We hear it all the time: “Riskier investments produce higher returns” and “If you want to make more money, take more risk.”

Both of these formulations are terrible. In brief, if riskier investments could be counted on to produce higher returns, they wouldn’t be riskier. Misplaced reliance on the benefits of risk bearing has led investors to some very unpleasant surprises.

This is the essence of investment risk. Riskier investments are ones where the investor is less secure regarding the eventual outcome and faces the possibility of faring worse than those who stick to safer investments, and even of losing money.

*  *  *

The Many Forms of Risk

The possibility of permanent loss may be the main risk in investing, but it’s not the only risk. I can think of lots of other risks, many of which contribute to – or are components of – that main risk.

In the past, in addition to the risk of permanent loss, I’ve mentioned the risk of falling short. Some investors face return requirements in order to make necessary payouts, as in the case of pension funds, endowments and insurance companies. Others have more basic needs, like generating enough income to live on.

Some investors with needs – particularly those who live on their income, and especially in today’s low-return environment – face a serious conundrum. If they put their money into safe investments, their returns may be inadequate. But if they take on incremental risk in pursuit of a higher return, they face the possibility of a still-lower return, and perhaps of permanent diminution of their capital, rendering their subsequent income lower still. There’s no easy way to resolve this conundrum.

There are actually two possible causes of inadequate returns: (a) targeting a high return and being thwarted by negative events and (b) targeting a low return and achieving it. In other words, investors face not one but two major risks: the risk of losing money and the risk of missing opportunities. Either can be eliminated but not both. And leaning too far in order to avoid one can set you up to be victimized by the other.

Potential opportunity costs – the result of missing opportunities – usually aren’t taken as seriously as real potential losses. But they do deserve attention. Put another way, we have to consider the risk of not taking enough risk.

These days, the fear of losing money seems to have receded (since the crisis is all of six years in the past), and the Fear Of Missing Opportunities is riding high, given the paltry returns available on safe, mundane investments. Thus a new risk has arisen: FOMO risk, or the risk that comes from excessive fear of missing out. It’s important to worry about missing opportunities, since people who don’t can invest too conservatively. But when that worry becomes excessive, FOMO can drive an investor to do things he shouldn’t do and often doesn’t understand, just because others are doing them: if he doesn’t jump on the bandwagon, he may be left behind to live with envy.

...

There are many ways for an investment to be unsuccessful. The two main ones are fundamental risk (relating to how a company or asset performs in the real world) and valuation risk (relating to how the market prices that performance). For years investors, fiduciaries and rule-makers acted on the belief that it’s safe to buy high-quality assets and risky to buy low-quality assets. But between 1968 and 1973, many investors in the “Nifty Fifty” (the stocks of the fifty fastest-growing and best companies in America) lost 80-90% of their money. Attitudes have evolved since then, and today there’s less of an assumption that high quality prevents fundamental risk, and much less preoccupation with quality for its own sake.

On the other hand, investors are more sensitive to the pivotal role played by price. At bottom, the riskiest thing is overpaying for an asset (regardless of its quality), and the best way to reduce risk is by paying a price that’s irrationally low (ditto). A low price provides a “margin of safety,” and that’s what risk-controlled investing is all about. Valuation risk should be easily combatted, since it’s largely within the investor’s control. All you have to do is refuse to buy if the price is too high given the fundamentals. “Who wouldn’t do that?” you might ask. Just think about the people who bought into the tech bubble.

Fundamental risk and valuation risk bear on the risk of losing money in an individual security or asset, but that’s far from the whole story. Correlation is the essential additional piece of the puzzle. Correlation is the degree to which an asset’s price will move in sympathy with the movements of others. The higher the correlation among its components, all other things being equal, the less effective diversification a portfolio has, and the more exposed it is to untoward developments.

An asset doesn’t have “a correlation.” Rather, it has a different correlation with every other asset. A bond has a certain correlation with a stock. One stock has a certain correlation with another stock (and a different correlation with a third). Stocks of one type (such as emerging market, high-tech or large-cap) are likely to be highly correlated with others within their category, but they may be either high or low in correlation with those in other categories. Bottom line: it’s hard to estimate the riskiness of a given asset, but many times harder to estimate its correlation with all the other assets in a portfolio, and thus the impact on performance of adding it to the portfolio. This is a real art.

*  *  *

To move to the biggest of big pictures, I want to make a few over-arching comments about risk.

