User:Oceanflynn/Zero Sum Game (Finance)

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Zero Sum Game (Finance) ...

History[edit]

The London Gold Pool collapsed in March 1968 as the US dollar was devalued and nation states exited the 1944 Bretton Woods Agreement - which had placed the US dollar as the sole reserve currency in the world. At that time and other nations' currencies were pegged to the US dollar which in-turn was pegged to gold at $35.20 dollars per oz. Because the U.S. owned over half the world's official gold reserves — 574 million ounces at the end of World War II — the gold standard system had appeared secure.[1] Once unpegged to the dollar the price of gold increased to $800.

In August 15, 1971 then President Richard M. Nixon announced that the U.S. "would no longer officially trade dollars for gold."[2] For over four thousand years humanity consistently based its currency on gold.[3] However by 1971, the dollar has declined in value against European currencies. France began to purchase gold (at c. $35 an ounce). With the unpegging of gold from the dollar, it fell even faster. Nixon United States Congress devalued the dollar to protect it and as it dropped in value against European currencies, countries began to leave the Bretton Woods system.[4] The pressure began to intensify on the United States to do so as well.[4]

In March 20, 1972 the Federal Reserve Board set the interest rate at 4.75%. In September 18, 1973 it was 10%, October 23, 1973 it was 9.75%, October 29, 1973 9.5%, February 19, 1974 9%, February 25, 1974 8.75%, to a high of 12% in July 8, 1974. It was up and down, then down to 6.75% by January 21, 1976, the 6.25% by November 24, 1976.[5] From May 13, 1977 when it was at 6.50% it was gradually increased to 21.50% in December 19, 1980, an all time high.

As a result of the 1973 oil crisis which began in October 17, 1973, "central banks in the West sharply cut interest rates to encourage growth, deciding that inflation was a secondary concern. Although this was the orthodox macroeconomic prescription at the time, the resulting stagflation surprised economists and central bankers, and the policy is now considered by some to have deepened and lengthened the adverse effects of the embargo."[6]

October 6, 1979 Federal Reserve chairman Paul Volcker increased the Fed Funds rate "of interest it charged on loans to member banks" from 11% to 12%. Volcker "was prepared to allow interest rates to fluctuate more widely than any time in recent history in order to focus more accurately on bank reserves and thus the growth of the money supply."[7]

"The dollar stopped its downward descent on most international exchanges, and the price of gold stopped climbing. But closer to home, the Fed's actions threw stock, bond and commodity markets into turmoil and quickly led to record lending rates which threatened to close off much of the nation's housing market."

— CQ Press 1979

By June 27, 2003 it was 4.00% and by December 16, 2008 it was down to 3.25%. As of December 16, 2015 the prime lending rate in the United States was 3.5%.

November 3, 1981 with rates at 17.50% bonds and mutual funds lost much of their value.[8]

Forbes 2013

In 1973 Fischer Black and Myron Scholes published their paper "The Pricing of Options and Corporate Liabilities," where they introduced their Black–Scholes model which estimates the price of the option over time.[9] They had presented the paper at the Wells Fargo 1970 conference. The key idea behind the model is to hedge the option by buying and selling the underlying asset in just the right way and, as a consequence, to eliminate risk. This type of hedging is called delta hedging and is the basis of more complicated hedging strategies such as those engaged in by investment banks and hedge funds.

1973 was a "watershed year for both economics and investing," when "real growth declined" and "inflation took off" a zero sum economy was created which created "a zero sum investing game whose implications go well beyond the demolition of growth stock investing."[10]

New investment incentives were created as the "stock market began to value corporate assets at a discount from replacement value, rather than at a premium."

