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Apple, Tesla and Nvidia were among 2023’s ‘magnificent seven’ stocks – here’s what to expect from them all in 2024.

In the 1960 western The Magnificent Seven, a group of seven gunfighters protect a village from bandits. Only three survive to ride out of town at the end of the movie. The odds look much better for the seven tech companies recently dubbed the magnificent seven after dominating US stock markets in 2023. But there are problems that could ambush some of these companies in 2024.

Apple, Alphabet, Microsoft, Amazon, Meta, Tesla and Nvidia have driven a rally in US stocks in 2023. They now make up nearly a third of the S&P 500 measure of the largest listed US companies, which has risen more than 20% since January. These tech stocks had provided shareholders with a whopping 71% return by mid-November while the other 493 names added just 6%.

This impressive performance led Bank of America analyst Michael Hartnett to name these companies the magnificent seven earlier this year. Goldman Sachs soon followed, calling their massive outperformance the “defining feature” of the equity market in 2023.

But as dramatic as this performance has been – and although they’re all essentially tech companies – don’t make the mistake of thinking they’re all the same. In fact, the outlook for the magnificent seven next year is mixed, particularly in light of expected changes in their core markets.

Rising competition in the EV market

Let’s start with the bad news first. Electric vehicle (EV) manufacturer Tesla Motors will continue to lose market share in 2024. While chief executive Elon Musk has been dealing with advertising problems on X (formerly Twitter), one of his other businesses, over the first three quarters of this year, Tesla has seen its US market dominance shrink from 62% to just over 50% of the market. Both BMW Group and Mercedes-Benz Cars have expanded their footprints.

And over the next few years, the growing global heft of Chinese manufacturers looks hard to beat. Chinese EV players such as BYD, Nio, Wuling and Xpeng produced almost 60% of the world’s EVs in 2022 – and they have been doing so in a very affordable manner. In the first half of 2023, the average cost of an EV in China was US$33,000 (£26,040), more than half the US$70,700 (£55,800) people pay for EVs in Europe and the US$72,000 (£56,800) paid in the US.

US president Joe Biden has proposed strict new car pollution controls that will require almost two-thirds of new cars sold in the US to be electric by 2032. But the cost of EVs will need to come down if they are to achieve mass market appeal.

Sunny outlook for cloud computing

Magnificent seven members Amazon, Microsoft and Alphabet make up two-thirds of the cloud computing market, which will continue to grow in 2024, although perhaps not quite as much as in the past.

Still, the market for cloud infrastructure services is expected to expand from US$122 billion in 2023 to US$446 billion by 2032. In particular, concerns about the macroeconomic environment have seen some customers focus on using the cloud more to reduce costs in recent years, although this has yet to have any meaningful impact on revenues.

And for Amazon in particular, there are some niggling questions around its outlook. Although its cloud business remains solid, its original e-commerce business has seen growing competition recently, notably from rival retail giant Walmart, which is eating into its business in the US.

This is one reason why holding Amazon shares provided an annual return over the past two years of -16.7%, as of early December, according to my calculations.

Unstoppable AI

Also linked to the cloud computing industry, California-based chip maker Nvidia Corporation has been the runaway success of the magnificent seven this year. This is all thanks to its dominance in processing AI workloads on the cloud. The majority of cloud players use Nvidia graphics processing units (GPUs).

But while its two-year return of 43.3% is the most impressive of the seven tech companies, there are competitors on the horizon that could nibble away at some market share.

Nvidia’s nearest rival AMD drew attention with its latest chip offering in 2023 – it’s betting the market will be worth US$400 billion by 2027. A number of other start-ups are also developing chips for niche AI fields.

Can Nvidia maintain its dominance? If it does, its earnings will skyrocket
alongside the growth of AI. But even if it loses some market share, the AI market will boom for years.

The outliers

For those keeping track, that just leaves two final members of the magnificent seven.

Apple Inc – the world’s largest company by market capitalisation – consistently delivers solid returns: 16.2% over the past two years by my calculations. At the other end of the scale, social media company Meta (owner of Facebook, Instagram, Threads and WhatsApp) is the only one of the group to have shown an essentially flat stock market performance over the past two years.

Although Meta’s revenues and earnings have consistently beaten expectations this year, the threat of anti-trust legislation in the US and Europe hangs over the company, as does an advertising market that is bottoming out. Both of these issues could harm Meta’s revenue outlook next year.

So, the magnificent seven have all survived to ride out of town at the end of 2023, but it’s as clear as a tumbleweed rolling down a deserted main street that not all of them are in for a leisurely horseback ride through 2024. Saddle up, partners!

Karl Schmedders, International Institute for Management Development (IMD)

Karl Schmedders, Professor of Finance, International Institute for Management Development (IMD)

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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How government payments to the vulnerable can multiply to create economic growth for everyone.

The economic fallout of COVID-19 left people around the world facing a significant threat to their livelihood. As governments scrambled to mitigate the pandemic’s impact on their populations, many decided to use direct payments to support vulnerable citizens.

More than a sixth of the world’s population received some sort of cash transfer in 2020. These programmes were a key source of support for many people during the COVID-19 pandemic, with governments across the globe scaling up or introducing such payments.

Brazil, for example, introduced the Auxílio Emergencial programme, while the US implemented Economic Impact Payments. Both cash transfer programmes aimed to shield vulnerable populations. This was also not exclusive to middle- and high-income countries. Togo, for instance, implemented the Novissi cash transfer programme during the pandemic.

Using cash payments to protect people’s livelihoods and lift the poor out of poverty is not a novel strategy. It can be a simple way to provide basic social protection to people in need, helping citizens to withstand sudden shocks and also facilitating their recovery after a crisis.

Cash assistance as financial burden?

But cash transfers still attract a lot of debate. Besides typical concerns like creating dependency and reducing labour supply, these programmes are costly. This can cause concern about their sustainability and hinder the initial implementation and scale-up.

For example, the Social Assistance Grants for Empowerment programme in Uganda in 2010 became so politicised that it was challenged every step of the way to its implementation and later expansion. Even before its pilot programme, concerns regarding its financial sustainability and the potential creation of welfare dependencies were raised by politicians.

During periods of economic crisis, austerity policies can also directly influence social assistance initiatives. After the 2010 economic crisis, for example, Greece initially suspended and subsequently terminated its housing benefit programme, attributing this decision to budget constraints.

But cash transfer programmes aren’t “handouts”. The positive impacts on the people that receive them are well documented. They are powerful instruments for strengthening household resilience and fostering opportunities that can extend beyond the immediate recipients.

The multiplier effect

There is another vital element of social cash transfers that most people aren’t aware of: the economic multiplier effect. In a recent study with Ugo Gentilini, Giorgia Valleriani and Yuko Okamura of the World Bank, and Giulio Bordon of the UN’s International Labour Organization, we found the multiplier effect can greatly enhance the financial sustainability of social cash transfer programmes.

The core concept is that every dollar transferred that is spent rather than saved can increase the total income in the economy beyond its original value.

Consider a smallholder farmer who uses some of her grant to buy fertiliser at the local market. The local merchant profits from it and then spends this additional income, increasing profits for someone else and setting off a ripple effect through the economy. These taxable gains go beyond the people that get the payment, effectively “multiplying” the original grant’s worth for the economy.

Investing in the entire economy

We reviewed 23 studies of 19 cash assistance programmes across 13 countries and found substantial evidence of this multiplier effect from social cash transfers.

In Brazil, for example, Bolsa Família, the current national social welfare programme of Brazil and one of the largest cash transfer programmes in the world, was found to increase real GDP per R$1 (£0.16) spent by R$1.04. This is a small but positive spillover into the Brazilian economy.

Another noteworthy example is the GiveDirectly initiative in rural western Kenya, a pilot programme that offered a US$1,000 (£791) one-off transfer to 10,500 poor households. This programme led to a strong positive economic shock with a multiplier of 2.5 per US$1. So, every US$1 transferred generated a value of US$2.50 locally – a strong positive spillover to the local economy.

Social cash transfers have the potential to not only support the poor and vulnerable, but also to stimulate the wider economy. Rather than simply accepting the general perception of social transfers as an expense, we should start recognising their true value as an investment in a country’s entire economy.

Conrad Nunnenmacher, United Nations University; Franziska Gassmann, Maastricht University, and Julieta Morais, United Nations University

Conrad Nunnenmacher, PhD Research Fellow in Innovation, Economics, Governance and Sustainable Development, United Nations University; Franziska Gassmann, Professor of Social Protection and Development, Maastricht University, and Julieta Morais, Researcher in Social Protection, United Nations University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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Deceit pays dividends: How CEO lies can boost stock ratings and fool even respected financial analysts.

The multibillion-dollar collapse of FTX – the high-profile cryptocurrency exchange whose founder now awaits trial on fraud charges – serves as a stark reminder of the perils of deception in the financial world.

The lies from FTX founder Sam Bankman-Fried date back to the company’s very beginning, prosecutors say. He lied to customers and investors alike, it is claimed, as part of what U.S. Attorney Damian Williams has called “one of the biggest financial frauds in American history.”

How were so many people apparently fooled?

A new study in the Strategic Management Journal sheds some light on the issue. In it, my colleagues and I found that even professional financial analysts fall for CEO lies – and that the best-respected analysts might be the most gullible.

Financial analysts give expert advice to help companies and investors make money. They predict how much a company will earn and suggest whether to buy or sell its stock. By guiding money into good investments, they help not just individual businesses but the entire economy grow.

But while financial analysts are paid for their advice, they aren’t oracles. As a management professor, I wondered how often they get duped by lying executives – so my colleagues and I used machine learning to find out. We developed an algorithm, trained on S&P 1500 earnings call transcripts from 2008 to 2016, that can reliably detect deception 84% of the time. Specifically, the algorithm identifies distinct linguistic patterns that occur when an individual is lying.

Our results were striking. We found that analysts were far more likely to give “buy” or “strong buy” recommendations after listening to deceptive CEOs – by nearly 28 percentage points, on average – rather than their more honest counterparts.

We also found that highly esteemed analysts fell for CEO lies more often than their lesser-known counterparts did. In fact, those named “all-star” analysts by trade publisher Institutional Investor were 5.3 percentage points more likely to upgrade habitually dishonest CEOs than their less-celebrated counterparts.

Although we applied this technology to gain insight into this corner of finance for an academic study, its broader use raises a number of challenging ethical questions around using AI to measure psychological constructs.

Biased toward believing

It seems counterintuitive: Why would professional givers of financial advice consistently fall for lying executives? And why would the most reputable advisers seem to have the worst results?

These findings reflect the natural human tendency to assume that others are being honest – what’s known as the “truth bias.” Thanks to this habit of mind, analysts are just as susceptible to lies as anyone else.

What’s more, we found that elevated status fosters a stronger truth bias. First, “all-star” analysts often gain a sense of overconfidence and entitlement as they rise in prestige. They start to believe they’re less likely to be deceived, leading them to take CEOs at face value. Second, these analysts tend to have closer relationships with CEOs, which studies show can increase the truth bias. This makes them even more prone to deception.

Given this vulnerability, businesses may want to reevaluate the credibility of “all-star” designations. Our research also underscores the importance of accountability in governance and the need for strong institutional systems to counter individual biases.

An AI ‘lie detector’?

The tool we developed for this study could have applications well beyond the world of business. We validated the algorithm using fraudulent transcripts, retracted articles in medical journals and deceptive YouTube videos. It could easily be deployed in different contexts.

It’s important to note that the tool doesn’t directly measure deception; it identifies language patterns associated with lying. This means that even though it’s highly accurate, it’s susceptible to both false positives and negatives – and false allegations of dishonesty in particular could have devastating consequences.

What’s more, tools like this struggle to distinguish socially beneficial “white lies” – which foster a sense of community and emotional well-being – from more serious lies. Flagging all deceptions indiscriminately could disrupt complex social dynamics, leading to unintended consequences.

These issues would need to be addressed before this type of technology is adopted widely. But that future is closer than many might realize: Companies in fields such as investing, security and insurance are already starting to use it.

Big questions remain

The widespread use of AI to catch lies would have profound social implications – most notably, by making it harder for the powerful to lie without consequence.

That might sound like an unambiguously good thing. But while the technology offers undeniable advantages, such as early detection of threats or fraud, it could also usher in a perilous transparency culture. In such a world, thoughts and emotions could become subject to measurement and judgment, eroding the sanctuary of mental privacy.

This study also raises ethical questions about using AI to measure psychological characteristics, particularly where privacy and consent are concerned. Unlike traditional deception research, which relies on human subjects who consent to be studied, this AI model operates covertly, detecting nuanced linguistic patterns without a speaker’s knowledge.

The implications are staggering. For instance, in this study, we developed a second machine learning model to gauge the level of suspicion in a speaker’s tone. Imagine a world where social scientists can create tools to assess any facet of your psychology, applying them without your consent. Not too appealing, is it?

As we enter a new era of AI, advanced psychometric tools offer both promise and peril. These technologies could revolutionize business by providing unprecedented insights into human psychology. They could also violate people’s rights and destabilize society in surprising and disturbing ways. The decisions we make today – about ethics, oversight and responsible use – will set the course for years to come.

Steven J. Hyde, Boise State University

Steven J. Hyde, Assistant Professor of Management, Boise State University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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Entrepreneurs, beware: Owning your own business can make it harder to get hired later.

If you’ve been thinking about starting your own business lately, you’re not alone. Americans began launching ventures in record numbers during the pandemic, with an above-trend pace continuing through 2023.

Unfortunately, many of of these enterprises won’t last long: 30% of new businesses fail within two years, and half don’t last past five, according to the Small Business Administration. While some of these unlucky founders will pursue new ventures, many others will try to rejoin the traditional labor force.

You can’t blame them. People often see “going back to work” as a safety net for risk-taking entrepreneurs. As professors of management who study entrepreneurship, we wanted to see if this was true.

Screened out

So we surveyed more than 700 hiring professionals to determine whether founders really can get new jobs that easily, as well as seven former entrepreneurs who successfully made the transition back into the workforce.

We found that former business owners were actually less likely to get interviews compared with applicants with only traditional experience. This was true regardless of whether they had sold or closed their businesses. And the longer they were out of the traditional workforce, the worse their chances of success were.

