Humour all too often is the perfect tool to depict the truth. Abrose Bierce published the ‘Devil’s dictionary’ in 1911, defining his view of government, finance, commerce and life in general at the time. One classic example is his definition of ‘riches’ as ‘the savings of many in the hands of one’.
Edward Chancellor has recently updated the dictionary for our times. The following are a few of my favourite.
Asset price bubble: The most noticeable consequence of the U.S. Federal Reserve’s easy money policy.
Austerity: Also known as “sado-fiscalism”. A forlorn attempt to stave off government bankruptcy.
Bank: An institution which, by applying leverage and mismatching assets and liabilities, earns short-term profit and generates long run losses
Behavioural finance: The field of study resting on the notion that an asset price bubble is the result of “irrational exuberance” (see Greenspan*) rather than the inevitable consequence of bad monetary policy and conflicts of interest on Wall Street.
Bernanke, Ben: Former Fed chairman who failed to spot the housing bubble before it burst and in 2007 claimed that U.S. subprime mortgage problems were “contained”. After the Lehman Brothers bust, Bernanke succeeded in re-inflating the Greenspan* superbubble. Soon after leaving the Fed, he was rewarded with a job at Citadel, a hedge fund, which presumably didn’t hire Bernanke for his market insights.
Bitcoin: A digital tulip bulb.
Bonus: In banks, a large payment out of short-term profit to retain “talent”. While a bank’s profit is generally illusory, bonuses endure.
BRIC: A “Bloody Ridiculous Investment Concept” (Peter Tasker, fund manager and author). An emerging bull market acronym comprising the first letters of Brazil, Russia, India and China coined by Jim O’Neill, a former member of theGoldman Sachs marketing department.
Capex: The splurging of shareholder funds on the latest investment fad.
Career risk: The near inevitability that a fund manager will be sacked if he or she refuses to participate in an asset price bubble or exhibits more than a hint of tracking error.
Chief executive officer: A corporate boss who extracts any surplus value created by the business he or she runs for his or her own benefit.
Chinese GDP: A “man-made” figure (Li Keqiang, future Chinese premier, in 2007).
Compensation committee: A group of people, often the chief executives of other companies, tasked with ratcheting up the CEO’s pay.
Corporate governance: A set of rules intended to preserve the fiction that executives are working on behalf of shareholders.
Correlation: A spurious statistical relationship between the prices of different assets, used in risk models.
Deflation: A benign fall in the price level due to productivity improvements and the expansion of global trade. Not to be confused with debt deflation, the consequence of the Fed’s easy money policies.
Derivatives: “Financial weapons of mass destruction” was the definition once used by Warren Buffett, but that hasn’t stopped the Berkshire Hathaway chairman from dabbling in them himself.
Earnings per share: A corporate performance metric, published quarterly, which says little about a company’s true profitability and is easily manipulated. Often set as a target for executive compensation schemes.
Economist: A person who failed to anticipate the global financial crisis; generally, an undistinguished mathematician with a poor understanding of finance
Financial innovation: New ways conceived by Wall Street to extract fees, conceal risks, and evade financial regulation.
Financial regulation: A Maginot Line constructed around Wall Street after the last bust.
Forecast: An inaccurate prediction, invariably optimistic, produced by brokers to generate turnover and by pension plan sponsors to mask insolvency.
Inequality: The social consequence of Fed policies that inflate Wall Street fees and CEO pay while simultaneously reducing returns on the public’s savings.
Interest rate: The price of money over time, which balances saving and investment. In the hands of the Fed, a dangerous policy tool.
Liquidity: Since the financial crisis, the oxygen of Wall Street, supplied on demand by the Fed. “Of the maxims of orthodox finance none, surely, is more antisocial than the fetish of liquidity, the doctrine that it is a positive virtue on the part of investment institutions to concentrate their resources upon the holding of ‘liquid’ securities. It forgets that there is no such thing as liquidity of investment for the community as a whole” (Keynes).
Mean reversion: The touching belief of value investors that life will one day return to normal.
Moral hazard: Wall Street’s mentality of “heads I win, tails you lose”, fostered by Fed policy.
Off balance sheet: The hidden truth.
Pension plan: A collection of unpayable corporate promises backed by inadequate funds and managed on the assumption of unrealistic returns.
Proprietary trading desk, or prop desk: A place where investment bank traders front-run trades placed by their clients. Recently rebranded as the “flow desk”.
QE: Quantitative easing, exemplified by the Fed’s purchase of securities with newly printed money with the aim of defeating U.S. deflation and boosting economic growth. In practice, QE has resulted in asset price bubbles, over-investment in commodities and emerging-market credit bubbles, whose ongoing collapse is producing global deflation and lower world economic growth.
Retail investor: An outsider on Wall Street who isn’t rich enough to be a fully fedged muppet and thus pays higher fees
Shareholder value: A cover for the transfer of wealth from shareholders to company managers.
Too big to fail: The notion that very large banks act irresponsibly in the knowledge that they will be bailed out by the state. In fact, banking crises are more likely to break out in places where many small banks compete with each other.
Value-at-risk: A self-serving risk-management metric used by investment banks to justify taking on too much risk and managing it ineffectively.
This article was issued by Antoine Briffa, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.