Category Archives: Layman Finance

Artificial Intelligence and Universal Basic Income

Lately, I have been about AI (artificial intelligence), and pondering the long-term impact of this new “industrial revolution”. In the first cycle, and I think we are in it right now, AI will automate most of the tasks which require human intervention, but through technological revolution, have been easy to computerize (e.g. finance, accounting, law, medicine and diagnosis). Stage 2 will be when AI will start to wreak havoc on other industries when all of the easy fruit has been picked. I think the most immediate impact of AI should be felt in the financial industry, as computer should be able to automate most of the back office tasks easily, and without much due effort (as long as most of the forms are standardized etc).

More to follow …..

Home Capital Group (HCG.TO) – What is next?

Almost everyone is now aware of the Home  Capital Group’s debacle. The alternative mortgage lender, which operates our of Canada, has had its high-interest saving balances reduced from $1.4B to a mere 340 million within less than a week. I have been consuming a lot of articles about the company (see some links below), and it seems to me that this ‘bank run’ is solely due to the loss in confidence over the banks. Currently, as it seems, that the book is ‘healthy’ (as per the media), however, in my opinion (albeit I do not profess to be an expert in calling the timing of the markets), a 33% YoY increase in house prices is sign of a bubble. I imagine Home Capital has originated mortgages in the last year, and some of these mortgages would end up being ‘slayed’ in a down market, say if the market reverts to the price it was in 2016 (which is a 33% decrease!).

The other question is if there will be a bank run on the Canadian banks? Currently the Canadian big-6 banks are well capitalized, however, will this change in market sentiment move the inter-bank rates against the Canadian Banks? (think Greece / Portugal /Spain). We will find that out shortly!


Legal Experts question why Home Capital didn’t just write a cheque to mitigate the damages (FP)

Executive Summary of IMFs Global Financial Stability Report

It is a long report – but good read nonetheless.

Here is the executive summary for those who are interested:

Financial stability has improved in advanced economies

Financial stability has improved in advanced economies since the April 2015 Global Financial Stability Report. This progress reflects a strengthening macrofinancial environment in advanced economies as the recovery has broadened, confidence in monetary policies has firmed, and deflation risks have abated somewhat in the euro area. The Federal Reserve is poised to raise interest rates as the preconditions for liftoff are nearly in place. This increase should help slow the further buildup of excesses in financial risk taking. Partly due to confidence in the European Central Bank’s (ECB’s) policies, credit conditions are improving and credit demand is picking up. Corporate sectors are showing tentative signs of improvement that could spawn increased investment and economic risk taking, including in the United States and Japan, albeit from low levels.

Risks continue to rotate toward emerging markets, amid greater market liquidity risks

Despite these improvements in advanced economies, emerging market vulnerabilities remain elevated, risk appetite has fallen, and market liquidity risks are higher. Although many emerging market economies have enhanced their policy frameworks and resilience to external shocks, several key economies face substantial domestic imbalances and lower growth, as noted in the October 2015 World Economic Outlook (WEO). Many emerging market economies relied on rapid credit creation to sidestep the worst impacts of the global crisis. This increased borrowing has resulted in sharply higher leverage of the private sector in many economies, particularly in cyclical sectors, accompanied by rising foreign currency exposures increasingly driven by global factors. This confluence of borrowing and foreign currency exposure has increased the sensitivity of these economies to a tightening of global financial conditions (see Chapter 3). As emerging market economies approach the late stage of the credit cycle, banks have thinner capital cushions, while nonperforming loans are set to rise as corporate earnings and asset quality deteriorate. In China, banks have only recently begun to address the growing asset quality challenges associated with rising weaknesses in key areas of the corporate sector. These developments in emerging market banking systems stand in contrast to those in advanced economies, where banks have spent the past few years deleveraging and repairing balance sheets, raising capital, and strengthening funding arrangements. Against a challenging backdrop of falling commodity prices and weaker growth, several emerging market sovereigns are at greater risk of losing investment-grade ratings in the medium term. Pressures on sovereign ratings could intensify if contingent liabilities of stateowned enterprises—with a large and rising share of emerging market corporate bond issuance—have to be assumed by the sovereign, for example, from firms in the oil, gas, and utility sectors.

