Friday 7 December 2007

The Economy in Turmoil - Sub-Prime Mortagages

A lot has happened over the last few months, the sub-prime mortgages fiasco, the banking crisis in Britain, housing prices dropping, the inevitable slowing down of the economy and the recent cuts in interest rates by the MPC (Monetary Policy Committee) and of course rising oil prices.

All of these can be seen to be linked. America, being the worlds biggest economy, affects the world economy by events taking place in its economy. So the Sub-prime mortgage lending that was going on, where basically the banks were giving loans to people with bad credit history, and being extremely lax about it, meant that suddenly, as a lot of loans went bad (people couldn't pay them back) you have major banking firms reporting losses on a gigantic scale, and we are talking billions of dollars. CitiGroup's chief executive and chairman resigned after it was announced that profits for the quarter were down 57%, and their $55 billion Sub-Prime mortgages portfolio has lost between $8-$11 billion dollars in value. And most other banks have been hit drastically too. Goldman Sachs forecast a £200 billions of loss to sub-prime mortgaging to the entire financial sector.

This, combined with the rise in oil-prices, (which are influenced by a number of factors such as time of year, middle-eastern situation, trading on the commodities market and the strength of the dollar) has meant consumer confidence has taken a severe beating. Just look at what happened at Northern Rock...if that wasn't a loss of confidence then what it? Now consumer confidence is very important to all countries but especially so to the US. This following statement is from the BBC and explains the impact of consumer confidence or lack of:

"Consumer spending accounts for two thirds of the US economy. Their lack of confidence and falling house prices have hit analysts' forecasts for economic growth. Capital Economics analyst Paul Ashworth said that the data "supports our view that US GDP will contract over the final three months of this year and that falling house prices will constrain consumption and cause GDP growth to average only 1.7% next year."

And of course the house prices are falling due to the repossession of homes that banks do when people default. This has meant lots of unsold houses which has led to a fall in prices. The following picture shows the situation in a badly struck Cleveland:

Now when America's economy sneezes, the rest of the world seems to get the cold. With the inter-bank trading become much more cautious after this crisis, meant that Northern Rock struggled to get the funds its business required, and hence the run on its branches. And of course the losses were also to some degree shared by the British financial sector.

The British economy has definitely slowed, which isn't a big deal, it was widely forecast to. But the fact it has happened at a time when inflation is slightly high, has meant that the normal way of combating it, by cutting the rates will just mean that inflation gets worse. This is the key reason why stimulating the economy will prove such as difficult task.

As Evan Davis the BBC Economics Editor pointed out that due to the drop in the value of the pound, which is due to the inflation, Britain's exports would become cheaper and drive the economy forward that way. However there are certain problems with that such as the currency value of other countries is cropping too, in fact this is the highest the pound has been to the dollar ever. But hey lets hope.

PS: In my Virtual Trader account (see my review on it in an earlier post) I went on after a long while, what with being in Egypt and things, and imagine my bemusement when I discovered that I had gone and bought shares in Northern Rock which were now gloriously in the red. Goes to show that a thorough look at the figures and an understanding of the business model is the key to buying the right shares. Something I'll keep in mind for next time.






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Sunday 2 September 2007

opportunity cost

Hi,

I went to Egypt for the summer to learn arabic in a two month intensive course. But what is that actually worth? We could look at the empirical value, it cost me about £800 to study, live, tour and explore Egypt. But then that doesn't really account for how much it was worth to me. Say for example, it is worth much more to me than the simple empirical sum, because I enjoy arabic and love exploring new countries much more than £800.

So how to attach a value to this trip then? let continue with the price route: So, the fact that I spent £800 on the trip tells us what? It tells us that this trip was more valuable to me than say spending it on a holiday in France...or buying a new Laptop...or the other millions of things I could do with £800. so thats it: the opportunities I foregoed to go to Egypt is the implicit cost of the trip to Egypt to me.

This opportunity cost can apply to a variety of different things such as time...the time i spent in Egypt is much more valuable to me there than anywhere else....because I spent it there.