The first is that risk is counterintuitive.

* The riskiest thing in the world is the widespread belief that there’s no risk.
* Fear that the market is risky (and the prudent investor behavior that results) can render it quite safe.
* As an asset declines in price, making people view it as riskier, it becomes less risky (all else being equal).
* As an asset appreciates, causing people to think more highly of it, it becomes riskier.
* Holding only “safe” assets of one type can render a portfolio under-diversified and make it vulnerable to a single shock.
* Adding a few “risky” assets to a portfolio of safe assets can make it safer by increasing its diversification. Pointing this out was one of Professor William Sharpe’s great contributions.
The second is that risk aversion is the thing that keeps markets safe and sane.

When investors are risk-conscious, they will demand generous risk premiums to compensate them for bearing risk. Thus the risk/return line will have a steep slope (the unit increase in prospective return per unit increase in perceived risk will be large) and the market should reward risk-bearing as theory asserts.

But when people forget to be risk-conscious and fail to require compensation for bearing risk, they’ll make risky investments even if risk premiums are skimpy. The slope of the line will be gradual, and risk taking is likely to eventually be penalized, not rewarded.

When risk aversion is running high, investors will perform extensive due diligence, make conservative assumptions, apply skepticism and deny capital to risky schemes.

But when risk tolerance is widespread instead, these things will fall by the wayside and deals will be done that set the scene for subsequent losses. Simply put, risk is low when risk aversion and risk consciousness are high, and high when they’re low.

The third is that risk is often hidden and thus deceptive. Loss occurs when risk – the possibility of loss – collides with negative events. Thus the riskiness of an investment becomes apparent only when it is tested in a negative environment. It can be risky but not show losses as long as the environment remains salutary. The fact that an investment is susceptible to a serious negative development that will occur only infrequently – what I call “the improbable disaster” – can make it appear safer than it really is. Thus after several years of a benign environment, a risky investment can easily pass for safe. That’s why Warren Buffett famously said, “. . . you only find out who’s swimming naked when the tide goes out.”

Assembling a portfolio that incorporates risk control as well as the potential for gains is a great accomplishment. But it’s a hidden accomplishment most of the time, since risk only turns into loss occasionally . . . when the tide goes out.

The fourth is that risk is multi-faceted and hard to deal with. In this memo I’ve mentioned 24 different forms of risk: the risk of losing money, the risk of falling short, the risk of missing opportunities, FOMO risk, credit risk, illiquidity risk, concentration risk, leverage risk, funding risk, manager risk, over-diversification risk, risk associated with volatility, basis risk, model risk, black swan risk, career risk, headline risk, event risk, fundamental risk, valuation risk, correlation risk, interest rate risk, purchasing power risk, and upside risk. And I’m sure I’ve omitted some. Many times these risks are overlapping, contrasting and hard to manage simultaneously. For example:

* Efforts to reduce the risk of losing money invariably increase the risk of missing out.
* Efforts to reduce fundamental risk by buying higher-quality assets often increase valuation risk, given that higher-quality assets often sell at elevated valuation metrics.
At bottom, it’s the inability to arrive at a single formula that simultaneously minimizes all the risks that makes investing the fascinating and challenging pursuit it is.

The fifth is that the task of managing risk shouldn’t be left to designated risk managers. I’m convinced outsiders to the fundamental investment process can’t know enough about the subject assets to make appropriate decisions regarding each one. All they can do is apply statistical models and norms. But those models may be the wrong ones for the underlying assets – or just plain faulty – and there’s little evidence that they add value. In particular, risk managers can try to estimate correlation and tell you how things will behave when combined in a portfolio. But they can fail to adequately anticipate the “fault lines” that run through portfolios. And anyway, as the old saying goes, “in times of crisis all correlations go to one” and everything collapses in unison.

“Value at Risk” was supposed to tell the banks how much they could lose on a very bad day. During the crisis, however, VaR was often shown to have understated the risk, since the assumptions hadn’t been harsh enough. Given the fact that risk managers are required at banks and de rigueur elsewhere, I think more money was spent on risk management in the early 2000s than in the rest of history combined . . . and yet we experienced the worst financial crisis in 80 years. Investors can calculate risk metrics like VaR and Sharpe ratios (we use them at Oaktree; they’re the best tools we have), but they shouldn’t put too much faith in them. The bottom line for me is that risk management should be the responsibility of every participant in the investment process, applying experience, judgment and knowledge of the underlying investments.

