Wille Faler’s Buzzword Bingo

Much has been speculated about the Credit Crunch’s potential effects on the wider economy - and I’m still inclined to believe that although the effects on the labour market might be negative, it will not be anywhere near as brutal as the aftermath of the dotcom-bust and 9/11, at least not for IT.

Personal, anecdotal evidence (the best kind*, as you can bend it anyway you want to fit your thesis..) would suggest that the IT market is actually pretty bouyant at the moment: in the last two or three weeks I have been barraged with more phone calls from recruiters than at any other time in the last 2-3 years, even though the last 2-3 years have been rather good.

* ..although quite obviously not the most reliable kind of evidence..

House Price Crash Calculator

..personally, I think a reset to mid-to-late-2005 prices seems reasonable, given current rental yields and credit conditions.

Anyone trying to follow the gyrations of the economy and markets these days would be excused for feeling slightly panicked. But in times like these, trying to react and predict every movement of the markets and its implications is folly - it’s a sure way of growing an ulcer.

What is more interesting and definitely a lot more productive is to try to see what the long term implications of current and recent events might be, what long term effects will they have in 1, 2 or 5 years time? What do those long term trends mean in terms of you protecting your downside and capitalizing on the opportunities?
Forget about whether the stock markets are up or down 5% tomorrow, try to see where the ball will bounce next in the long term, before someone else does it!

The best medicine in these days is to apply a few mindsets, regardless of whether you are an investor, running a startup, or just a regular Joe worried about his livelihood:

• Don’t panic about events on a particular day!
• ..but don’t delude yourself either, or engage in wishful thinking. Just because you don’t want or wish for something to happen doesn’t mean it can’t happen anyway. Self delusion, wishful thinking and denial are strong instincts these days in most people, don’t be one of them.
• Don’t try to “time the market” - unless you are clairvoyant, you’re likely to get it wrong, just try to find what you think is good value based on rigorous analysis and research. But be warned, there may not be much good value out there at the moment.
• Take the long view - try to see where current and recent events are leading in the long term, not what might happen today or tomorrow.

Volatile times carry a lot of noice, the trick is in cutting through the noice and finding the signal.

I’m generally against government intervention and hand-outs, but seeing this, it is good to see that the government at least helps out those that need it the most.

A lot can be said about the current credit crunch - first and foremost central banks across the world in general, and the american Federal Reserve in particular have poured gasoline on the credit bonfire by means of artificially low interest rates, resulting in unhealthily cheap credit being plentiful. This is not a lesson the Fed seems to have learned anything from, now that they are again lowering interest rates and pursuing wildly inflationalary monetary policies that will only go towards rewarding irresponsible economical behaviour (spending more than you have on things worth less than you spend), and penalizing responsible economic behaviour (saving and producing).

But, blaming only the monetary policies and monetary system is short of the target, even if they have not helped the situation - it’s kind of like blaming obesity on McDonalds for selling Big Macs so cheaply.

The core problem has been a perverted incentive system in both retail- and investment banks coupled with weak checks and balances on risk taking:
Effectively, people in the banking industry have seen massive potential rewards in pursuing high risk, short term goals, but very small downsides if those risks would go haywire.

Let’s just examine the following example:
If you were to put $1 billion of someone elses money on the line on a very high risk gamble, were you knew that if it worked out, you’d be getting a $10 million bonus, but if it went all wrong, all that would happen would be that you got fired and could move on to the next employment were you would be faced with similar situations. Would you be inclined to take the great risk for the big reward, with the knowledge that the downside was very limited?

I think the answer to my question for most sane, rational people would be a resounding “Yes!”.

What is currently playing out is nothing more than the consequences of massively perverted and misaligned incentives between the employers and employees (the bankers themselves) on a massive scale.

If a companys goals are in complete misalignment with its employees incentives, disaster will always follow, it is as simple as that. The Federal Reserve and other central banks will probably keep their incompetent bumbling up for the foreseeable future, but the affected banks can certainly do something about reforming their screwed up and broken incentive systems .

Getting a large bonus should not be a God given right regardless of long term results, it should be a privilege and reward received for doing the right thing in the long term perspective, regardless of whether it means taking a few short term hits at times.

(A link for those of you not familiar with the term “Welfare Queen”, only thing is, this time the welfare checks are written by the Federal Reserve by means of bank bailouts and inflationary monetary policies).

“Hi, I’m from the Government, and I’m here to help!”

..anyone who actually takes the “analysts” in the media seriously should have their brains lobotomized. It should be common knowledge that anyone even remotely worth their salt won’t work in business journalism, as amply shown by the video above, regarding Bear Stearns, that collapsed the other day (the first section of the video itself is only 7 days old).

A man is getting into the shower just as his wife is finishing up her shower,
when the doorbell rings.

The wife quickly wraps herself in a towel and runs downstairs.  When
she opens the door, there stands Bob, the next-door neighbour.  Before
she says a word, Bob says, ‘I’ll give you $800 to drop that towel.’
After thinking for a moment, the woman drops her towel and stands naked
in front of Bob, after a few seconds, Bob hands her $800 and leaves.  The
woman wraps back up in the towel and goes back upstairs.  When she
gets to the bathroom, her husband asks, ‘Who was that?’

‘It was Bob the next door neighbour,’ she replies.

‘Great,’ the husband says, ‘did he say anything about the $800 he owes
me?’

Moral of the story:
If you share critical information pertaining to credit and risk with your
shareholders in time, you may be in a position to prevent avoidable exposure.

People love predicting and predictions, yet new turn of events always seem to catch us off guard. Just compare last years predictions with todays realities: UK property was predicted to continue growing at mindboggling rates, today it’s dropping for the fourth month in a row. Growth in 2008 was expected to beat growth in 2007, now we are worrying about a potential recession.

Why are we so sure about our predictions, yet manage to get them so wrong whenever events turn in another direction?
The hint is in the words of the last sentence: direction.

Most predictions aren’t actually predictions, they are extrapolations - They extrapolate the future based on the current direction and trajectory, nothing more. They may take known information into consideration, but they rarely affect the extrapolation in a material way.
The fact is unexpected events and turns of direction are just that, unexpected, people rarely, if ever see them coming. But these events are the events that often dramatically change the current direction and shape the future: Who saw 9/11 coming? Almost no one. Has it shaped history as we know it for the last 6-7 years? Definitely.

The moral is that predicting the future is a fools errand, you’re always going to be wrong. Extrapolating the future from the current direction is fine, as long as you realize that it is just that, and not necessarily an accurate prediction of future events.