Why do employers hesitate to take a chance on former business owners?

It starts at the earliest stages, with the recruiters who screen people into – or out of – consideration for interviews. We found that recruiters worried that entrepreneurs would jump ship to start their own companies as soon as they can. This is a problem for employers, since hiring is a long, expensive process that can take months or even years to pay off.

For example, one recruiter told us, “I am looking for candidates that will be long-term employees, as we invest quite a bit into each hire. When I interview people, it is generally a red flag if they say they want to start their own business or already have a business on the side.”

A related fear: A worker who leaves to start a new venture might be tempted to poach talent, clients and tactics from their old employer.

Recruiters were also concerned that former entrepreneurs may refuse to take directions. Spending time as your own boss can make it difficult to adapt to a lower place on the organizational hierarchy. As one recruiter in our study put it, former business owners “are used to being the one who makes all the decisions.”

They also raised issues of job fit, questioning whether ex-entrepreneurs’ knowledge and abilities would translate to traditional work. “The concern would be the skills they have developed don’t transfer,” said one of our interviewees. In addition, for entrepreneurs who have worked alone, it can be difficult for recruiters to know how well they’ll perform with others.

Even when a former entrepreneur is a good match for a position, recruiters can fail to make the connection because of stereotypes or misunderstandings about their experience. A former bakery owner we interviewed recalled applying for a position and being pigeonholed based on their experience: “They said, ‘Oh, I wish we were hiring for a baker!’ and I said, ‘No, no, no, I’m applying for your front office.’ It was like they thought all I knew was just a baker, but that is far from the truth.”

Landing an interview

Our research adds to a growing body of evidence that ex-entrepreneurs struggle to get interviews and offers. Thankfully, it also offers insights that organizations can use to improve their applicant pool – and that enterprising job seekers can use to boost their odds.

Our study found that former entrepreneurs face less bias when they apply to roles that seem entrepreneurish – in other words, that are in line with stereotypes about business owners. So, for example, they’re more likely to land interviews when applying for positions with a lot of autonomy, such as in new business development, rather than those that require following lots of rules, such as in legal compliance.

Relatedly, our research suggests that recruiters – perhaps unintentionally – have biases against ex-entrepreneurs. Acknowledging such tendencies is a good first step toward minimizing their influence. Moreover, not all recruiters are equally affected: Another recent study showed that recruiters who also have prior entrepreneurial experience – as well as women and those who were recently hired – were less likely to screen out former business owners. So organizations with more diverse hiring teams and a deeper understanding of entrepreneurial experience might see less-biased results.

For their part, ex-entrepreneur job applicants would be wise to highlight in-demand aspects of their work history. For instance, a recent survey by Boston Consulting Group found that executives rank innovation as one of their top three priorities. Former entrepreneurs should emphasize their many valuable characteristics – such as being passionate and creative – that contribute to innovation.

The lack of a traditional employment history may create obstacles for entrepreneurs trying to rejoin the workforce. Recruiters who overlook their value risk missing out on strong candidates.

Jacob A. Waddingham, Texas State University and Miles Zachary, Auburn University

Jacob A. Waddingham, Assistant Professor of Management, Texas State University and Miles Zachary, Associate Professor of Management and Entrepreneurship, Auburn University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Is the US banking crisis over?

The US banking crisis triggered worries about the global banking system earlier in the year. Three mid-sized US banks, Silicon Valley Bank, Silvergate and Signature, fell in quick succession, driving down bank share-prices across the world.

America’s central bank, the Federal Reserve, made significant amounts of cash available to the failed banks and created a lending facility for other struggling institutions. This calmed investors and prevented immediate contagion, with only one more US regional bank, First Republic, collapsing a few weeks later.

Yet it’s far from clear whether the crisis is really over. As traders return from their summer holidays to a period commonly associated with upheaval in the markets, how are things likely to play out?

Tight margins and dwindling deposits

Central banks have continued to increase interest rates to counter sustained inflation in recent months. In July, the Fed raised its key interest rate to as much as 5.5%, the highest in 20 years. The rate was near zero as recently as February 2022.

Though the increases have slowed this year, such a sudden change can be very harmful for banks – particularly as part of the sort of U-shaped movement in rates that we have seen since the global financial crisis of 2007-09.

US benchmark interest rate, 2007-23

Raising rates reduces the value of banks’ assets, increases what they have to pay to borrow, limits their profitability and generally increases their vulnerability to adverse events. Especially in the first half of 2023, banks have had to cope with low loan growth and high deposit costs, meaning the amount they have to pay out in relation to customers’ deposits.

This increased cost is partly because lots of customers have been withdrawing their money and putting it into places where they can make more interest, such as money market funds. It forced banks to borrow more from the Fed to ensure they have enough money, and at rates much higher than they used to be.

This was one of the reasons for the banking collapses in the spring, destabilising them at a time when the value of the debt on their balance sheets had also fallen sharply. This saw more customers at other banks withdrawing deposits for fear that their money wasn’t safe either. In sum, US banks saw deposits declining between June 2022 and June 2023 by almost 4%. Together with higher interest rates, this is generally bad news for the banking sector.

You can see the effect on banks’ profitability by looking at overall net interest margins (NIMs). These are a measure of what banks receive in interest income minus what they pay out to depositors and other funders.

US banks’ net interest margins (%)

Credit rating downgrades

The ratings agencies have added further pressure. In early August, Fitch downgraded its rating of US government debt to AA+ from AAA. It cited a likely deterioration in the public finances over the next three years and the endless politicking around the debt ceiling, which is the maximum level that the government can borrow.

Sovereign downgrades often reflect problems in the wider economy. This can destabilise banks by making them seem less creditworthy, leading their credit ratings to be downgraded too. That can make it harder for them to borrow money from the markets or potentially even from the Fed. This can then have knock-on effects in reducing banks’ lending capacity, capital buffers for coping with bad debts, overall profitability and share prices.

US banks’ share prices 2023

Sure enough, a week after the Fitch announcement, Moody’s downgraded the credit ratings of ten US mid-sized banks, citing growing financial risks and strains that could erode their profitability. It also warned that larger banks including Bank of New York Mellon and State Street were at risk of a future downgrade.

The other major ratings agency, S&P Global Ratings, has since followed suit, while Fitch is threatening to do likewise. Our research suggests bank downgrades are associated with making them riskier and more unstable, particularly when accompanied by a sovereign downgrade.

Having said all that, there are positives for US banks. Both interest rates and bank deposits are at least projected to stabilise in the coming months, which should help the sector. Despite the overall decline in banks’ profitability, bigger banks are reporting improved margins from charging higher interest on loans. Some of these banks also expect a boost from things like increased deal-making later in the year. Signs like those could help to bring more stability across the board.

In Europe, banks have seen reduced deposits and net interest margins in recent years, which helps to explain why Credit Suisse needed to be rescued by fellow Swiss bank UBS in March. Yet European deposits and profit margins have been recovering in the most recent couple of quarters. At the same time, the European Banking Authority’s recent stress tests concluded that large EU banks are robust.

UK banks appear to be in a slightly worse condition than EU banks. They remain resilient on their balance sheets, but their deposits have not recovered to quite the same extent as in Europe. They have also been adjusting down their profit forecasts in anticipation of further rate hikes by the Bank of England.

Regulatory intervention

To strengthen the US sector, the regulators are planning to further increase the minimum levels of capital that must be held by large US banks (with assets worth more than US$100 billion (£79 billion)).

These plans to increase banks’ capacity to absorb losses are encouraging, though will take more than four years to fully implement. The Basel II international banking rules were introduced to a similar end in 2004, but were not implemented in time to prevent the global financial crisis.

For the moment, the US banking system remains vulnerable both to shocks within the financial system and more general calamities. It will still be a few months before we can say with confidence that the worst is over.

George Kladakis, Edinburgh Napier University and Alexandros Skouralis, City, University of London

George Kladakis, Lecturer in Financial Services, Edinburgh Napier University and Alexandros Skouralis, Research Assistant, Bayes Business School, City, University of London

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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Insider trading − the legal kind − is a lot more profitable if you work for a multinational company.

Corporate insiders who trade stocks based on the information they gain on the job earn a lot more if they work at multinational corporations than their peers at U.S. companies with no sales abroad. That’s the main finding of our new peer-reviewed research.

Insider trading happens when a director or employee trades their company’s public stock or other security based on important or “material” information about that business. Insider trading isn’t illegal as long as the person reports the trade to the Securities and Exchange Commission and the information is already in the public domain.

We wanted to know if multinational insiders stand to make more money because of the complexity of the information they could possess relative to outsiders.

So we examined returns from over 2.5 million trades reported to the SEC from 1987 to 2019 by insiders at over 10,000 companies. This is only a subset of all insider trades reported during the period because we focused on only those transactions most likely to be informed by the employee’s insight. We then compared monthly returns for insiders at multinational and domestic companies with those for a typical investor.

We found that all insiders beat the market, but those at multinationals did better – especially if they were on the highest rungs of the corporate ladder. While insiders at domestic companies typically obtained a return of 2.4% in the month following a stock purchase, those at multinational corporations reaped 2.8%. That may not sound like a lot, but, assuming consistent returns, it could amount to earning $170,000 more if an insider traded $1 million over several months. And it’s triple the typical stock market monthly gain of 0.9%

The most in-the-know insiders – executives and others with the most intimate knowledge of the company and its operations – at multinationals got an even bigger advantage, earning 3.6% per month vs. 2.7% at domestic companies.

Why it matters

Insider trading is familiar to most people from movies that portray it in criminal terms, such as Gordon Gekko of “Wall Street.” In the film, he makes millions off others’ inside information.

But even when it is legal, insider trading is very profitable. That’s because insiders trading on public information are more knowledgeable about their industry and process information more effectively than outside investors.

With global companies, the advantage of being an insider increases. Since multinational companies generate earnings in foreign countries, with different currencies, cultures, economies and operating environments, it can be hard for an outsider or analyst to accurately value the company and its stock price. This is especially true when the company does business in regions that are culturally and linguistically distinct from the U.S. This helps insiders trade more efficiently, by buying underpriced stocks at a bargain and selling them later for a windfall.

Companies often motivate their employees to work harder by offering them a stake in their success, but if insiders seem to be getting an unfair advantage over ordinary investors, it may undermine trust in financial markets. The size and profitability of such trades – particularly in light of our data – mean regulators and policymakers may want to consider whether new restrictions on insider trading are needed, such as placing additional limits on the timing or frequency of trades.

What other research is being done

Scholars, including us, are pursuing many avenues of research on insider trading, such as how insider trading restrictions are determined and how insider trades inform markets when news is limited. We’ve recently conducted research on how insider trades by colleagues at the same company tend to cluster together, and we are currently looking at how innovation affects insider trading.

Another recently published project relates to how information is incorporated into stock market prices and how investors underreact to news that may affect insiders’ ability to trade profitably. Similarly, ongoing research uses a GPT language model to assess the complexity of business regulatory filings and financial statements by analyzing technical jargon that can confuse investors, which could also affect how outside investors understand stock prices compared with insiders.

The Research Brief is a short take about interesting academic work.

D. Brian Blank, Mississippi State University and Dallin Alldredge, Florida International University

D. Brian Blank, Assistant Professor of Finance, Mississippi State University and Dallin Alldredge, Assistant Professor of Finance, Florida International University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

What’s the difference between a startup and any other business?

All startups are businesses, but not every business is a startup.

Nearly 100,000 new businesses were formed each week in the United States in 2022. But what sets a startup apart?

As a professor of marketing and innovation who has worked at several startups, including Netflix in its early days, I can share some of the differences between a startup and a more traditional business.

Startups are inventing something new

A traditional business generally has an established solution to a known problem and has not developed anything particularly new.

For example, a new sushi restaurant in your neighborhood may be a new business, but it is by no means a startup. However, if a new local company had developed a device that automated sushi-making and tried to get sushi restaurants to try it, that would be a startup. The restaurant is simply trying to satisfy the neighborhood’s needs for sushi, whereas the device company is trying to change all sushi restaurants with its new method.

A startup is centered on an innovation that has never been brought to market before. This could be a product or service, a technology, a process, a brand, or even a new business model. Generally, they have big industry-changing goals about disrupting the market leader or current customer behavior.

Think Uber, an inventive startup that originally operated in San Francisco. It built off the time-tested taxi model – a business – and created a unique ride-sharing app that had never existed previously.

The goals of startups

Regardless of their product and location, the main focus of a startup is to figure out if there is a need for their product.

Startups are trying to find and optimize a target market for their new solution. Who would value and buy what they have developed? Startups often think they have a good picture of who would like what they are building, but they’re not always right.

For example, I headed marketing nearly a decade ago at relationship-focused tech startup Contactually. When Contactually began to promote its services, it aimed for small businesses in several industries, thinking that the product met needs equally across all of them. But subsequently we found out that our offering worked particularly well for real estate agents and brokers, and we started to put all efforts into meeting this group’s needs exclusively.

Part of identifying a target market is establishing a product/market fit – the degree to which the innovation satisfies a market need. Startups know they may be on to something when customers from the target market purchase the new solution and are willing to share their positive experiences with others.

Once a startup has passed those stages, it will try to scale. This means successfully growing the startup so that it’s not limited by funding or staff. For example, once Netflix launched its streaming platform in 2010, it was able to scale around the globe in an easier and faster manner than if it had stayed with its original DVD-by-mail business model.

Finally, to accomplish the things that would enable it to scale, startups are generally focused on spending time with and learning from their customers. Once they reach a specific size, most businesses focus less on customer learning and more on making the company more efficient.

Transitioning into an established business

Amazon, Netflix, Uber and Airbnb are global powerhouses that began as startups. Successfully growing a startup into a prosperous company is extremely hard. Industry data suggests that 90% of startups will fail.

Once established within their market, traditional businesses find themselves with a different challenge: running more efficiently.

Startups may be able to rely on funding from different kinds of outside investors while they gain their footing. But an established business needs to run smoothly to make a profit from what it’s selling.

Non-startup companies need to figure out how to manage workers better and run the business in a way that solves the customers’ problems while enabling the company to meet all of its goals.