The sixth is that while risk should be dealt with constantly, investors are often tempted to do so only sporadically. Since risk only turns into loss when bad things happen, this can cause investors to apply risk control only when the future seems ominous. At other times they may opt to pile on risk in the expectation that good things lie ahead. But since we can’t predict the future, we never really know when risk control will be needed. Risk control is unnecessary in times when losses don’t occur, but that doesn’t mean it’s wrong to have it. The best analogy is to fire insurance: do you consider it a mistake to have paid the premium in a year in which your house didn’t burn down?

Taken together these six observations convince me that Charlie Munger’s trenchant comment on investing in general – “It’s not supposed to be easy. Anyone who finds it easy is stupid.” – is profoundly applicable to risk management. Effective risk management requires deep insight and a deft touch. It has to be based on a superior understanding of the probability distributions that will govern future events. Those who would achieve it have to have a good sense for what the crucial moving parts are, what will influence them, what outcomes are possible, and how likely each one is. Following on with Charlie’s idea, thinking risk control is easy is perhaps the greatest trap in investing, since excessive confidence that they have risk under control can make investors do very risky things.

Thus the key prerequisites for risk control also include humility, lack of hubris, and knowing what you don’t know. No one ever got into trouble for confessing a lack of prescience, being highly risk-conscious, and even investing scared. Risk control may restrain results during a rebound from crisis conditions or extreme under-valuations, when those who take the most risk generally make the most money. But it will also extend an investment career and increase the likelihood of long-term success. That’s why Oaktree was built on the belief that risk control is “the most important thing.”

Lastly while dealing in generalities, I want to point out that whereas risk control is indispensable, risk avoidance isn’t an appropriate goal. The reason is simple: risk avoidance usually goes hand-in-hand with return avoidance. While you shouldn’t expect to make money just for bearing risk, you also shouldn’t expect to make money without bearing risk.

*  *  *

At present I consider risk control more important than usual. To put it briefly:

Today’s ultra-low interest rates have brought the prospective returns on money market instruments, Treasurys and high grade bonds to nearly zero.
This has caused money to flood into riskier assets in search of higher returns.
This, in turn, has caused some investors to drop their usual caution and engage in aggressive tactics.
And this, finally, has caused standards in the capital markets to deteriorate, making it easy for issuers to place risky securities and – consequently – hard for investors to buy safe ones.
Warren Buffett put it best, and I regularly return to his statement on the subject:

. . . the less prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs.

While investor behavior hasn’t sunk to the depths seen just before the crisis (and, in my opinion, that contributed greatly to it), in many ways it has entered the zone of imprudence. To borrow a metaphor from Chuck Prince, Citigroup’s CEO from 2003 to 2007, anyone who’s totally unwilling to dance to today’s fast-paced music can find it challenging to put money to work.

It’s the job of investors to strike a proper balance between offense and defense, and between worrying about losing money and worrying about missing opportunity. Today I feel it’s important to pay more attention to loss prevention than to the pursuit of gain. For the last four years Oaktree’s mantra has been “move forward, but with caution.” At this time, in reiterating that mantra, I would increase the emphasis on those last three words: “but with caution.”

Economic and company fundamentals in the U.S. are fine today, and asset prices – while full – don’t seem to be at bubble levels. But when undemanding capital markets and a low level of risk aversion combine to encourage investors to engage in risky practices, something usually goes wrong eventually. Although I have no idea what could make the day of reckoning come sooner rather than later, I don’t think it’s too early to take today’s carefree market conditions into consideration. What I do know is that those conditions are creating a degree of risk for which there is no commensurate risk premium. We have to behave accordingly.

(No deja de ser un auto-publi-reportaje semi-encubierto, pero creo que era interesante)

[saturno]

La suppression des espèces, une question complexe -
Par Bruno Bertez  (le blog à lupus)


Temática: la supresión del cash es la escapatoria programada a la inundación de liquidez.


Parte I
http://leblogalupus.com/2015/06/08/les-clefs-pour-comprendre-du-lundi-8-juin-2015-la-suppression-des-especes-une-question-complexe-1ere-partie-par-bruno-bertez/

Parte II
http://leblogalupus.com/2015/06/10/les-clefs-pour-comprendre-du-mercredi-10-juin-2015-la-suppression-des-especes-une-question-complexe-2eme-partie-par-bruno-bertez/comment-page-1/#comment-98972

    RAPPEL DES FONDEMENTS DU DEBAT:


    La guerra contra el cash se libra en 5 frentes
La guerre contre le cash se déroule sur cinq fronts. Faute de distinguer entre ces différents fronts, la confusion s’installe et le débat devient impossible.

