Category — Investing

The opening session today in the ongoing OECD Forum 2010 was on the future of capitalism, where economic historian Anatole Kaletsky argued that “we’re entering a new period of pragmatism, when ideology will give way to a more “common sense” approach.” Arguably, this is not such a radical notion; the financial crisis has shown in a dramatic way that there have been some serious cracks in what has commonly been accepted as “good” economic policy. It is easy to blame greed and carelessness in the financial sector, but that hardly goes to the heart of the problem. At the end of the day, even if the greed and carelessness of a few “evil bankers” really is to blame, policy has to change if the economic structures have been conducive to making it cause despair for millions of people.

Aside from highlighting dysfunctional economic structures and the need for reform, a very immediate consequence of the crisis is that Governments have been [Read more →]

In the still ongoing political smear campaign against Goldman Sachs conducted by the Senate Subcommittee on Investigations, the latter has been particularly enraged by Goldman Sachs’ supposed “bet against home owners”. That is, because Goldman Sachs was net short exposure to mortgage-related securities, policy-makers have been arguing that the bank was contributing to pushing prices down, and in an evil way benefiting from the ruin of hard-working regular Americans.

Now, first of all, I am unsure about whether Goldman’s supposed “big short” really had a significant impact on housing prices. Arguably, the collapse of the U.S. housing market in 2007-2008 was a necessary consequence of unsustainably rapid price increases brought about by horribly easy credit in the years before, and would have been just as painful for regular hard-working Americans regardless of whether Goldman had a net short position or not. One could perhaps even argue that the crash would have been worse if Goldman had not been as hedged as they were.

Above: Charles Ponzi, the model banker, according to the Senate Subcommittee on Investigations

Nevertheless, it is interesting for the sake of argument to assume that Goldman’s supposed “big short” did in fact push down the price of property, which seems [Read more →]

The Norwegian Government Pension Fund, managed by Norwegian Bank Investment Management (NBIM) sold off more than half of it’s 133 billion kroner position in Greek, Portugese, and Spanish government bonds during 2009. The funds chief executive, Yngve Slyngstad, explained that while Eurozone government bonds in 2008 were priced as if they gave risk-free returns, “we said they were more like return-free risks”. Well done, Nassim Taleb would have been proud – there are arguably no such things as risk-free returns anyway (at least not in Southern Europe).

Yngve Slyngstad, not yet fifty years old, started his career as a junior researcher at Norges Bank at the age of 31 after completing a whopping four Master’s degrees in Law (University of Oslo), Economics (UC Santa Barbara), Business Administration (NHH) and Political Science (University of Paris, Sorbonne), spending years backpacking around Asia, and living by himself in the wild and weather-torn Northern Norway reading Wittgenstein. Needless to say, we here at Evolution-Revolution think this is a pretty awesome guy.

Back in January my dear co-author The Sundance Kid wrote a short piece on  the future prospects of the Norwegian krone, whereby Evolution-Revolution agreed with Credit Suisse’s prediction that the krone was on its way up (while, admittedly, making ourselves guilty of blogger-journalism-commentator hedging dicussed in this post by the eminent Baruch at Ultimi Barbarorum). Since then, the Norwegian Krone has, indeed, strengthened a bit vis-a-vis both Euro, Pound, and Dollar (although as Nassim Taleb would be quick to point out, this might have been completely random). Nevertheless, the krone still has a way up to go, even more so than it did in January.

In particular, three factors underlie this prognosis: [Read more →]

We’ve previously endorsed the Norwegian Government Pension Fund’s  (GPF) approach to enhancing global corporate governance. Recently, NBIM – the manager of the fund – was also instructed to allocate about five percent of its portfolio into unlisted real estate. I consider this  decision quite bad for the following reasons.

Property investments are notoriously illiquid. Currently the reserves of the GPF is used to cover the domestic fiscal budget deficit. As wee have recently seen, the deficit and need for fiscal expansive policy will usually be the highest when liquidity is the lowest. Illiquidity  implies below real value prices and as such NBIM will always be selling its real estate investments when prices are the worst (this is in a longer term perspective when oil revenues are actually smaller than the budget deficit)

It was the Yale endowment fund under management by David Swensen that started advocating that long term investors such as the GPF should allocate more of its investments [Read more →]

I recently read Siddharta by Hermann Hesse,  a wonderful book set in ancient India about a young man’s search for understanding and inner peace. Amongst other profoundities, the book also contains some interesting insights on trading and investment. After a thorough brahmin education, followed by three years of life as an ascetic sadhu, the young Siddharta becomes an apprentice under a rich merchant. Only knowing how to, according to himself, think, wait, and fast, he quickly becomes a highly successful and very rich merchant. Importantly, he does this not by using greed or a hunger for “success” as a motivation, but rather by means of cool detachment. Hesse, of course, describes this far more eloquently than I could ever hope to:

“This Brahmin,” [the master merchant Kamaswami] said to a friend, “is not a proper merchant and will never be one; never is his heart passionately engaged in our transactions. But he has the secret of those to whom success comes of ts own accors, be it that he was born under a lucky star, be it magic, be it something he learned among the Samanas. He seems only to be playing at doing business. Never do the transactions have any real effect on him; never are they his master; never does he fear failure or worry over a loss.”