For a non-startup business, specific goals could be how much money or profit the firm makes, how and where to expand to grow more or faster, how much time it takes to create a product, or how to make more products with the same or fewer resources.

While the focus of a startup is to determine if there is a demand for a new and innovative product, the primary goal of a traditional business is to create an efficient operation that can last far into the future.

With luck, a successful startup, like Uber or Netflix, will scale and grow, eventually evolving into a traditional business – one that some future startup may try to disrupt with a brand-new idea.

Hello, curious kids! Do you have a question you’d like an expert to answer? Ask an adult to send your question to CuriousKidsUS@theconversation.com. Please tell us your name, age and the city where you live.

And since curiosity has no age limit – adults, let us know what you’re wondering, too. We won’t be able to answer every question, but we will do our best.

Joel Mier, University of Richmond

Joel Mier, Lecturer of Marketing, University of Richmond

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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Cryptocurrencies are experiencing their worst crisis since the arrival of the first crypto assets and virtual currencies in the 1990s and their democratization in the 2010s.

Bitcoin had an unprecedented tumble in late 2020 and has yet to recover. In addition to this sharp decline, there is much discussion about the worrisome collapse of some so-called stablecoins, which are supposed to be less volatile.

This is compounded by the fall of cryptocurrency giants, particularly due to allegations of fraud in cases like the FTX scandal. At its peak, FTX had one million users and was the third-largest cryptocurrency exchange in terms of volume.

Experts agree that the aftershocks of its collapse have hit investors hard and will likely slow the pace of crypto asset adoption for the next few years.

As an expert in the field of cryptocurrencies, I will try to answer the following question: are cryptocurrencies really here to stay, or are they just a fad?

Speculation and extreme volatility

Cryptoassets include tokens that can be used for digital currency purposes (i.e. cryptocurrencies such as Bitcoin and Ethereum). They are also used for investment in an entity (a “security token,” which entitles the holder to ownership of a portion of an entity), or for products or services (a “utility token,” which entitles the holder to a product once it has been produced, for example).

Stablecoins, which are supposed to be associated with lower volatility, are unique in that they are backed by a currency (e.g. the U.S. dollar), a commodity (e.g. gold) or a financial instrument (e.g. a stock or a bond). This is to keep the value of the digital currency stable.

Bitcoin’s plunge is followed in the headlines on a daily basis. While this is not the first time it has fallen, it is particularly noteworthy as it is the biggest drop in value since late 2020. The collapse is partly due to rising interest rates and the flight of investors from these risky investments. Although it is recovering, Bitcoin is still a long way from the heights it once reached.

This media coverage raises many questions about the sustainability of these cryptoassets. Indeed, the latter are marked by extreme volatility in their unregulated markets in addition to being associated with speculation by many players in the financial world.

Indeed, the BBC recently reported that cryptocurrency laundering rose 30 per cent in 2021. The U.S. Federal Trade Commission, which aims to protect U.S. consumers, reported that in 2021, fraud schemes cost investors more than $1 billion in cryptocurrencies. Needless to say, very few of the defrauded investors have recovered their money.

One billion users by 2022

Yet we are seeing a slow but sure increase in the adoption of cryptocurrencies by companies. In an ongoing study of the impact of cryptocurrency adoption by public companies on their social responsibility, I noted that many of them, such as Starbucks and McDonald’s, have started to accept Bitcoin as a form of payment. This is particularly the case in their branches in El Salvador, following that country’s adoption of Bitcoin as legal tender.

Others, such as Japanese online retail giant Rakuten, have chosen to accept cryptocurrencies even if their country is not pushing to adopt Bitcoin as a currency. They say they are driven by a desire to offer more payment options to their customers.

The user base for cryptocurrencies is growing year on year. For example, Crypto.com, an exchange platform, estimated that about 295 million people had entered the cryptocurrency market as of December 2021. The platform expected the number of users to cross the one billion mark by December 2022.

Cryptocurrencies also allow people with unreliable or insecure banking systems to access a parallel banking system that is independent of the traditional banking system. Offering a less affluent part of the population access to a different form of banking system is one of the reasons the President of El Salvador gave for making Bitcoin legal tender in the country.

A healthy fluctuation

The growing interest in decentralized finance (DeFi), as well as the development of the metaverse, are also factors that influence the sustainability of cryptocurrencies. Decentralized finance often relies on stablecoins for its operation. Meanwhile, the metaverse, a universe of 3D virtual worlds, also allows the use of cryptocurrencies to purchase goods or services, creating an immersive world.

Experts in the sector believe that, despite the debacle that the cryptoasset market has experienced recently, decentralized finance — particularly via products backed by cryptoassets — is here to stay. This is because there is a market and players willing to participate.

Moreover, they argue that while this sharp decline in cryptocurrency-related markets does remove some players, this is a welcome change. By the admission of Raoul Ullens, co-founder of Brussels Blockchain Week (an annual conference devoted to blockchain and cryptocurrencies):

it is healthy, for the adoption, the maturation of these Web3 technologies, to skim, to rebalance the sector. […] An unhealthy ecosystem will not attract the masses.

According to these players, such a drop in the cryptoasset markets is not only necessary, but also healthy, contributing as it does to re-balancing the valuation of cryptocurrencies.

Cryptocurrencies are here to stay

The launch of cryptocurrencies by central banks, via central bank digital currencies (CBDCs), also lends weight to the argument that cryptoassets are here to stay. Indeed, the Bank of Canada is currently working on the creation of a CBDC. According to the institution, a CBDC issued by the Bank of Canada would be an “official digital currency (that) would retain its face value in Canadian dollars because it is issued by the Bank of Canada, just like bank notes.”

Other nations in the world have already issued such a currency, including the Bahamas (Sand Dollar) and Nigeria (eNaira). One reason CBDCs are different from privately issued digital currencies (such as Bitcoin or Ethereum) is that their intended use is for transaction purposes only, not for investment or speculation. They offer the same possibilities of use as cash.

CBDCs also aim to promote the financial inclusion of a part of the population that has little or no access to the traditional banking system, and to simplify the implementation of monetary and fiscal policy in the issuing countries.

Developments in the world of digital currencies, whether in the metaverse or with the arrival of the CBDC, and the craze that they continue to generate, mean cryptocurrency is here to stay.

This durability means the form of cryptoassets take will continue to evolve and transform with the technologies that support them (notably, blockchains) and the variation in demand from users and/or investors.

Annie Lecompte, Université du Québec à Montréal (UQAM)

Annie Lecompte, Assistant prof – Audit, Université du Québec à Montréal (UQAM)

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Why SVB and Signature Bank failed so fast – and the US banking crisis isn’t over yet.

Silicon Valley Bank and Signature Bank failed with enormous speed – so quickly that they could be textbook cases of classic bank runs, in which too many depositors withdraw their funds from a bank at the same time. The failures at SVB and Signature were two of the three biggest in U.S. banking history, following the collapse of Washington Mutual in 2008.

How could this happen when the banking industry has been sitting on record levels of excess reserves – or the amount of cash held beyond what regulators require?

While the most common type of risk faced by a commercial bank is a jump in loan defaults – known as credit risk – that’s not what is happening here. As an economist who has expertise in banking, I believe it boils down to two other big risks every lender faces: interest rate risk and liquidity risk.

Interest rate risk

A bank faces interest rate risk when the rates increase rapidly within a shorter period.

That’s exactly what has happened in the U.S. since March 2022. The Federal Reserve has been aggressively raising rates – 4.5 percentage points so far – in a bid to tame soaring inflation. As a result, the yield on debt has jumped at a commensurate rate.

The yield on one-year U.S. government Treasury notes hit a 17-year high of 5.25% in March 2023, up from less than 0.5% at the beginning of 2022. Yields on 30-year Treasurys have climbed almost 2 percentage points.

As yields on a security go up, its price goes down. And so such a rapid rise in rates in so short a time caused the market value of previously issued debt – whether corporate bonds or government Treasury bills – to plunge, especially for longer-dated debt.

For example, a 2 percentage point gain in a 30-year bond’s yield can cause its market value to plunge by around 32%.

SVB, as Silicon Valley Bank is known, had a massive share of its assets – 55% – invested in fixed-income securities, such as U.S. government bonds.

Of course, interest rate risk leading to a drop in market value of a security is not a huge problem as long as the owner can hold onto it until maturity, at which point it can collect its original face value without realizing any loss. The unrealized loss stays hidden on the bank’s balance sheet and disappears over time.

But if the owner has to sell the security before its maturity at a time when the market value is lower than face value, the unrealized loss becomes an actual loss.

That’s exactly what SVB had to do earlier this year as its customers, dealing with their own cash shortfalls, began withdrawing their deposits – while even higher interest rates were expected.

This bring us to liquidity risk.

Liquidity risk

Liquidity risk is the risk that a bank won’t be able to meet its obligations when they come due without incurring losses.

For example, if you spend US$150,000 of your savings to buy a house and down the road you need some or all of that money to deal with another emergency, you’re experiencing a consequence of liquidity risk. A large chunk of your money is now tied up in the house, which is not easily exchangeable for cash.

Customers of SVB were withdrawing their deposits beyond what it could pay using its cash reserves, and so to help meet its obligations the bank decided to sell $21 billion of its securities portfolio at a loss of $1.8 billion. The drain on equity capital led the lender to try to raise over $2 billion in new capital.

The call to raise equity sent shockwaves to SVB’s customers, who were losing confidence in the bank and rushed to withdraw cash. A bank run like this can cause even a healthy bank to go bankrupt in a matter days, especially now in the digital age.

In part this is because many of SVB’s customers had deposits well above the $250,000 insured by the Federal Deposit Insurance Corp. – and so they knew their money might not be safe if the bank were to fail. Roughly 88% of deposits at SVB were uninsured.

Signature faced a similar problem, as SVB’s collapse prompted many of its customers to withdraw their deposits out of a similar concern over liquidity risk. About 90% of its deposits were uninsured.

Systemic risk?

All banks face interest rate risk today on some of their holdings because of the Fed’s rate-hiking campaign.

This has resulted in $620 billion in unrealized losses on bank balance sheets as of December 2022.

But most banks are unlikely to have significant liquidity risk.

While SVB and Signature were complying with regulatory requirements, the composition of their assets was not in line with industry averages.

Signature had just over 5% of its assets in cash and SVB had 7%, compared with the industry average of 13%. In addition, SVB’s 55% of assets in fixed-income securities compares with the industry average of 24%.

The U.S. government’s decision to backstop all deposits of SVB and Signature regardless of their size should make it less likely that banks with less cash and more securities on their books will face a liquidity shortfall because of massive withdrawals driven by sudden panic.

However, with over $1 trillion of bank deposits currently uninsured, I believe that the banking crisis is far from over.

Vidhura S. Tennekoon, Indiana University

Vidhura S. Tennekoon, Assistant Professor of Economics, Indiana University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

US regulators avoided a banking crisis by swift action following SVB’s collapse – but the cracks it exposed continue to weaken the global financial system’s foundation.

U.S. regulators’ swift reaction to the collapse of Silicon Valley Bank and two other lenders partially restored calm to markets, but concerns remain over the stability of the global financial system.

The government is racing to orchestrate a US$30 billion rescue of First Republic Bank by the nation’s largest financial institutions after the California lender’s shares continued tanking. Meanwhile in Europe, Credit Suisse’s own financial woes deepened, prompting the Swiss government to offer a lifeline. While Credit Suisse’s issues are unrelated to those of the failed U.S. banks, they further exposed deep anxiety in global financial markets.

To better understand what U.S. regulators did, the impact of their decisions and what problems remain, The Conversation turned to two finance scholars, Brian Blank of Mississippi State and Brandy Hadley of Appalachian State.

What did US regulators do?

The program introduced by the Federal Deposit Insurance Corp., the Department of the Treasury and the Federal Reserve on March 12, 2023, essentially amounts to life insurance for U.S. banks.

The biggest concern from the sudden collapse of Silicon Valley Bank on March 10, as well as Signature Bank two days later, was the tens of billions of dollars in deposits that would otherwise go uninsured. While the FDIC insures deposits up to $250,000, anything above that is at risk of loss in the event of a bank failure.

So the FDIC agreed to provide a backstop for all SVB and Signature depositors no matter how much they had deposited. And the Fed created a new lending facility to protect other small- to medium-size banks from the same issues that caused bank runs at SVB and Signature.

Notably, this protection for depositors does not extend to management, lenders or investors, including many institutional investors, pensions and large index funds. In addition, the program will be funded by an FDIC fund that comes from a tax on member banks. Taxpayer dollars aren’t at stake, Congress approval wasn’t required and, most importantly, only customers’ claims are protected. This is why the Biden administration insists this is not a bailout – even though some critics call it that.

Nonetheless, the government did intervene to stop the fallout from failing banks, even if done differently than in the past.

Why did the government act so quickly?

When the bank run on SVB’s deposits began on March 8, the lender initially sought to find a buyer. When that failed, regulators stepped in quickly to limit the risk to the financial system.

This was particularly important given that banks rely heavily on trust, and a loss of depositor faith in other mid-size banks could be extremely harmful.

But besides posing a systemic financial risk as the 16th-largest U.S. lender, the failure of SVB also threatened the health of the tech sector.

Close to half of U.S. startups backed by venture capital firms, including tens of thousands of technology and health care companies, were customers at SVB. The bank’s failure would have made it hard for many of them to pay their workers or take out loans that keep businesses running.

What are the problems of this approach?

One concern is something economists call moral hazard.

U.S. regulators were basically doing what governments have done to prevent banking crises since at least the 19th century: provide liquidity. That is, according to the academic theory established by Economist magazine founder Walter Bagehot in 1873, central banks should lend freely to lenders during a financial crisis to prevent a panic and restore confidence in the system.

But doing this could create a moral hazard by potentially encouraging risky behavior by banks, which may come to believe they will always be bailed out. This dilemma highlights the challenge of balancing the need for financial stability with the desire to avoid creating perverse incentives.

With the SVB rescue, regulators likely hope to avoid this by focusing protection efforts on depositors – not equity or debt investors.

Another problem is that the rescue treats the symptoms more than the root causes.