1- Macroeconomico. La supresión del cash aceleraría la velocidad de rotación y favoreceria la recuperacion
    Premier front, celui de la macro-économie. La suppression du cash est suggérée par certains pour accélérer la vitesse de rotation de la monnaie et ainsi favoriser la reprise économique. Le cash serait en quelque sorte une sorte d’obstacle à la bonne transmission des politiques économiques et singulièrement à celles des mesures non-conventionnelles, comme les taux zéro ou négatifs.


II- Rentabilidad de los bancos. Los bancos se quejan de que el cash es costoso. Sin mencionar las comisiones por tarjetas

    Second front, celui de la rentabilité des banques. Les syndicats bancaires vont valoir que la manipulation du cash coûte cher (très cher disent-ils). Ils vont jusqu’à chiffrer le coût de l’usage du cash bien entendu en omettant celui des solutions alternatives. Les banques ne vont pas jusqu’à chiffrer le bénéfice supplémentaire qu’elles tireront des commissions sur l’usage des cartes, etc.

III- Seguridad de los bancos. No hay cash, no hay "runs", no hay colapso de entidades

    Troisième front, celui de la sécurité bancaire. Si les déposants ne peuvent retirer leur argent cash des banques commerciales, alors les ruées, les « runs », les paniques qui font tomber les banques deviennent impossibles.

IV- Fiscalidad. Si no hay cash, todas las transacciones son identificables. Fin del dinero negro

    Quatrième front, celui de la fiscalité. La disparition du cash et son remplacement par les
paiements modernes permet de tracer toutes les transactions et ainsi elle est censée faire disparaître la fraude, laquelle se pratique souvent à partir des espèces.

V- Salvar Esquivar el problema de la libertad individual. Si no hay cash, son posibles medidas dirigistas contra los ahorradores, como imponer la contratación obligatoria de bonos por encima de cierto nivel


    Cinquième front, celui des libertés individuelles et du choix par le détenteur d’argent liquide d’en faire ce qu’il veut. A partir du moment où tout est recensé, surveillé et contrôlé, à partir du moment où tout est piégé dans le système, on a les outils pour forcer les agents économiques à certains types d’emplois plutôt qu’à d’autres. Comme des souscriptions obligatoires (genre emprunt de solidarité) à certaines émissions dès lors que l’on dépasse un certain seuil de crédit en banque.

Algunos aspectos son discutibles, pero está bien visto. De todos modos, advierte que se trata de "economía ficción" (distópica): por ej. la desaparición del cash, como lo intentan aú en Suecia, se revela un fracaso

Lo traigo por LH84 y sus indagacions sobre la velocidad del dinero, y por Republik cuando le ronda la idea de eliminar pagos en metálico.


Para más contexto  (artículo de A.Edwards, via Atlántico)
http://leblogalupus.com/2012/01/02/y-a-t-il-eu-un-hold-up-des-banques-centrales-sur-les-classes-moyennes-yes-affirme-albert-edwards/


Es un blog muy bueno.
Es curioso que reencuentre incluso imagenes ppccianas, (panóptico, Dr Diafoirus = Profesor TBO) pero para llegar a unas conclusiones ideologicas opuestas -- en cuanto a ortograma (no acerca de la etiología)

Entraría dentro de los banca-culpistas. Con una salvedad : que su análisis no es pisitófilo.

Un ppcc anticapitalista- vamos. Si PPCC hace economía poética (utópica), éste versa en la economía-ficción (distópica)

[Currobena]

No dudo que estén planeando la eliminación del efectivo en euros, pero no creo que vaya a eliminar la economía sumergida. Simplemente, la gente usará dólares en vez de billetes de euros.

Lo que sí impedirá son los pánicos bancarios, salvo que permitan sacar fajos de dólares del banco, cosa que dudo bastante.

[Lego]

Aprendices de dioses...

Lo que nos espera, porque esas cosas sólo se sostienen por la fuerza, pero a lo bestia.  Y la gente usará dólares o lo que sea. Y emergerán proto-bancos y proto-préstamos denominados en lo que sea que la gente adopte como moneda de cambio, que pasará a estar perseguido y reprimido al principio, y luego cortijeado cuando vean que es imposible contenerlo sin meter al 70% de la gente en la cárcel.   

