Friday, 21 November 2014

Micro Level Trends – A Capital Markets' Mentality – From Fragmented Confusion to Simplified Confuscianism

In the pursuit of an alternative, philosophically flavoured web-log, two distinctly different 'Ying' and 'Yang' sections follow.

The intention is to starkly highlight the apparent oppositional cultures and values between the present 'clubland corners' of international finance (as seen by previous Libor and recent FX scandals) and the spiritually powerful and socially righteous influence of the millennia old eastern perspective that is Confucianism.

Today, beyond the everyday functional and very necessary 'lingua franca' of capitalism, which itself can unfortunately appear alien, it seems that new and more opaque language constantly arrives. That of codified terms and phrases seemingly invented to cause dis-connectivity and remoteness.

As such the very language of western-derived “global capitalism” must itself be re-orientated to something far more broadly understandable, credible and convincing so as to underpin worldwide belief in an often volatile but 'up-lifting' ideology.

To this end, investment-auto-motive's intentionally juxtaposes what appear very alien counter-parts;

1. The Lexicon of Modern Finance
2. The Edicts of a True Sage

If 21st century capitalism is to become truly improved, then the “better tomorrow” rhetoric heard soon after the 2008 'depression' must be translated as action positively woven into the worldwide fabric of investment, commerce and consumption; with far greater gravitas prevailing.

[NB the word 'depression' scarcely used but all too true]

1. The Modern Western Lexicon -
(aimed at the layman)
It must first be said that the core lexicon of 20th and 21st century finance pertains to the necessary central functions of deploying capital as part of the investment process. This spans an A-Z which covers a host of acronyms, words and phrases which underpin broad business modelling, project modelling and other aspects of “investment” per se: DCF (discounted cash-flow), NAV (net asset value), BV (book value) and P/E (price to earnings level).

However, the result of a over a century's worth of finance sector expansion (ie “financial innovation” via “financial instruments” saw both the growth of ever more systemic complexity and a greater remoteness of the system's own primary governors. The size of the global derivatives market a obvious example of the former, whilst the latter seen by the dishonourable actions of some affecting the inner workings of Libor and FX markets

Competitiveness, and indeed hyper-competitiveness, has historically been a product of the yesteryear “WASP” mentality within a finance sector clique which in the modern era was spawned from Vienna, moved to Paris, onto London, Hong Kong, New York, Tokyo, Delhi and Shanghai – Shenzen. As capitalism itself moved onto the next big economic chapter in whichever country, it was inevitable that the very culture of finance in each city would be imbued by the “hungriness” of new sector entrants, whether once poor and ambitious individuals working within a firm, or similarly new start-ups seeking a either a slice of any transaction value within a burgeoning new market, or able to gain from “buying low and selling high”.

As with any tribe-like SIG (special interest group) cultural identity is partially borne from, and later promoted by, the application of a clique-like language: so as to be “in the know or in the club”, both verbal and often visual.

The language and codification obviously becoming more remote and specific the greater the SIG secrecy. Today's multi-device, multi-platform communication age has both allowed clans of similarly minded to form in cyber-space and seemingly promoted different clanships; dedicated chat-rooms spanning from youth-orientated tribes (eg Goth / Emo / Twilight / Zombie / Cyber-Punk etc) to the likes of Mumsnet (obviously for pre/post natel mums) to 'silver-surfer' rooms for an ageing and seemingly ever more socially remote older populace. Add-in the constant stream of information overload from ever multiplying sources, and it is little surprise that speech and general communication has become condensed: the impact of shortened “text speak” [txt spk] setting the stage for ever more diverse, explicitly / implicitly alienating codified “SIG speak”

[NB As an interesting aside, given this trend, a following post script looks at how this trend is possibly being inadvertently (or possibly intentionally promoted) via the continued fascination with the WW2 code-breaker Alan Turing in the new film 'Imitation Games'

The very story highlights the pathway “from confusion to clarity” via Confucianist principles].

As regards the financial sector SIGs, just as crypto-Tarantino film-buffs and emerging film-directors seek to de-construct and reconstruct filmic plots and motifs, and video-game players seek to similarly de-construct and reconstruct on-screen war strategies (just as chess-players have); so it seems that any SIG will (all too unfortunately) attract and include various hyper-competitive, and so often collusive, types. Others drawn-in to possibly Machiavellian schemes so as to either not feel socially omitted or even to avoid victimisation.

