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EU sues Goldman over volcanic ash

  
  Education
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European Commission President Jose Manuel Barroso announced late Sunday that the European Union has filed suit against investment banking giant Goldman Sachs for the fallout of ash from Iceland’s Eyjafjallajökull volcano.  The volcanic ash, which has blanketed the skies over most of Europe for the last four days, has grounded almost all European air traffic, stranding travelers and disrupting economic activity throughout the European Union.

In a statement delivered in Romansh, the official EU language of the month, Barroso said, “We have uncovered evidence that this so-called ‘natural disaster’, which is costing the EU hundreds of millions of Euros, is in fact an Act of Goldman, and we intend to hold the Zionist-American cabal in charge of the firm accountable.”  “First the profligate Americans drag the world into a near-depression and now they crap all this ash on us.  Who the hell do they think they are?” added Greek Prime Minister George Papandreou from Athens, where he was chairing a conference on Greek sovereign debt entitled, “How American Speculators Forced Us to Cook the Books, Lie to Our European Partners, and Pretend We Don’t Need A Massive Bailout”.

The EU complaint alleges that Goldman operated a proprietary wind-blowing strategy to direct the volcano’s ash into Europe’s stratosphere.  Goldman is accused of profiting from the fallout by buying complex Flight Cancellation Swaps that are netting Goldman millions of dollars every time another European flight is cancelled.  The complaint cites a smoking gun email from Francois Tubbey, a 16-year old Goldman vice president, to an unidentified woman at “i@&$*[email protected]” stating, “That’s right, baby, Fat Franky’s in charge of the weather.”

Several European banks who are counterparties to the FCS’s are alleged to be suffering billions in losses with no end in sight, apparently because they continue to sell the FCS’s to Goldman.  Reached for comment, the Chairman of Royal Bank of Scotland, one of the counterparty banks, said, “Yes, we know almost all European flights are cancelled, but our advisor is Goldman Sachs, and they keep urging us to sell these FCS’s to them, so we do.  We intend to hold them fully responsible.”

Goldman issued a statement saying that it intends to “vigorously defend itself,” adding that the EU’s charges are “unfounded in meteorology and probably also in fact.”

In a related development, the InterGovernmental Panel on Climate Change said today it is considering investigating Goldman’s role in climate change.  “We’re going to get the documents, proceed cautiously, and determine precisely when Goldman started melting the Polar icecaps.” [via email]

The Four Main Parts of James Chanos’ China Argument

  
Analysis, Economy, Education, Video
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Note: The commentary that follows has been taken from Jim Chanos’ speech to a group of investors, on the subject of China’s economy.  The video of this speech can be viewed below.

 

 

 

 

 

 



Hedge fund manager Jim Chanos has generated some controversy over the past few months because he has had the temerity to argue that China is experiencing an asset bubble.  Skeptics argue that he misunderstands the nature of the Chinese economy.

There are four main parts to his argument:

•    GDP drives economic activity.
•    Local party bosses have an incentive to game the system
•    Real estate speculation
•    Overbuilding of industrial and commercial real estate

Let’s take these arguments one by one.

1) GDP drives economic activity

In most industrialized countries, GDP is what Chanos calls a residual: it is the result of economic activity.  But in China, GDP growth is seen as sacrosanct, and Beijing sets a GDP growth target every year.  Local party bosses act to ensure that they meet this target.

2) Local party bosses have an incentive to game the system

Since GDP growth is explicitly stated as a public policy, local political bosses have an incentive to make sure that they contribute to the country’s efforts to meet the GDP target growth rate.  In practice, this means that local municipalities can, for example, meet revenue targets by selling off land to developers.  Party bosses have an incentive to sell as much land as possible, regardless of whether doing so creates too much supply.

3) Real estate speculation

One of the main arguments advanced against Chanos’ China thesis is that real estate speculators in China have to have more equity than do their American counterparts. The implication is that China won’t suffer from a meltdown of real estate.  But this argument, while possibly correct, misses Chanos’ larger point.  Speculators in Beijing buy up multiple apartments, seeing them as a store of value, akin to commodities like gold or palladium.

Implicit in this practice is the notion that there is a greater fool down the line.  Treating real estate as a store of value, rather than an investment that produces real or imputed monthly cash flows in the form of rent defies economic logic. (more…)

Four Keys to Understanding Uncertainty

  
  Education
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1) Uncertainty is always subjective. It is a state of mind that is derived from a mix of objective data, emotions and personal experience. To say that the market is always equally uncertain is to say that mood is always the same. It is not. It constantly changes.

If the perceived uncertainty is always the same, earnings reports would not have such huge impact on prices. We all know that this is not the case. In many cases, earnings reports provide new data that changes market expectations and therefore prices. Options premium is higher before earnings exactly because uncertainty is higher.

2) Uncertainty has become a synonym for bad mood in our everyday life.

The future is always uncertain, but our perceptions of the future vary. And perceptions define actions. Actions (supply and demand) define prices. Somehow uncertainty is used with a highly negative connotation in our everyday life. It is a game of words. Just like the weather people always say that there is a 30% chance of rain and never that there is 70% chance of sun.

3) Uncertainty is basically another word for market sentiment. High levels of perceived uncertainty (bad mood) and high levels of perceived certainty (good mood) have historically been good contrarian indicators, IF your investing horizon is long enough.

4) There are different types of uncertainty.

There is an economic uncertainty. Uncertainty leads to a decline in economic activity. Less people are hired. Old machines and software licences are used longer. Investments are cut. This is what it has been happening in Europe for 2 years.

Uncertainty

  
  Education
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1) Uncertainty is always subjective. It is a state of mind that is derived from a mix of objective data, emotions and personal experience. To say that the market is always equally uncertain is to say that mood is always the same. It is not. It constantly changes.

If the perceived uncertainty is always the same, earnings reports would not have such huge impact on prices. We all know that this is not the case. In many cases, earnings reports provide new data that changes market expectations and therefore prices. Options premium is higher before earnings exactly because uncertainty is higher.

2) Uncertainty has become a synonym for bad mood in our everyday life.

The future is always uncertain, but our perceptions of the future vary. And perceptions define actions. Actions (supply and demand) define prices. Somehow uncertainty is used with a highly negative connotation in our everyday life. It is a game of words. Just like the weather people always say that there is a 30% chance of rain and never that there is 70% chance of sun.

3) Uncertainty is basically another word for market sentiment. High levels of perceived uncertainty (bad mood) and high levels of perceived certainty (good mood) have historically been good contrarian indicators, IF your investing horizon is long enough.

4) There are different types of uncertainty.

There is an economic uncertainty. Uncertainty leads to a decline in economic activity. Less people are hired. Old machines and software licences are used longer. Investments are cut. This is what it has been happening in Europe for 2 years.

There is market uncertainty that impacts volatility. When correlation is close to 1.0 (another way to say that stocks move together disregarding of their individual characteristics), uncertainty is perceived as high. It leads to choppy environment that market timers prefer to sit out in order to preserve monetary and mental capital. Perceptions define reality.

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