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Monday 6 August 2007

economic sanctions

Recently I was reading a book covering the history of the Ottoman empire. In it I came across a period where Sultan Salim the Grim ( he once got playfully asked by his vizier to inform him in advance about his execution date so that he could put his affairs in order - and he replied that he had been thinking of getting him executed ( he executed 3 viziers during his short reign) and that as soon as he found a suitable replacement he would let him know!) put sanctions on the the rival Safavid empire. This led to the Safavid empire really struggling, but at the same time it led to the Ottoman empire to suffer as well. What happened was that the Safavid's provided the raw goods, which were traded in the Ottoman Empire, and then the final product - silk sold in Italy - so the aftershocks of this embargo was felt all the to Italy. This leads to the question whether, looking at it in a purely economics point of view, whether economics sanctions are actually useful, because though they achieve the primary aim of making the opposition suffer, it kind of defeats the bigger objective of remaining stronger than the enemy, because you just both get weaker together.
However if a trade embargo is called on a country collectively, as in everyone is overwhelmingly ostracising it - such as Iran currently, that means that the losses are in a sense spread around to become negligible, and due to the fact that theres a lot of countries involved, chances are that they also have the raw goods which the embargoed country has to offer.

I'll end this entry from a quote from this Egyptian I met, he wanted me to bribe him...so I told him its against my religion...so he said its not really (he was Muslim too), rather he painted it as such an essential part of the economy so much so that it was in essence the "economy" as a whole. Needless to say I didn't give him anything.



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Monday 23 July 2007

unequal economy

Sorry about the delay, the arabic course takes a hell a lot of my time up, but the real reason to be honest is that its a bit if a chore to come down to the internet cafe.
A thing I noticed though in Egypt was the huge gap between the rich and the poor. One way this shows is that when we cash in a tenner that equals LE100. But the thing is that most things can be bought for under 50p or in LE5 and with most being under LE1 which means about 0.5p. And the thing is people don't have change for the LE100 we carry around - even supermarkets, which just throws up the comparison with the upmarket Egypt even more starkly: Star City Mall. 250 plus shops, probably the most flash shopping centre I have ever been to, we don't do them as well even in Britain. But here LE100 is nothing, and actually the prices are higher than Britain.
So I'll sign off and go and pay my 0.5 pence for the hour of Internet usage I guess.



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Saturday 23 June 2007

Making a living out of crumbs



Today I was reading a really good post by Evan Davis.
He raises the point that huge events such as the upcoming Glastonbury festival etc create huge cashflows, and when that starts happening, though the cash may be flowing in externally, and then flowing out, the community as a whole, gains incredibly, though most of the gains go elsewhere.

And this got me thinking about a lot of successful businesses kicking around today such as EBay, Amazon, Youtube, or even Google and countless others. What do all these have in common? The main part of their business depends on external sources inputting for their own gain, yet the "hoster" which in a sense is the website, get a cut of the profits - the crumbs. Only Amazon actually sells its own stuff, the rest of them just depend on other people. But the point is, that if a million people come to buy someone else's stuff on your site, chances are that a considerable amount buy from you too.

This leads onto a topic Adam Smith discusses in his Fait Principal , "The Wealth of Nations". Here he highlights that protectionist, isolationist policies are not good for the economic well being of a country. He used the example of China, who only had one port open to other nations to trade, and as a result the economy was stagnant.

An example of why this isn't successful: China is good at making toys. Switzerland is good at making chocolate. If the Chinese chocolate makers get advantages over the Swiss from the government, this would mean, due to the lesser number of chocolate makers in China, and due to the lesser quality, the Chinese masses get a raw deal. And vice versa for Swiss people with the toys. This means that no fresh money is coming into the countries and people are spending more than they need on everything.

However if both countries kept their borders open, everyone would be better off as to the price of toys and chocolate, and at the same time, foreign investment would start flowing into them, as people spot that these countries are sitting on quite a lucrative business, and as the money flows in, invariably some of it is going to leak down to the masses, the result of which is a better economy.

Amazon do this too, as, rather than being in direct competition with these other sellers, they just say "Hey, just sell at our place instead". This is a pretty good advertisement for capitalism and the free-market world economy, as really when we consider, the overall benefit to everyone, this is the way forward.