The source of SVB’s downfall was that it invested a significant chunk of its assets in Treasury securities that lost value as the Fed hiked rates in 2022. SVB sold $21 billion worth of these bonds at a loss of $1.8 billion in order to cover customer deposit withdrawals. This then prompted a stampede of clients to yank their mostly uninsured deposits.

But despite the depositor protection offered by the new program, many more banks still face asset-liability mismatches – that is, short-term deposits being invested in longer-term securities – that will not go away as a result of the program. Banks reported $620 billion of these unrealized losses as of December 2022.

Some other banks – such as Signature and Silvergate Capital, which also recently failed – are similar to SVB, with concentrated business in risky sectors like venture capital, technology or cryptocurrencies.

How big of a concern is the root of the problem?

The good news is that few banks are likely to have the same combination of unrealized losses, concentrated deposits and default risk that are likely to result in withdrawals as fast as what happened at SVB and Signature.

Critically, large and mid-size banks are sufficiently regulated, diversified, hedged and capitalized to prevent similar problems, especially given the very different balance sheet compositions and asset liability management strategies.

But the risks are big, as the Fed’s aggressive campaign to raise interest rates could potentially make things worse. Inflation remains elevated, which would normally lead the U.S. central bank to continue to drive up rates. The nascent concern about stabilizing the financial sector at the same time as taming inflation means the Fed has its work cut out for it.

So is the financial system safe?

Unfortunately, not yet.

While the crisis has been averted for now by limiting the risk of another bank run, the financial system – as well as the modestly strong U.S. economy – is showing cracks and fragility.

The recent troubles at Credit Suisse are a stark reminder of how quickly things can spiral out of control. Credit Suisse shares have been under pressure for several years because of its own unique problems, including scandals and a closely knit customer base that makes it more vulnerable to contagion.

But now the recent U.S. bank failures are causing broader panic among banks globally, and this is hitting shares of Credit Suisse hard, prompting the Swiss National Bank – Switzerland’s equivalent of the Fed – to promise to provide liquidity if necessary. This offers some relief but signals just how easily things can spiral out of control.

There’s no reason to think that the financial system is in serious trouble – for now – but the risks of more jitters have increased, putting more pressure on central banks, including the Fed, to roll back their inflation-fighting plans. Of course, doing so can unleash other risks – such as prices once again spiraling out of control.

All told, it’s a challenging balancing act, requiring careful precision and swift action to avoid a painful fall.

D. Brian Blank, Mississippi State University and Brandy Hadley, Appalachian State University

D. Brian Blank, Assistant Professor of Finance, Mississippi State University and Brandy Hadley, Associate Professor of Finance and the David A. Thompson Distinguished Scholar in Applied Investments, Appalachian State University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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To the delight of investors across the cryptosphere, the price of bitcoin (BTC) has rallied over 53% since its low of US$15,476 (£12,519) in November. Now trading around US$23,000, there’s much talk that the bottom has finally been reached for the leading cryptocurrency after a year of painful decline – in November 2021, the price peaked at almost US$70,000.

If so, it’s not only good news for bitcoin but the whole market in cryptocurrencies, since the others broadly move in line with the leader. So is crypto back in business?

Dotcom lessons

The past is littered with various periods of market turmoil, from the global financial crisis of 2007-09 to the COVID-19 collapse in 2020. But neither of these is a particularly good comparison for our purposes because they both saw sharp drops and recoveries, as opposed to the slow unwinding of bitcoin. A better comparison would be the dotcom bubble burst in 2000-02, which you can see in the chart below (the Nasdaq is the index that tracks all tech stocks).

Nasdaq 100 index 1995-2005

Look at the bitcoin chart since it peaked in November 2021 and the price action looks fairly similar:

Bitcoin bear market price chart 2021-23

Both charts show that bear markets go through various periods where prices rise but don’t reach the same level as the previous peak – known as “lower highs”. If bitcoin is following a similar trajectory to the early 2000s Nasdaq, it would make sense that the current price will be another lower high and that it will be followed by another lower low.

This is partly because like the 2000s Nasdaq, bitcoin seems to be following a pattern known as an Elliott Wave. Named after the renowned American stock market analyst Ralph Nelson Elliott, this essentially argues that during a bear phase, investors shift between different emotional states of disappointment and hope, before they finally despair and decide the market will never turn in their favour. This is a final wave of heavy selling known as capitulation.

You can see this idea on the chart below, where bitcoin is the green and red line and Z is the potential capitulation point at around US$13,000 (click on the chart to make it bigger). The black line is the path that the Nasdaq took in the early 2000s. The blue pointing finger above that line is potentially the equivalent place to where the bitcoin price is now.

Bitcoin now vs Nasdaq in the early 2000s

The one other thing to note on the chart is the wavy line that’s moving horizontally along the bottom. This is the stochRSI or stochastic relative strength index, which is an indication of when the asset looks overbought (when the line is peaking) or oversold (when it’s bottoming).

A sign of a coming shift is when the stochRSI moves in the opposite direction to where the price is heading: so now the stochRSI is coming down but the price has held up around US$23,000. This too suggests a fall could be imminent.

The game of wealth transfer

Within markets, there is often a game that investors from institutions such as banks and hedge funds play with amateur (retail) investors. The aim is to transfer retail investors’ wealth to these institutions.

This is particularly easy in an unregulated market like bitcoin, because it is easier for institutions to manipulate prices. They can also talk up (or talk down) prices to stir up retail investors’ emotions, and get them to buy at the top and sell at the bottom. This “traps” the irrational investors who buy at higher prices, transferring wealth by giving the institutions an opportunity to convert their holdings into cash.

It therefore makes sense to compare how the retail and institutional investors have been behaving lately. The following charts compare those crypto wallet addresses that hold 1 BTC or more (mostly retail investors) with those holding upwards of 1,000 BTC (institutional investors). In all three charts, the black line is the bitcoin price and the orange line is the number of wallets in that category.

Retail investor behaviour

Institutional investor behaviour pt 1

Institutional investor behaviour pt 2

This shows that since the FTX scandal back in November, which led to the world’s second-largest crypto exchange collapse, retail investors have been buying bitcoin aggressively, resulting in the highest number of addresses holding at least one BTC ever. On the other hand, the biggest institutional investors have been offloading. This suggests that the institutional investors agree with our analysis.

Where we’re heading

There are those who argue that bitcoin is a bubble and that ultimately cryptocurrencies are worthless. That’s a separate debate for another day. If we assume there is a future for blockchains, which are the online ledgers that enable cryptocurrencies, the key question is when bitcoin will reach the accumulation phase that typically ends a bear phase in any market.

Known as Wyckoff accumulation, this is where the price of the asset repeatedly tests two areas: the upper bound where traders previously sold heavily enough for the price to stop rising (known as resistance), and the lower bound where traders bought heavily enough that the price stopped going down (known as support).

At the point where institutional investors decide the lower bound has proved to be sufficiently resilient – in other words, they think the price is cheap at that level – they will start buying the asset again. That moment is only likely to come after there has been a capitulation.

Of course, history does not repeat itself exactly. It may be this is the first time that retail investors have outsmarted the large institutions, and that the only way is now up.

More likely, however, there is more pain on the way. With a recession on the cards, unprecedented job layoffs and weak retail data coming out of the US, it doesn’t point to the kind of optimism that tends to move markets higher. It would therefore make sense to brace yourself for another plunge in the price of bitcoin and the rest of the crypto market.

James Kinsella, PhD Researcher in Finance, University of Bath and Richard Fairchild, Senior Lecturer in Corporate Finance, University of Bath

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Financial contagions can be triggered easily, if conditions are right. First one financial institution falls and then others follow, like a chain of falling dominoes.

The cinder that sparked the global financial crisis in 2007 is considered by many to have been a March 14 briefing by executives of the Lehman Brothers’ investment bank.

Under intense questioning from financial analysts, the executives admitted the bank had overstated the value of billions of dollars in subprime mortgages.

This news saw Lehman Brothers’ stock price crash, and led to investors losing faith in the entire edifice of complex financial deals that had been so profitable for banks and brokers.

As share prices fell, more investors scrambled to sell their stock, driving prices even lower. The contagion spread through global share, property and derivative markets.

Of course, it was a crisis waiting to happen. It took years to create the rickety system that collapsed under pressure. It was going to happen sooner or later. But it still needed a trigger.

We’re at a similar point in cryptocurrency markets.

2022’s major collapses

Last year has seen several major crypto-related collapses.

In May the Terra/Luna cryptocurrency, considered a reputable stablecoin with a total market cap of US$31 billion in April, was wiped out.

In July the US-based crytocurrency lender Celsius, with assets valued at US$12 billion in May, went bankrupt.

Then in November, FTX – one of the world’s biggest cryptocurrency exchanges, valued at $US32 billion at the beginning of 2022 – collapsed, taking with it the assets of 1.2 million customers.

Binance fears

Crypto owners are spooked, waiting for the next exchange to drop.

Last week it looked as if that might be the world’s biggest cryptocurrency exchange, Binance, after customers withdrew US$1.9 billion of assets in 24 hours.

To put that in perspective, that’s just 3.5% of the US$55 billion in assets Binance reported it was holding on December 18. Binance says withdrawals have settled down.

But the panic was real enough – apparently triggered by some large depositors interpreting a trading halt for one of Binance’s listed coins as signifying something more serious.

Centralised exchanges are a risk

In any market crisis there’s always an underlying problem that provides the fuel for a cinder to spark.

In this case the problem is that Binance and other other centralised crypto exchanges (known as CEX) are riskier than other ways to store crypto assets.

There are good reasons for any crypto owner, after seeing what happened with FTX, another centralised exchange, to withdraw their assets.

The lesson from FTX is that if you don’t have self-custody of your crypto assets, you have no real control.

Centralised cryptocurrency exchanges are more like banks than exchanges. They act as custodians, holding customers’ crypto or fiat currency, similar to holding money in a bank account.

But banks are regulated – in part to minimise the disastrous “bank runs” that occurred regularly in the past.

This includes a global regulatory framework known as the Basel prudential guidelines, introduced in 1988 to ensure every bank holds enough capital and sufficient liquidity to meet withdrawals. It also requires banks to report financial information on a regular basis.

We take all this for granted. But it didn’t happen magically. It’s a function of careful planning based on strict minimum liquidity and capital requirements imposed by banking regulators.

Containing the next crisis

Banks are closely supervised because they hold most of the money in the economy. For the economy to function it is vital that people can store money safely and securely, and accessed when required.

We need the same oversight of cryptocurrency.

Every centralised crypto exchange is in danger if customers’ withdrawals exceed its liquid assets. If it can’t cover withdrawals, it must freeze customers’ accounts. At that point the end is nigh. This is what happened with FTX – albeit the person making the most problematic withdrawals was founder Sam Bankman-Fried.

The next big crypto collapse is not a question of “if” but “when” – and whether governments can work quickly enough to build the regulatory buffers to stop collapse leading to contagion.

It may not be possible to avert a crisis, but it can be contained.

Paul Mazzola, University of Wollongong

Paul Mazzola, Lecturer Banking and Finance, Faculty of Business and Law, University of Wollongong

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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This is the second installment in our series on where the global economy is heading in 2023, which started with this article on global inflation.

As 2022 drew to a close, EU energy ministers finally reached an agreement to cap gas prices at €180 (£159) per megawatt hour (MWh) following months of volatility that piled pressure on European businesses and households.

The cap, according to EU policymakers, is an attempt to control the unruly market forces that saw gas prices spike to nearly €340/MWh last summer, driving electricity prices close to a record €1,000/MWh. But by winter, Europe had enough gas in storage for the season and was enjoying increasing imports of liquefied natural gas (LNG) through new floating regasification terminals in Germany and Holland.

While this government intervention might create the impression that the energy crisis caused by Russia’s February 2022 invasion of Ukraine is finally in the rear view mirror, it’s not. The recent gas price cap set by EU policymakers was set well over key LNG prices and the cost of gas bought ahead of time on the futures market for delivery this winter, which is currently trading around €70/MWh.

This matters because suppliers often hedge their price risk in the futures markets and so the cap will introduce uncertainty as the hedges may not reflect real market movements. This could lead to more price volatility.

In fact, it was the high gas prices in 2022 that actually kept the lights on in the UK and Europe this winter. China’s strict zero-COVID policy considerably slowed the country’s demand for energy in 2022.

This meant that more gas supplies from the US, west Africa, Qatar and even Australia headed for Europe, where both demand and prices were higher. Indeed, Europe might have lost about 70 billion cubic meters (bcm) of Russian gas supply in 2022, but it gained over 50bcm of additional LNG imports.

This shows how markets can work to solve problems. Next winter, however, a perfect storm of unfavourable weather and a resurgence of Chinese energy demand could make prices even higher and more volatile for all gas and power users.

If so, energy users may not only have to worry about Putin and extreme weather events in 2023, but also about increasingly assertive government policies potentially causing energy shortages.

Better energy crisis solutions

By meddling with markets, the politicians that set these caps risk repeating mistakes made by the US during the 1970s oil price shocks. Attempts to control energy cost increases by Richard Nixon – who was hoping for reelection as US president in 1972 – with price freezes, discouraged the usual stockpiling of seasonal petroleum products in the US. This led to shortages and misery for the American people.

With increasing government intervention in markets, such shortages could happen again in regions such as Europe. Subsidies, retail price caps and tax reductions are being applied across the world in order to shelter consumers from high energy prices.

But such actions only really support the rich (who consume disproportionately more energy) and support the continued use of damaging fossil fuels. This is bad news for innovators looking for better and cleaner ways to produce energy. It also subsidises the Russian war in Ukraine.

By attempting to shield consumers from high prices, governments will only encourage consumption via lower prices, prolonging the energy crisis. Targeted money transfers to the households in need would be less costly for governments and would also allow the market to do its job of rationing energy.

The outlook for oil

The oil market will be a very different story in 2023. The EU’s Russian oil sanctions came into effect on December 5 2022 for crude and will start on February 5 2023 for petroleum products.

This plan had a very good chance of hurting the Putin regime until the G7 countries set the cap at US$60 (£50) per barrel. Since this is above the going price for Russian oil, it makes the sanctions redundant.

