marketmaker's blog

The Madoff scandal still rings loudly in the news. Yet what has been conspicuously missing from reports is the basic reasons and risks for such a failure. A question, which should and probably by now does linger in many investor's minds is - are there more Madoffs to come?

A post from 247wallsteets, suggests there are - http://www.247wallst.com/2008/12/more-madoffs-to.html .

Judgements and advice are very precise when done about about the past. An interesting read however is the following  story on - Forbes Gurus: Best Investment Ideas For 2008. One Jim Stack, editor of Whitefish Montana's InvesTech Research and Portfolio Strategy, seems like he got a lot of it right. Back in 2007 he wrote:

"If complacency breeds danger," Stack wrote, "then we might be sitting on a powder keg heading into 2007."

A fascinating event unravelled last week. The Madoff 'Ponzi Scheme' Affair is at least to me not so shocking with the enormous size of its fraud - $50 bln.; the greed and aparent arrogance of the scheme ;nor with the specifics of the fraud itself, as much as with the people and instituitions that fell for it. Again, I hardly have 10 or 1 or 1 pro mille or a million to invest, so it may be easy to judge when you are not in the victims' shoes.

It is not often that I am lucky enough to read something that leaves me deeply impressed by the insight of the writer and also vindicates some of my own view. Yesterday however a good friend forwarded me a really remarkable essay by Nassim Taleb. It is an essential read for anyone trying to make sense of what's happening to our financial system. It also gives a very simple - non mathematical explanation as to why all our planning and risk systems failed completely. 

I have a favourite quote - it was attributed to an arab oil minister some time in the 70s, during the first oil crisis when the world was again thinking the end is nigh; for one economically speaking. He was asked about the imminent, as it would seem to most people end of oil. And on everyone's mind was a cataclysmic picture of scarcity and social breakdown. And in the spirit of wisdom of his Arab ancestors here is what he said:
 

"News of a sharp shares fall cause a sharp shares fall on wall street" - so read a funny but also a very truthful news story from the onion. Recession, spending falls and investment panic are all subjective events that are solely based on the perceptions of the market players. It is scary and fascinating however how they translate to the real world.
 

Quants, quantitative researchers - people who work with formulas and statistical models to try and predict markets, have a mistical aura. Their natural inhibition to talk and expain their views along with the overly complex calculations and models they construct makes them something of black horses.
 

The oil bubble is well burst and now major exporters are looking for a way to stabilize markets and hang on to at least the prices of 2 years ago. The only major commodity bubble left over from an  year of madness on financial and commodity markets is Gold.
 
Gold has been for most investors a safe-heaven investment with protected value. For millenia it's been favoured as a vehicle of saving because of its durability. There is demand for it too in electronics and insustry.
 

Many people and the markets on the whole have gone past the stage of suspicion, rushed into worry, and are currently running in panic of the markets collapse. Fear rules everything and it's as the poet put it a "a beast begot on itself, that feeds on itself". Equity is dead, debt is tremendous, credit ratings ( if you still trust them ) are bleakest than ever. There is not way out.
 

The middle of winter when the thick snow falls, what all kids want to do is go out and play in the snow, hurl snowballs at each other and eat good quantities of snow flakes and icicles. What mums, who always know what's better, do is either be bad not let them go out and play - since the cold and melting snow will eventually get  them sick. Or be more sanguine, and let them enjoy it while they can , and then patiently sit by their bed, feeding them soup and syrup.