Its like the shops we see, all selling the same kind of stuff, all lined up together. Ever wondered why they are together, thinking that wouldn't it be better for each shop to be away from each other and not have competition? Wonder no more.

The Internet, is the perfect testing ground for the free-market economy - where there are no restrictions, tariffs etc. Where you have access to all the "prices" of different products at the same time, which would naturally stimulate sales of the lowest, and thus drive prices down.

Price doesn't have to refer to the actual price, it could be quality too. So a good quality information website would be placed higher than a worse one, and thus the quality is driven up as the one that's 2ND improves to be first and the first works hard to remain first etc. And the place where all this comparison takes place....the search engine - the ultimate crumb-earning cash-cow.

Wednesday 20 June 2007

Egypt

I am off to the land of the Pharoahs, Egypt for the next two months so I may be kinda slow to write so sorry for that, but I'll try to get in a few posts before I go.
I'm going to learn arabic so wish me luck, apparently its really hard.
But I'll take my camera and post some pics as I go along...and somehow work in an Egyptian theme into my improvised novel.

An idiots guide to investing on the stockmarket - part 2

I'll basically highlight the desireable things in a stock...
a low P/E (see last post) - this means good returns on investment
high dividends - this means that even in a falling market these stocks will be falling less generally as no-one likes to lose a big fat dividend source. So both ways its win win.
Another is look for a low PEG as then it means that the P/E is low and the gains are high.
As for market cap...well I still don't really have much of a clue as to its effects. drop a line if you know.
Now other factors, look for a company with low debts, look for a blue chip firm - these don't generally go bust....
look for a company with prices that have fallen recently...but ofcourse this may mean they might fall further, but look at their actual value (Another post I think for that (seems kinda scary at first glance)) and if its lower than that, then the market will correct itself, but ofcourse if its higher, then don't be swayed by the emotions and actions of others, rather just sell straight away.
okay, part 3 of the guide is here.



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Saturday 16 June 2007

An idiots guide to investing on the stockmarket.

Okay first of all what are shares? They are basically (very basically), what a company does to gain some cash to expand. What they do is essentially sell you a share of the business which means you are eligible to receive a share of the profits (called dividends). Obviously a company going in loss means your share price goes down, as no-one wants a stock that's not paying dividends and going down in price due to its failure.

So what next. Well there is two things to consider in investing, one, what shares to buy and two, what strategy to employ in deciding what shares to buy.Here is a clip of the FTSE 100 share index. This is a list of the top 100 companies in the country and they all have a worth of over a billion. They are known as blue-chip companies, and are seen as safer investments, in that they are more reliable in giving dividends, and as they generally don't go bankrupt, never making the shares worthless. There is always a market to buy and sell these shares, meaning you wont struggle to buy or offload any stocks in these companies.

Next how to read the graph, here are a few definitions:
Price: Average price per share.
30 day change: price change in 30 days.
Beta: this is the measure of risk for an investor in investing in this company, the lower the better.
P/E: Price per share/earnings per share. The lower this is the better. This is used as a measure of the investability of a share.
PEG: P/E/annual growth rate of a company. If this is less than 1 then the share is under-priced, and if it is over one then the share is overpriced - though this is only generally.
Div Yield: This is the dividend yield, as in the percentage of money per share compared to the price: the higher the better...generally, and should be couples with a few other variables.
Market Cap: This is the number of shares a company has in circulation multiplied by the price of the shares.

So that's how to read a basic table. Phew. Its hard work for the beginners.
I'm off now, but next post I'll continue the "idiots guide to investing" by expounding further on how to choose a good stock. And then probably the next post after that will concentrate on the real "thing" in investing - the strategy.



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Thursday 14 June 2007

Heres an interesting and self-proving formula I came across recently:
MV=PT
where M=money in circulation of an economy
v=the velocity of the money circulation (how fast its exchanging hands)
p=the pricing in an economy
t=the number of transactions taking place.

this can be rearranged to find the recommended pricing:
P=MV/T
and this can also be used to show, if assuming that the V, velocity, and T, number of transactions, are constant, that inflation increases steadily with the money supply in the country.

