Footnotes
1. Smith,
Adam; Wealth of Nations; The
Essential Adam Smith; W.W. Norton, New York, 1986; p.p. 171, 169.
2. Ibid,
p. 154.
3. Ibid,
p. 162.
4. Ibid.
p. 322.
5. Ibid.
p.p. 251, 252.
6. In
order not to bore some of our readers, we won’t write anything else about East
Asia; except to say the story is Adam Smith meets the civilization of China.
7. Keynes,
J.M.; The General Theory; Harcourt
Brace and Company, San Diego, 1964; chapter 12; p.p. 154,155.
8. Bank
for International Settlements; https:///www.bis.org/press/p090519.htm.
9. Peterson
Institute; Real Time Economic Issues
Watch; https://www.petersoninstitute.org/realtime/?p=691.
10. According
to Simon Johnson and James Kwak, investment
complexity also allows some very smart people to game the loopholes in their
own institutions. Financial complexity is therefore the result of a system of
belief in unfettered free markets and short-term incentives that is very
dangerous.
11. Any
finite asset can serve as the basis of an infinite number of derivative
contracts that are only as good as their counterparties. As the 4/17/10 NYT
related, this allowed Goldman Sachs to create synthetic CDOs once the subprime
companies had started to run out of “risky borrowers to make bad loans to.”
This synthetic CDO, featured in a 4/16/20 SEC complaint, only referenced shaky
mortgages held in other portfolios (I). The synthetic CDO, ABACUS 2007-AC1 held
credit default swap insurance that smart investors in effect bought (II) and
gullible investors in effect sold (III), losing $1billion in months. This page illustrates the mechanics
of this complicated investment. “The
rise of synthetic C.D.O.’s…took an already bad situation and made it worst.”
The people who created this could have been doing something useful.
Our first job was analyzing investment
prospectuses. We learned the following: If the prospectus contained pages of complicated
sharing structure (that’s what the investment banks essentially set up) and
only one page describing the fundamental investment, there is a real problem.
In this case, the reference portfolio of mortgages was worse; it was just a
castle in the air.
This
article is an excellent discussion on the issue of transparency.
Transparency in the financial markets provides information to investors so they
can make up their own minds. Particularly in equities, there is more than
enough information out there for investors to make good decisions. That
requires only asking the right common-sense questions and knowing what the
information means. Generally speaking, the more detail you get about an
investment, the more credible it is.
12. Wilmott,
Paul; Frequently Asked Questions in
Quantitative Finance; advertisement.
13. Toynbee,
Arnold; Greek Civilization and Character;
Mentor Books, New York, 1953; p. 24. The Persian word for marketplace is
bāzār.
14. Our
earlier article, “How the U.S. Stock
Market Works,” found that the stock market is error correcting to a degree
that can be econometrically measured, as long as the U.S. economy can be
fine-tuned by monetary policy. In the Great Recession, the Fed has proceeded on
a course of “quantitative easing,” that has thrown everything including the
kitchen sink at the financial system in order to prevent its collapse. The U.S.
stock market is now no longer econometrically error-correcting. Given future
economic conditions, it might start error correcting at a lower level.
15. Gross,
Bill; Pimco Investment Outlook; March 2010.
16. Since
Samuelson, modern economics has expressed economic activity in terms of
equations. However, as a 4/5/10 Times
Online article relates, George Soros created a new economics institute at
Oxford. The director says, “Even now, more than 18 months after the start of
the credit crunch, some freemarket economists appear to be in denial about the
causes of the crisis and there was no consensus about what to do next…Too much
of modern economic theory relied on sophisticated mathematical models to
predict market behavior. A broader, interdisciplinary approach to economics,
taking in history, psychology, natural science – to deal with issues such as
climate change – and even literature was now needed.”
We think that economics and stock
market analysis are social sciences; thus like life there are
both exceptions (contingencies) and conditions when the rules hold.
17. Silicon
Valley Network; 2010 Index of Silicon
Valley; https://www.jointventure.org/images/stories/pdf/2010%20Index-final.pdf;
p.p. 20,60,64,65 respectively.
The 4/9/10 issue of Newsweek, p. 24, notes eight Silicon Valley
entrepreneurs to watch. Not one of their companies is in manufacturing.
18. Smith,
Adam; Ibid; p. 266.
19. de
Tocqueville, Alexis; Democracy in America;
Book II, chapter 8.