There's gold in them thar mobiles!

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Another FT on Africa.

How mobiles fuel banking in infrastructure-hostile environments in Africa:  Better to pay over the phone than carry the cash or waste time going to branches that do not exist.  All sorts of everyday transactions are suddenly greased to the point of actual convenience!

That growth in e-banking, in turn, fuels the ambition of local banks to expand services locally and expand the reach of their operations geographically—an incredibly virtuous trend generated primarily by sheer connectivity.

The key dynamic is the spread of banking services to the previously “underbanked.” The extension of short-term credit to individuals makes capitalism work—as in, I will gladly pay you by mobile for a hamburger today.

Credit to ODA (official developmental aid) where it is due:

Vodafone, the British telecoms company, with a local partner and the backing of Britain’s Department for International Development, launched one of the most celebrated mobile banking initiatives: M-Pesa of Kenya.

This is basically telecoms moving into banking.

The importance of language--and its abuse: when "swaps" really mean "insurance"

Wikipedia graphic

A simple but compelling observation by Floyd Norris in the NYT:  "swaps" used to mean swaps, but then they were expanded to include protections that were tantamount to insurance:

As it happened, however, clever people on Wall Street followed the prescription laid down by Humpty Dumpty in Lewis Carroll’s “Through the Looking Glass:”

“When I use a word,” Humpty Dumpty said, in rather a scornful tone, “it means just what I choose it to mean — neither more nor less.”

When Alice protested, Humpty Dumpty replied that the issue was “which is to be master — that’s all.”

The word here is “swap.” It used to mean, well, a swap. In a currency swap, one party will win if one currency rises against another and lose if the opposite happens.

Credit-default swaps are, in reality, insurance. The buyer of the insurance gets paid if the subject of the swap cannot meet its obligations. The seller of the swap gets a continuing payment from the buyer until the insurance expires. Sort of like an insurance premium, you might say.

But the people who dreamed up credit-default swaps did not like the word insurance. It smacked of regulation and of reserves that insurance companies must set aside in case there were claims. So they called the new thing a swap.

In the antiregulatory atmosphere of the times, they got away with it. As Humpty would have understood, Wall Street was master. Because swaps were unregulated, calling insurance a swap meant those who traded in them could make whatever decisions they wished.

That decision, perhaps more than anything else, enabled the American International Group to go broke — or, more precisely, to fail into the hands of the American government. Had it been forced to set aside reserves, A.I.G. would have stopped selling swaps a lot sooner than it did.

The decision that swaps were not insurance meant that anyone could buy or sell them — or at least anyone who could find a counterparty.

Had credit-default swaps been classified as insurance, the concept of “insurable interest” might have been applied. That concept says that you cannot buy insurance on my life, or on my house, unless you have an insurable interest.

Meaning, you have to have skin in the game to ensure your reasonably non-self-destructive behavior.

Pretty sensible and a nice explanation that I've missed up to now.  Simple works.

I will admit that I knew the swaps in question functioned like insurance; that's how I usually explained them--in rudimentary fashion.  What I was missing was the knowledge that expanded function purposefully leveraged a rule-set gap.  It makes the achieved abuse a lot easier to understand.

Underground banking in China

Pic here

Interesting FT piece on the underground banking in China known as minjian jeidai.

Basically it's Chinese companies borrowing short-term money from wealthy households instead of banks via a broker.  Households want better opportunities to use their investment money and banks find it hard to get such loans from banks, so everybody happy!

The problem is that anything that unregulated can have surprising impact, depending on the size of the flow, which nobody really knows.  Some bankers guess it's equal to about 10% of any locality's ongoing finance.

Point of piece by Gillian Tett:  compared to the now vilified West, China's state capitalism isn't exactly lacking in unregulated financing, and it's overall lack of financial transparency suggests that underground banking may be just a fraction of what we don't know.

Bottom line:  lots of bets being placed on future Chinese growth, even though "very few western investors really know that much about what is--or is not--happening at the grass roots in China now."

