Jun 192008

There is something about that term “derivatives” that I find fascinating and yet alarming. It allows you to bet on anything. And anything that allows you to bet on anything from Angelina Jolie having twins to President Musharraf quitting can be both fascinating and dangerous

Stop the world, I want to get off.

Here is why. The other day I read this:

“There’s a fuse box buried deep within the US economy…and it’s about to blow…when it does, the lights on the dimming US economy will go black…major banks (once thought to be ‘too big to fail’) will be shaken to the ground. Corporate bankruptcies will soar. Bonds will crash. The Dow will dive towards 4000. And the dollar will continue its slide into the dustbin of monetary history.”

Now I don’t have a large investment portfolio — actually, to be perfectly honest, I don’t even have a small one.

I don’t get to park my car next to my bank’s CEO any more and am no longer whisked up to the executive offices of a financial institution by a “private” elevator to be served a cup of Earl Grey in bone china by a svelte thing in a Valentino suit, who, while handing me a copy of the Institutional Investor, bends down ever so slightly to conspiratorially whisper: “You are in it. Hmm, and you forgot to shave under your lower lip again, Mr S!”

Nowadays the only attention I get is when one gets a phone call from the bank to tell me I’m behind on my credit card payment, and that also from someone with a Madrasi accent from Chennai!

Nevertheless, I still take a passing interest in how the rest of the world is doing, so that I don’t look like a complete idiot when the guys in Armani suits and thunderous ties start talking of hedge funds, mutual funds, offshore funds, derivatives et al.

There is something about that term “derivatives” that I find fascinating and yet alarming. It allows you to bet on anything. And anything that allows you to bet on anything from Angelina Jolie having twins to President Musharraf quitting can be both fascinating and dangerous. All you have to do is find someone who will be willing to lay a bet against you and taraan! You have created a “derivative”.

In Jolie’s case her “giving birth to twins” turned out to be a hoax and in President Musharraf’s case…well, the books are still open.

I am sure that the alchemy of a “derivative” is far more complicated and sophisticated than my simplistic explanation but for our purpose it will do.

Money and profit are made in times of adversity.

Not many people will argue with that; history is replete with outstanding examples of people and corporate entities who have made fortunes out of other people’s misfortunes.

Pharmaceutical companies traditionally post windfall profits when some major epidemic or disaster has struck some area of the world. Closely following in the wake of the Horsemen of the Apocalypse, you will undoubtedly hear the wail of ambulance sirens, the unmistakable whop whop whop of relief helicopters and the whine of transport planes bearing relief goods to the areas. Myanmar, China, Darfur, and –not too long ago — Pakistan.

Insurance companies see an upward swing in their revenues when they draw an invisible line across nautical corridors declaring them “War Risk Zones”.

That is the way the real world works — and we all know it. But how about this:

Investment Guru John Pugsley, in a newsletter, states: “Deep in the shadows of the real economy lies an underground economy where the world’s largest players conduct secret transactions worth trillions of dollars…these transactions are made far away from the headlines of the evening news…it is 27 times the real size of the US economy…he calls it ‘The Phantom Economy’…and it is about to blow.”

Sound familiar?

He is supported in this by no less a personage than Warren Buffett, arguably “the greatest investor in stocks in history”, who issues this stark warning: “it is a mega-catastrophe waiting to happen.”

But wait, there is hope. There are fall-out shelters. And John Pugsley knows the address, has the navigational system and some very clued-in aides to safely take you and your investments there.

The five countries that Pugsley and his associates predict will rise “when the US economy and its stock markets go into free fall will be Poland, the Czech Republic, Romania, Bulgaria and Croatia. These economies are set to make economic quantum leaps as they get amalgamated in to the European Union.”

The sixth candidate in my periscope is going to be Viet Nam. Watch this country and observe its resilient people.

How does all this doom and gloom relate to Pakistan? Well, the other day I read somewhere that Mr Teflon Aziz, former prime minister and former finance minister was asked why Pakistan was in an economic mess considering that he was in charge of the country’s economic command & control system all those years.

His answer left me dumbfounded and I am sure made a lot of people very angry. He says he had not anticipated the fast growth rate and the demand for electricity and other essential items to reach this stage! That is how good, sound and farsighted his policies were.

What Mr Teflon Aziz is really saying is that if you invite say 50 people to your house for dinner and 70 turn up, nobody should be given anything to eat, saying “I didn’t foresee this!” Then you can get on the first available plane and high tail it out of the country.

No such thing as “hedging” your bets against such eventualities, right Mr Aziz? Sometimes I wonder if he worked for a bank or a casino.

According to John Pugsley, who knows a thing or two about such things, “all mega banks have today become casinos!” So there!

Now, scuttlebutt has it that Mr Sharif and Mr Zardari fell out not because of the restoration thing only but over who out of the two was going to get the top job, considering both of them deep down want the only job worth taking.

You guessed it. So rest easy, prime minister. Its not your job they’re after. One has already held it thrice and the other one doesn’t want it anyway. It isn’t the Chief Justice’s job either. That one is already spoken for. So which top job does that leave you?

I’m willing to wager my entire investment portfolio on who gets the job and who gets to keep it. Now all I need is someone to come along and bet against me, and taraan! We will have ourselves a derivative!

Mahmud Sipra is a best selling author and an independent columnist. He can be reached at sipraindubai@yahoo.com

Source: Daily Times, 19/6/2008

 Posted by at 5:50 pm

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