Mar. 18th, 2006 11:48 am
peterbirks: (Default)
Those of you with longer-than-average memories may recall that I put some money into Vodafone sometime last year when they were at, well, a little bit of a higher price than they are at now (and a lot higher price than they were eight weeks ago), on the grounds that the new management might spot that Vodafone was now in a mature industry, and that Vodafone would sell of its US and Japanese stuff and return a bundle to its shareholders in the form of a special dividend.

As usual, timing is everything and, as usual, I was ahead of my time. As Stravinsky said to Diaghilev of The Rites of Spring, "it's years ahead of its time!". To which Diaghilev replied sagely "Yes dear, so why do it now?"

It would appear that Vodafone has, at least in part, come round to my way of thinking. If I had timed my assessment of the situation as did a certain French lady (who does have the advantage of being a senior Vodafone executive) who bought shedloads of Vodafone shares at 110p at the end of January, then I could have cleaned up. As it is, after the special dividend, I shall just be minorly in profit. Bastards.


Here's an interesting piece from this week's Hedgeweek. Now, first you must realise that these people are investment managers. And you know my opinion of investment managers. However, of more interest is the immediate analogy to how some people play cash games.

Merrill Lynch Investment Managers has launched "Target Driven Investing" for defined contribution investment schemes. I won't go into the fluff surrounding the justification for this, which basically says that the predominant "lifestyle" approach is too risky (this is the one that gradually reduces your exposure to equities as you approach retirement age). The interesting part is MLIM's "solution".

"DC Target Return has twin objectives: generating a target return of cash plus 3% and preserving accumulated capital. ... DC banking works on the principle of setting a long-term target rate of return measured over a member's career and includes a regular banking mechanism whereby a proportion of the risk assets is switched into safer assets every time the return target can be locked in.

Now, read that carefully, because this is what in poker is called "eating like a mouse and shitting like an elephant". What, for example, do you do when you are way short of cash plus 3%? Logically, you have to shift into riskier assets.

In fact, this is either the strategy of "quit when you are up by a certain amount" or "play weak-tight when you are up by a certain amount".

If I had an investment manager who told me that whenever a particular asset class had performed well enough for the year he would immediately switch into safe assets to preserve the gain, my first question would be "and would you switch into riskier assets if I was down? Or would you just increase the stakes? And, if I may ask, what's wrong with taking your locked-in profit and smacking it into something really risky, provided you are plus EV on the deal?"

Target-driven investing just about makes some sense if you are getting very close to the end of the investment period (i.e., the member is nearing retirement); because, in a very real sense, it is getting close to the last hand that you will ever play, so 52% edges aren't that good an idea. But for someone in their 40s, a TDI approach is madness.

Still, it's Merrill Lynch. People will fall for it because they haven't got a clue. I just hope some of the guys working at MLIM are playing on Party Poker.
peterbirks: (Default)
I see that Anshul Rustagi, superstar of complex derivatives at Deutsche Bank, has been sacked for overstating his position by a mere £30m. As DB will doubtless say, this is not very much in the grand scheme of things when it comes to DB's derivatives book, so perhaps Mr Rustagi should appeal, claiming that the amount was "trivial".

Much though I would love to use this as evidence of some kind of portent of doom in the credit derivatives market, I won't, because it just wouldn't be true. All that this incident showed was that these guys are dealing in areas so complex that the risk managers aren't brainy enough to keep up with them (since once reason that they are risk managers is that they are not fast and sharp enough to be traders).

Could Rustagi have carried on for longer and "done a Leeson"? I doubt it. Unlike Barings, DB is not run by total tossers who preferred to believe mythical profits rather than hard numbers like cash flow.

But we can see how it all developed. Young stud in big gambling game (non zero-sum) wins money, thinks he's good, plays bigger, gets unlucky, is too embarrassed to reveal that even he can occasionally make a big loss, conceals loss, chases loss, loses again, and so on. Gets discovered, and yet another blow-up. Taleb chuckles into his soup.

more observations )
peterbirks: (Default)
OK Harrison, I bet you haven't been playing this music choice in the past few weeks!

It always amuses me when people battle against the closure of final salary pension schemes. My employer is the result of millions of mergers/takeovers, and because of this there are myriad schemes within the company. However, since turnover outside editorial is quite high (let's face it, would you stay in sales or marketing for longer than two years?), there are only a few employees in my building on the final salary scheme offered by the now-no-more Lloyd's of London Press (yes, we publish Lloyd's List, the world's oldest daily newspaper).

