Greek Complexity

"Accounting as a force for democracy"?

The Economist writes of China's urge to bring its accounting rules in line with international standards. Stultifyingly boring though this might sound to some, the new policy has wide-ranging implications: the article goes so far as to claim that the new rules could help bring about democracy in China. How?

The new accounting rules are meant to properly reflect the value of companies, usually based on market prices. The writer argues that, implemented properly, the new rules would result in greater transparency in the way Chinese companies are owned and managed, which includes proper disclosure of government meddling. In addition, measuring and reporting such newfangled concepts as revenues and profits would also help reflect the "real desires of the Chinese people". And finally, dubious partnerships, cross-ownerships and "sleazy transfers of mispriced assets from the state to the private sector" would be exposed for all to see.

Knowledge is power. Ergo, the new accounting rules, in theory, could help speed Chinese democratisation.

Watch out: the bean counters are picking up their knitting needles.

Technorati Tags: china, accounting, politics, democracy

Joost!

Does anyone have a spare Joost invitation token they can give me pleeeease?

Technorati Tags: joost, tv, internet, media, internet tv

Hedge fund clones

Goldman’s Absolute Return Tracker index is a hedge fund clone that allows investors to invest in hedge fund-like strategies without the associated high costs.

Link: Goldman sets up hedge fund clone

Goldman Sachs has become the first bank to create a hedge fund replication tool in a move that could lead to a shake-up of the $1,300bn hedge fund industry. [This is a] revolution being compared with the arrival of index trackers in the mutual fund world a generation ago. Replication strategies are based on academic research that suggests hedge fund performance is largely driven by movements in underlying markets, such as equity, bond and commodity prices, rather than the intrinsic skill of managers.

So many issues come to my mind here:

• Goldman's brokerage business will no doubt face problems with hedge fund clients complaining that Goldman is biting the hand that feeds it (same for other banks that follow Goldman's lead)
• Some hedge funds will close shop when it is revealed that their strategies depend more on following prices and using leverage, than true security-picking skills
• Other hedge funds will close shop when Goldman's bargain basement fees (1%) demonstrate to customers that high fees are not a prerequisite for investing for hedge fund-like performance
• High returns will (arguably) become harder to achieve in future as democratisation of the investment process results in more money chasing the same investment opportunities. If this happens, this will be by far the biggest effect of this development.

Technorati Tags: technology, finance, strategy, software

Liquidity and markets

The Economist writes about the effects that global liquidity is having on emerging economies. Link: The global gusher

Worldwide, an abundance of liquidity has lured investors into riskier assets in search of higher returns. [...] The deluge of spare cash has two main sources. First, average real interest rates in the developed world are still below their long-term average. Second, America's huge current-account deficit and the consequent build-up of foreign-exchange reserves by countries with external surpluses has also pumped vast quantities of dollars into the financial system. A large chunk of Asia's reserves and oil exporters' petrodollars have been used to buy American Treasury securities, thereby reducing bond yields. In turn, low bond-market returns have encouraged bigger inflows into higher yielding emerging-market bonds, equities and property, especially in Asia. Liquidity has been further boosted by the use of derivatives, and by carry trades (borrowing in currencies with low interest rates, such as yen, to buy higher-yielding currencies).

This liquidity is a problem for many emerging economies today, as the article explains, but what can we say about how the situation will look in the future. The Economist does not make any predictions but let me venture some guesses. If liquidity remains:

• Global (real) interest rates will continue to stay low for the foreseeable future.
• Use of this cheap capital will continue to grow especially in developed countries by consumers, entrepreneurs (new start-ups) and companies on the acquisition trail.
• Some emerging economies will impose controls on capital inflows while others will gradually allow their currencies to move more freely.
• Markets for some assets will become overcrowded with investors, move to unreasonable highs (property comes to mind) and experience corrections that will scare away liquidity, at least temporarily.
• The use of derivatives will continue to grow (duh) and boost liquidity.

There you have it. A hotch-potch of guesses by a non-economist. Would anyone like to comment?

Technorati Tags: economics, emerging markets, liquidity, money supply, interest rates