Given that humour provides a sensory feeling of well-being, confidence and belonging, it has historically been deployed by the manipulative as a method by which to bring other people onside, so creating group bonding and the facilitation of any nefarious plan. This done possibly with the ignorance of those 'on board' used as uninformed pawns, to the obvious direct detriment of specific victims.

This has been the typical process for the “boiler-room scandals” that have existed from the formation of the very first 'professional' stock-market in Amsterdam, throughout the centruies and decades to date: 'The Wolf of Wall Street' sadly glamourising the prime perpetrator, Jordan Belfort; with Paramount at least serving the retail and institutional shareholders of its parent Viacom by making $392m on a $100m budget.

Much as the novelist Arthur Hailey shone a torch into the auto-industry workings of 1970s Detroit in his book 'Wheels', so far more infamously by the late 1980s the “big as life” fictional characters that are Gordon Gekko and Patrick Bateman and Sherman McCoy had been created, respectively in the film 'Wall Street' and novel and film 'American Psycho', and likewise 'Bonfire of the Vanities'. Each reflections of Wall Street's 'top-dog' mantra, anti-hero swagger and differing levels of anti-social psychosis.

These reflective stories had the immediate effect of social ripples across the then increasingly apparent 'post-industrial' era. Wherein NYLON 'big bang' innovation had led to the blooming of the financial services sector, and so according aligned content feeding the broad public's fascination with the metaphorical “cut and thrust” of high finance deal-making; titles such as 'Barbarians at the Gate' crystallising the Sun Tzu mentality where competitiveness met avarice.

That 'cut and thrust' made all too physically real by investment banker Bateman; whilst the self-made anti-establishment Gekko simply sought to dissect the undervalued assets of troubled firms.

Though Gekko was later recast in 2010 as becoming more humane, what both characters originally share is the overt “hunger” and nigh-on unlimited “animal spirit” which unfortunately propels many a young new financier.

Hence, the seemingly ever re-generated, rapacious internal mentality that exist within certain sections of the world's money markets; created in the modern age by the media and super-charged by notional professionals with agenda-driven SIG mentality.

Thus, over the prevailing decades the media has created a definite milieu in the public's consciousness, one of money, power and hedonism: the mythologies of Wall Street, The City and financial districts elsewhere. It is one which still attracts the intelligent, young and ambitious, even if the reality for many high-flyers is the mundanity of process-led, time-crammed vs high precision, tasks; the very antithesis of the sector's notional 'sexiness'.

Perhaps no wonder then that such a lexicon is created, by the more imaginative. The concern being that – as seen time and time again - the ambitious and dishonourable create self-serving inner-circles in often quite remote self-contained, specialist silos.

The following phrases are a mixture of sayings drawn from the finance sector: some 'sexified' by the media and so re-injected into Wall St, The City etc with added appeal and zest; but for the most part drawn from John Lanchester's 2014 glossary-like book “How to Speak Money”, as partly illustrated by The Times newspaper supplement T2 on 28/08/2014. This with additional commentary by investment-auto-motives as deemed useful.

Starting with the infamous:
“Murders and Executions”- uttered by Bateman, the darkly humouristic re-interpretation of Mergers and Acquisitions which had already become an over-used Wall St phrase by the mid 1980s, and periodically utilised by later new entrants into finance, itself as a codified message as to who was or was not supposedly “in the know”.

Continuing with the lesser known:
“Bear Hug” - an offer supposedly so generous apparently impossible to refuse, but as with all value assessment, why cash-out if the underlying asset is obviously valuable to others who are desperate to 'over-pay'? Better then in most cases then to “maintain one's own larder”.

“Buy Side” - the typically large institutional funds (ie pensions, insurance), private fund managers and private equity funds that purchase investment intelligence services from...the
“Sell Side” - those analysts / brokers / investment bankers who undertake the 'bottom-up' and 'top-down' investigative work.

“Consolidated” (the) – those funds which undertake investment strategy in-house, typically for proprietry and client trading to theoretically demonstrate that through a shared “skin in the game” approach that they are wholly aligned to creating a 'win-win' outcome for the client. (This somewhat undermined by certain hypocritical firms that foresaw the US housing bubble and 'shorted' their own interests whilst advising clients to 'stay long').