There is an interesting connection here, of course, to modern “practical investment” literature, in which the virtues of emotional control and self discipline are frequently emphasized as being of critical importance to success. The lesson to be drawn from Hesse, then, is perhaps that one possibly extremely effective way of achieving this just this is to not care very much about money – in a Siddhartian sense, “rise above” is perhaps a more appropriate choice of words.

It might not be so easy, though. In Hesse’s work,  Siddhartas spirituality is almost completely killed off by many years of hedonism and financial success – and he becomes so emotionally and philosophically tortured that he abandons his life as a wealthy merchant and almost commits suicide.

Rescuing a virgin in dire straits

The development of Norway’s soverign wealth fund, the Government Pension Fund (GPF), has always been interesting. GPF will this year attend 2000 meetings with American companies, in which they own up to 5 percent, urging them to separate the role of CEO and Chairman. They hope to make the governance structure more transparent and independent. Governance structure in many American corporations is arguably quite old fashioned and this should be a welcome nudge in the right direction. It’s hard to argue this to be a bad thing and it could quite possibly increase returns for Norway in the long run. Even a marginal increase would be significant as the stated investment horizion of the fund is infinite, that is until the collapse of the universe or the world financial system, whichever should come first.

The authors of this blog merrily receive about 82000 Norwegian kroner (NOK, €10 000) every academic year in living support for students from the Government of Norway. As we study in Estonia and do not engage in currency hedging, our standard of living (in economic terms) is subject to the NOK/EUR exchange rate. (Estonia has pegged its currency to the Euro and is most probably joining next year)

Over at Financial Times they report that Credit Suisse has made its currency predictions for the next year and betting on the strength of the krone and selling the Euro. With the budget balance and current account surplus larger than 10 percent of GDP, lowest unemployment rate in Europe and buoyant stock and housing markets Norway looks like a sure bet. It looks like we can expect a lenient new year in Tallinn.

Of course there are certain caveats to such a prediction. Foreign exchange markets are notoriously hard to predict and from what I remember investment banks tend to fare worse than just predicting the current exchange rate. Further, as a small economy, Norway would suffer under the curse of small currencies if a new financial crisis was to arise (which many are predicting). Last, the krone correlates rather well with the oil price which might / might not be a benefit for an eventual speculator.

Thanks go to Radu, a loyal evolution-revolution reader, for sharing the FT-article.

Update (May 4th, 2010): More on the Future Prospects of the Norwegian Krone (it’s still on the way up) – New article

Der Spiegel has a very interesting article on three Swedish guys who have started their own jeans brand, Noko Jeans. Noko has chosen a quite unusual country for the manufacturing of its jeans: North Korea. Apparently the People’s Republic has its own web site where it offers opportunities for foreign investors. Maybe we are actually seeing the first few steps of a softening up of North Korea and its eventual emergence as a part-taker in the global community.

For Noko the deal was closed in the same way as most early investors in China did it. Heavy drinking and socialization with the locals to build trust and making a deal with a conglomerate that really seems to make everything. They couldn’t get all that they wanted though; the jeans had to be black since blue denim jeans were considered too much of an American symbol. Some old habits die hard after all.

The Wall Street Journal reports today that the United States Federal Government is dwarfing private investors in providing venture capital for new high-tech startups – in particular in “clean technology”. Predictably, many (Americans) are worried that this is another step in the direction of a socialist United States. This is worrying too much.  There are abundant examples of governments successfully investing in industry – especially “infant industry” – in non-socialist countries with weaker constitutional safeguards than the U.S. If anything, it is a much more sensible way to do stimulate the economy during a recession than having people paint lamp-posts or pick leaves.

More importantly, the surge of public investments into high-tech business is probably very good for the private sector, both in the long and short run. Already, private venture capitalists are eager to invest in companies that receive loans or equity investments from the government. This, of course, can simply be attributed to the fact that more access to capital and concessionary interest rates should make lower risks and higher returns more likely. However, the much more significant effect – especially over time – is the establishment of strong intrasectoral networks that are necessary for any advanced industry to flourish. Such networks – prominent examples are Silicon Valley and (until recently) the car manufacturing clusters around Detroit – allow for specialized production knowledge to be developed and disseminated, specialized suppliers and consumers to gain sufficient economies of scale, and for consumers to “learn” new products; all necessary ingredients for dynamic economic growth. Notably, a high degree of geographic concentration is not always necessary, but a fairly large number of firms and a significant industry size is.

The network dynamic also highlights a particular reason why it may be appropriate for taxpayers to be venture capitalists. Because many of the benefits of venture capital investments – such as new innovations or other “network benefits” as outlined above – are external to individual firms and investors, but still benefit the economy as a whole, VC investment incentives are in some ways more symmetrical with those of taxpayers than private VC firms.

Of course, the establishment of strong dynamic intrasectoral networks can and has many a time been achieved without government intervention. However, it has not been achieved without plentiful financing – plentiful financing clearly not available in the wake of a financial crisis, especially for small firms. When the Federal Government is able and willing to make the necessary investments, why not be pragmatic rather than paranoid and let it? If anything, in five or ten years the U.S. might just find that they paid off.