The US dollar is down again since yesterday relative to the Canadian dollar. I hope this is a temporary pause before it continues its “correction” from the painful-for-me long time lows. I don’t know why I let myself continue to be surprised that investing is just a more sophisticated and dignified form of gambling.
The loss in the US dollar is largely being blamed on the surprise decision by the US Federal Reserve to cut American interest rates. The reason given is growing fears of a recession in the USA, the world’s largest economy. It is the biggest single cut in US interest rates for more than two decades, and follows steep stock market sell-offs around the world.1
One angle is sadly humorous:
SocGen’s unwinding of the massive [$7.15 billion US dollars] rogue [Jerome Kerviel] positions on Monday would have contributed to the violent slump in share prices and may, therefore, have played a part in the surprise decision by the US Federal Reserve to cut American interest rates.2
Though Societe Generale says it first learned of what it termed “massive fraudulent directional positions” on Jan. 19, it waited until it could close out those trades before going public with the problem. Winding down the trades, the bank said, resulted in a €4.9 billion write-down, making it potentially the largest loss ever from an alleged rogue trader.3
The combined trading positions he built up over recent months, say people close to the situation, totaled some €50 billion, or $73 billion.4
CEO Daniel Bouton said, “Perhaps we made a mistake in that respect, but the authorities will pass judgement on it.”5
Mr Bouton said today that “four or five” of his managers and supervisors had resigned and a legal investigation was taking place.
[...]
Carlos Garcia, a Fortis analyst, said: “The most serious thing is that this puts into doubt the risk management systems at some banks. You can’t suddenly announce from one day to the next a hit of $7 billion. 6
After reading about about this on various news sites, I went to Marc Andreessen’s blog to see what pithy commentary he had on this issue7, and I wasn’t disappointed, and imagined more to come in the following days. Again, Marc hasn’t disappointed.
10.48 - bank had a “duty to cut off positions before disclosing the information.†“With the chance of good fortune, it was possible to liquidate these positions over three days which was quite exceptional…We discovered this at the same time as the market plummeting….we really had to settle those positions as fast as we could and we did so during the three day crisis which you all witnessed.†[Aha! Thus the massive worldwide equity market crash on Monday!]
“They could have turned into gains if the market had gone up.†[If I had wings, I could fly!]
10.55 - “the risk and control system is not faulty.†[Yes, clearly not.]8
When I moved down to California in September 2005, I started to follow the US and Canadian dollar exchange rates more closely. For the last year and a half, since starting with Automattic and getting paid in green backs while living in Canada, I’ve been watching very closely.
I now understand why I see so many FOREX (foreign exchange) scam and spam sites. Currency like everything else it seems is gambled, and based on daily and short term fluctuations very recklessly. Likely, because it seems simpler than other investing.
Every day I get a Canadian US dollar newsletter, and it seems very light on true insights — far lighter than newsletters for a specific stock or stock sector that I have read. Short term, currency is a crap shoot.
My hope is that medium and longer term there is some more sanity to the relationships, but I’m not encouraged based on my limited experience. In fact I’m fairly embarrassed for us all. Sure, it is a complex system and all investments are speculative, but currency is the very foundation of our system, and in my naivety I thought it would reflect stability in our economic practices.
Without the gambling, it might be surprising that our nations have been so unsuccessful at minimizing the swings between grown and recession.
The advice I have received numerous times, which seems the best, is trade it the day I get paid — though I have yet to follow it. Trading regularly reduces the risk (and the possible benefits), and also saves you from the exhaustion of trying to truly anticipate FOREX.
- Katie Allen and Graeme Wearden, Guardian Unlimited, “Federal Reserve slashes US rates on day when ‘chaos reigned supreme’“ [↩]
- Times Online, “Jerome Kerviel named in €5bn bank trading fraud“ [↩]
- Nicolas Parasie, The Wall Street Journal, “Societe Generale Hit By Fraud, Write-Downs“ [↩]
- By David Gauthier-Villars, Carrick Mollenkamp and Alistair Macdomanld, The Wall Street Journal, French Bank Rocked by Rogue Trader [↩]
- Peter Allen in Paris and Gordon Rayner, Telegraph, “Jerome Kerviel behind Société Générale fraud“ [↩]
- Times Online, “Jerome Kerviel named in €5bn bank trading fraud“ [↩]
- I greatly admire Marc’s knowledge and ability to articulate and have fun both with technology and financial topics. [↩]
- Marc Andreessen, “Oh boy! The FT liveblogs the Societe Generale conference call“; original: “Live blogging the SocGen conference call [↩]
5 Comments
The situation with Jerome Kerviel and SocGen is not as straight forward as it looks. The Bank announced it’s raising capital worth $8 billion something. They can’t just make a decision like this in response to a single crisis. Their subprime losses were only about $3 billion. No way they would have planned to raise $8 billion. Surely they knew more than they’re telling, or at least they knew about this problem before hand.
