the title of this post is a quote from confucius' analects, "he who through knowledge of the old, understands the new, can be a teacher." a simple but powerful idea, which lies at the heart of one of the central points of this blog: long term averages always catch up with the market.
niall ferguson, a scottish professor who teaches history at harvard university, is a strong proponent of this concept. he has recently received much attention because in his book "the ascent of money", published just as the financial crisis was starting to unfold, he predicts the crisis and describes its causes.
he is also a talented speaker, and 2 months ago, when wall street froze up with fear, he delivered a brilliant speech at the carnegie council, in a room full of very old people eating muffins.
highlights:
* so many smart people were surprised by the crisis, because they only referred to their own life's experience. the problem is that this experience is never long enough to include the 1930's, and is therefore misleading. understanding financial history over a much longer period provides a far better perspective.
* increasing home ownership in america had a political aim; home owners tend to be more conservative and therefore vote conservative, compared to people who rent
* the much-talked-about decline of american power as a result of the crisis must be seen relative to how other powers are faring, and so far, they are not faring well. this, paradoxically, is good news for the u.s.
* the post-credit crisis era will depend to a large extent on the relation between china and america. for now, china has little choice but to keep buying american treasury bonds.
this is a rare opportunity to see a visionary from the world's number one academic institution speak, on a topic that is not only relevant now, but will remain relevant as long as money and markets exist. skip the very boring introduction by the host and drag the cursor directly to 4min 15sec in the video.
the book has also been made into a tv series by britain's channel 4, and although it has been removed from youtube, below is the first program, where professor ferguson explains the origin of modern banking in the west, and its role in society.
Tuesday, January 27, 2009
Monday, January 19, 2009
COLD, HARD REALITY
excellent editorial by thomas friedman, author of "the world is flat", in saturday's new york times.
in his post, he claims the reason why banks keep asking for more money, is that their balance sheets are in much worse shape than they dare to tell us.
his point boils down to the same old thing which i have been writing on this blog for the last 3 months, and before that in letters to colleagues: asset prices are still way above their real value, and the only way out of the crisis is to face the cold, hard reality that companies are worth probably only half of what they are trading for today.
as of december, the standard & poors p/e （市盈率） has travelled back to its long term average, so you hear people saying that therefore the worst is over now. a look at the graph tells you that cannot possibly be true, because after you have soared way above a long term average for the last 20 years, you need to dive way below it, and stay there for a while, usually in the range of 5 to 10. add to this that corporate profits are in free fall, and a 50% discount on today's prices might even be considered not that bad.
the evidence is all around us, although, as friedman puts it, the american government and the banks are too scared to admit it. one of the reasons why bank of america needed yet more bail-out money, is obviously because last september they were forced to buy merrill lynch at usd 50bn, a whopping 70% premium over what the company was worth according to the stock market the day before. that price had nothing to do with the real value of merrill lynch, and everything with the hope that a high transaction price would calm the market.
friedman's suggestion is for obama to call all ceo's of the banks together in his office, and tell them that their balance sheets have been reviewed, given a fair value, and following that they will be either nationalized, merged, or shut down.
that would be an unprecedented move in the history of capital markets, forcing the values of financial companies dramatically down, with lasting consequences. these are unprecedented times though, and the road we are on now doesn't seem to be leading us out of the woods.
in his post, he claims the reason why banks keep asking for more money, is that their balance sheets are in much worse shape than they dare to tell us.
his point boils down to the same old thing which i have been writing on this blog for the last 3 months, and before that in letters to colleagues: asset prices are still way above their real value, and the only way out of the crisis is to face the cold, hard reality that companies are worth probably only half of what they are trading for today.
as of december, the standard & poors p/e （市盈率） has travelled back to its long term average, so you hear people saying that therefore the worst is over now. a look at the graph tells you that cannot possibly be true, because after you have soared way above a long term average for the last 20 years, you need to dive way below it, and stay there for a while, usually in the range of 5 to 10. add to this that corporate profits are in free fall, and a 50% discount on today's prices might even be considered not that bad.
the evidence is all around us, although, as friedman puts it, the american government and the banks are too scared to admit it. one of the reasons why bank of america needed yet more bail-out money, is obviously because last september they were forced to buy merrill lynch at usd 50bn, a whopping 70% premium over what the company was worth according to the stock market the day before. that price had nothing to do with the real value of merrill lynch, and everything with the hope that a high transaction price would calm the market.
friedman's suggestion is for obama to call all ceo's of the banks together in his office, and tell them that their balance sheets have been reviewed, given a fair value, and following that they will be either nationalized, merged, or shut down.
that would be an unprecedented move in the history of capital markets, forcing the values of financial companies dramatically down, with lasting consequences. these are unprecedented times though, and the road we are on now doesn't seem to be leading us out of the woods.
Tuesday, January 13, 2009
TRANSPARENCY
sooner or later, the former real estate editor of the shenzhen special zone daily (深圳特区报）will probably pay the price for creating transparency where transparency is not welcome. but for now at least, 牛刀's blog shines a bright light on the chinese real estate market with a strong grip of economic fundamentals and the courage to speak out on some serious issues.
a few posts that are well worth reading are on the economics of supply and demand, and on the cost of bribes paid to government officials by developers, which he estimates make up 30% of the country's house prices. for those of you wondering when to buy, he also offers some insights on the timing of the turn around.
he comes to some obvious conclusions - that you cannot have a properly functioning market without proper supervision ("监管的不断流于形式"), and that for the market to become healthy again, real estate prices first need to return to their real value ("房价不降到位，市场的预期就无法更改"), which they still haven't today. almost correct, as the traditional recovery process actually includes a period of prices going below their real value.
the irony is that all you need to do to avoid getting caught in the trap yourself, in china, or anywhere in the world, is simply compare the basics.
i was in bao'an last weekend visiting some apartments which a friend had recently bought. even today, the prices there are close to those in the center of my home town of antwerp, belgium, which is the second largest port of europe and controls 80% of the world's diamond trade, while 30% of the population have a university degree, and the average income is about 10 times higher than bao'an.
you do not need a university degree to understand there is probably something wrong here - either antwerp is way too cheap, or bao'an is way too expensive.
a few posts that are well worth reading are on the economics of supply and demand, and on the cost of bribes paid to government officials by developers, which he estimates make up 30% of the country's house prices. for those of you wondering when to buy, he also offers some insights on the timing of the turn around.
he comes to some obvious conclusions - that you cannot have a properly functioning market without proper supervision ("监管的不断流于形式"), and that for the market to become healthy again, real estate prices first need to return to their real value ("房价不降到位，市场的预期就无法更改"), which they still haven't today. almost correct, as the traditional recovery process actually includes a period of prices going below their real value.
the irony is that all you need to do to avoid getting caught in the trap yourself, in china, or anywhere in the world, is simply compare the basics.
i was in bao'an last weekend visiting some apartments which a friend had recently bought. even today, the prices there are close to those in the center of my home town of antwerp, belgium, which is the second largest port of europe and controls 80% of the world's diamond trade, while 30% of the population have a university degree, and the average income is about 10 times higher than bao'an.
you do not need a university degree to understand there is probably something wrong here - either antwerp is way too cheap, or bao'an is way too expensive.
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