As they fret that this scheme might be taken away from them, I say that I wouldn't enter a final salary scheme if it was thrown at me. Money purchase schemes, I tell them, are far preferable. Since these people tend to believe what they read in the newspapers (you would think that they would know better) they look at me as if I am mad.

Look, I say, if you are in a final salary scheme you are effectively lending money to your company at a very generous rate. And, if they spunk it all away so that there is none left, you are very near the bottom of the pile (just above shareholders) when it comes to getting any money back. And the government compensation scheme recently introduced merely exacerbates the moral hazard. I, meanwhile, get the money that is placed in my pension scheme parked somewhere else, every month, where the company can't get near it. Now, which would you prefer?

Hmm, they say, when you put it like that...

The only people who might logically argue in defence of final salary schemes are employees in the public sector. But I suspect that even here there may be trouble ahead. What happens if urban councils can't put up their local taxes enough to pay for existing pensions? Already we have local councils doing a fair impersonation of General Motors or Ford in that a large part of their budget is now allocated to people who aren't doing any work any more. It can't go on forever.

Centrally funded civil servants probably have the right to feel safest. Governments, after all, never default, do they?

Tell that to retired teachers and army staff in Russia. The ones selling any old trinkets on street corners, because their pensions are now, basically, worthless, thanks to the clowns running the country when Yeltsin was in power.


And, speaking of sovereign debt, a subject dear to my heart (particularly the misleading phrase "emerging markets", when it isn't clear where they are emerging from or, indeed, where they are emerging to — but "sub-prime" markets doesn't have the same ring, does it?) I see from today's Lex Column in the FT that yields on Italian sovereign debt (Birks opinion, little better than shite, triple B minus) are a mere 20 basis points above that of Germany (Birks opinion, double A plus). The only logical exxplanation for this narrow spread is that investors continue to hold the naive belief that the EU will not allow a member's debt to default. That might have been the case when there were six, nine, or even 12 members, but I don't think it holds true now. There is a tangible, and not minute, chance that Italy will fall apart. There is a definite chance that it will default on its debt within the next 20 years — perhaps not up there with the chance of GM defaulting within the next five years (now happily sitting at above 50% probability), but a significant chance nevertheless. If I were in the markets, I'd be punting on widening spreads between triple A sovereign debt (T-Bonds) and, ahem, "emerging market" debt. Italy's yield will be somewhere between the two.

Free Money

Aug. 16th, 2005 01:09 pm
peterbirks: (Default)
Never tell a chancellor of the exchequer that there is no such thing as a free lunch. For a start, it isn't true, either physically or metaphorically. Chancellors get free lunches all the time. Granted, many of them verge on inedibility (I've yet to find a hotel that can serve 1,000 people a decent meal), but you get what you pay for.

The same might be said of the popularity of your currency. In the third-greatest comeback in history (after England at Headingly in 1981 and Lazarus at Bethany in about 31 AD) sterling is once again becoming a currency of choice at foreign central banks. According to the IMF, 4.4% of the world's foreign currency reserves are in sterling, up 0.6% in the past four years. What this seemingly innocuous number hides is that the absolute size of the world's foreign currency reserves have gone up from $1.68tn to $3.73tn. That means that while in 2000 about £42.5bn was held abroad, now there is about £83.8bn. That works out at £8bn a year for five years, equal to £160 a year for every man, woman and child in the country. Not a massive sum, but it's not something to be sneezed at either. We all have had an extra three quid a week to spend because of the increased popularity of sterling as a reserve currency.

And, for Gordon Brown, this is indeed a free lunch. It helps to keep interest rates low (because foreigners are buying our gilts) and the economy moving.

But, as the UK found out to its cost from 1919 through to 1985, and as the US will find out to an even greater cost when its T-bonds cease to be the destination for every bit of other countries' loose change, there is a horrible downside potential. Because when countries start selling your currency, you are in a mess, and it's a mess you can do nothing about. We haven't actually sold these people anything, apart from a "promise to pay the bearer on demand". What we've done is borrowed consumption now in return for paying it back later. That's what America has been doing for the past 25 years. This kind of thing can go on for a lot longer than people expect, even longer than Warren Buffett expects. But that does not mean that it is never going to happen.

You can't really stop countries investing in your currency (and chancellors of the exchequer have an intrinsic self-interest in encouraging it), but what you should do is realize what is happening and plan accordingly. Spend that extra money on something which will last and which will be useful.

How about a massively revamped railway network and restored underground water system? After all, that's part of what the Victorians spent the first wave of extra money on.

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