NEW ARTICLE!

I am starting again a series of articles, having been absent a while from my website/blog. I've just finished Soros's last book on the 'New Financial Paradigm 2008' which made a fascinating read, especially when it came to Soros's thoughts on human psychology and philosophy. I find it amusing how, regardless of the area of expertise/domain, when one wants to go deep to the roots of a problem, it always seem to boil down to human behaviour. Recessions are more a sociological phenomenon rather then an economical one.

Take the housing crisis and the stock market crash. Top MBA programs still teach the theory of the efficient market hypothesis in their Finance Courses. Reading 'The Black Swan' I realised that there are alternatives to the mainstream financial theories which are not so obscure, yet I find it surprising that those theories are not even mentioned in top business schools which are supposed to bread the leaders of the corporate world. Herd thinking is a well known behavioural pattern common for the human society and tends to be repetitive, it is just the timing that is difficult to predict and also the exact consequences of that behaviour, once the critical climax is reached in an economic boom cycle for example.

However, Soros's example shows that timing doesn't have to be very precise, common sense is always a good tool to use and most of all, understanding the phenomenon is paramount to any strategy you might adopt in response. Sounds trivial? I would argue that a significant number of corporate leaders did not understand what was going on. They were reacting on inputs, with their mind operating under the constraints of conventional wisdom and herd thinking. Also, a lack of leadership and courage has led to corporations sliding into a behaviour that now seems difficult to explain.

Looking at the real estate sector, Soros's makes an excellent point on noticing how availability of money is determining the real estate market prices and not only supply and demand. That the relationship between asset prices and availability of money is relative and the credit boom has led to a massive inflation in real estate prices. I remember once, being in the business school at a course on Capital Raising Techniques and a top executive from a Wall Street bank was lecturing us on leverage. I remember feeling uneasy on how lightly the financing of major projects was taken by the executive and when I asked about the risk of the bank not managing to place the securitised loans on the market to other investors he was quick to answer they don't have that many loans on their books. Turns out they had quite a few. As in couple of tens of billions of USD.

That means we need to go back again to the old business ethics problem. Fundamentally the problem of any organisation is lack of control over the leadership and this has not changed over the last decades. Regulators are always behind the reform curve and always late. Stockholders have access to the information management provides. Employees are obedient and red flags are not at all a common practice. This problem is exacerbated during prolonged economic boom cycles for the obvious reasons, managers feel secure enough and get greedy.

We are at the end of a long period of economic growth and the extreme market corrections reflect the long boom period. The longer the boom, the larger the bust. How long is this going to last and how will the landscape look after the recovery? Some people say two years, some two generations. I think we cannot compare this time with any other period in the human history. We live time of unprecedented prosperity for the middle class, yes, even now, and I find ludicrous the comparison with the 1929's Great Depression where 30% of the working force was unemployed and now papers amplify variations of 1-2% in unemployment forecasts to biblical proportions.

You think this is bad? Please go to your local library and rent a book on the Great Depression, with pictures. Read something else then the daily newspaper aiming for the ratings. We leave in an age of information overload, sources are important when you look for information. Newspapers and TV are poor in information but are interesting nevertheless to be use for spotting new trends. I found reading 'The World is Flat' by Friedman very relevant for the topic of this article. The interconnectivity of the new world can no longer be ignored. The consequences are overwhelmingly positive, despite some obvious threats. International trade builds trust and wealth for both the developing countries and the developed countries. The technological advances in the developing countries enhance productivity and wealth creation. This will continue to be the case for the foreseeable future. I do not find many reversible processes among the ones mentioned above. I do not believe in a future world being divided. I see the last bastions of extremism in the Middle East and Asia feeling threatened by this surge of the New Better Educated Middle Class. They should, cause change is coming to their door and they will have to answer the bell ring.