Not all that different from the US housing market five years ago, she ends.

Sobering thought.

The Chinese are net buyers of T-bills again, but what choice do they have WRT euro?

WSJ story.

For the first time in six months, China is back to being a net buyer of USG debt, "boosting its position as the top foreign holder."

China soldoff a bunch of T-bills near the end of 2009, spooking a lot of American observers.  For a while, it seemed like Japan was back to being #1 by default, but a revision of the data ended that notion.

Because of Greece and the EU's woes, everybody seems to find US T-bills once again the most attractive option--especially among the Europeans themselves.  While an imprecise measure, this suggest that America's prospects for floating future debt are improved.

The "flash crash" and its parallels to 1987

WSJ story.

Investigators looking into the "flash crash" of 5/6/10 see a lot of similarities to the famous "black monday" crash of 10/19/87, the first one I ever really paid attention to.

The key bit:

On Oct. 19, 1987, the Dow Jones Industrial Average tumbled more than 20%, and the swoon extended into the following day, before a rebound. Floor traders, working by telephone, dominated the action and computer-generated trading was still in its infancy. Dark pools and high-frequency trading were the stuff of science fiction. Trading reached 600 million shares, according to the SEC.

Fast forward to May 6, 2010: The worst part of the lightning descent lasted roughly 10 minutes and the decline hit 9.8% at its worst. Trades, many executed in milliseconds, reached 19 billion shares.

In both cases, troubles first appeared in the stock futures market, which precipitated a decline in the regular "cash" market. The two created a feedback loop, dragging both markets lower.

Perhaps the most concerning parallel was how professionals abandoned the market. In 1987, some human market-makers on the floor of the exchange stopped providing bids for certain stocks.

Two decades later, in a market dominated by technology, high-speed traders who often provide liquidity for the market, just switched off their computers. Other big players, including fast-trading hedge funds, also pulled out of the market, according to traders and exchange officials.

We are told that the trigger for 5/6 remains unclear. 

Percentage-wise, 10/19/87 was a much larger final drop of 23%. The 5/6/10 drop was only 9% at the low point (points-wise, the 999-point drop was bigger than the 508 lost in 1987, but the market's much higher now) and ended up only 3% down at close.

The big scare this time was all the electronic trading that made most of the plunge happen in 10 minutes.

Major lesson seems to be (for now):

 Technological advances have been widely touted as having made the market more efficient--and more resilient.  Instead, the May 6 plunge showed that technology mainly served to speed up trading and magnify the market moves.

Short answer:  human behavior is still the big driver (the pull-out mentality that is natural enough), but when combined with electronic millisecond trading, the emotion is turbo-charged, suggesting that whatever we've got for circuit-breakers now isn't enough.

Chart of the day: Where government control of banks is for real

From an Economist special report on banking in emerging markets.

To paraphrase Crocodile Dundee:  That's not a state-dominated banking sector, THIS is a state-dominated banking sector!

Now, I realize that the following is not a popular thing to say, but I like our chances a helluva lot better with private banks than that of these states with their state-owned banks.

Doesn't mean it doesn't make sense for the BRICs to have a large state banking sector.  When you've got all those rural poor, you want that state-directed counter-business-cyclical capacity built into your system (i.e., you can command banks to keep lending during a down cycle).  Plus, you've got more political muscle when it comes to all the infrastructure building your country needs to catch up with the West.

All that is fine and good and we don't want to do anything to discourage such development, because we sure as hell don't want to own those problems.

But remember this: catching-up ain't the same thing as vaulting ahead, so take all those fabulous linear projections with a great big grain of salt.  Once you head into the intensive growth (more innovation, less the simply adding of more resources), having a big state banking sector isn't a plus--as Japan's government-cozy banking sector has proven.  You want a little more ruthlessness built into the system.

Still, some wonderful perspective for those who imagine that our government now owns the financial sector.

