In the stupid/intelligent, coward/valiant chart where will history plot today’s investors?

Sir it is clear what Saskia Scholtes is driving at in “Fear rather that fundamentals is driving trading” August 11, but as she readily admits that it can become self-fulfilling, we should never forget that fear can easily morph into a fundamental. You can fear finding a bear in the woods but if it appears you’d better treat it as a real fundamental or you pay for it. Now how you handle that fundamental and avoid panicking well that is a totally different matter which brings us to a graph where on the axis we plot from stupid to intelligent and on the y axis from coward to valiant, and then sit back and wait for history to plot us…on a minute by minute basis.

Markets also abhors experts not behaving like experts

Sir, Frank Partnoy in “Markets abhor the vacuum left by derivatives” August 10 describes very well why the volatility has increased as a result of the investors finding out that their investments are in many cases not accurately or timely valued and that they might be up for some nasty surprises. Add to this the fact of having to see how good grades were awarded to mortgage collateralized debt obligations by the credit rating agencies without them even leaving their desk and do a little check-up on how those mortgages were issued and you might see the perfect volatility storm coming into sight.

We need to attach a warning message to the credit ratings.

Sir Andrew Ward reports August 10 that President George W. Bush has said there was a “proper role for government” in enhancing financial literacy as “we had a lot of really hardworking Americans sign up for loans and the truth of the matter is they probably didn’t fully understand what they were signing up for”.

Mr Bush might have a point but from what we currently see those most in need of a financial literacy course seem to be all the investors struggling to make head and tails out of credit rating grades or financial models that really do not mean what they say.

Of course it also cannot only be a question about the reading but also about the writing. For a starter, as a minimum role for the government, I would suggest they start by making obligatory, whenever credit ratings are disclosed the inclusion of a “Warning, following these ratings blindly is dangerous to the financial well being of your portfolio.”

Cutting out short term data will not fix it, more important is sending out the right long term signals.

Sir, of course that US economic long term competitiveness could be harmed by the companies and markets excessive short term focus but to believe that US economic long term competitiveness could somehow be helped along by cutting quarterly guidance is to be completely out of focus. Do not get me wrong, I am all for scrapping the quarterly guidance, although there are people making a living out of them, but what I mean is that for the US to be able to link more responsibly with the future, much more important is to start out sending the right long term signals. For instance, may I suggest a gasoline tax that prices gas at the pump at US$ 7 a gallon?

The growth of global finance is not that free or muscular.

Sir, all you say in “Why finance will not be unfettered” June 25, might be indeed be right but nevertheless you say it wrong. Yes the market has grown tremendously but if you truly believe that this has more to do with “seeking out pockets of undervaluation” than the exploitation of new instruments for temporary overvaluation, you are a true optimist. Unfortunately when the marking to the market of today’s almost incestually benign models and conditions need to be marked to the markets of the future, and we begin discovering where the risks have been hiding out, will probably find a lot of fat and very little muscular tissue in the growth. And to talk about “liberation of finance” and “unchained financial capitalism” when you have forcibly chained so much of the market to the opinions of some very few credit rating agencies reminds me of when Arthur Koestler describes how he as a young and utterly illusioned student, was able to see freedom in the communist Soviet.

Valium or placebos?

Sir, Lawrence Summers with “A lack of fear is cause for concern”, December 27, put his finger where it really hurts since many of us never imagined possible the huge discrepancies that exists between how nervous most investors seem to feel, in private, and how little of this risk perceptions the market seems to be transmitting through its public pricing.

Somehow it looks like either the market has lost the connection with the investors or that someone somewhere is peddling some real potent valiums or extremely credible placebos. At least when Summers says “As institutions have become more sophisticated in their approach to risk they have felt comfortable in taking positions they might have been reluctant to hold even a few years ago” we know someone has been gulping down a lot of medicine lately. So let us now pray it is what the doctored ordered and that it does not have too bad side effects.

Summers risk fear