“Carry” (the) - short-hand for 'carried interest': the incentive fee earned by a fund's managers, separate from the management fees which pay the operational costs; increasingly seen as an overt expense to be reduced or eliminated by an increasingly informed and demanding client base.

“Cheeteahs” - high-frequency trading (HFT) firms with IT systems and geographic locational advantage to act as rapid-fire (micro-second) first-movers in high volume markets. (As with 'Bulls' and 'Bears', Wall St likes its animal metaphors to enliven its 'animal spirits'

“CoCos – Contingent Convertible Notes, debt which converts to equity depending upon pre-set circumstances, typically the share price staying above a specific value for a certain length of time. If instead a firm's value-creation remains poor – and its stays “a dog” - its remains as a typically set high yield fixed income instrument.

“Cramdown” - the re-organisation of a failing company, as approved by major vote-holders and/or official agency, to the detriment of other share-holders, the latter forced to take a...
“Haircut” - in the Chapter 11 restructuring process, or complete bankruptcy, the requirement for many creditorsor often lower order creditors to accept much reduced cents on the dollar as resultant comprimised repayment

“Dark Pools” - non public market, private exchanges by which large trade volumes may be undertaken without visibility which may create consequential reactionary market-shifts by other observing traders; recently 'open' exchanges such as the LSE seeking to offer similar 'closed curtain' services at specific times of the day, primarily for institutional and large private equity funds.

“Dumb Money” - a derogatory term for the majority of small-time retail investors who rely upon the apparent 'professionalism' of financial service sector intermediaries; especially so 'financial advisors', who themselves are typically un-informed foot soldiers with often only basic knowledge of the products of the company they represent
[NB This the massive cohort of the population that John Lanchester seeks to inform]

“Dumplings” / “Princelings” - the children of wealthy, powerful Asians given jobs at western banks to assist broader present or prospective client relations.

“Gearing” - a alternative term to 'leverage' or more precisely Credit. Gearing typically used as a credit to equity ratio; originally applied to cash-flow rich businesses by either equity-holding founders or early/mid stage private equity parties, or often both; the theoretically quickly grown business able to 'throw-off' much improved cashflow and so rapidly raise the value of equity stakes. But through the late 1990s and 2000s, this over-stretch and failure to meet projections caused the collapse of various companies; so providing rich-pickings for either asset-strippers or 'fire-sale' buyers, often for bolt-on acquisition into similar business models.

“Greeks” (the) – hellenic symbols used to denote a 'future's formulae':, 2.gamma, 3.theta and 4. “vega” (the latter not real but creatively conjured-up to fit); reflecting 1.stock-price today, 2. the date for exercising the option, 3. the price for exercising the option, 4.the expected volatility of the stock.

“Headwinds” - a term used to denote usually macro-level challenges encountered by a fund's general portfolio, or directly experienced by the specifically oriented fund (typically sector directed, geo-politically directed or regionally or globally 'events driven'.

“McNuggeting” – the creation of a stabilised price environment, by way of stabilised input costs, for commodities/products with historic supply and so price volatility.

“Shorting” - the borrowing of all or a specific allotment of a counter-party's held shares in a target company which the borrower believes will actually fall in stock-price, so ultimately paying less for the block of shares at the later date; a risky move given the possibility for a rise of the stock-price if supporting intelligence appears.
“Naked Shorting” the term used for a form of market manipulation via the illegal selling of shares that do not “affirmatively” exist, hence by-passing the conventions of supply and demand.

“Target-Rich Environment” – the appropriation of military-speak demonstrating the broad range of theoretical investment opportunities available.

“Tournament System” (the) - the hierachial employment structure by which ambitious lower order staff, management, executives and company founders work hard – so providing high productivity - in order to hopefully eventually gain the sizeable renumeration package of CEO / Partner / Chairman level.

“Nugget Hunting” – a contorted term originally used for the real (or supposed) discovery of major gold nugget deposits. Rumours periodically spread to induce gold-rush migration of the poor toward certain regions so boost sales of associated goods and services (eg ancillery equipment empty hotels, etc) aswell as locate mass labour and consumers for alternatively planned industries.
[see Australia's 'Welcome' nugget in Ballarat, Victoria, specifically its real discovered size vs the size of the giant nugget publicised ]. The true 'nuggets' then not the metals / minerals in the ground but sales by the stores.