Oil is a homogeneous commodity, mainly traded via ships and so virtually impossible to sanction globally. Supplies outside Opec are plentiful and growing and the fear of recession and poor Chinese demand have stopped prices from rising too rapidly in recent months. This means the short-term outlook is for lower oil prices, with likely increases coming only later in 2023.

But even the mighty global oil market has been affected by the long arm of government policy. In addition to the G7 sanctions, the Biden administration started releasing oil from the US Strategic Petroleum Reserve before the mid-term elections last November.

This was to keep domestic gas prices low – an established US vote-winner – but this additional supply also kept international prices low. As the price of US crude fell towards US$80 a barrel in the past month, the administration started filling its reserves again.

As a result, the US government has effectively become a trader and a swing producer in the oil market, giving it the power to affect prices. We can expect another turbulent year in energy markets in 2023, but such government actions and their consequences may turn out to be the biggest factor moving markets.

This article is part of Global Economy 2023, our series about the challenges facing the world in the year ahead. You might also like our Global Economy Newsletter, which you can subscribe to here.

Adi Imsirovic, University of Surrey

Adi Imsirovic, Senior Research Fellow, Oxford Institute for Energy Studies, University of Surrey

This article is republished from The Conversation under a Creative Commons license. Read the original article.

I am looking for two additional expert witnesses in a commercial real estate lending case.  You will be paid an expert witness fee for your time, and qualifying as an expert looks great on your resume or on your website.  All testimony will be given using Zoom.  Here are the details. Last week, Bank of America shook up the investing world with their latest letter to their investors.

A torrent of fiscal and monetary stimulus to fight the effects of the coronavirus, combined with already-low interest rates, will contribute to a ‘Great Debasement’ of the U.S. dollar in the years ahead,” according to Bank of America Merrill Lynch.

“That, in turn, will make investments in commodities and emerging markets more appealing, as investors look for reliable inflation hedges and savvy ways to play a weaker greenback,” BofA chief investment strategist Michael Hartnett wrote.

“Interest rate repression means investors can’t hedge the inflationary risk of $11 trillion of fiscal stimulus via ‘short bonds’ … so investors are crowding into ‘short US dollar’, ‘long gold’ hedges,” Hartnett wrote.

U.S. dollar depreciation is “well underway as the default narrative for a US economy with excess debt, insufficient growth, and maxed-out monetary and fiscal stimulus,” he added.

“Holy Poopski!” as they say in Russia.  In my lifetime, the dollar has always been the strongest currency in the world.  Now Bank of America is saying that the value of the dollar will be falling steadily in the coming years.  This means we will start to suffer inflation again, after decades of disinflation, as imports cost more and more.

But what was The Great Debasement?  Debasement means mixing more of a common metal with the precious metal (usually gold or silver) that gave the coins its worth, while maintaining the face value of the coin.

The reasoning behind debasing the coinage was to be able to make more coins and therefore create more money.  However, the side effect was inflation, with people hoarding the older coins that contained more of the precious metals.

The Great Debasement (1544–1551) was a currency debasement policy introduced in 1544 in England, under the orders of Henry VIII.  The Great Debasement saw the amount of precious metal in gold and silver coins reduced, and in some cases, the precious metal replaced entirely with cheaper base metals, such as copper.

By 1551, the coinage was worth one fourth to one-sixth what it had been before Henry VIII began the debasements.  Eventually the layer of silver had become so thin that it would wear off, revealing the copper below.  This happened particularly on Henry VIII’s nose on his image on the coin, giving him the nickname, Old Copper Nose.

Overspending by Henry VIII to pay for his lavish lifestyle and to fund foreign wars with France and Scotland are cited as reasons for the policy’s introduction.  The main aim of the policy was to increase revenue for the Crown, at the cost of taxpayers through savings in currency production, with less bullion being required to mint new coins.

During debasement, gold standards dropped from the previous standard of 23 carat to as low as 20 carat.  Silver was reduced from 92.5% sterling silver to just 25%. Revoked in 1551 by Edward VI, the policy’s economic effects continued for many years until 1560, when all debased currency was removed from circulation.

In defense of Henry VIII, the countries of Europe had been debasing their own currencies for decades.  A common practice of the period was the clipping of coins, or removing some the valuable metal from their edges.  This is why the edges of later coins were eventually given those scores of vertical groves, to expose any evidence of clipping.

Because English currency had not yet been debased, it was, prior to 1544, the envy of Northern Europe.  Unfortunately, English currency kept disappearing from circulation.

Think about it.  You owe a debt that must be repaid with a one-ounce gold coin.  You have two coins.  One is a French gold florin that is 50% gold.  The other is an English gold sovereign that is 88% gold.  Which will you likely use to repay your debt?  Which coin will you keep?  This leads us to Gresham’s Law.

Gresham’s Law is the tendency for money of lower intrinsic value to circulate more freely than money of higher intrinsic and equal nominal value.  Nominal here means face value.  In layman’s terms, “Bad money drives out good.”  Debased coins drive good coins out of circulation.

When merchants worldwide lost confidence in the English mint, English traders were financially punished.  If they had a coin that was 20 carat, it traded at an even lower exchange rate, say 18 carat.  Since England was a trading nation, and its merchants were losing money on every exchange of coinage, the debasement was eventually ended.

But that didn’t immediately end the problem for English merchants.  English coinage had lost the confidence of the world.  The discrimination against English coinage continued for another nine years.  Finally the Crown was forced to buy up all of the debased coins – sort of like when the U.S. eventually redeemed all of the greenbacks issued during the Civil War.  The debased coins had to be melted down and replaced with totally new coinage.

Okay, so what do we with this new knowledge?  If Bank of America is to be believed, investors should buy gold and international stocks, located in countries that are debasing their own currencies slower than the United States.  How humiliating!  Geesch.

By George Blackburne

When a privately held company goes public via an Initial Public Offering, it is one of the most significant milestones in the company’s entire history. The way it works is that the company issues share certificates to investors and gets listed on a chosen stock market. After the listing, the company’s shares can be traded on the market.

It is an extremely complicated process with a maze of regulatory and compliance requirements. But the benefits, in terms of finance, are just as high. A successful and well-subscribed IPO can instantly turn a small regional company into an international corporate heavyweight.

The biggest benefit of an IPO is obviously the massive infusion of capital for financing ongoing operations and planned expansion of the business. It improves the company’s liquidity position and helps reduce debt. There is also a big uptick in brand recognition and trust in the company’s products and services.

The way an IPO works is that the SEC needs the company to file a registration statement along with a prospectus detailing every aspect of the company and its business. The prospectus will also include the company’s post-IPO plans and how the company plans to utilize the funds.

Underwriters and the company’s accountants are required to work together to fulfill these regulatory requirements. They will provide the management with advice on shifting from a private decision making process to a public company answerable to the board and shareholders. The most important thing the underwriters do is help decide the price and number of shares that the market can absorb.

There are significant post-IPO reporting and disclosure requirements for public companies. Publishing quarterly financial results and holding an annual shareholder meeting are two such examples. One big area where change is almost inevitable after an IPO is the management. Every company that goes public ends up hiring new executives who have experience in managing large public companies.

The success of a public offering largely depends on the growth potential of the company and its sector, and whether or not the business has sound basics and a revenue model. But many IPO’s have failed inspite of having all this. It may be because they didn’t choose the right market or the right price, or chose the wrong time to go public.

In Canada, for example, IPOs tend to be smaller than the ones in the US. They are also slightly under-priced because the market doesn’t have the same strong appetite for risk. European IPOs have to look at a lot more factors and have a smaller window, since problems in any EU member nation can affect markets in all the other nations.

During the dot-com era, anyone with a website willing to fulfill the regulatory requirements could launch an Initial Public Offering and become an overnight millionaire. Things are different now, and investors are looking for a safe bet with long-term potential. The process of getting listed as a publicly traded company is long and hard, but the flood of money that accompanies a successful IPO is well worth the effort.

In order to grow and expand, many companies will go through the IPO process and make an Initial Public Offering (IPO) to the IPO Market. A new IPO valuation is usually made, and the IPO Canada are becoming more common nowadays.

Article Source: https://EzineArticles.com/expert/Adriana_Noton/446836

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Greed and Fear.

Two Emotions that play a bigger factor in the success or failure of humans than any other emotion we experience. Both fear and greed refer to an intrinsic emotional state. Tens of Millions of dollars have been made and lost based on these 2 emotions alone. In trading, in business and in relationships. So why do so many educational courses, stock trading books and online courses avoid this topic all together?

Perhaps they are not avoiding the topic of emotions, Perhaps by teaching certain methods and skill sets to their readers they are in fact dealing with the emotional side of trading head on!

It is well known that emotions create a certain amount of pleasure or displeasure. It is also known that emotions are networked with mood, frame of mind, desires and passions. The list goes on… So how do we as individuals develop a skill set to navigate these emotions in business in trading and in life?

Charles Darwin argued that emotions actually served a purpose for humans and rightfully so, If our emotions have been evolving for over 2 million years. Should we not be using these amazing skills to our advantage rather than placing blame on them for poor decision making? It is my belief the poor decision making has nothing to do with emotions and everything to do with laziness and lack of planning.

A Lesson From One of the Greats!

I would be doing my readers a disservice if we did not mention the strategy of Warren Buffett. One of the most successful investors of our time. Warren Buffet stuck to his strategy and profited greatly. Warren Buffett showed us just how important and beneficial it is to stick to a plan. When deciding whether or not to invest in a company himself, Buffett and his partners follow a few simple guidelines, one of which involves trying to determine the company’s longevity.

As the market becomes overwhelmed with greed, the same can happen with fear. When stocks suffer large losses for a sustained period of time, the overall market can become more fearful of sustaining even further losses. But being too fearful can be a grave mistake. It is precisely at this time successful investors and traders alike make their move. This is where the real money is made.

Just as greed dominated the recent Cryptocurrency boom or fear dominates the headlines on potential trade war outcomes, investors quickly move around from one “secure” investment to another. It becomes a constant game of cat and mouse.

This flooding in of money to the stock market shows a complete disregard for many technical indicators that continue to scream a correction is inescapable. Retail Investors seem overjoyed with the flooding in of headlines that read ALL TIME HIGH. Should retail investors be overrun by fear of a major correction?. Granted, losing a large portion of your retirement portfolio’s worth is a tough pill to swallow, but even harder to digest is the possibility of missing out on the massive gains the market is currently offering investors of all experience levels.

Having a clear understanding of my own personal goals, a understanding of my success and creating a list of my OWN wants and needs rather than taking dreams of others and trying to reach them has been a colossal factor in putting out the greed flame in my own trading and daily decision-making.

I have also added a link of “Must Read” Books that have been advantageous in my journey of reigning in my emotions on decision-making. I will update this as I see fit..

One method I have found to be helpful is to be careful on how I measure success, wealth, goals and most importantly happiness. It is far to easy these days to allow outside influences affect our happiness and success. Social media blasts us day in and day out with the success of others.

Article Source: https://EzineArticles.com/expert/Farryl_Buchman/2585246

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Throughout, history, we have experienced, a variety of economic conditions, and circumstances, including, recession, inflation, and somewhere, in – between! For a few years, we experienced, very – low inflation, largely, caused by a variety of conditions, world – wide, and largely, disrupted – by, the ramifications, and impacts, created and caused, by this horrific pandemic! Currently, we seem to be experiencing, a serious amount of inflation, created, by many factors, including, but, not, limited – to: post – pandemic ramifications; Supply and Demand issues, caused, to a large – degree, by, supply – chain, issues; maintaining, unrealistically – low, prolonged period of near – record – low, interest rates, etc. With, that in mind, this article will attempt to, briefly, examine, consider, review, and discuss, 6 potential dangers, from prolonged periods of inflation, and why, it is important to know, and understand, options and alternatives, to attempt to choose, the best – path – forward!

1. Cost of Living: Some factors, determining, the Cost of Living, include: wages (and wage growth); prices, etc, and how wages, are, or, aren’t able, to keep – up, with the increase in costs, etc! Most realize, we have, in the past – few months, experienced, a huge, jump, in pricing, most – apparent, in the food stores, restaurants, and, nearly, everything, related – to, day – to – day, existence, etc!

2. Federal Reserve: In recent times, the near – historic – low, extended period, of interest rates, has, in addition, to the intended measures (helping businesses, and the economy, in trying – times), has caused a Real Estate, Sellers Market, and, a huge rise, in home prices, in most parts of this country! In addition, it created a surge, in consumer use of credit, because, borrowing, appeared, cheaper! However, most economists forecast, many of these supports, and maintaining, such low rates, will, gradually, be reduced (or minimized), probably, beginning, next year. What impact will that have, and will we see, the historic reaction, which has been, when rates rise, it helps reduce inflation, etc?

3. National economy/ conditions: Largely, because of a world – wide, supply – chain, set of obstacles/ challenged, many industries, have experienced, challenges, in terms of, getting sufficient amounts of needed materials, etc! Go into, nearly, any store, and you will see, more – sparse, shelves, than we have seen, in recent memory! In addition, building supplies, products, food, toys, cars and car parts, etc, are under – stress, because of this!

4. Worldwide economies/ economic conditions: Nearly, every nation, is experiencing, economic issues and challenges! The United Kingdom, because of worldwide, as well as specific national trends/ causes/ conditions, has been largely, impacted! Since, we live, largely, in a global economy, when there is any disruption, in the supply – chain, it affects, everyone!

5. Stock and Bond Markets: Because of several reasons/ factors, the United States Stock Market, has benefited, significantly, and experienced, significant increases, in the price of stocks. In addition to the obvious ones, because, interest rates, have been, so low, many investors, believed, stocks, were, nearly, the only game – in – town! When, if, interest rates, rise, bond rates, will rise, and existing, bond prices, will adjust, and drop!

6. Immediate, intermediate, longer – term ramifications/ impacts: The immediate impact of inflation, is, usually, rising prices, and, wages, which, usually, rise, at a far – lower rate! In the intermediate – period, we begin to see, weakening economic trends, and in the longer – term, depending on how long, it ensues, there are often, several, undesirable ramifications, and impacts!

Don’t take inflation, and its risks, for – granted! The more you know, and understand, the better prepared, you will be!

