When I started my career in the financial markets in 1985 at Daiwa Europe Ltd, market knowledge and experience were very limited. Veterans were 26 years old with 3 years experience trading Eurobonds. As raw recruits new to the industry, the 5 minute executive decision that determined whether you were to be on the sales or trading desk was farcical in today’s eyes. I was last in the queue to have my career path chosen by Kiyokawa-san. “You trade US treasuries………!” Ok, great, so I got to sit over in the bond corner, splendid. Long before the days of Bloomberg and the internet, your ONLY real reference point was Marcia Stigum’s ‘The Money Market’, still in print today.
Victor Meldrew was a fictional character in a long running UK TV series, ‘One Foot in the Grave’. He is the archetypal elderly pensioner who complains about everything and anything. His catch phrase was ‘I don’t believe it’. Even to this day, such was the success of the series, that being accused of being a Victor Meldrew is a euphemism for being a cantankerous and whinging old man. My wife often mentions this in passing, whilst citing a recent Daily Mail article about the links between levels of cynicism and dementia. Extraordinary. ‘I don’t…’
As I approach my 50th birthday I find myself concerned that there are hidden consequences of new technology, and that innovation and competition are not always obviously good or should I just accept the status quo and let it pass me by.
In economics competition is universally viewed as healthy especially with respect to breaking up monopolistic policies and certainly there are many obvious clear cut instances of how the often down trodden consumer has benefited from competition. However, little is written of the often negative effects of competition leaving the consumer worse off in terms of quality and choice.
Economics 101. How it should work.
Firm A provides X service or materials to the consumer. They charge £100. Their costs are £60 and hence their margin is £40. This high profit margin brings another firm B into the marketplace keen to supply X service/materials for £90 despite having the same costs of £60, undercutting firm A and happy to have a £30 profit. Sometime later, firm C discovers new technology means of capital and/or labour which reduces the cost of supplying X to £40 and happy to have the same profit margin as firm B of £30 firm C can now sell X to the market place at just £70.
It’s a win, win for the consumer. They are now getting X for £70 instead of £100.
Last week after a rather slow start to 2014 in the financial markets, we saw some interesting price action in two of the most talked about markets. We had decisive 20 day price breaks in US equities and gold. In the 1980s Richard Dennis, a commodities speculator once known as “Prince of the Pit”, gave a new meaning to the word “turtles”.
The Turtles were a small group of novice traders that Dennis trained in a short period of time to follow a basic trend following system. When the experiment ended five years later, his Turtles had reportedly earned an aggregated profit of $175 million.
Welcome to the 90% club, membership is free but you don’t want to join.
Since 2011, gold is down over 35% while US equities are up 44%. That is a sizeable move in asset classes which you could argue currently both require QE money printing for support.
The media will tell you that there has been a “great rotation” into stocks and gold investors have sold all their holdings. They will tell you that this is because of the “economic recovery” in the US. One look at the ISM Manufacturing index will tell you that hugging the 50 line is hardly a stellar recovery.