Same world: two answers

You know you love something when when you have the ill of following the trail of unanswered questions. It can't be defined as an obsession because you are not on its trail every single second. Sometimes, you put down the hunt, and you take a break that might last a decade.

Time erases everything else, and you don't even remember what was erased. They become leaves in the wind. However, no matter how windy, some questions remain crisp.

In my case, I always had a serious issue with some Finance models. I felt I had to be a very credulous person to believe the outcome. These models fall in the trap of similarity to reality gets confused with the real world.

In Finance, a lot of predictions are based on inputs like the Beta of a stock (the basis of CAPM). This is an amazing description of the risk / reward equation. Their visionaries earned the Nobel prize of economics for this discovery. And it is an amazing model to explain so many unanswered questions. Not only they found the ultimate pattern from where a lot of the chaos spawns, they proved it with models and comparing to actual historical samples.

At the end, if everyone accepts the mathematical model by principle, the model becomes reality until the model breaks. If everyone agrees on it, then it works. However, most analysts get the valuations wrong. Besides a hand full of people, they missed the financial collapse. Greenspan continued to mention the subprime crisis in his Congress hearings. There wwas talk about risks, but even in 2008, most analysts predicted a surge in stock prices, and the market drop a serious number: 38%.

After the crisis, CEOs mentioned how their toxic assets were correctly priced using their models while their prices were crumbling just outside the window. They were at peace justified by their models even though their companies were free falling. Then there was a call for the elimination of mark to market. Even though there is some Truth about not pricing a security in a distress market situation, the elimination of mark to market has a darker side: the implicit assumption that the model is correct and the market is wrong from that point on.

With access to the same information, the field of Finance and Accounting deliver two complete different answers.

Under US GAAP, the finding of the "Value" of an item needs to rely on a hierarchy of the truthfulness of inputs. They range from level 1 to level 3. It is simply the Law. Level 1 is considered the value of identical assets or liabilities traded on the active market with the highest volume. Level II are valuations based on secondary inputs. Level 2 contains the the valuation based on inputs like the Beta of a stock. The Level 3 in the hierarchy is management's predictions of the value of things.

You cannot use the beta of a stock to valuate a security when there is an actively traded market with the highest volume. You cannot rely on the earnings call when the securities are being actively traded at high volumes. Meanwhile, Finance models are taught under the solid assumption that results derived from secondaries values produce a more "realistic" value of the asset.

This is the beauty of liability. Science without the fear of burning on the stake becomes conjecture. Without liability, science ends in the hypothesis stage forgetting the feedback when we were wrong.

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On a side note, its application on portfolio management is without a doubt of unparalleled necessity.

Gold: the new investment of choice and the new index of the world economy

Gold continues to be the investment of choice in moments of crisis. With the devaluation of the dollar and the increased domestic spending by the US government, other countries have flocked to Gold for reserves instead of continuing to accumulate US dollars. At some moment, the Euro was becoming the currency of choice, but it is just another currency, and it seems to fluctuate rapidly with recent budget crises in smaller European governments.

The US government has always been seen as the safest of investments. US treasuries are by definition the risk -free investment. In today's economy with high budget deficits, trade imbalances, and increased borrowing in the US, Moody’s and Fitch are reviewing lowering the credit score of the US government. It won’t be a hard review, but it is a noticeable development. This is just a sign of the increased uncertainty about the future of the US economy. The recent quantitative easing by the US Federal Bank has made major investors wary of inflationary pressures and they expect the continued devaluation of their own reserves as a consequence.

In the other side of the globe, China has started to take precautions on inflation which was reported at 5.1% this past November. Among other measures, China has been raising interest rates, and it has allowed corporations to keep their profits outside of China to diminish the liquidity in its local market. China has also started to allow market forces to close certain high polluting and energy-wasting factories. This will allowed them to slow down manufacturing which will restrain the liquidity in the market by slowing down the demand on manufacturing inputs and commodities while lowering payroll at the same time.

With all these developments, Gold continues to be the investment of choice. But at the same time, Gold has become the index of the sum of all fears. In recent days, optimistic US job reports has caused the decrease of Gold prices. Gold prices are adjusting rapidly to new information. Even without investing in Gold, Gold can still serve us well as the overall index of the world economy.

The prophets

Moody's and Fitch were made all powerful by the US government especially after the creation of the mortgage industry.

Having a challenged rating history, now they set themselves to lower the credit rating of their Creator: the US government. How do you lower the rating of the risk free rate? Doesn't this make the whole world riskier by default? If this is not Nietzsche at work, I don't know what else is. Thus Spoke Zarathustra. The model becomes the new reality.

The time has come to ask from Art: Is it efficient or emotional?

Arts Exchange is "ready to Open its doors." It has been for a while. But the news couldn't be more exciting. The first exchange house for Art will open its doors in France. You will be able to trade shares of Art pieces from the 19th century to the present.

Anyone can go public by offering their Art. It gets pretty complicated just thinking about it. It seems someone will be able to sell shares and at the same time sell the Art to a collector. Who is to say you can't? Who is to track physical ownership? A physical inventory count? An independent audit? These shares sounds like toxic assets already, but it can't be more interesting.

It will probably end up being an eternal auction. How would the US Tax Code treat this? It can treat it as a long term capital gain like the sale of stock or at the tax rate of a collectible at 28%? Interesting. It can be either. It could already become a tax shelter for US collectors. Selling the shares of Art can save you more than a small change compared to selling the Art itself.

I always thought the reason behind the 28% tax rate of collectibles was to penalize black market wires. But New Mexico is pushing for making the collectibles tax rate the same as the long term capital gains to help the Art market. Overall, the tax legislation and the new Art Exchange couldn't be more exciting news for the Art World and probably for the black market "money changers" if 28% was meant to penalize them.

Only 25% of IFRS practitioners have input into it

Let's join the herd that doesn't have input into its own regulation.

We could have decided to make all streets one way to simplify the traffic system. At least it would eliminate the arrow for crossing the incoming traffic to the left. Less data for drivers to deal with. But we didn't. We have a class that teaches people before they are allowed to drive. And they get ticketed every time until they learn it.

Maybe we should take the world's tax code instead. Please. Oh my God! I can't think of anything more needed out of excruciating desperation and pain. Nothing is more certain than taxes and Death because US Taxes cause immediate and un-amortized Death.

I would love to see what Congress will respond to their constituents when a crisis occurs again 5 years from now, and the US can't just change US GAAP to deal with the new issues discovered. Sovereignty is something that probably accountants haven't had to deal much with.