Si es una idea poco realista en Suecia, en España o Italia ya ni hablamos.  Y luego está en Sudamérica o África jejeje. 

[JENOFONTE10]

No dudo que estén planeando la eliminación del efectivo en euros, pero no creo que vaya a eliminar la economía sumergida. Simplemente, la gente usará dólares en vez de billetes de euros.

Lo que sí impedirá son los pánicos bancarios, salvo que permitan sacar fajos de dólares del banco, cosa que dudo bastante.

Los fajos de billetes ya están próximos al 'extraperlo', y tienen limitaciones para sacarlos de los bancos. 

Si yo fuera fabricante de bolsas negras de basura, estaría muy preocupado  por la demanda 'top de gama', ese modelo isotermo (para montañas andorranas nevadas) con departamentos estancos para fajos de 500.

Saludos.

[saturno]

Regalo para galófonos (o lectores):

www.les-crises.fr/crise-du-capitalisme-andre-gorz-avait-tout-compris/

Con un debate (¿liminar?, no he leido gran cosa de Gorz) en los comentarios, por una vez, bastante asentado,  .

[lectorhinfluyente1984]

Is Deutsche Bank the New Lehman?

http://www.zerohedge.com/news/2015-06-12/deutsche-bank-next-lehman

[breades]

Un comentarista enlaza a :

http://endoftheamericandream.com/archives/7-key-events-that-are-going-to-happen-by-the-end-of-september

Donde se dice que:

[...]

July 28th – On May 28th, Reuters reported that countries in the European Union were being given a two month deadline to enact “bail-in” legislation.  Any nation that does not have “bail-in” legislation in place by that time will face legal action from the European Commission.  So why is the European Union in such a rush to get this done?  Are the top dogs in the EU anticipating that another great financial crisis is about to erupt?

[...]

[lectorhinfluyente1984]

Gracias Breades!

Grecia como causa o detonante del DB affaire, Grecia como excusa, que si por eso Grecia no puede salir del euro, que si la Fed$ solo ayudaría a Alemania a ayudar a DB a cambio de cortar para siempre con Rusia, que 75 trillion $ en derivados con contrapartes por todas partes no se pueden "disolver" sin generar una bola masiva de sucesos inesperados, que si se disolverán por acuerdos crony entre el cártel megabancarios y los BCs, que si con impresora "todo" es posible, etc.

Una ley para clarificar los bail-ins parece como muy acorde con el Zeitgeist de lo que estamos viviendo...

Prohibir el cash para que todo esté en algún banco "bail-in-able" parece también muy conveniente

[lectorhinfluyente1984]

Back to 2013...

http://www.silverdoctors.com/jim-willie-if-deutsche-bank-goes-under-it-will-be-lehman-times-five/

When asked by The Doc how Deutsche Bank differs from Lehman Brothers in 2008, and what events could lead to a renewed banking crisis, Willie responded:

My best German source informs me that 3 major banks are in trouble, and these 3 banks are fighting every single night to fight off insolvency and failure.  He says CitiGroup in New York, Barclays in London, and Deutsche Bank in Germany- every single night are in trouble. 

The important thing to keep in mind about Deutsche Bank is that it won’t go down alone if it goes down at all.  If it fails, it will take along with it 3,4,5,6 or 10, or 15 other banks!   It will be 1 or 2 quickly, then a 3rd and 4th a few weeks later, another, then before you know it, all of Italy and their major banks would be kaput.

My belief is that Deutsche Bank and its constant overnight risk of failure is somewhat tied to derivatives related to LIBOR, and also a risk related to their FOREX derivatives.   In other words, derivatives that the banks use to balance off the currencies.

Believe it or not, in the derivatives world, gold is treated like a currency.  Isn’t that ironic?
The FOREX derivatives that the banks are involved in are very much tied to gold.

The big immediate threat for Deutsche Bank though has to do with their problems in hiding debt for the Sovereign nations applying for the Eurozone.   For example, Greece and Italy couldn’t have their debt ratios over certain levels, so what Deutsche Bank did was they turned nice big chunks of Sovereign debt into currency swaps.
For an example of how this works: Suppose you have a $250,000 bad business loan that is stinking up your credit report.  So you call up your favorite Deutsche banker (or Goldman or Morgan- pick your criminal enterprise that is your personal favorite) and you tell him, look I have a $250,000 debt here and I want to make it go away.   They say OK, we can do something clever here.  We can pay off your debt so your credit report looks good, and we can establish this $250,000 Euro swap, and we’ll keep it off the books!

