"Money lost, nothing lost; Health lost, much lost; Character lost, everything lost."

Lately I’ve been writing about economics and finance that are subjects I really like but don’t reflect my interests. Today when I was watching the Bloomberg TV where 3 Hedge Funds were being raided by FBI due to insider trading, the reporter asked to the interviewee: “What are the consequences for the ordinary traders?” Then the interviewee said: “You know, this shakes the market structures. You buy a stock because you trust in that company. When a case of insider trading happens, how can people trust in each other?” and that’s when I thought: “I must need to write about it, character has always been a good interest for me.

Everyone knows that monetary relationships are based on trust, it means we are in a fiduciary system so a prerequisite to get a job would be to demonstrate confidence, character and responsibility above all the technical skills. However nowadays people are hired and paid due to their achievements, technical skills and academic education, this is so wrong I think. I’ve been on some group internship interview and I haven’t heard of anyone saying about character or something like that, they disguise personality through their perfectionist speeches to be hired. Well, there is a need to have a little bit of malice but we can’t let this be the main selection item.

To own a character is something very complicated nowadays when there are a lot of easy ways to achieve a goal in a short space of time, this can be magnificent, but there is no lie sustained for a long period of time. I believe time make us see the difference between bad and good. Time is, no doubt, the god of truth; it is the main responsible for the downgrade of empires owned by bad faith; and guarantee the wealth and stability for those whom were responsible and did their homework. Once I read a certain Chinese proverb that said a lot of thing about breach of trust: "Money lost, nothing lost; Health lost, much lost; Character lost, everything lost.

So I think people should valorize a little bit more the people character, find out if they are truthful and responsible. When I own my Investment Bank I’ll assure to interview any candidate that tries to get a job and work for me and with me. We cannot depreciate the personal relationships based on honesty because it is this relationship that paves the way to a better future." 

Brazil’s Tax on Capital Inflows, 2009–10

Today I was reading the Global Financial Stability Report released by IMF and I saw a very nice text about the brazil's tax on capital inflows. It is so interesting to read about it because I believe many countries such as Indonesia or Thailand will adopt this measure to slow down the capital inflow on their countries to avoid bubbles on assets.

"Brazil’s reimposition of an upfront tax on capital inflows in October 2009 triggered a wave of interest in many countries in the potential use of such measures to limit exchange rate appreciation. There is evidence that the Brazilian measures worked to change the composition of capital inflows and that they had a small but discernible impact on interest rate arbitrage.

However, they do not appear to have reduced aggregate capital flows into Brazil. In response to heavy portfolio inflows and substantial exchange rate appreciation during the preceding seven months, Brazil imposed a 2 percent entry tax (the IOF) on inflows to domestic bond and equity markets on October 19, 2009.1 Other types of capital flows, including direct investment, and dollar borrowing by Brazilian banks and firms, were not directly affected. The Finance Ministry announced that the measure was intended to combat speculation in capital markets, and to counteract the appreciation of the real, which it viewed as damaging export industries and employment. This was not the first time Brazil had employed controls on portfolio inflows—up until October 2008 it had levied a 1½ percent tax on bond (but not equity) inflows, but the authorities had eliminated the tax in response to the financial crisis.

Nominal appreciation against the dollar came to an end after the IOF was imposed, but reserves continued to rise steadily and the real continued to appreciate against the euro. Daily exchange-rate volatility was essentially unchanged after the tax. Foreign reserves continued to accumulate but at a reduced pace of about $100 million a day, compared with a little more than $200 million a day in the seven months before the tax was imposed. Chow breakpoint tests fail to show a decisive structural break associated with the tax for either reserves accumulation or for the dollar exchange rate. Foreign investors appear to have exploited some opportunities to divert flows away from investments on which the IOF would have a significant impact to those where it would not. Equity flows, which had reached a record pace in March-October 2009, and for which the effects of the IOF would have been significant, did diminish after October. However, and somewhat surprisingly, the rate of inflows into domestic bonds, where the impact of the IOF should also have been large, remained quite robust after the IOF was imposed. There were increases in short- and long-term dollar borrowing, neither of which is subject to the IOF in its present form. Foreign net long real positions in the domestic derivatives market, for which the effective incidence of the tax would be much lower than in the bond market, have also increased on average since the IOF. Futures-implied offshore interest rates can be constructed and compared with actual interest rates to test the effectiveness of arbitrage under the capital inflow tax. The nondeliverable-forwards (NDF) implied interest rate in Brazilian reais, based on the offshore nondeliverable currency forward, f90,off , can be calculated as:

iBRL,off = (1 + is) (f90,off |e)4 – 1.

This measure can then be compared to the onshore Brazilian three-month interest rate to determine a “basis spread,” as BSoff = (iBRL,off – iBRL). Full covered interest parity would entail that this be zero. For most emerging markets, however, basis spreads are not zero, even under normal market conditions. If the IOF is effective in breaking the link between domestic and foreign fixed-income markets, or in inserting a wedge between the two, this should be evident in market prices. If the new regulations eliminate arbitrage, or impose a cost of arbitrage between domestic and offshore markets, then there should be a difference between the implied interest rate in Brazilian reais available offshore through the NDF market, and the interest rate in reais available onshore in Brazil. The implied interest rate in reais should be lower offshore, where the IOF cannot be collected.

The basis spread derived from NDF trading should become negative, entailing a lower-than-market interest rate in Brazilian reais. If the 2 percent IOF is fully binding and if there had been full arbitrage before it was imposed, then the basis spread should widen by 2 percent on instruments with a one-year maturity. In the event, offshore basis spreads showed small but discernible signs of shifting in the period after imposition of the IOF. Offshore NDFs strength- ened relative to onshore currency forwards, and the NDF-implied basis spread did widen, although by only a fraction of the 2 percent (or 8 percent for 90-day instruments) that would occur if the IOF were fully binding. Both of these relative movements of offshore spreads were in a direction and of a magnitude consistent with a small but discernible effec t of the tax on cross-border arbitrage. There was little movement in onshore spreads. Overall, movementsin Brazilian basis spreads did not diverge appreciably from those of comparable emerging economies that took no special actions during this period, suggesting that the net impact of the IOF on interest rate arbitrage was not large." - IMF World Economic Outlook, October 2010.

Exemplo de Carteira usando conceitos de Harry Markowitz

 Read this post in english - click here.
Sempre quando procurei na internet nunca achei exemplos práticos que ajudassem o melhor entendimento sobre o que Markowitz apresentou em seu modelo de Portfólio. Deste modo, coloco a disposição um exemplo de carteira composta por 5 ações e seus respectivos retornos, riscos e porcentagem investida em um Portfólio. Qualquer duvida que surgir, poste seu comentário abaixo que estarei a disposição para ajudar.

Baixe aqui o exemplo em excel de Portfólio seguindo os conceitos de Markowitz.

Brazilian Stock Market Responding to Capital Inflows

Brazil and other emerging economies are experencing a resurge on capital inflows. There are two opposite consequences, on the one hand, the capital inflow have provided a boost on domestic demand, but on the other hand, these flows have increased concern about domestic overheating, external competitiveness (currency apreciation) and hightened risks of a potencial booom-bust cycle. There capital inflows have induced booms in many equity market, and concerns about asset price bubbles have been growing, according to the World Economic Outlook released by IMF.

In Brazil it is possible to see this boom caused by the foreign investors on the derivatives market (Figure 1) and stock market (Figure 2).

Figure 1. 1 Year BM&F Flux

Figure 2. 1Year IBovespa Flux

Chronic problems of economic order

At first, headlines as this one looks like a little bit abstract for us, but these problems are things that we should have in mind, we should know how to discuss it and have a critical look at it. Have you ever thought about if you had to pay almost a 100% of your incomes to the State and in return don’t receive a good Medicare, social care or Medicaid? That’s what I’ll talk about in this post and by the way, I suggest two interesting contents: : I.O.U.S.A (Movie) and the book: Empire of Debt by Bill Bonner and Addisom Wiggin .