"Real growth no longer matters. In an economy with inflation of 10%+ and secular growth of 1-2%, real growth is not significant. Worse yet, real growth penalizes investors rather than rewarding them. The stock market values assets at only about 60% of replacement value. The worst implication of zero sum investing is the social one. A whole generation is growing up with the attitude that getting ahead in life involves raising prices and speculating on assets rather than producing more goods and services. The traditional virtues of hard work, frugal saving and wise investment seem absurd when speculators make over 1000% in gold while doing nothing productive to earn it."

— "Investing in a zero sum economy."
Gold prices (US$ per troy ounce) from 1914, in nominal US$ and inflation adjusted US$.

By 1973 the "stock market value[d] assets at only about 60% of replacement value."[10]

1973 inflation rate was 3.65%.[11]

"[T]raditional values of hard work, frugal saving and wise investment" became outdated. By 1973 real growth penalized investors instead of rewarding them and therefore "no longer [mattered]."[10] The goal of production of more goods and services became outdated.

By 1973 speculators could "make over 1000% in gold while doing nothing productive to earn it."[10]

what with their stagflation, a real stock market performance worse than that of the 1930s, and a crisis of confidence such had never bedeviled the American people before.

In the 1970s, as "interest rates became increasingly volatile," financial institutions pioneered assets and liabilities management (ALM) to manage risks that arise due to mismatches between assets and liabilities.

In 2003 New York Times journalist Alex Berenson, observed that, "Fannie Mae and other big holders of mortgages and mortgage-backed securities chronically underestimate the odds of a big move in interest rates that could devastate the value of their portfolios, said Nassim Nicholas Taleb, a hedge fund manager and the author of two books about risk and the financial markets."[12]

In 2012 mathematician Ian Stewart argued that the Black–Scholes equation "may have contributed to the crash, but only because it was abused. In any case, the equation was just one ingredient in a rich stew of financial irresponsibility, political ineptitude, perverse incentives and lax regulation."[13]

"While acknowledging Fed policy is capable of driving stock prices higher, mark Spitznagel warns, it will ultimately be self-defeating, "there is only so much debt that an economy can take on."[14] agel’s strategy stems from his skepticism toward government efforts to revive the economy. He acknowledges that the stimulus policies of the Federal Reserve and other central banks have the power to drive stocks higher. But they will ultimately be self-defeating

Assets and liabilities[edit]

Main article: Assets and liabilities
  • Net financial assets of sectors of USA economy, 1945-2017
    Net financial assets of sectors of USA economy, 1945-2017
  • Liabilities of sectors of USA economy, 1945-2017, based on flow of funds statistics of the Federal Reserve System
    Liabilities of sectors of USA economy, 1945-2017, based on flow of funds statistics of the Federal Reserve System
  • Financial assets of sectors of USA economy, 1945-2017, based on flow of funds statistics of the Federal Reserve System
    Financial assets of sectors of USA economy, 1945-2017, based on flow of funds statistics of the Federal Reserve System

Speculation... [15]

"The article focuses on issues related to speculating and trading of stocks involving the specialist and the trader. The author first discussed the zero sum game, wherein total return on a portfolio is divided into two parts, the market return and the trading return. While the theory is a beautiful one, it ignores the reality that all participants are not on equal footings. That is, the specialist on the floor of the New York Stock Exchange is regulated at a particular disadvantage, while a trader can essentially pick off the specialist. He then explained a complex mathematical model and showed how it can be used to create successful speculation strategies for stocks by an analysis of the specialist system and a game played by children and a numerical example of the model."

— Speculation 1977

NAICS[edit]

North American Industry Classification System (NAICS) [16]) is used by business and government to classify business establishments according to type of economic activity (process of production) in Canada, Mexico, and the United States of America. Finance and Insurance industries begin with the 52 classification. For example, 523140 Commodity Contracts Brokerage, 523110 Investment Banking and Securities Dealing, 523120 Securities Brokerage, 523930 Investment Advice, 523999 Miscellaneous Financial Investment Activities and 523210 Securities and Commodity Exchanges.