So you have this $250,000 bad loan stinking up your books, it goes away, and is replaced by something hidden- a euro currency swap!  That’s precisely what was done on a larger macro scale by Greece and Italy- and Deutsche Bank is involved with several of these, and the total that is becoming disclosed is $400 Billion.    Apply your typical ratios and you can conclude that they are $10, $15, $20 billion short for capital requirements!

The big banks are so criminal that they have converted fraud and criminal activity into a small cost of doing business!

 

When asked to clarify his statement that a failure of Deutsche Bank would likely result in a contagion of bank failures Jim Willie responded:

Deutsche Bank is in a slightly different situation than Barclays, even though Barclays just announced a 12.8 billion capital shortfall Tuesday.  The former Deutsche Bank CEO Ackermann was forced out last year.
Interpol came into Ackermann’s office and conducted a financial document raid.  There’s a new sheriff in town. Sources indicate that big, powerful Eastern interests hired Interpol to clean things up.

We had events in April, May, and June in which 5,000 metric tons of gold were lifted out of London.  Eastern entities were angry as hell that their gold had been leased and rehypothecated.  The London banks used the Easterners’ gold as equity for futures contracts that went bad- like in Spanish, Greek, and Italian debt.

Deutsche Bank’s CEO could not withstand an assault on their office to retrieve data, even though he appealed to several high level politicians.

Fast forward to July 2013, and now we are seeing several Deutsche Bank Vice Presidents being indicted under various fraud charges, and they are almost all cooperating with Interpol!   They’ve flipped to cooperate with the serious fraud division of Interpol.

London and New York remain fortresses (for the cartel banksters), but Frankfurt might be in the process of being penetrated.

Getting back to your question as to why a Deutsche Bank failure would be different than Lehman Brothers, it’s because they are involved with all the different Sovereign bonds!   Spain, France, Italy, Greece, they’re involved with all of them and their balance sheet qualifications for the European Union!

Deutsche Bank is involved very closely with all of the Eurozone currencies and bonds, and they have massive swaps interwoven with all the major Western banks.
I have a client informing me that Deutsche Bank has a bunch of swaps that they wrote against Detroit muni bonds!    Deutsche Bank has their fingers in alot of different pies!  Lehman Brothers was involved in numerous mortgage instruments.

Dont bet your money that Deutsche Bank will go down, but if it does, the next day its going to be Citi, Barclays, HSBC, Morgan Stanley, Soc Gen, and big threats to JP Morgan and Goldman Sachs!

In conclusion, Deutsche Bank owns $25 trillion in OTC swaps with the Central banks and other major banks, so expect a daisy chain of derivative failures for the $1.6 quadrillion derivative market if it were to fail! 
Deutsche Bank cannot break down by itself.  It would result in the complete breakdown of the European Monetary Union!

In today’s world when a big bank dies, they merge them with another big bank.  Another European bank, potentially Barclays.   I think we are going to see massive amounts of money flooding into gold!

A bank failure contagion, that’s whats going to push gold way over $2,000/oz again.
Silver is going to be moving over $100 and gold is going over $5,000, I’m as certain of it as I am that the sun will rise in the east in the morning come January.

[wanderer]

Sobre cómo el sacrosanto^* incremento del PIB, es un artefacto estadístico con poca o ninguna relación con el incremento real de la riqueza, y mucho menos aún, del bienestar de la población:

The Fallacies Of GDP


Submitted by Alasdair Macleod via GoldMoney.com,

The common error of confusing growth with progress goes largely unnoticed, though it permeates all macroeconomic analysis. There is no better example of this mistake than the fallacies behind the interpretation of Gross Domestic Product. GDP is the market value of all final goods and services in a given year. As such, it is only an accounting identity reflecting the quantity of money in the economy.

Econometricians constructing GDP have devised a sterile statistic that should not be used to set economic policy. It leads to the common error of assuming any increase in GDP is desirable. Statistics like GDP tell a story of an economy based on historical prices but devoid of any qualitative value; and progress, the improvement in the human condition, is what really matters.

Transactions reflecting both wealth creation and also economically destructive state spending are included in GDP without differentiation. Far from the government component of GDP being singled out from the total, it is often welcomed as contributing to economic growth. Macroeconomists, with an eye on the statistical impact of cuts in government spending, discourage governments from making them. The lack of distinction between wealth-creation and wealth-destruction is fundamental to their belief that state intervention is beneficial.

