My unpublished (100,000 word) book “The Financial Jigsaw”, is being serialised here weekly in 100 Issues by Peter J Underwood, author
Last week we looked at the failure of trust in the markets and possible effects. Everyone has their own ideas on how this is going to play out. Here is one set of scenarios which I came across last week: https://gnseconomics.com/en_US/2019/01/11/the-scenarios-of-the-collapse/ There is always the argument that nobody really knows what is likely to happen because markets have never before been in the distorted conditions we find today – worth the short read, if only for interest. Here is the link to last week: Issue 35
We continue to look at how markets function and are so distorted that the ability of markets to expose true price discovery has failed, corrupted by all the interventions from government and the central banks. Here is some more of the evidence.
CHAPTER 7
Markets
“Interest is the difference in the valuation of present goods and future goods; it is the discount in the valuation of future goods as against that of present goods.”
Ludwig von Mises: “Planning for Freedom”
Everything is determined, the beginning as well as the end, by forces over which we have no control. It is determined for the insect as well as the star. human beings, vegetables, or cosmic dust, we all dance to a mysterious tune, intoned in the distance by an invisible piper.
Albert Einstein
Measuring the degree to which trust in markets and business has diminished
The worldwide consulting firm Edelman Berland publishes a “Trust Barometer” each year and looks at various issues dealing with trust in both the U.S.A. and globally. One question that is asked: “How much do you trust businesses, in each of the following industries, to do what is right?”
The two industries at the bottom of the list are “Financial services” and “Banks”—both at 50% in the 2013 survey (Edelman, 2013, p. 6) and were also at the bottom of the heap in the 2011 and 2012 surveys. Clearly little or no progress has been made as far as global public perception is concerned.
Now the 2016 Edelman Trust Barometer reveals the largest ever trust gap (12 points) between the informed public and mass population, driven by income inequality and divergent expectations of the future.
The public have become aware of banking and financial services scandals in 2012-18 (such as mortgage fraud at American banks, drug money laundering at HSBC, rogue traders at UBS, Libor manipulation at several banks, including Citi Group and Barclays) and the ‘interest rate swap’ scandal that hit Barclays bank yet again; here are the supposed causes:
2012 Results from Edelman Berland’s Trust Barometer Concerning the Financial Industry:
- 25% – Corporate Corruption
- 23% – Corporate culture driven by compensation
- 20% – Lack of regulation and oversight
- 13% – Banks being too large
- 11% – Conflicts of interest
- 06% – Changes in the economy
These indicators make an important point for advisors and their clients. Financial planning goes beyond just investing in securities. Advisors should take a broader view of a client’s needs keeping a vigilant eye on the moving targets that are the markets.
There are so many different types of markets that it is impossible to cover all of them in one book. We will consider some the largest and most common ones that pervade the global financial world and which are likely to be experienced by most people at some time in their lives.
Stock markets, generally known as ‘equities’
The stock markets are probably the most well-known of all financial markets and are represented in most countries around the world; the main ones being in London with many various sized markets centred on the London Stock Exchange (LSE) and reported through the FTSE indexes.
The other ones are in New York, the New York Stock Exchange (NYSE) measured by the popular DOW and SP500 indexes and many in Europe, such as the DAX index in Germany. They all provide a central exchange for investors to meet, agree prices for various companies and organisations, and finalise deals.
Securities markets took centuries to develop. The concept of debt dates back to the ancient world and is clearly indicated by ancient Mesopotamian clay tablets recording interest-bearing loans.
There is little consensus among scholars as to when corporate stock was first traded. Some see the key event as the Dutch East India Company’s founding in 1602, while others point to earlier developments and it is argued that a share/stock market even existed as far back as ancient Rome.
A stock exchange provides services for stock ‘brokers’ and ‘traders’ to deal in the buying and selling of various securities, the payment of interest income and dividends including those of shares issued by companies, unit trusts, derivatives, pooled investment products and bonds.
Trading is increasingly less centred on a location, rather, most modern markets are electronic networks which offer advantages of increased speed and reduced cost of transactions. All free markets are driven by supply and demand where prices are fixed according to the degree of desire that investors have for a particular company or enterprise.
There is always a risk attached to these investments which can go down in price as well as up. It requires a good deal of experience to trade in these markets and an average person, who wishes to have some of their savings in such a market, will generally be guided towards mutual funds, such as investment or unit trusts, compound funds and more recently, exchange traded funds (ETFs) which have proliferated in the last 10 years.
These investments consist of many different companies collected into one unit, fund or trust and therefore they spread the risk associated with shares in only one single company. However a breed of speculator has emerged over recent decades called ‘Day Traders’ who use the internet to trade directly on an exchange, often minute by minute, and seek to ‘score’ wins through short-term price movements on shares, indexes, mutual funds etc. It may sound an attractive way to ‘earn’ a living, but beware, the downsides are considerable.
To be continued next Saturday
The government requires it’s employees to have bank accounts and all checks be deposited electronically in a bank, and the government says the money belongs to the bank, we’re bank shareholders. Wrong, we aren’t shit to the government or the banks except as sheep to exploit. Their banks are mouse traps and their money is the cheese; everything they say is a lie.
Yes, Robert, you are quite correct. Bail-in legislation confirms that we are merely creditors of the bank and our savings/deposits can be taken at any time.