Related[edit]

intralinks[edit]

Pages that link to the Michael Spitzagel article include Benoit Mandelbrot, Talk:Benoit Mandelbrot, Frédéric Bastiat, Go (game), Leelanau County, Michigan, Northport, Michigan, Ron Paul, Henry Hazlitt, Economics in One Lesson, Nassim Nicholas Taleb, Libertarian Republican, List of New York University alumni, Ludwig von Mises, Ludic fallacy, List of Austrian School economists, Universa Investments, Nassim Nicholas Taleb, Talk:Universa Investments, User talk:72.67.167.160, Talk:Mark Spitznagel, Empirica Capital, East Gate Bel Air, Los Angeles, 2010 Flash Crash, User:Tony Sidaway/Living people/tranche 085, List of libertarians in the United States, Hugh T. Keyes, User talk:Chevalier6718, List of Kalamazoo College people, Idyll Farms, List of people from Bloomfield Hills, Michigan, Rand Paul presidential campaign, 2016, Endorsements for the Republican Party presidential primaries, 2016, User:B/List of articles about living people containing fair use images, Everett Klipp, "Black Swan" Funds

References[edit]

  1. ^ Lowenstein, Roger (August 4, 2011). "The Nixon Shock". Bloomberg BusinessWeek Magazine. Retrieved 26 March 2013.
  2. ^ "August 15, 1971: A Date Which Has Lived In Infamy". Forbes. 15 August 1971. Retrieved 2 January 2016.
  3. ^ Benn Steil; Manuel Hinds (2009). Money, Markets, and Sovereignty.
  4. ^ a b Frum, David (2000). How We Got Here: The '70s. New York, New York: Basic Books. pp. 295–298. ISBN 0-465-04195-7.
  5. ^ Wall Street Journal prime rate history
  6. ^ 1973 oil crisis
  7. ^ "Federal Reserve's Inflation Fight", CQ Press, 7 December 1979, retrieved 2 January 2015
  8. ^ Patton, Mike (30 August 2013). "Why Rising Interest Rates Are Bad For Bonds And What You Can Do About It". Forbes. Retrieved 2 January 2016.
  9. ^ Black, Fischer; Myron Scholes (1973). "The Pricing of Options and Corporate Liabilities". Journal of Political Economy. 81 (3): 637–654. doi:10.1086/260062.
  10. ^ a b c d Gipson, James H. (Summer 1981). "Investing in a zero sum economy". Journal of Portfolio Management via EBSCO. 7 (4): 2. ISSN 0095-4918. The article focused on investments in a zero sum economy.
  11. ^ http://www.multpl.com/inflation/table
  12. ^ Berenson, Alex (2004-08-07), "Fannie Mae's Loss Risk Is Larger, Computer Models Show", New York Times
  13. ^ Stewart, Ian (12 February 2012), "The mathematical equation that caused the banks to crash", The Observer, retrieved 2 January 2016
  14. ^ "Bearish" Mark Spitznagel Profiting Strongly Since 2009, Warns "Only So Much Debt An Economy Can Take" Submitted by Tyler Durden on 11/25/2014 http://www.zerohedge.com/news/2014-11-25/bearish-mark-spitznagel-profiting-strongly-2009-warns-only-so-much-debt-economy-can-
  15. ^ Jaffe, Jeffrey F. (Spring 1977). "Speculating with a specialist: Who wins?". Journal of Portfolio Management via EBSCO. 3 (3): 52–55. ISSN 0095-4918.
  16. ^ "NAICS North American Industry Classification System". virtualpet.com. Retrieved 14 September 2015.

Categories: Key words: Investments, Asset (economics), Assets (accounting), Stocks (Finance), assets and liabilities, Saving and investment, Capital market, Stock exchanges, Stock index futures, NAICS, Securities and Commodity Exchanges, Speculation, Financial futures, [[Floor traders (Finance), Mathematical models (finance), Forecasting, Predication models,

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