Tuesday, March 31, 2009

$50 to $46,562 in 2 years on Intrade.

I was reminded this morning of a member (lets call her “Mrs. Midas” for this note) who made one deposit of $50 on 1st March 2007. As of 31st March, Mrs. Midas has an account balance of $46,562.30.

Mrs. Midas has made no other deposits, nor has she made any withdrawals. She has paid the exchange $4,463.66 in trading fees during this time.

During the two years since the initial deposit she has traded against 1,061 of other traders. The successful member traded on 516 separate markets covering economic, financial, political, entertainment, legal and current event categories on Intrade.

While this member was unprofitable on 38% of markets traded, a demonstrably disciplined cash and investment management approach contributed to the superb performance of her account.

The growth in her account balance and the dispersion of profitable markets to unprofitable markets traded are depicted below.

Monday, March 30, 2009

Deflation Most Likely, But What (and When) about Inflation?

Most (as do we) believe that the risks of deflation are far greater than inflation currently. However, if the vastness of the quantitative easing and other “unconventional measures” being taken by central banks cause to much money to be printed then inflation expectations might and I mean might just ignite.

There are of course many other reasons why expectations of inflation may ignite, e.g. people start believing that the global role of the US dollar is undermined.

So while we predict that deflationary pressures will be with us for quite a while when will inflation raise its head and what types of markets would you like us to list on these topics?

Please let us know here.

Source: Google Trends

Thursday, March 5, 2009

We and Others Know How To Get Credit Flowing Again - We Think!

Now that governments around the world have declared they won’t let banks fail, at least certain banks that is, credit should start flowing between these banks naturally at national and international levels. But the credit is not flowing yet and this is due to lack of confidence between the banks.

This lack of confidence is due to lack of timely and accurate financial information (aka transparency) relating to the quality of the balance sheets of banks. Bank A will not do business with Bank B because of fear that B may be unable to honor its obligations due to toxic assets (aka bad loans or derivative positions) or go out of business even though Bank B’s government has bailed it out before.

But if governments (central bank’s, treasury’s, etc) are already acting as an insurer of banks through bailouts what is needed is to go one step further. This need not cost more per se. That step is moving bank to bank lending and borrowing onto a central market place where all transactions are guaranteed by a clearing house. In financial speak, move bilateral over-the-counter interbank trading onto an exchange with a central clearing house and clearing members.

Sure, there would be implementation issues like who would manage the exchange (While Intrade is happy to help ;-) perhaps the G20 could establish), who would be the clearing members and what banks would get trading rights. Also the thorny problems like would or should Ireland be able to join with our current precarious (albeit exaggerated) position? It should also be a pre-requisite for any bank to get approval of their guarantor Government before they can trade on the interbank platform to provide the very best financial information about its assets and liabilities.

Access to the market would create massive incentives for governments and banks to “come clean”. The incentives are access to credit and comfort when giving credit. If Japanese banks had such an incentive in the 90’s would they have recognized their debts earlier and would this have shortened their lost decade?

So, if what is needed is more transparency and trust then use an exchange with a clearing house. They work elsewhere. They have a big role to play here now we think.

What do you think?