Richard has owned businesses, been a COO, CEO, Director of Development, consultant, professionally run events, performed financial planning, consulted to thousands, and conducted personal development seminars, for 4 decades. Rich has written three books and thousands of articles. Website: http://plan2lead.net and JOIN the RICH IDEAS Facebook group: http://facebook.com/groups/RICHIDEAS

Article Source: https://EzineArticles.com/expert/Richard_Brody/492539

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Too often, we consider things, based on labels, perceptions, etc, instead of delving, deeply, and considering, the true impacts, and ramifications, and possible, paths – forward! At – current, one of the most – discussed, topics, is, inflation, and what it might mean, to all, of us! However, these considerations, often, proceed, in an overly – simplistic way, which serves very little purpose, in a relevant, and/ or, sustainable way. In fact, most people are being affected, by inflation, and inflationary trends, but, little, common sense, considerations, are focused – upon! With, that in mind, this article will attempt to briefly, consider, review, examine and discuss, 5 areas, where most people, are feeling inflation (or, will, soon), to a significant degree.

1. Groceries/ household items: Anyone, who goes to the supermarket, has seen, their bread – basket, items, such as groceries, and other, household items, go – up, significantly, in – price, in the past year, or so! What has driven this? Probably, the single – biggest factor, is, supply – chain, considerations, because, items are more difficult and expensive, getting to the stores! One factor, is, of course, Supply and Demand, because of this. This concept states, when supply doesn’t keep – up, with demand, prices usually rise! Another factor is probably, greed, and, also, related to pandemic ramifications, and impacts. How long will this continue, and what strategies, might address this?

2. Utilities/ oil and gas, etc: We are seeing, rising costs, in electric rates, as well as heating costs! Oil and gas prices are rising, at a fast – pace, and this, causes, everything, else, to get more expensive, also!

3. Gas/ fuel, at the pump/ station: We are near, or at, record – high, prices, in terms of what we are paying, at the pump! Some of this, comes, from, rising costs of labor, while much is also, due, to greed, from some, or several components, in the delivery – chain! President Biden just released, some of our Strategic Oil Reserve, to, attempt to address, the short – term, impacts, of increased demands, and the Supply and Demand, ramifications! Since, supposedly, the United States, is, now, the largest producer of oil, we can’t simply, blame OPEC, etc, but must realize, this is a multi – faceted, overall, inflation – related trend, etc!

4. Housing Costs (sales prices; repairs/ renovations; rents, etc): In most geographic areas, the price, to purchase, a house, has risen, dramatically, in the past year, or so! Some of this, is related to the Supply and Demand, ramifications, related to a continuing, Sellers Market, because of a lack of demanded, inventory. Some is, because, which low mortgage rates, buyers perceive they can afford, more, because of the impact on monthly payments. Part is related to inflation, but, whether, inflation, created rising home prices, or, that rise, contributes to, overall rates of inflation! Remember, also, because of the ramifications, on the thought processes, and perceptions, created because of the horrific pandemic, we are seeing much of this trend! Because, materials, and labor, has gotten more expensive, we are experiencing a far – higher cost of repairs, and renovations, etc.

5. Dining – out/ entertainment: Restaurants have felt the cost of inflation, as much, as any industry! Challenges, getting help, the increased costs of labor, and food, utilities, etc, have creates, significant price increases, in the cost of dining – out, etc! Entertainment costs have risen, because of a variety of impacts and ramifications of the pandemic, and inflation!

Inflation is, with – us, but, for how long? Many factors will determine, the longer – term ramifications, but, it is, certainly, wise, to proceed, wisely, and prepared/ ready!

Richard has owned businesses, been a COO, CEO, Director of Development, consultant, professionally run events, consulted to thousands of leaders, and conducted personal development seminars, for 4 decades. Rich has written three books and thousands of articles. His company, PLAN2LEAD, LLC has an informative website http://plan2lead.net and Plan2lead can also be followed on Facebook http://facebook.com/Plan2lead

Article Source: https://EzineArticles.com/expert/Richard_Brody/492539

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No nation was ever ruined by trade – Benjamin Franklin

Desires, wants, demand and supply are some of the basic concepts of economics. But these basic concepts play a major role in the development of an economy. It is on these fundamental concepts an economy accelerates. All nations look for rapid economic expansion and are in search of new markets. The policies framed by the government are very significant in enhancing the pace of economic development in a country. Similarly the era of globalization brought in rapid changes in the fields of investment, production, finance, trade and technology and hence it is often cited that the world has shrunk in size and the world is a global village.

Introduction

All the countries in the world are bestowed with natural resources and no country is self sufficient on all the resources. Some countries are superfluous in resources while the others are inadequate. It only at this situation trade take place, the earlier form of trade was the barter system which prevailed across civilizations. Due to practical difficulties, the barter system was abandoned and new and complicated versions of trade took shape in the form of trade barriers and economic policies. With complications on trade on the rise, a new economic policy that would guide nations was the need of the hour and the elucidation to that was Globalization.

Globalization is a process wherein the production of goods and services take place across nations, without any barriers on production, distribution, exchange and consumption. But the pros and cons of globalization continues to be a highly debated topic.

Structural changes in the economy

India attained independence in the year 1947 and the planning for the economy started from 1951 onwards with the introduction of the first five year plan. India is an agrarian economy where 70 percent of the population depends on agriculture and agro related industries for their livelihood. It was only during the Second Five year plan (1956-1961) importance was given to the development of industries. Gradually the industrial policies paved way for rapid economic expansion, gainful employment, introduction of basic and heavy industries, export promotion and progress of small scale industries.

The small scale industries has been a major contributor to the country’s Gross Domestic product with about 45 percent share in industrial goods and 35 percent share in exports. The small scale industries are the bridge linking the large and medium industries and act as an engine of Growth in the 21st century.

Gradual development of industries

Let me take an example of Thanjavur District in Tamilnadu (India) to explain how a place acclaimed as the ‘Granary of South India’ slowly transformed itself as an industrial hub providing employment opportunities to the people of nearby villages. Thanjavur is famous for its architectural wonder – The Big temple and also for the ancient handicrafts and musical instruments.

Setback in the agriculture sector

Even though agriculture yielded good harvests, a majority of the workforce suffered due to seasonal unemployment, procurement and issue price for the food crops, migration of laborers, poverty and other such problems. Further added to the woes of the farmers, the climatic conditions played havoc in the productivity of food crops. To overcome these problems people started to shift to agro based and other allied industries.

The path taken

The small scale industries played a crucial role to tackle the twin objectives of unemployment and poverty. The setting up of the District industries center in 1979 played a vital role in the development of small scale industries located in the Thanjavur district. The small scale industries were successful because they were not only agro based but also chemical, engineering, textile and other miscellaneous industries were set up in rural areas. These industries were labor intensive and they provided employment opportunities to the people and increased their standard of living.

Pre liberalization

It was only after 1980, the government started the initial process of liberalization and the trend was to diminish the strict licensing system and to allow more freedom to the entrepreneurs. There were fluctuations in the economy that could be felt throughout the industries.

Post liberalization

During the post liberalization (1991 onwards) era the focus shifted from ‘protection’ to ‘competition’ based growth. The industrial policies followed by the government were successful in bringing about a change in the development of Thanjavur. Along with this the functioning of commercial banks and private banks, cooperative societies were instrumental in the progress of the district.

The district per capita income at current prices in the year 1999-2000 was Rs.16269 and during the year 2006-07 it had increased to Rs.26714. During the 1980s the number of industries registered was 146 and in the 1990s the total number of industries stood at 227 and during 2009 – 10 the number of units registered were 15028. This is clear from the above data analysis that there is considerable progress of small enterprises sector contributing to the development of the district.

Conclusion

Since Thanjavur is an agricultural dominated district, paddy husks are available in plenty. Industrial units are set up, that use this husk as a raw material to produce card boards and wax can be produced from rice bran. Some of the agro based industries successful in this area are Coconut products, Confectioneries, Banana Products, Dairy products, Electronic Items, Toys and Games, Ready Made garments, Bio fertilizers and Coir based industries.

Globalization has brought in a plethora of opportunities, it is up to the country to optimize the resources and bring in escalation in every segment. Encouraging one sector and neglecting the other will lead only to lopsided expansion. It is a lesson to be remembered by the planners that sustainable growth in agriculture will alone solve the food security problem as well as employment, as majority of them are depended on agriculture. Appropriate policies can be framed to attract the foreign direct investments in manufacturing, automobile and IT related services industry.

Gayathri Ramachandran
Asst. Prof. M.B.A

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What are IBAN accounts?

IBAN or International Bank Account Number is basically having a global bank account. It is created internationally to identify the bank accounts across national borders and overseas countries. This is an important account because whenever you make an international payment, it is compulsory to have the IBAN. It contains both a bank account number and an identification code for the bank itself. As a matter of fact IBAN is a unique code that easily identifies a beneficiary’s bank account for the purpose, round the globe. It is not a new account number, only an ungraded version of digital system of your current account.

The IBAN consists of an alphabetical country code, which is followed by two digits, and then up to 35 characters of the bank account number. An IBAN is used to uniquely and properly identify or recognize a customer’s bank account across the world. Today, more than 54 countries are using IBAN accounts and mostly the counties of the European Union, UAE, Kuwait, Saudi Arabia, Germany and more are the participants.

Significant Features of using IBAN accounts

• An IBAN is a Straight Through Processing or STP of Electronic Payments system. This system minimizes delays and extra costs related to account numbers.
• The implementation of IBAN will bring more efficiency in the process of remittance related transactions. It serves to cut risk of transcription errors.
• The IBAN accounts facilitate with quicker processing of your funds transfer.
• Normally, banks are required the accuracy IBAN at the time of a fund transfer and they check only the IBAN is correct or not to make the funds transfer. This establishes the operation of funds transfer from one place of the world to another easier as well as more immediate. It is used for sending and receiving both local and international funds transfers.
• You don’t have to pay any additional charge while using IBAN, only you have to pay normal transaction processing fees.
• Now, it is easier for the IBAN customers to perform their funds transfer because of online banking facility. It reduces the monetary value and enhances the operational efficiency.

The Purpose of using International Bank Account Number or IBAN accounts
International Bank Account Number is essential for the purpose of receiving as well as sending an electronic payment from the bank. You can receive and send an electronic payment internationally or overseas and also locally, when you have a correct and accurate IBAN. If you want to send an electronic payment through IBAN to another country, it is possible only when that country has adopted IBAN facility. This means both the parties must have the International Bank Account Number or IBAN accounts to have successful fund transfer transactions.

The consequence of using improper IBAN
Due to any error or misunderstanding, you have given incorrect and forget to give the IBAN information, a certain amount of charge is applied by the receiving bank and your IMT may be rejected. The amount of charge will be deducted from your payment or else charge back. Thus, always check your IBAN properly before making fund transfer transaction.

If you wish to have an IBAN account, then go for it because it is easy to create and also a great help for fund transfer across the world smoothly.

 

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This article compares and contrasts the responsibilities of a CFO versus a Controller, Accountant or Bookkeeper. Many business owners do not understand the differences between the roles and the value a CFO can bring to the business. Additionally, many business owners do not feel they can afford a CFO, however that is where a part time CFO who participates with the business owner and management is critical. A part time CFO can spend as little as a day or two month with the business and add value to the bottom line.

A. CFO Responsibilities:

1. Cash Management

Cash management includes understanding your business’s “operating cycle” (i.e. cash to cash cycle). To improve your “operating cycle” it is imperative you understand what it means, how to calculate it, and what influences it before you can improve it. Cash expectations your cash balance to be in 6 months?” Most of the time companies are fighting cash flow problems today and can’t think about the future past this week. Forecasting and managing cash flow provide a real sense of control over the business. Implement a Cashboard-Dashboard, 13 week cash flow forecast and review cash flow reports at least monthly. The key for any business is to focus on cash, not just EBITDA and Net Income, as Cash is King!

2. General Financial Sophistication

• A sounding board for the owner in making key decisions, as the Trusted Advisor
• Fewer cash flow surprises using a Cashboard-Dashboard and 13 week cash flow forecast
• Better trained accounting staff
• Better documentation and controls
• Fewer surprises relating to tax payments and effective communication with the CPA for taxes
• Alternative, recommendations and solutions to company problems

3. Budgeting

The ongoing process of developing, implementing and reviewing the budget and its associated variances to actual results. The CFO helps correlate the operations and financial results of the business so the management team understand the financial impact of the decisions they make.

4. Compliance

The ongoing process of keeping in compliance with bank, investor covenants, tax versus management reporting working papers, insurance, corporate minutes.

5. Financial Oversight and Management

Analyze and review monthly P&Ls and Balance Sheet and Cash Flows with the board and management team. Look at the story behind the numbers, not just the numbers. Drive toward data-driven decision making. Monitor key business metrics using a dashboard which gives you the vital statistics in the areas needed to monitor working capital. For instance, each month a report is produced showing information such as aged receivables, receivable days, inventory levels by category, inventory turnover, and days in payables. These statistics should be looked at and compared month by month to determine if the problem is getting better or worse. Trending and associated analysis and decision making is a key CFO function. Action should be taken immediately when the numbers show a trend that will be bad for the company.

Oversee the activities, work and quality of the Controller/Accountant/Bookkeeper. Working capital and treasury management. Overseeing CPA relationship, business lawyer relationship.

Working capital planning and forecasting. A simple Cashboard-Dashboard report will focus management in the right areas, and help to move the business into stronger cash performance.

Review financial reports before sending to investors or any other external party.

6. Key Ratios

Track and analyze key financial ratios against industry standard benchmarks. Put plans in place to exceed certain industry ratios, or make decisions to not meet certain ones, to meet others, and to exceed others.

7. Profitability

Gross margin analysis by product line, products or customer is critical for small businesses. Migrate towards having the internal systems provide information to manage gross margins for product lines and products.

8. Processes and Systems

Design, implement and maintain accounting processes and procedures. Processes, whether documented or not, exist in all businesses. It is the way staff perform the work necessary to produce products or services. In most small businesses, the underlying processes to accomplish the work are rarely documented or reviewed as a whole (i.e. system). Developing efficient and effective systems and processes generally reduce costs and/or improve productivity. In businesses where there is a planned exit or merger or sale of the company, documented processes are critical so the buyer gets more value from the company, and the investor/buyer does not have to these things themselves.