This was proposed by John Stuart Mill who used Hume's work to base his formula. Another thing economics owes to the Great 18Th century Scottish Enlightenment.

Sunday 10 June 2007

Recycling in the Economy and Dickens




I was recently reading "Our Mutual Friend" by Charles Dickens. The story revolves around the will of a very rich man, who leaves all his money to his son - as long as he marries this random girl, otherwise all the money is going to be inherited by the old mans faithful servants. Where does this link in with Economics you may ask...

Well the old man actually made his money from recycling, by getting peoples rubbish, arranging it into piles and then sorting through it, with the dust being useful for some random people, with the wood being useful for some other random trade, and of course if any jewels etc are found, then they can be sold. A personification of economy really.

Now the interesting thing is that even in the mid 19Th century, 900,000 tonnes of dust was being produced by the households of London. Nowadays this figure would be far larger, with London's population having increased enormously, and consequently its waste has increased. So actually a vital part of the economy is how we manage our rubbish, and as always, with anything that is described as "vital", there is a lot of money to be made.

Nowadays we know that we definitely need to recycle, as the Earth's resources are finite. This makes this sector even more important. But what is also important is an economical usage of farmland, because when we look at some farmlands, the farmers can either opt for output of £50 per annum for eternity, or he could go for intensive farming techniques, and get about £400 per annum for the next 15 years.

Unfortunately the farmer will often opt for the short-term option. This is further exacerbated by the supposedly "low" interest earning loans given by the IMF and the World Bank. No loans given by these selfish organisations have been paid back yet, and the amount keeps rising too...due to the "reasonable" interest charged on the loans. This usage of Western interest-earning loans is in my opinion the new hidden imperialistic tool of oppression. The debtors are always going to be less well off than the creditors, and due to the very nature of the loans, will be subservient to the Western nations.

But the beautiful thing is, that there is no costs of invasion, maintenance, crushing of the odd rebellion etc to be incurred by the imperialists, rather its just a steady flow of cash flowing in, almost as tributes were being paid to the Caesar by smaller kingdoms who had to pay to be left free, during the Roman Empire.

In the meantime...check out my much lighter blog where I'm writing an improvised novel:
www.history-philosophy.blogspot.com


Friday 8 June 2007

virtual trader review

I came across this neat little program that MSN have started offering:

https://secure.digitallook.com/cgi-bin/digitalcorporate/msn/home.cgi



Basically what this is, is that it offers you £100,000 start-up money and then you can trade real shares with realistic market conditions etc. Its an excellent way of enjoying all the excitement of playing the stock market, but without the money involved, which obviously could be good or bad depending on how good you are.


And basically they rate you on how much you gain on the 100000 in terms of your assets. And then you get put on a ranking table, on which I'm currently 27 (get in!), and for the 15-19 year old league I'm currently 3rd (GET IN!).


Finally to conclude the post here's a few tips I've picked up during my reading of "Investing in Stocks and Shares" by Dr. John Wright

  • Decide on what you want from these stocks - if its long term growth then look at a company which has been growing in price steadily over the last few years, and that's pretty much most companies in the FTSE 100.
  • Another thing to consider is the dividends, which is a share of the profits. This will be high for some companies and generally will accompany a high price.
  • A good way to make money is to do some good research on undervalued companies which generally will be better conducted on less known stocks, which are less analysed and your looking at the AIM 350, FTSE 250 etc.
  • Finally diversify the portfolio of shares into lots of different sectors. This alleviates the risk of one falling - as then the money from that sector will be invested in other sectors fueling a rise in another sector, so basically you don't lose. Interestingly if you invest in 10 sectors that alleviates 90% of the alpha risk which arises from investing in just one company. Investing in 20 alleviates 95% of the risk.
Finally I'll end with a little stock market axiom "The trend is your friend" - but in true stock market fashion it can also prove totally untrue.

