EconView 4/10: Some thoughts on ‘Young Money’

He took the title of my autobiography

He took the title of my autobiography

“It’s only 2 years”

When I went to college I had no conception of the ‘recruiting process’ that ambitious undergrads have to pursue the next level of success. I thought bankers were people who helped me open a deposit account, what’s the big deal? But, by junior year, I got it. Just by going to recruiting events, I was enamored by the allure of “tackling complex problems” with very smart people while being compensated “generously“. Most of all, I felt that a career in that direction, working for a big preferably finance or consulting company would be viewed by my peers as a continuation of a successful life. That didn’t happen but I still wonder what could have been.

That’s why I was drawn to Kevin Roose’s Young Money: Inside the Hidden World of Wall Street’s Post-Crash Recruits, (Grand Central Publishing, 2014). Truth is, despite many of my peers going into and currently working deep in front-office finance it was still somewhat of a black box to me. What did they do day-to-day? Are the horror stories I’ve been hearing just a massive (and unhealthyhumblebrag? Finally, I hoped to have an answer.

Young Money is structured into a narrative of the 8 young financiers interwoven with commentary about various aspects of the financial services industry and humorous retellings of the author’s own awkward forays into the more visible aspects of that lifestyle. It reads easy (I finished it in less a week), the characters are likable and themes of the amorality of Wall Street (side tangent: “amorality” instead of “immoral” is more apt here. Roose has a memorable line, and I’m paraphrasing here, mentioning that if Wall Street could make more profit with the same amount of risk as shaving pennies from financial transactions as distributing vaccinations in developing countries, they’d do it)  and the uncertainty most 20 year-olds face while thinking of about the rest of their lives is hammered throughout the book.

Perhaps being that age and having friends made me desensitized to some of the problems that the analysts face. Yes, working the “banker’s 9-5” (both A.M) is terrible, yes, doing work on the weekend jeopardizes relationships with your friends and significant others and yes, ordering take out food from Seamless and sitting for hours on end will probably affect your health adversely. None of that is particularly insightful.

However, Roose does touch upon some of the more interesting aspects of the culture. I was intrigued by some of the ways recruiters look for young analysts by offering vague descriptions of what their life may be like or how certain educational institutions seem to encourage students going into the industry. Roose also mentions how money can change people over time in a particularly memorable detailing a Wall Street fraternity event for the people who have made it. I would have love to read more about each topic with research to back up his statements but the book, perhaps purposefully so, focuses more on the anecdotal experience of the 8 people he chose to follow.

Ultimately, I feel like I got a sanitized version of the rants on Wall Street Oasis when I wanted something more like The Big Short which I felt was more a narrative on the system the individuals who made it.

Watch more:
The Daily Show – Kevin Roose Interview

Also:
Slate – Mad Men Season 7 Preview
Washington Post – The Attorney General, a Republican Senator and Asparagus.
CBC – Trevor Linden is back with the Canucks!

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EconFact 3/29 – Let them them fail

http://www.npr.org/blogs/money/2013/10/10/230914894/what-a-u-s-default-would-mean-for-pensions-china-and-social-security

What bond looks like

The other big story in the Emerging Market (EM) world aside from the conflict in Ukraine/Russian conflict is the changing nature of the Chinese economy. The 2013 3rd Plenum, a meeting of Communist Party’s Central Committee, seemed to suggest a more market-driven philosophy to guiding China’s economy moving forward having massive consequences for China going forward.

This week, I’ll be focusing on China.

Why a default may be a good thing

On March 7th, something remarkable happened in the Chinese corporate bond market (I know, it sounds awesomely interesting, right?) – a Chinese corporate bond failed for the first time in history.

Just a quick rehash, a bond is basically an “I-O-U”  from a company to an investor. Investopedia does a great job explaining it:

The indebted entity (issuer) issues a bond that states the interest rate(coupon) that will be paid and when the loaned funds (bond principal) are to be returned (maturity date). Interest on bonds is usually paid every six months (semi-annually). 

The bolded words are my emphasis. Reason why I included that explanation is that when I say ” a corporate bond failed” I mean that a Chinese corporation, in this case a Shanghai based solar panel company named Shanghai Chaori Solar, did not pay back its interest payments, around $15 million USD, at a previously agreed upon date implying that the company does not have enough funds to do so. In other words, they defaulted.

Now, since China started its bond market in the 1990s, there have been some technical defaults among Chinese corporations, meaning that the interests payments have been made but some other clause of the bond contract was not upheld (to be fair, the United States has technically defaulted as well BUT NOT CANADA).

China’s somewhat default-free debt market is not due to all of the companies being financially responsible but rather a lot of them being bailed out by the Chinese Central Government before defaulting. Thus, March 7’s Chaori serves as a warning shot to Chinese corporations to get their fiscal house in order because they may not be bailed out anymore. In fact, China’s premier Li Keqiang warned that this may be the year corporate defaults as China ramps up its financial regulation. Indeed, this is a warning instead of a disaster since the Chinese government has noted defaults will be “controlled” in order to prevent systemic banking risk.