I’ve heard the comparison of investing to gambling often, and it’s a pretty defensible position, but I’m not sure I agree with it — though I suspect it’s a matter of terminology.
Perhaps the key similarity between gambling and investing is that you’re exposing yourself to a risk with the expectation of a reward.
In gambling, that risk may be random (lottery tickets, slot machines, VLTs) or there may be some aspect of skill involved (poker, etc.) but the odds will never be in your favour unless the casino is in the business of losing money. In the short term, you may make or lose money, but over the long term, your losses should fairly accurately reflect the odds of the game being played.
In the case of investing, you hold your assets in cash, bonds, equities or other securities, but not matter what you choose (even cash), you’re exposing yourself to a risk. Again, in the short time you may experience gains and losses, but over the long term, your performance should very closely reflect the historical returns of that asset or mix of assets. The S&P500 has returned an average of 10.43%/year between Jan 1926 - Dec 2007. Bonds return a fixed coupon which is clearly known as well.
In both cases you expose yourself to risk with the expectation of a reward. If so, then what’s the difference? I’d argue it’s the connotation: a rational person would not gamble, but they would invest — over long periods of time. In the short term, the returns on both may appear random, but long term one is a sensible strategy and the other isn’t.
That said, most investment advisers (and I am not one, so consult your local CPA etc.) advise against “market timing” as an investment strategy. I’d argue market timing *is* gambling; you’re trying to profit by hoping the market does something. The market doesn’t care what any of us thinks or hopes, in exactly the same way as the machine that cranks out the winning lotto numbers doesn’t care what ritual I go through to decide what my lucky numbers are.
Math tells us that a diverse asset allocation across several asset classes is a sensible way of reducing your risk exposure and evening out your returns. And, as a guy who enjoys math… even stats… that seems like a good way to go to me.
Why is putting all your assets in plain Canadian cash not the end-all solution? Think about it this way: you may have ‘lost’ money (as someone who intends to spend in Canada), but you haven’t if you intend to spend it in the US. Similarly, you’ve gained money by not investing it in an S&P index fund over the last 6 months, but you’ve lost compared to someone who shorted Toyota stock.
In other words, no matter what you do, someone made a better investment and someone made a worse one — but in the long term, you’re likely to approach the expected returns for the allocation you’ve selected. Just remember that lotto tickets and blackjack are not likely to be a sound ‘investment’ strategy, but they are definitely gambling
And yes, I agree with you — most “investment†sites giving advice on particular strategies are garbage. If working in equities has taught me anything, it’s that nobody knows what the market is going to do in the short term (and by that I mean anything short of a few decades!) even if long term there’s a pretty clear trend.
Gambling is directly profiting from capitol generated through another individual/group of individuals misfortune.
Trading the markets is definitely a risky business, but keeping a level head, being patient and not being greedy it’s possible to make a steady flow of income from trading currencies.
I rarely invest in the equity market anymore, and focus mainly on forex. It’s no get rich quick scheme, it’s just another form of risky investment. But it has advantages over equity markets.
The possibility to trade 24h/5.5 days a week, and the liquidity can’t be matched by any stock exchange in the world.
PS regarding your other post. Well done on making your adsense revenue a charity gift.
Well, I find it hard to play the stock market. Guess I am never cut out to be doing that. To me, I thought I studied the market well, but I always find myself at the wrong side of the market. So it is more like gambling than investment.
And I do agree that most sites gives garbage advise. You have those Larry, tradeaday etc membership and they just give you some trades which of course over time, some will strike. But nevertheless, it is a waste of money
But if anyone can time the market well, it is really a great job to have. Sigh…guess I will not be one of them. And btw, am I glad I stayed out of stock market over the last years..The sub prime thing will probably have killed me had I stayed on to play…
I have always found the stock market a hard concept to grasp. No matter how many books I read I can never quiet decide on the type of trader I am, and therefore am fairly reluctant to start.
I guess for now my money is confined to my current account