What is more dangerous; financial instability, global warming or terrorism?

We have seen various dangers on human civilisation, some man made, some natural and the rest which are the combination of the prevous two. Unfortunately, in last few hundred years we have seen three persistently threatening calamities all over the world. Need to measure the scope of their devastating effects on the planet; scope of effect only as we can not measure the actual imact even with high degree of standard deviation.

Let's first look at the global financial instability, which is probably never seen as a major threat as compared to the other two. This is normally seen as a cyclical issue which is self correctable or most pessimistically speaking, it only needs some stringent policies, austerity drive, fiscal policies overall etc etc and it will go away in few months to years, without bringing a major cause of concerns that deserved global discussion and leadership to uproute it.

To understand it better we will divide the discussion in five parts. First will deal with the history of finance and economics and its reltions with current financial concerns, second with global warming and lastly on terrorism. The fourth part will deal with comparing the impact of the three threats and last one will suggest the possible solutions to deal with them.

First Part:

Financial and Economic issues: History suggest that the stock market crash back in 1982 had shaken the US stock market when the major banks have lost the assets as much as they had created in last few hundred of years. Even before that in 1929, the great depression had forced the world to see a worldwide long term financial doom. Again in 1987, the stock market crisis followed by the Y2k IT bubble crash had given us enough indication to start finding out some inherent and ridiculous assymetry and systematic deformity in the financial ecosystems, caused by inaccurate financial models which only helped to mislead hyperambitious citizens of the financial world.

But starting at the end of year 2007, the financial crisis had the potential to put all the pevious ones to shame, but not many foresee that and still not many have realized that. The countries all over the world showered their money on the crisis and deceptively enough, the crisis showed the sign of disappearance, just to come back in an even worse form. A good analogy of the situation will be like this. After a long busy day, you are having a few sip of vodka and enjoying that with a cigar. Shortly you feel sleepy and the cigar falls on the carpet and smoke starts spreading in the hall. What you would do? You have got two options: either extinguish the cigards fully or put a towel on that so that smoke does not spread for sometime. Likewise and unfortunately, the world government took an approach similar to second approach to fight the worst financial tsunami in the history and did not try to find out and eliminate the underlying cause of the disaster. That time economists world over had warned their government of the possibility of the W-shape growth, but it was not taken seriously. Had it been taken on a serious note, the world leaders after discussion with their financial advisors, would have gather together to figure out how to tame this monsterous crisis so that it does not reappears again. But it did not happen, and we landed on the mouth of the financial volcano, which will burn everything to ashes in next ten to fifteen years.

Why was this the worst financial disaster? Unlike before, the world had become addicted to use of the financial derivatives, which was once termed as the Financial Weapon of Mass Destruction by veteran financial genius, Warren Buffet. In 2007, the total notional value of transaction involved in SWAP market was $587 trillion, 4 times of US GDP as per International Derivative and SWAP Association. Imagine a default of 1 percent, which will be equal to GDP of UK.

This time, the world is not sitting on the reserve of cash which it can sprinkle on the fire of crisis, if needed. What makes it monsterous is that this time the crisis is not caused by just the derivative, or fiscal deficit of major countries or shrinking of global business, but by the combination of all of these plus a much bigger issue which was ticking like a time bomb for last twenty years. That issue can on its own destroy the backbone of globals financial system. Of course, we are discussing now the credibility of US dollar.

New regulation expected in western capital markets

New financial regulations and higher capital regulations are inevitable, because it is clear by now that too much reliance on concepts like fair value accounting drags the balance sheet too far away from the reality and excessive innovation, more accurately, deliberate attempt to make it difficult for buyers to know the real picture of the securities involved in many derivatives which is a big reason behind trillion dollar crisis termed as Financial Weapon of Mass Destruction. CDSs are especially notorious as well as the short selling to cause the fall of companies. I think there will be more rules guiding the valuation of financial products, higher capital & margin requirements and stricter rules on issuance of MBS/ABS. And of course to stop Madoff like scandal, there could be a compulsory requirement for third party administration of accounts involving pension fund,hedge fund and mutual fund.
This will impact the capital market by reducing the amount of capital involved and the volume of transaction, lower number of creation of exchange based derivatives, funds going into low regulated markets, and overall lower level of economic activities which will reduce the overall growth of capital and financial markets however it will bring more stability and predictability. No doubt it will further reduce the incentive for many investment as regulation cost money and that will be charged back to investors.

Where to start to looking for a good stock?

There are no fixed rule to start to look for a good stock however I would advice the following:

1. In case of a foreign market (if you do not invest in India) look how good the country is doing economically, socially( because social unrest can damage your investment),politically etc etc. A good way to look into this is to use Porter's Diamond which analyses a country's competitiveness in terms of five important indicators:http://www.quickmba.com/strategy/global/diamond/

2.Watch the industry it is operating into,
a.how bad the competition is, how easy it is to enter the market, watch out suppliers and buyers capacity to negotate with companies and what are the subsitute that can be offered for the companies product/services.

3.Do a more intense economic analysis. Find out the government plan on investment,interest rates,steps to control inflation and unemployment,policies on divestment and deregulations,FDI etc.

4.A thorough analysis of company's business and finance is required at a later stage when all above steps gives no red signal. Find out whether company is having high P/E ratios/industry P/E ratio, Div%,Current share price/one years highest share price,P/BV ratio etc and if answer to any of those is yes, we need further investigation in the financial statement of the company, however it does not mean that one should not analyse the Financial Statement of the companies for a better understanding of the companies' financial health. I will explain in next blogs how to analyse financial statements under various accounting standards.
=P/BV ratio*(Current/52weeks highest price)*P/E of company
P/E of industry
The lower the ratios better the investment, however I would not consider a ratios bigger than 2 worth investing unless there are strong factors supporting the company's prospects of grwoth such industrial dominance,government plans and company's recent growth in the market which can not be taken into account by the ratios above.

5.Find out how company is performing in business as compared with the competitors and whether there is any legal cases,bank covenant,lack of supply of raw materials or other restrictive conditions against the company's ability to do the business optimally.

6.Find out if banks are still willing to give the finance for the company's business needs and whether company has been performing consistently well previosuly, if yes it will be a more reliable stock than one which does not perform consistently.

It is about investment and economics of India and World

Right now the world is going through a massive tectonic shift under its financial system and this will be a witness of the time when the new world order starts to manifest. It is a bit chaotic but not all is bad. This change is difficult to understand but it will make sense sooner.
Here I will introduce some of the way which will help us understand some of the most confusing phenomena around us and in the world 'sfinancial market. I will introduce some analytical techniques to differentiate between the growth and value stock and between matured and developing industry and most importantly, how many factors are interlinked. I will help you see the importance of various economic indicators on our financial well being including but not limited to stock exchange. It will also help you get a glimpse into various other interesting business events around us which has affected us in the past and which will continue to do so in future in various ways. You must understand them.

Keep reading and I assure you it will be a great journey towards many discoveries............................