Going forward, this is just another part of China’s effort to “liberalize” its economy by letting the market, rather than government intervention, determine the credit-worthiness of Chinese corporations.

Read more:
Forbes – Some of the implications of China restructuring its corporate bond market.

Also:
Los Angeles Review of Books – A great analysis on how HBO’s Girls treats work.

EconFact 3/28 – “Free” Trade Zones

http://online.wsj.com/news/articles/SB10001424052702304795804579100640245613408

The other big story in the Emerging Market (EM) world aside from the conflict in Ukraine/Russian conflict is the changing nature of the Chinese economy. The 2013 3rd Plenum, a meeting of Communist Party’s Central Committee, seemed to suggest a more market-driven philosophy to guiding China’s economy moving forward having massive consequences for China going forward.

This week, I’ll be focusing on China.

Trying Capitalism 

In the expanse of Shanghai, a bastion of capitalism lives not. No, not the American embassy but an Free Trade Zone (FTZ) – a 29 km^2 (11 miles^2 for you heathens) area set up in September 2013 where corporations can conduct business and not be under the normal regulations that the Chinese Central Government usually enforces.

The zone is viewed as a testing ground for greater financial liberalization as the country adopts a more market-friendly approach to its economy.

This ranges from interest-rate liberalization, or banks can pay whatever interest rate they want for deposits (capped at $500,000), zero-tariff policy on imports/exports, allowing the sale of video game consoles (!) which were banned in China since 2000, as well as tax-exempt status for businesses for 10 years.

There are a couple of places in China where “Special Economic Zones” exist (the most well known in Shenzhen) but Free-Trade Zone in Shanghai is especially remarkable because it is seen as a model to be replicated throughout China and really is a “testing ground” for future reforms.

Read More:

China Briefing’s excellent summary of the features of Shanghai’s FTZ

Also:

There’s nothing like proving Louis CK wrong.
We’ve seen Christian Bale play a billionaire, but can he play Steve Jobs?

EconFact 3/21 – RMB FX WTF?

Uh Oh

Uh Oh

The other big story in the Emerging Market (EM) world aside from the conflict in Ukraine/Russian conflict is the changing nature of the Chinese economy. The 2013 3rd Plenum, a meeting of Communist Party’s Central Committee, seemed to suggest a more market-driven philosophy to guiding China’s economy moving forward having massive consequences for China going forward. This week, I’ll be focusing on China.

So far, like other aspects of the Chinese economy, the RMB, has been state-controlled. China’s currency has been pegged to the US dollar at roughly 8 RMB to the dollar. Since exports are a large party of the Chinese economy – this matters greatly; a cheaper RMB (also known as Yuan/CNY) means cheaper, more competitive exports. However, currencies tend to appreciate with more exports, that is, with more Chinese exports in the global market, they should rise in price but the Chinese government has kept the currency artificially low by acquiring foreign reserves and thus masking the market value of the RMB for some time.

In 2005, under pressure from trading partners, China moved to a “managed float” system where the currency was allowed to have more volatile appreciation and the currency moved from 8 – 6.8 RMB/Dollar. The Chinese government stabilized the currency in 2008 due to the financial crisis but resumed appreciation trend in June 2010. During those times, daily volatility of the currency was limited at 0.5% per day.

In 2012 daily volatility moved to 1% and now it’s announced that 2% band for the RMB is possible. This is seen as a move to internationalize the RMB and for it to move closer to its market price. This move has already seen making a huge impact in the FX market (see chart).

EconFact 3/20: Slowing Dragon

 

20140320-093048.jpg

The other big story in the Emerging Market (EM) world aside from the conflict in Ukraine/Russian conflict is the changing nature of the Chinese economy. The 2013 3rd Plenum, a meeting of Communist Party’s Central Committee, seemed to suggest a more market-driven philosophy to guiding China’s economy moving forward having massive consequences for China going forward.

This week, I’ll be focusing on China.

Slower, but more more stable growth

It’s not secret that China is slowing down. The average annual year-over-year GDP growth over the last 30 years has been around 10.14% but the last few years have seen a downward GDP trend. The most recent annual GDP number is 7.7% for 2012 and the finance officials forecast an even lower projection of 7.5% GDP growth for 2014. The PMI Manufacturing Index and Industrial Production numbers for China has so far disappointment in 2014.

But a lower GDP may be a good thing for China.

Growth in China has been so far been credit-fueled and investment-ledmeaning that you have entities borrowing from investors to fund projects, especially property developments. However, this frenzy in simply building things with borrowed money can lead to the misallocation of capital personified by the rise ghost cities.

Investment has been a crucial, but unsustainable part of growth because it incurs debt: provincial government debt and the increase of shadow-banking, unregulated, off-balance sheet banking interactions. While providing additional liquidity, a lack of regulation and transparency threatens the stability of the overall financial system.  So far, the central government has taken action in auditing provincial government financial activity but it’s unclear how much transparency there will be going forward.

A transition to a more consumer-led growth will provide a stable and fundamentally-led growth for the economy but probably not result in double-digit growth numbers we’re used to from China.