This goes beyond just the financial area of the company to operations, sales, marketing, technology, HR and all areas of the company. The more these process areas are fully documented, the higher the value of the company.

9. Internal Controls

Structure, work and authority flows. Theft avoidance, cash tracking, accounting processes that limit access. Internal control procedures reduce process variation, leading to more predictable outcomes. Focus is on effectiveness and efficiency of operations, reliability of financial reporting, and compliance with laws and regulations.

10. Strategic Planning

As a company grows towards an exit/liquidation event, a strategic planning process is essential. This is not as much a document, but more an ongoing process to analyze and describe the strategic goals and tactical implementation. Parts of the strategic plan include: SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis, ideal customer profile, competitive analysis, short and long term action plans. The CFO guides the business through the preparation for an exit strategy in order to maximize enterprise value.

11. Corporate Credit and Collection

Establish and improve corporate credit standing. Separate personal from business credit reporting so the company’s credit stands on its own following the seven steps to success in developing business credit.

12. Audits

Oversee external accounting and other audits as required.

13. Information Systems

Oversee the continued improvement of internal operations for information systems. Well documented IT systems, software and hardware asset tracking are key factors when a buyer completes IT M&A due diligence for to a company that wants to be sold.

14. Financing

Direct the business in the development of an effective capital structure by securing debt financing at attractive terms, managing the lender relationships and ensuring compliance to the debt terms.

B. Controller/Accountant/Bookkeeper Responsibilities:

1. Main Responsibilities

The main responsibilities of of the Controller/Accountant/Bookkeeper are to maintain and operate the books and records of the business. Prepare, control, balance and check various accounts using standard bookkeeping methods. Enter daily/weekly/monthly financial transactions in QuickBooks or other accounting software. Maintain general ledgers recording the status of various accounts and make sure that all the accounts balance. Prepare financial statements. Verify the accuracy of computerized accounting and record-keeping systems.

*Accounts Payable
*Accounts Receivable
*Bill Payment
*Payroll and Check Registers
*Bank Reconciliation
*Financial Statements
*Customized Reports
*Payroll Services
*Payroll Check Writing
*Payroll Tax Returns
*Monthly, Quarterly, and Annual Payroll Reports
*Federal, State and Local Tax Reports and Filings
*Accurate and Timely Data Entry
*Tracking Inventory
*Available for phone call questions
*Validate trial balances
*Invoice Matching
*Interface with vendors as needed

2. Standard Operating Procedures (SOP)

Under the guidance of the CFO, document the accounting and bookkeeping standard operating procedures manual. Help the CFO create the full accounting process documentation, review for improvements, and update the process to increase streamlined accounting/bookkeeping processes.

3. Compliance

Maintain best practices accounting and bookkeeping in compliance with General Accepted Accounting Principals (GAAP).

C. Conclusion:

There is a significant strategic and tactical difference between the value a CFO brings to the executive leadership of a business and Controller, Accountant or Bookkeeper. The key is for the CEO/business owner/entrepreneur to schedule an initial meeting with a CFO, access the business need, and determine an action plan to drive the business to the next level of sales and profit. As mentioned in the introduction, most small businesses cannot afford a full time CFO, so a part time or virtual CFO is the ideal arrangement. The key is find a CFO with experience that can be the Trusted Advisor to the CEO/business owner/entrepreneur and provide financial, operational and business insights.

Keith McAslan is a Partner with CxO To Go a national professional services company headquartered in Denver, Colorado that provides on-demand C-Level expertise and best practices to client companies on a part time, flexible, and affordable basis. Keith is sought after to provide advisory services as the Trusted Advisor to Owners and CEO’s. By utilizing his extensive experience as a successful financial and operational C-level executive, Keith brings a results driven leadership style to complex situations.

McAslan’s expertise includes: financial advisory; management consulting; part time, interim & virtual CFO, COO and CEO; debt and equity financing; turnaround management; acquisition and divestiture advisory. Most recently Keith, was instrumental in the successful sale of Western Forge to Ideal Industries. As the interim CFO with finance and private investment transaction experience, he guided the management team through the complex sale and due diligence process completing the sale from prospective buyer presentation to close within 60 days.

Article Source: https://EzineArticles.com/expert/Keith_McAslan/543340

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Creating clear and accurate financial forecasts for your company during the start-up stage is crucial.

Most business owners complain that building accurate financial projects is time-consuming, and that time could be used generating sales rather planning. However, few investors will invest in your company if don’t have clear projections.

Correct financial projections will help you create staffing and operational plans that will take your company to the next level.

Here are ways to help you build financial projections for your business.

Start with Expenses

Is your company in the start-up stage? If so, then it’s easier to predict expenses rather revenues. Therefore, start with estimates for the common expenses such as rent, utility bills, phone bills, legal fees, advertising, cost of goods sold, materials, and cost of customer service.

Double your estimates for marketing and advertising because they tend to escalate beyond expectations. Triple legal and insurance fees because these are difficult to predict.

Check the Key Ratios to Ensure Your Projections are Accurate

Don’t forget about expenses, especially after doing aggressive revenue predictions. Most entrepreneurs focus on reaching revenue goals and assume they can adjust expenses if revenue doesn’t materialize. Positive thinking could help you improve your sales, but it’s not enough to pay the bills.

By using key ratios, you can reconcile your revenue and expense forecast. Here are a few ratios that can guide to make an accurate forecast:

Gross Margin

This is the ratio of total direct costs to the total revenue for a certain period. Note assumptions that could increase your gross margin from 10 to 40%. For instance, if your customer service and sales expenses are low now, they could be high in the future.

Operating Profit Margin

Operating profit margin measures the profit a business makes on a dollar sale, after paying the variable cost of production – like wages and raw materials, and before paying interest or tax. Expect to see a positive movement from this ratio.

As your revenue grows, overhead cost should be a small proportion of total cost, so your operating profit margin should increase. Most entrepreneurs make a mistake by predicting the break-even point too early and they assume they won’t require financing to get to this point.

Total Headcount per Client

Are you a one-person entrepreneur who plans to grow your business on your own? Then, pay a lot of attention to this ratio.

Divide the number of employees in your firm (just one if you do everything on your own) by the total number of customers you have. Then, ask yourself if you’ll want to be managing all those accounts in five years when the company has grown. If not, then you need to reassess your assumptions about the payroll or revenue or both.

Article Source: https://EzineArticles.com/expert/Jon_Allo/1079948

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In our home we try to get the children to help out. One day our youngest son came into the living room and asked, “Does anyone want a cup of coffee?” “Yes, please!” we said. He replied, “What kind of coffee do you want? Capitated or decapitated?”

This old blog article about the commercial loan brokerage business is one of the best of my forty-year career. If you are making $500,000 per year, you don’t have to read it.

My best blog article EVER?

You’re reminded that I am largely retired now. If you need a commercial loan, please contact one of my two wonderful loan officers, Alicia Gandy (our Loan Goddess) and George IV (my wonderful son, who is old and very experienced in his own right):

Warm Regards,

C-LOAN, INC.

George Blackburne, III

The Big Boys, the ladies and men who make and arrange the really huge commercial real estate loans, have their own specialized language.  You can think of it as advanced commercial mortgage-ese.  Today we’ll discuss one of their underwriting terms, mark-to-market (MTM) accounting in real estate.

Mark-to-market accounting assigns a value to real estate assets based on what the property could command on the market if it were sold today.  This often means assigning a value based on the current market rents for the building, as opposed to the actual rent being generated from existing tenants.

Now let’s use mark-to-market accounting is some real life deals:

When Boston Properties acquired the General Motors building for a record $2.8 billion in June of 2008, it internally assigned a value based on the current market rents for the building, as opposed to the actual rent being generated from existing tenants.  The company noted that the average rent being paid at the GM building was $90 a square foot, which it said was half the current market rent of $180 per square foot.  This MTM analysis played a significant part on its decision to buy the property.

Here is another one, which I pulled from a closing tombstone in FinFacts, the bi-monthly newsletter of George Smith Partners, one of the largest commercial mortgage banking firms in the country.

Pop Quiz:

What’s the difference the a commercial mortgage banker and a commercial mortgage broker?  Commercial mortgage bankers retain the servicing on the commercial real estate loans that they originate for life companies and the Agencies.  The Agencies include Fannie Mae, Freddie Mac, HUD, and Ginnie Mae.

And what have I been preaching to you for decades?  The real money in commercial real estate finance is in loan servicing fees.  A commercial mortgage broker is often a poor person.  A commercial mortgage banker is usually a rich person.

Okay, so here is the MTM language from FinFacts:

“George Smith Partners secured a $4,500,000 refinance for a 13,051 SF mixed-use property in West Hollywood. The loan is fixed at a rate of 3.92% for a 5-year term.  At close, the Property had four month-to-month leases in place, plus two cell tower leases.  This was problematic since some lenders would not include MTM income or cell tower income in their underwritten cash flow.  Although several lenders offered a competitive interest rate, they used a high stress rate when applying their debt coverage ratio constraint.  As a result, most lenders quoted proceeds of less than 45% LTV.”

“The selected lender was able to mitigate the impact of these challenges by using a lower stress rate, giving full credit for MTM leases and including the cell tower income. As a result, they were able to provide proceeds of 50% LTV at a fixed rate under 4%.”

Sadly My Predictions of Stock Market Doom Were Accurate:

On Sunday I wrote:

“Even if COVID-19 never gets out of control in the U.S., hundreds of thousands of small businesses in China are in serious trouble, especially with tens of millions of their workers confined to their homes. The owners of most small businesses in China have no more than four months worth of operating expenses in savings, and small businesses employ 60% of China’s workers.”

“And the thing is, many of these small Chinese companies manufacture parts for American companies. As a result, the worldwide supply chain has been shaken. We can’t manufacture our own high-value goods without many essential parts coming from China. Container ships coming in from China are coming back only 25% full.”

“…A worldwide pandemic is a virtual certainty.  I am writing this article on Sunday afternoon. It will be interesting to see if the U.S. stock market gets hammered on Monday.”

Unfortunately, the stock market lost more than 1,000 points on Monday, and it has been getting hammered ever since.

You guys are my buddies, and I am trying to warn you.  The consequences of this virus are far, far greater than the precious lives that the world will lose.  Small business owners in China have been traumatized.  They are NOT going to be borrowing more money from their banks.

Grasp the concept that the multiplier effect, in a world of fractional banking, can work in reverse at the rate of 20:1.  If a Chinese bank takes in a $1,000 monthly loan payment, and it does not immediately recycle that payment into a new loan, a whopping $20,000 gets sucked out of the Chinese money supply.

Now get your mind around the shocking reality that Chinese banks rake in on the order of US$4 billion per month in loan payments.  If these banks have no willing borrowers to whom to lend, the unfathomable sum of US$1 trillion will disappear every year from the Chinese money supply.

Money is going to be destroyed in China like it is being sucked into a black hole.  A tidal wave of deflation is likely to sweep over the world.  Your $1 million home might be worth just $550,000 in 20 months, even if the authorities can mass-produce a vaccine before the end of the year.

Borrowers have been traumatized, and traumatized borrowers seldom borrow.  The government cannot force companies and people to borrow, so the world’s money supply is headed down a giant drain.  You will see deflation everywhere because no one will have any money.

Think ‘ole George is crazy?  Think back to the depths of the Great Recession, when Fed Chairman Ben Bernanke injected a whopping $4 trillion into the U.S. money supply.  (Remember all of that talk about the Fed’s big balance sheet?) Why didn’t we have runaway hyperinflation?  Because the Fed was merely replacing the $4 trillion worth of money that was destroyed when banks stopped lending and borrowers stopped borrowing during the Great Recession.

I sold all of my stocks and invested in a short fund eight days ago.  As my golf buddies would say, when I occasionally sink a long putt, “Even a blind squirrel finds a nut on occasion.”  Haha!  

Or maybe I am one of a small handful of folks who understand that the multiplier effect can work in reverse.  I remember reading a wonderful economics book, by James Dale Davidson, entitled The Great Reckoning, in the mid-1990’s.  In about the middle of the book, in the middle of some chapter, he briefly mentioned, “that under some circumstances, the multiplier effect can actually work in reverse.”  I remember the blood suddenly rushing to my head, and tiny pins and needles suddenly sweeping all over my body.  “Oh, my God!”

So in 2007, a year before the Great Recession, I wrote the financial novel, The Reverse Multiplier Effect, When Crushing Deflation Destroys America.  At the time, the concept of deflation was unfathomable, even to most investment advisors.  My book prescient.  During the Great Recession, trillions of dollars were destroyed, as banks took in loan payments and did not recycle them.  Only the heroism and determination of Helicopter Ben Bernanke and his injection of $4 trillion saved this country.

Deflation is coming.

Article Provided By  By George Blackburne

A CLE CLO stands for a commercial real estate Collateralized Loan Obligation, and it is a security that is backed by a pool of commercial loans.  The individual borrowers make their payments to the issuer – the company that made and pooled the loans – and then the issuer makes payments to the investors who invested in the bonds backed by the CLO.

A typical commercial al real estate CLO (“CLE CLO”) lasts somewhere between two to four years.  In order to create a CLO, the issuer – also known as the collateral manager – begins by securing a warehouse line to acquire the commercial loans.  Once this warehouse line has been secured and the new commercial loans have been made, the collateral manager begins issuing the CLO securities to investors.  The proceeds from the issuance of these securities (CLO bonds) are then used to pay off the warehouse line, and the excess proceeds are used to purchase additional loan assets.

This brings up an interesting point.  Whenever an issuer (think of the issuer here as the lender) securitizes the loans, the issuer sells the bonds for more money than the amount of the loans.  The issuer earns a premium.  The issuer might make $300 million in loans and sell them off for $320,000.  This extra $20 million (premium) is the issuer’s whole incentive for securitizing the deal.

CLOs are separated into several tranches, which are separate slices of the pool of loans. They are differentiated by risk based on the priority of its claim on the payouts and the exposure to risk of loss from the loan pool.  The investors who invest in the lowest yielding tranche get paid first.  If there is any money left over, the second lowest yielding tranche gets paid, and so on.  Given the varying levels of risk, each tranche is typically assigned a different credit risk rating.