Thereafter applied to create an apparent market demand, which to gain from relies upon purchase of associated goods / services. Latterly apparently used in the IT-centric “Mining” context for BitCoin.

An Aside -

Just as John Lanchester's book seeks to inform the layman about the hidden, obverse sophistication of financial markets, so similarly his former engineering namesakes - Lanchester Bros Automobiles
- likewise sought to educate its clients about what was then the remote world of vehicle engineering. In their instance, the advantages gained from a well balanced “mid-ships” powertrain.

It is this philosophy of “balance” that is vital to the well-being of the financial sector and broader national economies, unfortunately the massive sizemic shifts experienced in 2007-8 requiring unprecedented counter-balancing forces (flat base rates, QE programmes etc)

2. The Edicts of a True Sage
(aimed at financiers)

The words of Confucius have been periodically seen within the investment-auto-motives weblog over the last seven years, applied when contextually useful to demonstrate the need for straight-forwardness, trust and social cohesion all corners of society; and especially that of finance.

Unfortunately (like the financial sector itself) the more 'modern' a society becomes, the less straight-forward it becomes. Especially so since the ever more sophisticated inter-twining of subtle message-driven media (through formats and technologies) with general mass societal and so personal consciousness. The 20th and 21st century's 'top-down' (im)morality messaging contrasts sharply to the yesteryear 'bottom-up' morality message of Confucius; wherein individuals themselves where expected to be morality broadcasters for the betterment of society.

[To this end the Confucian perspective has been latterly echoed by such diverse commentators as the 18th century's Jean-Jacques Rousseau and 21st century's (very media savvy) Russell Brand].

Thus it seems that even six years on from the financial crisis, there is reduced yet a still prevalent mass western reaction regards “the betrayal of capitalism”. The prime concern being that partial collapse of once wholly positively perceived capitalism, occurred within a post-religious secularist era: thus the heavy fall of two 'grand-narrative' social frameworks. So creating an ever bigger “belief vacuum” for many, so possibly opening the door to new forms of combined spiritual and economic “snake-oil” sellers; such false promoters likely to easily surmount the barriers to entry into financial services given the circumnavigation abilities over the regulatory environment.

So it is in this age and context, that every corner of the financial services sector should heed the words, sentiments and perspectives of the non-religious Confucius, as were handed down through Chinese history (from the Han dynasty onward) by way of The Analects; a compilation of his recorded sayings.

Chinese Emperors recognised the value of the Confucian belief system, spread via The Analects, so as to encourage a capability for general self-rule over the massive swathes of land which formed both dynastic regions and Old China large. The Sage's quotes etc reflected what was considered an age-old natural framework for societal affairs, best viewed as instrument for personal guidance and so 'bottom-up' societal influence; rather than the literally hidebound 'top-down' dogma of formal religion which was thought to promote tribalism, division and selfishness.

Central themes are those of:

1. “Superior Man” - obviously now translated as the “Superior Person”.
2. the Art of Living
3. Balance
4. Constancy
5. Courage
6. Death and After-Life
7. Demeanour and Deportment
8. Division of Labour
9. Education
10. Family
11. Filial Love
12. Fine Arts
13. Genius and Inspiration
14. God
15. High Aim
16. Learning
17. Manners
18. Meaning of Government
19. Meekness
20. Mental Morality
21. Military Training
22. Pious Observances for Deceased Parents
23. Propriety
24. Providence
25. Provision for Dependents
26. Qualities of a Leader
27. Rectification of Purpose
28. Sincerity
29. Speech and Conduct
30. Taxation
31. Temperance
32. Uprightness
33. Will

The initial categories, pertinent to the realm of responsible investment, have provided the following selected quotes

“the object of the superior man is truth”
“the superior man must make his thoughts sincere”
“what the superior man seeks is in himself, the ordinary man looks to others”
“the superior man is not partisan”
“the superior man does not set his mind 'for' or 'against', but to what is right”
“the superior man is correctly firm and not merely firm”
“the superior man is distressed by his want of ability”
“the superior man seeks to develop the admirable qualities of men, and does not seek to develop their evil qualities; the ordinary man does the opposite”.