I begin this post with an interactive chart from Financial Times, click here to see the chart. We can see that public or federal debt in US in 2007 was around 42% of GDP and can hit 85.5% in 2015. Do you think this is comfortable? In 2007, the Japanese federal debt was around 81.5% of the GDP and can reach in 2015 the mark of 154.7 % of the GDP.

The federal debt occurs when the outcomes are bigger than the incomes and we express that result as a percentage of the GDP. The increasing or decreasing in this number depends on the monetary policy the country is using; it can be a contractionary, expansionary or neutral policy.  People say that public deficit is used to stimulate the economy so in the future the country can enjoy that result. But, are we prepared to that supposed future? Take a look at the U.S gross and public debt chart. Do you think that this is healthy? 

Source: http://en.wikipedia.org/wiki/United_States_public_debt

Now, take a look at it :

Source: http://blog.foreignpolicy.com/posts/2010/02/10/how_bad_is_greeces_debt

The Greece debt is more than 100% of the GDP. That's not healthy and that's why the government is heading for austerity measures. France government is doing that too, the country is set to raise the national retirement age in a bid to overhaul the nation’s government-run pension system and restore its ailing public finances, according to European Institute. 

The most dangerous problem is realated to the ageing of the world population because this can represent a potencial meltdown of any nation. 

Why this can mean a meltdown for any nation? Just take a look at that picture above and you will going to  see for yourself. As the population get older, the government will colect less and will have to pay more for those people who contributed for the previdence all their life. More retirees means more spent with healthcare, how the governments will pay for it if he will receive less than before? Don't you agree that people can have less quality of life? Don't you think the government will rise taxes to equalize the bill? Today, most of government in the world are having a surplus in their social security but, is this going to continue? Think about it!

As you can see in this video, people is so used to spend their money buying a lot of things that they forget about what and how things will be in the future. I suggest this book in order to know more about the "consumerism": "The System of Objects, For a Critique of the Political Economy of the Sign, and The Consumer Society - Jean Baudrillard". The concept of sacrificing and building for a better tomorrow had been pushed a side by a live for today, easy credit and consumption order society. That's what I don't understand. People are thinking about just in themselves. Savings results in an increase in investment, additional research in development, a strong economy and a improve in the overall standard of living.

There are three types of people in this world: Those who save and invest, those who could easily save more but choose not to and those whom savings is very difficult. But who is the most injured when we talk about inflation? When the inflation rises people who are less well off will suffer more.

...

"So in that sense, if fiscal policy is lax or savings are exceptionally low, there is nothing monetary policy or any central bank can do about that. We cannot live in the present only, human beings cannot survive unless they create prevision for their future"  - Alan Greenspan.

so...

Now I have one more question I would like to talk about. We already talked about public deficit, savings deficit and now I would like to talk about the trade deficit. What is this? "An economic measure of a negative balance of trade in which a country's imports exceeds its exports. A trade deficit represents an outflow of domestic currency to foreign markets." - Investopedia.

Take a look at the U.S trade deficit ticker here: http://www.americaneconomicalert.org/ticker_home.asp

In 2007, U.S was the last contry on a list of Trade Balance, it means the country had the worst trade deficit in 2007, but on the other hand China was the first at that list, according to the CIA World Fact Book.

If you are buying more than you selling, your trade partners are going to own a lot of your wealth. When a country has a low savings rates and the government has to borrow money to pay their bills, the trade deficit can be problematic.

China is the second larger holder of U.S treasuries and it is dangerous because it concentrate power in China's hand. If they would like to liquidate those treasuries, it would be a caos all over the world. Now take a look at the major foreign holders of U.S trasury securities here.
So, are you still thinking that we just have to live the present? Aren't you been selfish? What about your kids? Think about it (again).

Bogle: Index Funds the Great Hope for Corporate Governance

Bogle: Index Funds the Great Hope for Corporate Governance