More light can be shed on this issue with an example. Imagine an economy with a fixed quantity of money and credit; further assume foreign trade is in balance, and that the population is stable. Products will succeed, stagnate or fail. People will get pay rises, pay cuts or be encouraged by reality to move from the least successful businesses into more successful businesses. The businesses of yesteryear fade and those of tomorrow evolve. Winners will redeploy resources released from the failures. Annual GDP, the sum total of all production paid for by everyone's earnings and profits, will therefore be unaltered from the previous year: it is a zero sum, assuming that as a whole people's money preferences relative to goods do not change. Without the injection of extra money, people are always forced to choose between items: they cannot add to the purchasing power of their income through extra credit created out of thin air, creating demand that otherwise would not exist.

Progress is, therefore, marked by improved products and lower prices, because as the volume and quality of production increases the total money value of them must remain the same. This is true for both final products and for investment in the higher orders of production. But importantly, GDP growth is nil.

Now we must consider what happens in the case of unsound money; that is to say money and credit that can be expanded by the will of the state and the banks it licences. Over a period of time, this new money is absorbed into the economy, reflected in new transactions that otherwise would not have occurred. The value of transactions attributable to the expansion of money and credit is likely to be a multiple of the new money introduced, as it passes from the original beneficiaries to later receivers.

If we assume this is a single expansion of the quantity of money these new transactions will only be a temporary feature. The prices of goods bought with the new money rise to compensate with a time lag. Having initially expanded, real GDP would then contract as the temporal lag between stimulus and price effect is fully unwound. With all transactions fully accounted for real GDP ends up unchanged, always assuming there has been no change in consumer preferences between money and goods.

The dubious benefit of stimulating demand by increasing the quantity of money and credit has been only temporary. Changes in GDP described above reflect not economic progress, but the absorption of the extra quantity of money and credit deployed. If the matter stopped there, the damage to a properly functioning economy would be limited, but monetary inflation also triggers a transfer of wealth from the majority of people to a small rich minority. This happens because price increases spread from where the new money is first deployed (typically through the banks and financial markets), leaving the majority of people to face higher prices with no offsetting monetary benefit. There is, therefore, a secondary impact: the apparent benefit of increasing the quantity of money is followed by a fall in demand for goods and services because of the wealth-transfer effect, the opposite of the intended result. The economy as a whole ends up worse off than if no monetary stimulus had occurred. This is why extreme monetary inflation is always accompanied by economic collapse.

In the foregoing example, the effect of a single injection of additional money and credit was considered, but once this policy is embarked upon it is almost always continued at a compounding pace. Macroeconomists note only the initial benefits, and when they fade, as described above, they clamour for more. The result over time is that weak-money policies lead to the continual currency debasement with which we are familiar today, together with the build-up of debt, which is the counterpart of expanding bank credit. As the currency buys less, more is required to achieve the same initial effect.

That changes in money and credit do not equate accurately to changes in GDP in practice is partly due to econometricians selecting which activities to include in GDP. They interpose an artificial distinction between categories of spending with the intention of isolating spending on new goods and services deemed to be consumption. This is an error, because these economists are forced into making a subjective judgement that is bound to be at odds with reality. In practice, a consumer can only be described in the broadest terms.

Consumers may spend money on buying assets such as housing, art or stocks and shares: there is no difference between spending on these and on anything else, because they all have a valid purpose in the mind of the consumer. In addition, there are unrecorded transactions on the black market or not recorded from small businesses, as well as transactions in second-hand goods which are specifically excluded on the grounds that the purpose of GDP is to record new production only. Therefore, much economic activity is excluded from the GDP calculation with the complication that money will flow between the econometrician's version of GDP to the wider transaction universe, undermining all the macroeconomists' attempts to link an increase in prices to an increase in the quantities of money and credit.

In conclusion, GDP has nothing to do with economic progress. It is a flawed statistic that imperfectly summarises the money-value of selected transactions over a given period. The fact it is usually positive is a reflection of the temporal difference between monetary inflation and the lagging effect on prices, and has nothing to do with economic progress.
http://www.zerohedge.com/news/2015-06-13/fallacies-gdp

^*: Sacrosanto para la escuela dominante neoclásica, cegada por la "ideología de la oferta"