“the practice of right living is deemed the highest”
“from the highest to lowest, self development must be deemed the root of all by every man”
“by nature men are nearly alike, by practice they get to be wide apart”
“when the ancients sough to exemplify illustrious virtue throughout their empire, first ordered well their states; desiring to order their states, they first regulated their families; wishing to regulate their families, they cultivated themselves; wishing to cultivate themselves they first rectified their purpose; wishing to rectify their purpose, they first thought to think sincerely; wishing to think sincerely, they first extended their knowledge as widely as possible”
“when you know a thing, to hold that you know it, and when you do not know a thing, to acknowledge that you do not know it – this is knowledge”
“when a man's finger is deformed, he knows enough to be dissatisfied; but if his mind be deformed, he does not know that he should be dissatisfied; this is called ignorance of the relative importance of things”
“when you hear words that are distasteful to your mind, you must inquire whether they be not right”
“there are four things from which the Master was entirely free: he had no foregone conclusions, no arbitrary predeterminations, no obstinancy and no egoism"

“learning without thought is labour lost; thought without learning is perilous”
“the wise through not thinking become foolish; and the foolish by thinking become wise”
“the study of strange doctrines is injurious indeed”

“those who are born in the possession of knowledge are the highest class of men. Those who learn and so acquire are next. The dull and stupid who yet achieve knowledge are a class next to these. Those who are dull and stupid and yet do not learn are the lowest of the people”

“the great man is he who does not lose his child's heart”
“he who has sincerity without effort hits what is right and discerns without laborious thought; he is a sage who naturally and readily follows the path”

“there is no evil to which the inferior man will not proceed when alone. When he beholds a superior man, he tries at once to disguise himself, concealing his evil under a display of virtue. The other penetrates him as if he saw his heart and reins”...”what is in fact within, will show without”

“the superior man is easy to serve and difficult to please, if you try to serve him in a way which is not accordant with right he will not be pleased; but in the employment of men he uses them according to their capacity...(conversely)...the inferior man is difficult to serve but easy to please; if you try to please him, though it be in a way which is not righteous, he may be pleased; but in his employment of men he wishes them to be equal to everything”.

“those who follow the part of themselves which is great, are great men; those who follow that part of themselves which is little are little men”.

“Let a man stand fast in the nobler part of himself, and the meaner part will not be able to take it from him”

“it is the characteristic of the completest sincerity to be able to foreknow...he is like a spirit”

Conclusion -

The history of modern capitalism has indeed been volatile, and undoubtedly those already with wealth and influence have been able to take advantage of such periodic volatility (as with 2008 onward) by recognising the timing of cycles and the opportunities born from challenges.

Yet as now globally recognised as capitalism spreads, it's very model (when well modulated) offers new horizons for most: alternative possibilities, increased education, less arduous work, greater convenience and improved comfort.

“Modulation of the System” then is the key, and this is the central theme of Confuscianism, itself ostensibly born from the 'Tao'

Although the mass media rightly draws public attention upon financial sector scandals, it must be remembered that the “watchdogs” and 'good guys' of the system: those internal supervisory bodies and specifically external regulatory agencies, which are responsible for highlighting such problems.

Although the 'revolving door' still operates - to good and ill consequences – the fact remains that the system itself relies upon the good judgement and righteousness of not just the “watchdogs” or “sheriffs”, but of the very inhabitants who choose to undertake their workaday lives within the sector.

Of course their will specific functional SIGs, and within each, those who are dishonourable, whether by way of politicised career climbing or more problematically able to 'rig the system' ultimately to their monetary advantage.

Yet it still appears the fact that, above and beyond the banking scandals seen, the very scale and importance of national and international finance, from London to Beijing, demands that those in positions of functional responsibility be trustworthy; thus Confuscian to some degree.

Today's prime issue then is for seniors and executives having the wherewithal to understand the deep complexities of specific parts of an oft befuddling, inter-connected system.

John Lanchester highlights the problem.