Policymakers confront a triad of challenges

The baseline outlook for financial stability, consistent with the October 2015 WEO, is characterized by continuing cyclical recovery, but with weak prospects for medium-term growth in both advanced economies and emerging markets. In advanced economies, improvements in private balance sheets and continued accommodative monetary and financial conditions have spurred a cyclical recovery, but the handover to higher levels of self-sustaining growth is incomplete. Emerging markets face substantial challenges in adjusting to the new global market realities from a position of higher vulnerability. Successful normalization of financial and monetary conditions would bring macrofinancial benefits and considerably reduce downside risks. This report analyzes the prospects for normalization according to three scenarios: the baseline, an upside scenario of successful normalization, and a downside scenario characterized by disruptions in global asset markets. Against this backdrop, the global financial outlook is clouded by a triad of broad policy challenges in evidence over the past several months:

Emerging market vulnerabilities—As examined in the WEO, growth in emerging markets and developing economies is projected to decline for the fifth year in a row. Many emerging markets have increased their resilience to external shocks with increased exchange rate flexibility, higher foreign exchange reserves, increased reliance on FDI flows and domestic currency external financing, and generally stronger policy frameworks. But balance sheets have become stretched thinner in many emerging market companies and banks. These firms have become more susceptible to financial stress, economic downturn, and capital outflows. Deteriorating corporate health runs the risk of deepening the sovereign-corporate
and the corporate-bank nexus in some key emerging markets. China in particular faces a delicate balance of transitioning to more consumption-driven growth without activity slowing too much, while reducing financial vulnerabilities and moving toward a more market-based system—a challenging set of objectives. Recent market developments, including slumping commodity prices, China’s bursting equity and margin-lending bubble, falling emerging market equities, and pressure on exchange rates, underscore these challenges.
• Legacy issues from the crisis in advanced economies—High public and private debt in advanced economies and remaining gaps in the euro area architecture need to be addressed to consolidate financial stability, and avoid political tensions and headwinds to confidence and growth. In the euro area, addressing remaining sovereign and banking vulnerabilities is still a challenge.
• Weak systemic market liquidity—This poses a challenge in adjusting to new equilibria in markets and the wider economy. Extraordinarily accommodative policies have contributed to a compression of risk premiums across a range of markets including sovereign bonds and corporate credit, as well as a compression of liquidity and equity risk premiums. While recent market developments have unwound some of this compression, risk premiums could still rise further. Now that the Federal Reserve looks set to begin the gradual process of tightening monetary policy, the global financial system faces an unprecedented adjustment as risk premiums “normalize” from historically low levels alongside rising policy rates and a modest cyclical recovery. Abnormal market conditions will need to adjust smoothly to the new environment. But there are risks from a rapid decompression, particularly given what appears to be more brittle market structures and market fragilities concentrated in credit intermediation channels, which could come to the fore as financial conditions normalize (see Chapter 2). Indeed, recent episodes of high market volatility and liquidity dislocations across advanced and emerging market asset classes highlight this challenge.
Strong policy actions are needed to ensure “successful normalization”

The relatively weak baseline for both financial stability  and the economic outlook leaves risks tilted to the downside. Thus, ensuring successful normalization of financial and monetary conditions and a smooth
handover to higher growth requires further policy efforts to tackle pressing challenges. These should
include the following:

• Continued effort by the Federal Reserve to provide clear and consistent communication, enabling the smooth absorption of rising U.S. rates, which is essential for global financial health.
• In the euro area, more progress in strengthening the financial architecture of the common currency to bolster market and business confidence. Addressing the overhang of private debt and bank nonperforming loans in the euro area would support bank finance and corporate health, and boost investment.
• Rebalancing and gradual deleveraging in China, which will require great care and strong commitments to market-based reforms and further strengthening of the financial system.
• More broadly, addressing both cyclical and structural challenges in emerging markets, which will be critical to underpin improved prospects and resilience.
Authorities in emerging markets should regularly monitor corporate foreign currency exposures, including derivatives positions, and use micro- and macroprudential tools to discourage the buildup of excessive leverage and foreign indebtedness.
• Safeguarding against market illiquidity and strengthening market structures, which are priorities, especially in advanced economies’ markets.
• Ensuring the soundness and health of banks and the long-term savings complex (for example, insurers and pension funds), which is critical, as highlighted in the April 2015 GFSR.


With bold and upgraded financial policy actions detailed in the report, policymakers can help deliver a stronger path for growth and financial stability, while avoiding downside risks. Such an upside scenario would benefit the world economy and raise global output 0.4 percent above the baseline by 2018. Further growth-enhancing structural reforms, detailed in the WEO, could bring additional support to growth and stability.

Full report here.

What’s Going On in Your Brain? Common Investor Biases and Where They Come From

In recent decades, psychologists, economists, and neuroscientists have worked together to understand how our behaviors depart from the standards of normative economic theory and why exactly we have a proclivity to do so.

(German) Leftists demand 100 percent tax on the rich

It seems that taxing the rich is the new norm, or the idea of it anyways. Per the German news source, the German leftist party is considering a 100% tax on anyone making over 500,000.

If anyone has read any economics course, or has common sense, would see why this would be a terrible mandate. Also, what is not clear is that if it only applies to people? And how much is corporate tax is going to be affected by the mandate. However, a 100% taxation on income after a certain threshold will discourage hardworking and geniune people from working and creating social value through their businesses. There is limited data on how many persons make such money.  It is to be noted that it may work some very smart people from joining specific area of work. For example, if the same mandate is applied to income from financial institutions (or capped to per say a million euros), it will actually drive smart people to other industries (small businesses, technology), which may create increased value in socity as compared to banks.

Excerpt from the aricle:

The party paper said the total tax on those taking home over €40,000 per month would be used to fund social welfare and investing in the country’s future.

“Explosive inequality is threatening democracy,” said co-leader Bernd Riexinger. “I call capping income at half a million euros a democracy tax.”

The upcoming campaign for Germany’s election in September was going to be one focused on wealth redistribution, said Riexinger.


You can read the full article here.


The euro crisis no one is talking about: France is in free fall [Fortune]

A fascinating article by Fortune Magazine! A full read is mandatory.

Given investors’ confidence in its sovereign debt, and its image as Germany’s principal partner in the sturdy, sensible “northern” eurozone, you’d think that France endures as the co-guardian of the endangered single currency. Indeed, the rate on France’s ten-year government bonds stands at just 2%, just a few ticks above Germany’s. From a quick look at the headline numbers, France doesn’t appear nearly as stressed as the derisively titled “PIIGS,” Portugal, Ireland, Italy, Greece and Spain. So far, the trajectory of its debts and deficits isn’t as distressing as the figures for the PIIGs, or even the U.K. and the U.S.

France’s vaunted role in the creation and initial success of the euro enhances its aura of solidity. It was President Francois Mitterrand who in 1989 persuaded Chancellor Helmut Kohl to back monetary union in exchange for France’s support for German reunification. In fact, France and Germany, along with the Netherlands, dramatized their commitment by effectively uniting the franc and deutschemark in a currency union that held their exchange rates in a narrow band, and heralded the euro’s birth in 1999. In the boom years of the mid-2000s, France virtually matched Germany as the twin growth engine of the thriving, 17-nation eurozone.