Sunday 3 June 2007

The Goldsmith opens Pandoras box

Many years ago, gold used to be the medium for exchange - money in other words. Now goldsmiths had excellent storage facilities, safe from most things, etc. So people would leave their gold at the goldsmiths and get a receipt in return. Now what happened was people started trading these receipts for other things, basically using these receipts as money. So the goldsmith gradually worked out that maybe he should start charging people a basic rate for usage of the facilities which he duly did.

Now the goldsmith got greedy. He realised that the receipt holders very rarely cashed in their receipts and retrieved their gold...so he decided to use this idle wealth for his own purposes: He started lending it out on interest. So now he was making a load of extra cash, none of the holders were any the wiser and the goldsmith bought himself a flashy new horse and cart...made out of pure gold (just the cart).

Now the goldsmith got even more adventurous (eyeing the platinum cart now), he decided that as the receipts were now accepted as money, why couldn't he just write receipts for gold he didn't have and lend that out on interest too. This resulted in a whole load of cash and the aforementioned platinum cart and the goldsmith was enjoying life. All the cash was flowing to him, he could just as easily destroy money which, when returned, would still be worth nothing, and he would basically rip it up and write a new one to dupe people with or just keep using that one. of course the interest was given to him in very much real money, so he was getting all of the "real" money which was actually worth something.

Now the people who had their money in the bank got suspicious and made what is known as a "run on the bank". They basically asked for their gold back...which the goldsmith had loaned out...thus the goldsmith went bankrupt. Life wasn't so rosy any longer.

Nowadays this so blatantly unfair system is practised legally by all the banks in the world (apart from some Islamic Banks), and even "runs" on the bank wont make a difference, because the Central Bank will just lend the bank money and get them out of their spot of bother. money is not backed by anything and is truly "worthless", hence the rising inflation rates we see.

There are a few incy wincy restrictions such as the reserve the banks have to have in comparison to the money they create and loan out on interest...such as it was 10% in the UK but is essentially down to less than 1% now. so for (using the 10% fractional reserve), £10 in the bank, £90 could be loaned out on interest.

This coupled with the scary fact that banks are the source of 95%+ of the money in circulation today, leads us to understand that the interest to be payable to the bank is only payable if the bank creates new interest fueled loans to pour into the economy, and to pay them we will need even more bank money with interest on top of that loan, and to pay that....

This vicious cycle will go on and on. Inflation, economy collapses and the boom and bust cycle can all be traced back to the abolition of the gold standard (not backing the paper money with gold), and by the adoption of fractional reserve banking.

We need to start to realise the crippling effects of interest in the society such as its widening of the rich-poor divide. And we should campaign for breaking of the yolk that the interest earning bankers have placed upon us, and look to establish an interest-free economy.

(My views find their origin in common sense and Islam, which forbids interest)

Thursday 24 May 2007

housing market

the current British market i reckon is gonna collapse, as people due to the over-buying to rent is kinda causing the prices to be unnatural, and due to the natural balance of the economy, the prices will right themselves by first collapsing real low when everyone sees the prices going down but will then rebound up slowly. This is further exacerbated by the high interest rates which is going to create pressure on mortgage payers which will result in more houses coming onto the market.
Any ideas to add to these rather rambling ideas is welcome...you all know where the comments button is.

Thursday 17 May 2007

inflation and how to curb it

the fresh inflation fears as have been reported in the press recently, lead us to consider that the current methods of addressing inflation, namely increasing the interest rate, may need readdressing.
Before looking at alternative measures to curb inflation, lets look at the effects of inflation:
causes a rise in people spending.
this causes a rise in investment as people are afraid of losing purchasing power in savings, so turn it to real value.
causes increases in wages etc although this is generally not consistent with the inflation.
international trade will suffer as inflation pushes up prices, meaning people will look abroad for cheaper goods, meaning that the import>export.
Her Majesty's Government slyly slips in a few "stealth taxes" so as to disinflate the economy.
and costs will be incurred by businesses as they need to reprice regularly eg print new price tags.

so how to address inflation...well firstly lets understand that a little inflation is good as it allows a little growth, as well as making wages to rise, which generally speaking dont ever get bargained down. The popular way is to get the Central Bank such as the Fed Reserve or the Bank of England to hike up interest rates thus promoting savings and reducing the velocity of the money (how quickly it changes hand)and thus prices. This could have the adverse effect that as many people have debts, their expenditure increases with a interest rate rise, yet their cutting out of unnecessary items still doesnt meet the usurious rates, so the wages have upward pressure applied and this would fuel inflation itself.
Another option that i heard the Chinese recently use, was to raise the reserve money that banks have to have, which reduces money velocity and inflation and hence prices, yet doesnt raise the debts of the public or harm the balance of trade of the country.

the question for this post is: What other methods could be used to curb inflation?