As the son of an old school banker in an era when investment was directed toward wholly “visible” commerce, the yesteryear system was clearly comprehensible. Yet today, in an age when money and associated instruments have themselves become the prime products, the very structure and fabrication of the financial system itself must be questioned, and not just by the layman; but critically by those who occupy the the upper echelons. However, as internal managing agents and official representatives of their own company's stockholders - many of which exist on the inside - they themselves are encapsulated by, and so "held hostage" by the modern, global financial system.

Can the complexity be deconstructed and the simpler yesteryear "visible" model become re-expanded? So as to fill the gap of any discontinued overly sophisticated instruments and markets. And if the genie cannot be put back into the bottle, can it at least be partially contained and off-set?

The very premis of 21st century capitalism is the burgeoning of new B2C and B2B economic participants across a myriad of EM regions, coupled with new business and consumer trends within ethically re-aligned AM countries.

This offers enormous hope of at least stemming the previous tide of never-ending financial innovation, which itself was created to maintain a form of fabricated economic momentum which was fundamentally slowing within the west even as new-tech promised to replace old-tech.

As such financial innovation becoming at least partly replaced by investment in the tangible, whether directly physical (as seen with infrastructure build plans) or the tangibly related (ie services and research/development). Thus the 'real' as opposed to the all too abstract and ethereal.

If this economic reality check does indeed hold sway, over the remainder of 21st century, it would be best served through the ideal of a merged mentality within the financial sector, wherein the selfish gene and animal spirits might be subsumed into that of a higher Confucian consciousness.

The American, Japanese and now likely European provision of Quantitative Easing – themselves necessary counter-balances - ensures that over the forthcoming decade that Capitalism is not the “zero-sum game” which up to 2007/8 it had appeared to become.

The trickle-down wealth will ensue, even if painfully slowly at present.

Importantly it may well be the influence of mainland China, through its promise of ever greater financial global connectivity (propelled by the recent Shanghai – Hong Kong 'Connect' exchange), that provides the impetus.

Whilst China obviously has its own relative glut of US$ billionaires, and many of their “Princelings and Princesses” will lead the capitalist charge across the globe, the very fact that filiel reverence still largely spans generations will play a role. Since the generational links hold with critical memory the “days of want”, the previous responsibilities of dynastic leadership, and (even if failed) the pro-societal ideals from its Communistic past.

This portends that Confucian capitalism must promise and deliver publicly perceived fairness in order for itself to reach full potential.

Post Script -

As per the SIG mentality...
...and the manner in which it has affected the western mainstream.

The emergence of special interest groups has been prolific with the inter-connectivity of the web, able to unite (but also divide) people across a plethora of often self-identity related topics and issues. However in an Orwellian-McLuhan manner, it appears that the broad adoption of often SIG specific communicational short-hand has become itself a powerful force in moulding broader mass culture.  

This seemingly very well recognised by the culture industry itself.

A contemporary example within British popular culture is the UK advertising poster for 'Imitation Game': the story of Alan Turing. This seemingly multi-directed at various target SIG audiences across the generations, from those with WW2 memories (which helped form much of their own identities), the Baby-Boomer generation, and onto younger Y-generation “IT geeks”, “games geeks” and the increasing number of “socially distant” who with a graduate education and insight into post-modern sociology might even think themselves akin to a modern-day Turing.

The film's 'quad' poster shows a myriad of background dials representing the Enigma code-breaking machine, all appearing similar with a pointer set to between D and E. This then somewhat of an initial disappointment to some viewers drawn to hoping to deduce any“secret code” created by the films director or poster designer. But of course to add intrigue there is nod to code-breaking. Within the thirty-plus dials set to D and E there is one set differently to between W and X; those who take the time to view all the background dials, supposedly becoming “in the know”.

investment-auto-motives suggests this then a “copy+” of Damien Hirst's cigarette-butt case installation artwork, which deploys a single cigar-butt innocuously amongst a hundred-plus cigarette-butts.

Thus in the intelligence and communication age, a level of often meaningless visual codification (beyond that of status fashions or cars etc) has become a marketing commodity in its own right.

This would no doubt amuse Turing himself. He, a laser-focused yet a 'simple soul', unfortunately existed in a complex environment which offered anything but the essential everyday truth(s) he sought.

Truth unsurprisingly the essential platform which all intelligent people demand, for powerful progress.

With this as a guiding principle, the 21st century edict must surely then be: "Minimum Confusion... Maximum Confucianism".