Thursday, December 22, 2011

Price Discovery and Price Propaganda - Sinners' Dictionary

Financial and Economic Analysis is...
Price Propaganda disguised
As Price Discovery.

I touched on this point in the last posting and I think this interesting topic deserves further elaboration. Why? Because it is the holidays, most of my clients are away sunning themselves on a beach or prepping their resumes for the annual job migration that comes after the announcement of bonuses - I have the time.

Price Discovery. In the days of old, when dinasours ruled the planet and Taufiq was studying 'A' Levels economics we had this thing called price discovery. The simple theory is that price of an item or service is discovered where the supply of such things meets demand in the x/y graph.

This theory, in theory, is effective where there is perfect disclosure of information and no barriers of trade, which can be in the way of import duties as well as technical barriers of entry - for instance, a rule that the bananas to be imported and sold must be straight and not curvy whatsoever, or that a car must meet a particular exhaust emission standards.

Disenchantment #1. The first reality-check I have come across is, sadly, that human communication is not perfect that way. Never was. Not just about financial or economic information. Things get lost or distorted in the transmission of any type information, "Yes, yes... don't worry. Her cousin is very pretty!". 

Disenchantment #2.The second reality-check is that people are wise to this distortion and have found ways not to just inform the market, but actually manipulate the market. And of course, people will do so in the manner that best suits their interest in the troika of the equity, debt and currencies market. Things were never perfect to begin with but the growth of derivatives have multiplied the profit and risk exponentially. For instance, do you know that the oil derivative futures market is actually bigger than actual trading in the global oil market? So the tail is now wagging the dog. And the tail is BIGGER than the dog.

Price Propaganda. Whether it is central banks, brokerage firms, rating agencies, investment banks, university economic faculties, 'thinktanks', monetary authorities or international financial organisations, at the end of the day, press statements, research reports and analyses are created according to their individual agendas, each party generating its own disinformation that best advances its respective goals - Price propaganda.

Chaos. In the traditional world of supply and demand, it is difficult to make obscene amounts of money without actually manufacturing / building / growing something that people wants to buy. So to liven things up and to allow banks to make tonnes of money shuffling paper, the financial industry has essentially engineered magical financial products, so complicated and so leveraged that even professionals find it hard to find out the degree of liability involved or where the liabilities are in fact parked or hidden. I may be wrong, but I don't think that such complexities were accidentally generated. It is only in the dark realms of financial chaos and anarchy that dynastic fortunes are made. Someone somewhere is benefiting from this man-made confusion. It began in Wall Street and the City of London, and the contagion is spreading... 

The Temple of Greed
Once upon a time, 
Jesus chased the moneylenders out of the temple. 
Now the entire world is their temple

The Good News. I hate ending on a depressing note, so this is the good news - You. Because there is someone out there as kind, sensible, generous, fair-minded and obviously as good-looking as you. We can make a change, we can make amends. We can still choose prudence over consumerism, community over individual self-interest, charity over selfishness, love over hubris and certainty over doubt. For even if the selfish ones have spread the religion of greed, it is based on falsehood, and falsehood never lasts. I rest the future of the world on the conscience of your present and in the lessons of your past. I know you will choose well.

wa min Allah at-taufiq

Hate has no place in Islam
Love will show the Way

footnote: The eye-candy in this posting is my aunt, Mak Ndak, pictures taken by her granddaughter, Balqies Arafia Zaid.

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