CLOs can be actively managed or static.  Managed CLOs allow the collateral manager to buy and sell individual loans for the collateral pool of the CLO to increase the gains of the security.  Static CLOs, on the other hand, invest in a pool of loans without any reinvestments once those loans mature, and typically feature a shorter term than actively managed CLOs.

CRE CLOs are primarily made up of bridge loans on properties that are in a transitional phase, such as a renovation, expansion or repositioning.   This differs from other common financing options like real estate mortgage investment conduits (REMIC), which pool mortgages together in order to issue mortgage-backed securities.   REMICs are significantly more restrictive, in that renovations or any changes to the properties affecting value may not be permitted.

Additionally, since CRE CLOs can be static or managed, collateral managers can change the collateral of the CLO throughout its reinvestment period.  REMICs, on the other hand, do not allow changes to the pool of loans throughout its entire lifetime.  This is due to the federally tax-exempt nature of REMICs, which can be lost if significant changes are made to the collateral.  CRE CLOs have proven to be a flexible option for borrowers, lenders and investors alike.

Did you know that if you have as conduit first mortgage that you are not allowed to improve the value of the collateral?  Suppose you own a shopping center, with a 20-acre vacant parcel behind it.  If you add 120 self-storage units onto that vacant land, thereby increasing the income generated by the property by $10,000 every month, that the conduit lender will likely foreclose on you!  It’s an IRS requirement.

In recent years, the issuance of commercial real estate (CRE) collateralized loan obligations (CLOs) has slowly increased.  After a record year in 2018, issuance was over 30% higher in 2019, signaling that the growth continues to accelerate.  The CLOs that have emerged after the financial crisis of 2008 have significantly different collateral, primarily comprised of transitional, first lien secured mortgages rather than the mezzanine and discounted debt that was seen prior to the crisis.

Prior to the financial crisis, CRE CLOs, previously known as collateralized debt obligations (CDOs), were structurally much different. Issuers typically did not have much risk at play in terms of equity in the security, and they were primarily used as a way to take advantage of arbitrage opportunities.  Many times, CDOs would be packaged with discounted subordinate bonds from commercial mortgage-backed securities (CMBS), thus taking highly leveraged, non-investment grade securities and repackaging them into highly rated CDOs.  There was very little exposure to transitional, first lien collateral.  These issues, among others, caused a high level of fear of these products within the market.  (This is a polite way of ways they were darned risky speculations.)

Following the financial crisis of 2008, many changes have been made to CRE CLOs.  As previously mentioned, the CLOs that have recently emerged have different collateral.  They are now primarily comprised of transitional, first lien secured mortgages instead of mezzanine and discounted debt.

Many times, issuers of CRE CLOs are the lenders who raise money by issuing the CLO bonds and offering equity to outside investors for the issuance of loans to borrowers seeking transitional loans.  Recent issuers typically hold a notable amount of equity in the CLO, opening themselves to losses.  In plain English, modern issuers of CRE CLO’s have a ton of skin in the game.

Before the crisis, many issuers had little to no loss exposure, creating situations of moral hazard in the pursuit of arbitrage.  Additionally, the terms of CLOs prior to the crisis were typically around ten years, while current terms are around three years on average.

CLOs offer several improvements to other CMBSs, including interest coverage tests and over-collateralization tests, so that the successive structure of the payments waterfall can be adjusted to divert the payments away from subordinate tranches and into senior tranches to avoid losses.

In late 2019, before COVID, highly-rated tranches of CRE CLOs with a two-year maturity were earning approximately 110 basis points over benchmark rates, while CMBS’s were earning just 50 basis points over benchmark rates.  The shorter duration and the floating rate nature of CRE CLOs is attractive to investors in a rising rate environment relative to CMBSs, that were previously enjoying higher demand.   Additionally, CRE CLO collateral managers are often involved in the loan origination and servicing processes for the loans making up the collateral, which can have a strong impact on loan performance and potential workouts.  In plain English, the same guys who brought the elephants to the parade have to clean up after them.

Pre-COVID Outlook For CRE CLOs

Before the coronavirus crisis, the demand for CRE CLOs was increasing.  This rising liquidity was allowing lenders to borrow at cheaper rates, which in turn lowered the rate at which borrowers could obtain loans.  Bloomberg indicated that there were 20 active issuers of CLOs as of July 2019.  In 2019, CLO issuance reached $19.2 billion, a 40% year-over-year growth since 2016.  As new issuers entered the market, borrowing options were growing as more issuers competed on offerings.

Post-COVID Update:

Collateralized Loan Obligations in the commercial real estate market are a major underpinning of the bridge loan sector.  It has been virtually shut down since early March as no bond buyers were active.

Activity has started up again in the past few weeks, as some pools of selected pre-COVID originated loans are being successfully securitized.  Spreads are wider, for example: pre-COVID pricing for AAAs was approximately LIBOR + 100.  Those bonds are now selling at about L + 235 with oversubscribed buyer interest.

Look for bridge loan programs offering 80% LTC loans at L + 275-300 pre-COVID to now offer 60-70% LTC at L + 450 – 550.  And the now familiar stratification of product types will be in effect: multifamily and industrial in favor, with office needing a good story, retail very selective and no hotels.

Guys, I would love to be able to say that I was smart enough to write this article; but in truth, I stole much of this great material from a wonderful article on the subject by an obviously competent law firm.  I have tried to translate some of the more complex language into baby language, which is the only language I understand.

The Post-COVD Update was stolen from my wonderful friends at George Smith Partners, who issue a wonderful, free newsletter, FinFacts, to which every aspiring commercial loan broker should subscribe.

By George Blackburne

Every year hundreds of commercial property owners get conned out of millions of dollars by advance fee scammers.

An advance fee scammer is a criminal pretending to be a commercial mortgage lender.  He will issue a very fancy-looking conditional commitment letter, which will call for some huge “good faith deposit” or “third-party report fee”.  Once he gets the deposit, he will disappear with your dough and stop returning phone  calls.

These advance fees could be anywhere from $20,000 to $100,000.  We are talking about serious money.

How can desperate commercial property owners be so foolish?  Forty-five years ago, I worked at an old-time finance company, where we made personal loans, secured by cars, vacuums, and sticks – the personal property (furniture, TV’s, etc.) – of working people.

My old branch manger, my very first boss, taught me a very important lesson about con men. “If you are in a room with one-hundred people, pick out the one person who you are absolutely sure is not the con man.  He will be your con man.”  Con men are very, very good.

Okay, but how can a commercial property owner or commercial loan broker spot one of these advance fee scammers?  Here are some techniques:

• Are the rates that this commercial lender is offering very low or very high.  If your deal has been turned down by three of four other lenders, and yet this “commercial lender” is offering you a very low rate and low points, there is a superb chance that this “commercial lender” is just a con man.
• On the other hand, if the interest rate and the points are brutally high, this commercial lender might legitimately want to make a commercial loan to you.  He’ll fund your loan, when nobody else will, because he is desperate for borrowers.

 

• Take a close look at this lender’s website.  The first thing to look for is an actual physical address, as opposed to just a P.O. Box.  In order for a process server to serve a complaint at the start of a lawsuit, he needs to able to find the defendant.  If the con man refuses to provide a street address, it is because he is ducking other process servers.  If he has no street address, you should run for the exit!
• Look up the lender’s address on Google Maps.  You should see a picture of the property.  Is it some gleaming office tower or just a little rental house?  If a commercial lender has the dough to make multi-million-dollar commercial loans, he should have a pretty nice-looking office.
• Does a receptionist or the loan officer answer the phone every time you call, or are you always forced to leave your name and number for the loan officer to call back?  Any legitimate commercial lender, who has the dough to lend millions of dollars, can afford a receptionist.  If you have to leave a phone number each time, it suggests the con man may be screening his calls from prior, pissed-off marks.

 

• Please grasp this critically important concept.  In order to make multi-million-dollar commercial loans, the lender needs dough to lend.  So many people forget this!  A life company gets its dough to lend from life insurance premiums.  Commercial banks, credit unions, and Federal savings banks (former S&L’s) get their dough to lend from their depositors.  Real estate investment trusts (REIT’s) get their initial capital to lend by selling shares in their corporation.  (They then borrow from banks to achieve additional leverage.)  Hard money mortgage funds have depositors (although these hard money funds are rapidly going the way of the dinosaur.)  Blackburne & Sons, my own hard money shop, gets it dough by assembling a different syndicate of wealthy private investors on every loan.  There are always savvy investors willing to make prudent loans during a crash, as long as the rate is a little higher and the LTV is a little lower.
• So ask your con man straight out.  Where do you get your dough to lend?  In most cases, the con man will mumble something about “various investors” or the fact that he doesn’t reveal his sources.  Uh, huh… sure.  Miserable butt-wipe!  Heavens I love owning my own company.  I get to say stuff like that.  Haha!  That expression, “various investors”, is a red flag for either a con man or a commercial loan broker masquerading as a commercial lender.
• Looking at the lender’s website again, can you find an Investor tab?  I find that very, very reassuring.  REIT’s and mortgage funds have shareholders and depositors who provide the capital to lend.  Is entry into the Investor tab even protected by a password requirement?  If so, I am feeling even warmer and happier.

 

• Is there a Loan Servicing Department tab.  Such a tab really, really warms the cockles of my heart.  It suggests that this commercial lender actually services its own loans.  That is a huge, positive indicator.
• Is there a News Releases or Press Releases tab on his web site.  Do the press releases look legitimate?  If so, I am feeling better.
• Is there a tombstone section on his web site?  Many legitimate commercial lenders have such closing announcements; but it’s always possible that a really smart con man might have created such a fake section to seduce you.

 

• Life companies are the only class of commercial lenders who have correspondents to originate and service their loans in certain areas, like Chicago or Los Angeles.  Every other legitimate class of commercial lenders services its own loans.
•  So ask your con man, do you service your own loans?  If not, run for the exit.
• How narrow is your commercial lender’s lending niche or area?  If he tells you that he only makes commercial loans, between $1 million and $7 million, on convenience stores in the Northeast, that sounds very legitimate.

• On the other hand, if he makes loans from $100,000 to $50 million, on any kind of commercial property, located anywhere in the country, at best he is just a commercial loan broker masquerading as a lender.  If the deposit is huge, he is surely a con man.
• Google the company name of the commercial lender, along with that of the loan officer, the company president, and the company owner.  Lots of juicy stuff will often show up about con men.
• But here’s the thing:  If you looked up this article on the internet, you already know the answer.  Your commercial lender is too good to be true.  He is too sweet of a talker.  Your subconscious mind has picked up some clues.  Trust such warning signs!  Your commercial lender is a con man – an advance fee scammer.

 

 

 

 

 

In negotiating an income property loan, the size of loan the borrower can obtain is usually more of a sticking point than the rate or the loan fee.

Since income property loan sizes are generally limited by the debt service coverage ratio (i.e., cash flow), rather than the loan-to-value ratio, the operating expense figure that the lender uses in his calculations is critical.

Suppose a property has the following Pro Forma Operating Statement:

ABC APARTMENTS
1234 MAIN STREET
SAN JOSE, CALIFORNIA

PRO FORMA OPERATING STATEMENT

Income:

Gross Scheduled Rents $100,000
Less 5% Vacancy & Collection Loss 5,000

Effective Gross Income: $ 95,000

Less Operating Expenses:

Real Estate Taxes $12,500
Insurance 2,550
Repairs & Maintenance 5,890
Utilities 7,345
Management 4,865
Fees & Licenses 987
Painting & Decorating 3,986
Reserves for Replacement 1,900

Total Operating Expenses: 40,023

Net Operating Income: $54,977

Then we hereby define the Operating Expense Ratio as follows:

Operating Expense Ratio = Total Operating Expenses divided by
the Effective Gross Income

Using our example above:

Operating Expense Ratio = $40,023 ÷ $95,000 = 42.1%

Appraisers and professional property managers often keep track of the operating expenses of the buildings they appraise or manage, and they publish their results. For example, the National Association of Realtors publishes the results of their surveys annually in several hardbound books including Income and Expenses Analysis-Apartments and Income and Expense Analysis Office Buildings.

Lenders have access to these type of publications, and they therefore are reluctant to accept at face value operating expenses supplied by the borrower when their operating expense ratios are less than those experienced by similar buildings in the area.

While it might be possible to operate an apartment building IN THE SHORT RUN at an operating expense ratio of less than 30 to 45%, in the LONG RUN, the end result will be a seriously deteriorated building.

It might be possible to get a lender to accept an operating expense ratio as low as 28% on a very new building, if it had fewer than 10 or so units, and if it had no pool and very little landscaping, and if you had authentic source documents to back up your claim. But in general, lenders will very seldom accept an operating expense ratio on apartments of less than 30 to 35%, and have been often known to use 40 to 45%.

The following are factors that will influence the lender to use a higher operating expense ratio:

1. Lack of individual metering of utilities
2. Swimming pool
3. Elevator
4. Extensive landscaping
5. Low income area and/or tenants
6. Presence of families with children

The larger the project, the larger the required operating ratio.  Large projects usually entail extensive recreational facilities and pools, and they often require full-time on-site management teams.

Operating expense ratios are not as useful in evaluating most commercial or industrial properties.  The reason why is because the space can be rented on a triple net basis, a net basis, or a full service basis.

Certain commercial properties, however, have surprisingly predictable operating expense ratios”

1. Self storage facilities:  25%
2. Mobile home parks:  25%
3. Non-flagged hotels and motels:  50%
4. Flagged hotels:  60%
5. Residential care homes:  85%  (food, nurses, etc.)

   If you are a commercial loan broker, and you are not calling every commercial real estate loan officer, working for a bank or credit union, within 20 miles of your office, you are missing out one of the biggest feasts in commercial real estate finance (“CREF”) in forty years.  Please grasp this concept:

   Almost every bank in the country is turning down almost every commercial loan request that it receives.  Helloooo?  What are they doing with these turndowns?

   These bankers would welcome anyone who could help them service their high-net-worth clients, especially since you will be taking the deals to a private money lender, like Blackburne & Sons, as opposed to a competing bank, which might steal their client.

By George Blackburne