17 October 2011

Current Issues - Update

1.  Greek Debt (again)

Proposed Solution by EURO nations:  to cut Greek debt in half.

VF view in one sentence:  great example of creativity of financial markets, ie fantastic solution for the short term, but solves nothing in the long run.

The problem explained:  is it now evident to everyone that Greece is a problem that no longer wants to be kept in hiding.  Exposure of European banks is so large, that it leads to the loss of confidence and apparently "recession".  One can keep the problem rolling from one month to the next of course, but this solution is no longer perceived to be enough to keep the markets confident... and please remember that the modern policymakers perceive that consumption and confidence are the key drivers to success (at VF we would dispute this of course).

Naturally the potential default of Greece, as we have always said, is out of the question.  Accounting rules state, that assets that is booked under accrual accounting would need to be remarked from 100% to 20% should such default event occur.  This means almost instant loss of approx EUR100bn (last time we said EUR53bn but the situation is worse now).  It would also mean a total fear of similar defaults in Spain, Portugal, Italy, and pretty much every country in EU (say Germany, though Germany is doing well only due to its relative position vs other countries that are doing terribly, and not in absolute sense - Vision Finance Sovereign Ratings put German rating at BBB - at par with Spain and Japan, and notch lower than Russia and Poland, and four notches lower than China and Qatar).  In summary default of Greece was and still is not a possible event, event if someone will rightly say that Greece cannot continue to burn USD500m a week.  Yes, Greece on paper is bankrupt, few would deny this, but "it is too big to fail" and at VF we not only understand this, but also support it.  Greece cannot be allowed to fail, even though for Greek people this would probably be the fastest way to recovery (default, exit from EURO, depreciation, cheap holidays, food, slow buildup of export led businesses, recovery).

However, policymakers managed to create a new ingenious solution to simply cut the Greek debt in half, by a "gift".  This means that they do not default, and it is also not a restructure (as this would trigger the default and earlier mentioned remarking of assets), but the Greek solution is just a "present" to them.  In reality it is of course a present not to Greece, but to its lenders, the banks of course.  It is also not a solution, but a postponement of the problems as Greece still has record deficit, requires USD500m a week to be kept alive and the situation is likely to get much worse before it gets better.  The solution that is being made does not correct this problem, and as we stated earlier this problem will require:  (1) inflation followed by (2) either significant currency depreciation or simply "protectionism" limiting imports.  Our view on this remains unchanged. 

2.  Recent Demonstrations

As we tend to have often outspoken view on the current financial situation many people ask us for our view on this.  In many ways we are a classic financial company engaging in standrd business that was done for centuries - that of intermediation, and yet likewise in many ways we are a very modern organization that recognizes that there is essential need for change (and with the plan to do it).  As the result we hence find ourselves in potential conflict of interest, though being Vision Finance, we do not run away from such uncomfortable topics, and prefer to clarify our view than to keep our supporters in the dark.

Firstly.  We do not support violence.  We do not support demonstrations, burning of cars, destruction of ATMs, raids on shops.  This is as far away from our values and culture as we can imagine and we will never support this.

Furthermore it is suboptimal form of protest, as apart from resulting in more populist and opportunistic politicians like Baroso, and few other people who totally do not understand finance and do not want to help you, it leads to no results.  There is no immediate solution to the problem of unemployment, destruction of social values and norms, unjust society, and the sooner the governments start to manage people's expectations the better, as otherwise there is every possibility for emergence of extremist views, silly bashing of bankers and billionaires who happen to be amongst the most hard working people on this planet, more violence, strikes, and general lack of desire to search for any long-term solutions.  There are solutions of course, but they are long term - not immediate - albeit luckily it is possible to "buy time" in immediate basis as Chinese and other emerging market countries are very understanding of the global problems and it is in nobody's interest to have a dramatic change of situation (apart from few who totally egoistically are hoping to make money on these demonstrations either from looting the shops or gaining popularity). 

We hence encourage the people to go back to their homes (most of them are lucky to still have them), organize their protests virtually if needed, and to express their anger in General Elections which is their opportunity to speak up, or even online.  Meanwhile learn, educate yourself, learn IT, finance, medicine, engineering, start reading some books, stop reading Vivas and Hellos and watching stupid soap operas, get yourself hobbies, keep fit, and maybe this way you will manage to make the world a better place.  Those of you who want to learn... you can email us on careers@financewithvision.com  and we will do our best to help you to learn, develop your skills so that one day you will be able to make serious money via your education and hard work.  We will not help everyone of course, but certainly we encourage you to go home and focus on yourself, and generally not to support these demonstrations.

Secondly.  Yes there are a lot of things that need to change, though in a trully capitalist manner we are keeping this information to ourselves, trying everyday to learn from our mistakes and successes to return with the improved formula.  This is on the mico issues that relate to finance and future of banking.

We notice however that most postulates do not relate to finance, but to a much bigger picture concept of "social justice", "fairness", use of resources, etc.  Nothing concrete unfortunately, and here we encourage you to seek concrete and to be specific, otherwise you are using the language the same as the people you are trying to change.  Look at policies seen in Sweden for instance, where there are also many things that are not right, but the social system is somewhat more understanding of deeper human needs that you fight for and the system is practically structured to ensure good utilisation of capital (tax on unused savings), talent (restricting lazyness and social expectation to create rather than consume), promoting hard work.  Study the speaches of Warren Buffett, mainly his quote "I want to leave my children enough to do anything, but no too much to do nothing".  Study the history of Steve Jobs and learn from it.  I read in the poll that you have 74% support amongst the population, but unless you are peaceful and you start to become concrete about change - you will lose it.

Vision Finance