A deeper look shows that France is mired in no less than an economic crisis. The eurozone’s second-largest economy (2012 GDP: 2 trillion euros) is suffering more than any other member from a shocking deterioration in competitiveness. Put simply, France’s products — its cars, steel, clothing, electronics — cost far too much to produce compared with competing goods both from Asia and its European neighbors, including not just Germany but even Spain and Italy. That’s causing a sharp and accelerating fall in its exports, and a significant decline in manufacturing and the services that support it.

The virtual implosion of French industry is overlooked by analysts and pundits who claim that the eurozone had dodged disaster and entered a new, durable period of stability. In fact, it’s France — not Greece or Spain — that now poses the greatest threat to the euro’s survival. France epitomizes the real problem with the single currency: The inability of nations with high and rising production costs to adjust their currencies so that their products remain competitive in world markets.

So far, the worries over the euro have centered on dangerously rising debt and deficits. But those fiscal problems are primarily the result of a loss of competitiveness. When products cost too much to make, the economy stalls or actually declines, so that even modest increases in government spending swamp nations with big budget shortfalls and excessive borrowings. In this no-or-negative growth scenario, the picture is usually the same: The private economy shrinks while government keeps expanding.

That’s already happened in Italy, Spain and other troubled eurozone members. The difference is that those nations are adopting structural reforms to restore their competitiveness. France is doing nothing of the kind. Hence, its yawning competitiveness gap will soon create a fiscal crisis. It’s absolutely astonishing that an economy so large, and so widely respected, can be unraveling so quickly.

The world’s investors and the euro zone optimists should awaken to the danger posed by France. La crise est arivée.

You can read the full article here.

Great Canadian real estate crash of 2013 [McLeans]

Article on the expected, or according to McLeans, in the progress housing “crisis” in Canada:

It’s not just Vancouver where realtors’ BlackBerrys no longer buzz. In Toronto, the city’s once insatiable demand for living in 650 sq.-ft. glass boxes has evaporated overnight. Condo sales are down by 30 per cent, while prices have fallen by 4.5 per cent. Some proposed projects have been put on hold, while some angry investors—like those who bought luxury suites at the Trump International hotel—are desperate to get their money out, and have turned to the courts. Even the Bank of Canada, which has helped inflate the bubble by tempting Canadians with years of rock-bottom interest rates, has issued a rare warning about the risks posed to the broader housing market of too many condo developers in cities like Toronto and Vancouver chasing too few buyers.

Summing up the entire article,

In such a scenario, the homeowners most at risk are those who are overextended. Of the $570 billion in mortgages that the CMHC insures, about half are borrowers with less than 20 per cent equity in their homes. “If housing lands hard and affects the broader economy, many people will find themselves effectively underwater at a time when they would most need mobility to pursue employment,” Rabidoux says. “In this scenario, a house becomes a prison.” And it’s not necessarily condo buyers or those who paid over a million to live in a hot downtown neighbourhood who are most at risk. Rabidoux says people who shelled out for sprawling “McMansions” in the suburbs could be in particular trouble, as the demand for oversized homes is expected to fall out of favour when baby boomers retire and seek out smaller living spaces closer to the city. Indeed, that’s precisely what happened in the U.S., where some estimates peg the number of unwanted “large-lot” homes at about 40 million across the country. As for smaller houses, Andrew says there remains a shortage of single-family homes in cities like Toronto and Vancouver, which should keep demand relatively high. “If you are buying a three- or four-bedroom house right now, then I think you’re going to be okay,” he says.

Actually, the above is a valid point. I was recently having discussion with an acquaintance, and they purchased a house in the suburbs, with 2500 sq ft, and one hour commute to downtown Toronto, the couple paid a whopping $650,000. That is a handsome sum of money, and significant for most families, especially when the economy seems on shaky footing.