EconFact 10/08: Dealing with Debt

An anonymous reader messaged me today asking to “explain the debt ceiling in layman’s” terms…I’ll give it a shot.

 

What is it? 

The debt ceiling is a theoretical limit on how much the United States government can borrow through issuing Treasuries also known as federal bonds. Treasuries act as an “I-O-U” paper promising regular interest payments as well as a principal payment. I say it’s “theoretical” because there is no hard-and-fast rule in the Constitution or any legal source saying it needs to be a certain size. It is currently near $17 trillion dollars.

 

Is it a US thing?

Pretty much.

 

How does this practice compare to other countries? 

Let’s just talk big economies here. The UK and Canada’s Treasury can borrow however much they want. The EU has a stated goal of keeping government debt to 60% of GDP but it’s not a law. China probably laughs at the idea of a debt ceiling considering their debt.

 

What would happen if it were abolished?
It would be easier to borrow money by issuing Treasuries and the world wouldn’t have to freak out that much. But, it may freak out so-called “fiscal conservatives” who are worried that the United States has too much debt anyway.

 

What happens it’s not raised? 

So, it’s technically not raised since May 2013 and the US Treasury has been using what they call “extraordinary” measures to issue new debt. On Oct 17, Secretary Lew estimates the government will not have enough cash one hand to make payments. These can range from Social Security Checks, government benefits to interest payments to international investors. People are really freaking out because the United States has always made their payments (well, sorta) and the US Treasury has been the “benchmark” financial instrument for many rate calculations.

Two things, if I can be a little technical. The first is that the Federal Reserve, which holds a lot of Treasuries, may technically be insolvent because it would be hard to value the Treasuries on hand if the United States defaults. The second is that since the Treasury is a “benchmark” financial instrument” it can have the consequences equivalent to changing what a “centimeter” is for physics (yeah, take that science).

 

Has it ever been lowered?
No.

 

Can it be lowered?
Theoretically, yes.

 

Are Democrats or Republicans more likely to raise the debt ceiling?
The debt ceiling has been raised under Republican and Democrats controlled Congress and Presidents and a mix between.

 

How can we keep raising it? What’s the point of it?
This comes back to how the US governs itself. The debt limit was seen as a formality because it is just a bill acknowledging payment for things the US government has already bought. Just imagine the budget being what you order at the restaurant and the debt ceiling paying you credit card bill afterwards: the money has been spent already. It is a Congressional issue because Congress has the power of the purse according the Constitution.

The issue comes when you have the worst Congress ever (factually proven) being an obstacle for almost everything done in the Obama administration.

How does the 14th Amendment factor in to this? 

Part of the 14th Amendment says:

“The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.”

This implies that the President may have executive power to raise the debt ceiling. However, this has never been done in history and the President Obama has ruled it out.

 

Do you have any cool facts about the debt ceiling? 

Yes –

  • The debt ceiling has been raised 14 times since 2001.
  • It has been raised 78 times total; under President Reagan’s administration it has been raised 18 times.
  • The debt ceiling has been in law since 1917 to fund the US entering World War I.
  • The mere debate of a debt ceiling talk has consequences: S&P, a rantings agency, downgraded US Treasuries in 2011, (the “I-O-U’s the US gives out), partly because of debt ceiling dysfunctions and partly because the US owes a lot of money.
  • The debt ceiling has been raised at an accelerating pace – Present Bush and Obama’s presidency has raised the debt ceiling from $6 trillion to $16 trillion.

Takeaway: Breaching the debt ceiling is bad news bears.

EconFact 09/30: How much is a scandal worth?

NOT the headline of my love life

NOT the headline of my love life

Since I’ve gotten exposure to the financial world in news, one thing that has always stuck with me is how firms and officials dance around accountability; for example, no one has gone to jail due to the 2008 financial crisis.
That’s why today’s announcement that JP Morgan has to pay almost a billion dollars AND admitted wrongdoing comes as a surprise for me. This comes as a shift in behavior from the SEC, the financial regulating body of the government and its new, aggressive leadership in the form of Mary Jo White. Banks and other large institutions do not normally admit any wrong doing despite settling with regulatory agencies because admitting wrongdoing can make itself vulnerable if future inconsistencies happen.
Here are some of my favourite the more recent scandals post-financial crisis.
  • JP Morgan’s oversight led to $6 billion in trading losses in early 2012.
  • Barclay’s has been implicated to manipulating the LIBOR rate – the London Inter-bank Offered Rate which is an important benchmark rates that influence things like mortgages or car payments.
  • HSBC has been money laundering for Mexican drug cartels. I wonder if Walter White has his money there.
  • The Vatican Bank has sketchy accounts used to smuggle money.
  • Goldman Sachs buys a tonne (in actuality, more like thousands of thousands of tonnes ) of aluminum to set the price of it.
  • PVM Oil Futures had a trader who traded half a billion dollars of oil while drunk causing oil prices to spike.
  • Dow Jones had a Flash Crash of nearly a thousand points due to computer error. To put this into context, people freak out about the Dow moving a hundred points on a daily basis.
  • <Takeaway: Finance has scandals. Surprise, surprise!