The May 6 market plunge: a web of rules with serious gaps

SEC chief Mary Schapiro spoke at a congressional hearing on the 11th concerning the 6 May 1,000-point drop in the Dow Jones Industrial Average that spooked America's other big markets.  Regulators, we are told, can't locate a single cause to explain it away, "but the lack of unified rules among stock exchanges played a role," Schapiro said (paraphrase).  

Classic problem, replicated today on a global basis.  Everybody is running on the assumption of harmonious rule sets, and plenty of players seem to be arbitraging that non-reality--some more dangerously than others.

The connectivity has outraced the rules--the essence of globalization today.

More signs of a reviving global economy

Besides the tremendous rebound in global trade (ah, the deaths of globalization are greatly exaggerated), we now see ancillary signs of recovery.

First, an FT story notes Maersk, the world's largest container ship company, announced a sharp return to profit in the first Q and predicted the future would be much brighter than previously anticipated.

Back home, the WSJ notes that venture capitalists are ramping up activity when it comes to acquisitions and IPOs.  One analyst said, "This kind of activity we haven't seen in years, not since the 1999 and 2000 time frame."

Finally, FT says IBM plans on buying $20B worth of companies in the next five years, more than it did in the previous decade.

Roubini: the crash was a "white swan"

Roubini has become quite the brand name, thanks to his great 2006 prediction of a global recession.  His web site goes way beyond the usual blog and book-hawking to providing "a uniquely tailored look at the logic of the global economy, applying the methodology of its renowned founder, NYU economist Nouriel Roubini"--replete with all sorts of analytical pieces by his employees.

What drew me to this interview:

What have we learned from these crises of capitalism?

The first lesson is that crises are not "black swan" events, using the terminology of my friend Nassim Taleb. They're not just random outcomes. They are the result of a buildup of financial and policy vulnerability and mistakes—excessive risk-taking, leverage, debt, and so on. The first chapter of my book is called "The White Swan" because these events are predictable. But generation after generation, we seem to forget the past. When there's a bubble, there's euphoria. There's irrational exuberance. Consumers can use their homes like ATM machines. Governments and policymakers are happy because they get reelected. Wall Street makes billions of dollars of profits. Everybody's delusional.

It was an old staple of mine in the NewRuleSets.Project brief to talk about rule-set resets happening every 7-10 years on Wall Street, primarily because it was a young man's game and once you got some distance from the last crash, all the new people, being somewhat ignorant of the causes, began to imagine they had invented some new way of perfecting their gaming of the market.  Over time, in their mounting hubris, they unwittingly or wittingly broke old taboos, saying it was different this time.  As those abuses accumulated and the self-delusion grew, the crash was inevitably triggered, and many--but not all--of the "new" rules were found not to have surpassed the old ones, even as the old ones now needed to be updated to account for the new behaviors engendered in the latest round of going just a bit too far.

I got this entire logic from my people at Cantor Fitzgerald.  They said it was as regular as a clock.

So, 2008, about 7-8 past the last financial meltdown known as the dot.com crash, was a pretty decent bet or prediction to make.  Don't be surprised when another one happens sometime in the middle of this decade.

Then again, it's different now, because now we have more than just the NYC-London financial axis in play. Now we've a number of significant markets, all of whom are going through their own learning-curve cycles with predictable crashes and reboots--or rule-set rests, as I call them.

So yeah, more white swan than black.

Chart of the day: money along the Seam

 (Click to enlarge)

 Interesting to me in that the hotspots seem to line my Core-Gap divide, meaning we're talking New Core an/or Seam States attracting the bulk of this money seeking higher returns.

Also note that recent or ongoing conflict isn't the big deterrent, so former Yugoslav republics and their neighbors do well, as do a number of states in the Middle East.  Frontier integration comes with inevitable levels of social violence.

Gist of article:

Even as investors flee the sovereign debt of developed countries, they are pouring record amounts into the bonds of emerging-market economies.

To me, that's a huge advantage of today's globalization:  money can seek a better alternative--when required--than the West.