One of the gravest mistakes is to get into investments because the interest rate is too cheap, even though the investment itself may not have that much great rate of return. Real estate investment (such as a house) maybe worthwhile if the purchaser will be living in the dwelling himself/herself, and would be able to afford the dwelling even if they lose the job for 6 months. Such a purchase should not be purchased with the end in mind of renting the unit or capital appreciation, as the softening of the market would decrease the rent and the price, both at the same time. The article notes this point quite eloquently;

The concern is that the market is being driven by speculators, not families. Many condo purchasers buy off a floor plan—often borrowing against an existing property—and then sell or rent their unit once it’s completed several years later (units can also be sold, or “assigned,” to another buyer while a tower is under construction). “So far, the demand for units and supply has not been too far out of balance,” says Ohad Lederer, an analyst at Veritas Investment Research, citing estimates that investors comprise half of the Toronto condo market. “And that’s reflected by a relatively robust rental market. But I’m definitely concerned that, over the next couple of years, an imbalance will emerge.” It’s happened before. In Miami, a pre-2008 condo boom left 7,000 new units unoccupied after the crash. The upside? College students could suddenly afford to rent swanky suites with granite countertops and ocean views.

Lederer recently sent secret shoppers to several condo sales presentation offices. They made some disturbing discoveries: sales staff who didn’t ask for mortgage pre-approvals and who grossly misrepresented the demographic trends—namely the number of expected new immigrants to Toronto—that are supposed to keep units in high demand. But Lederer says he is most disturbed by the sector’s “shoddy mathematics.” By his calculations, many condo owners who rent their properties are realizing returns of less than four per cent. If rental rates fall as more units come on the market—Lederer estimates there are at least 5,000 too many condo units being built in downtown Toronto—those same investors will soon be losing money, prompting them to sell. “Being a landlord is already a negative cash proposition at today’s prices,” he says, adding that a bust in the condo sector will likely have a “trickle up” effect by reducing demand for starter homes.

With discussion with multiple friends working in the finance industry, majority seem to agree that it is best to get into real estate, as “real estate always goes up”. Lets hope they are right!

You can read the full McLeans Article here.



Iceland’s President Explains Why The World Needs To Rethink Its Addiction To Finance

Just read an article with Iceland’s president discussing the banking crisis and his handling of the crisis. Of the most insightful and profound things he has discussed in his interview, I really enjoyed the following:

As everybody knows now, we did not pump public money into the failed banks. We treated them like private companies that went bankrupt, and we let them fail. Some people say we did it because we didn’t have any other option, there is clearly something in that argument, but it does not change the fact that it turned out to be a wise move or whatever reason. Whereas in many other countries, the prevailing orthodoxy is you pump public money into banks and you make taxpayers responsible for the banks in the long run, and somehow treat the banks as if they are holier institutions in the economy than manufacturing companies, commercial companies, IT companies, or whatever. And I have never really understood the argument: why a private bank or financial fund is somehow holier for the well being and future of the economy than the industrial sector, the IT sector, the creative sector, or the manufacturing sector.

But there were other issues at stake as well. What the British and the Dutch were arguing was that somehow the European banking system was such that a private bank would operate anywhere in Europe, and if it succeeded, the bankers got extraordinary benefits, the shareholders got big profits. But if it failed, the bill would simply be sent to ordinary people back home: farmers and fishermen, nurses and teachers, young people and old. And that, I maintain, is a very unhealthy formula for the future of the European banking system. If you sent a signal to the bankers that you can be as irresponsible and daring as you want to be, and if you are lucky, you become very rich, but if you fail, other people will pay.

It is surprising that the country that prides itself on the capitalist nature of itself is the one that is not capitalist at all in its nature (talking about U.S over here!). And Iceland, which is more socialist than the U.S was able to take such step, such as letting the banks fail. Along with the failure, the government should also stand the people responsible for such gross negligence that caused the entire housing mess (i.e sellign MBS, CMOs as AAA when they should have been rated junk).  One of the reasons that might be is the lobbying of these financial institutions, and the immense power such institutions have on the lawmakers.

Now it is your time to think.

Iceland’s President Explains Why The World Needs To Rethink Its Addiction To Finance (BI)