Saturday 12 May 2007

Supply and Demand

Once upon a time, in a land far far away, there lived a wookie in a hut. Now the wookie's parents had just died when we join him, so after many intricate, ethereal and suspiciously gothic ceremonies, to mark his parents passage into the great void, the Wookie, being the pragmatic individual he was settled down to look at his inheritance. His parents had left him a brilliant collection of hair from famous wookies from all aver the planet Endor. The wookie was happy.

Now Chewbacca, who had dropped by, in his typically forthright manner informed the wookie, henceforth known as Bob (as its easier to type), that he should sell this hair onwards and maybe keep only a little bit for himself as a momento to his parents, as what the hell was he going to do with a collection of bloody hair, "which was useless" he said. Now Chewbacca didn't know that hair for wookies, isnt grown, rather it is glued on, after obtaining it from any reasonable hairdressers, so after an offended looking Bob tartly informed him of this information, the reasonably chastened Chewbacca realised that due to the scarcity of humans, and thus hairdressers whos business needs humans, the hair was worth a bomb.

so the supply is limited, and demand is huge, hence the price is going to be astronomical...now Bob starts rolling in the big bucks, he has the whole merchandise going, hell at one point he was even going for wookie chieftain...but then a hair mine is discovered and suddenly, along with his own hair collection, Wookie market is flooded with new mined hair. The supply increases, the demand goes down, as wookies mania for new hair is satiated and people dont regard this as the "in-thing" or necessary anymore. No one buys the hairs anymore from Bob's shop, so Bob is forced to price down, and match his price to the relatively low current demand, and he starts selling at the most effective price.
The question is....what would happen if say for example if the mining firm collapsed due to some random tradegy at the mine, or better still, some shocking revelation about the owner, and keeping in mind that wookie demand for hair is relatively inelastic (meaning they dont give a damn about the price and pay whatever to get it) what would happen to the price, and how could Bob improve his business model further.
dicuss

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Friday 11 May 2007

The Tripartite theory
Hi, for my first post I'm going to look at basically why the hell I'm not a millionaire. The reasons, once I started a period of deep introspection, are very simple, (and put a damper on my plans):
1. I do not work - and as suggested by Smith (the guy on the £20 note) compensation for labour is one of a tripartite of sources for income.
2. I do not own any property, hence I cannot rent (which they would pay to me for giving them the opportunity to use that land to make a profit) out to people and make money that way.
3. I do sell things...like last week I sold a cricket bat for £7 and making a huge profit on the way too, but not exactly Forbes standard you may agree.

So basically to become a millionaire for all you budding entrepreneurs, you have to either become VERY talented at a job, Buy up land and rent it out or start selling things for a profit.

for every post I'll pose a question for the reader to answer, so as to make this blog an excellent source of combined information and for me to gain in knowledge.
The question for this post is in this scenario...I own a huge farm , I rent it out benevolently to some serfs, who decide to stay at home and employ their kids to work...the kids go up in arms with this arrangement and rapidly gain wages to compensate for their industriousness. Now the serf sells the produce for a high enough price to cover the rent and labour and to still have profit remaining. Good so far...DISASTER strikes, the pitchfork has been broken upon a particularly nuggety rock...the serf pays for it...is this another section of money making, thus proving the tripartite theory of rent, profit and wages wrong, or is this a cunning way of asking the answer for a question I am not entirely sure about?
Discuss.

About Me

LEICESTER, East Midlands, United Kingdom
Co-founder of DesignMolvi, Qur'an hafidh, graduate of Oxford University. Now blogging at www.islamicfinanceguru.com