The markets whipsawed in volatile trading last week as war was waged over key technical levels in the Dow (10,000) and S&P (1050). The backdrop was bitter sweet: trouble among the perennial sick men of Europe (Portugal, Italy, Ireland, Greece and Spain) on the one hand, and upbeat earnings in Corporate America on the other. With all the uncertainty over the short-term trajectory of the economy, it would be tough to fault political leaders for at least preaching that the glass is still half full. That said, it’s almost criminal for the Secretary of the Treasury to tell the American people — on their holiest of sporting days — that America’s economy was frothing at the end of last year,…

In the midst of a global financial pandemic, private enterprise finds itself under the public microscope yet again — as it did during the 1930s after a century of unbridled growth and later in the 1970s after decades of stifling regulatory oversight. With this 21st century changing of the guard, the theoretical bases for free market capitalism are now under academic and legislative review. At the heart of the debate is the accuracy of the economic models taught to college students around the planet as though they were immutable physical laws.

Scientists and market commentators have long been aware of the susceptibility of the markets to any single investment philosophy. The rise of early program trading contributed to the historic one-day loss of nearly 23% on Black Monday in 1987. Recent experiments with risk securitization may cost trillions of borrowed dollars to unwind and decades to fully digest.

Faith in the underlying mechanics of portfolio theory and market efficiency has certainly contributed to humanity’s recent leap forward in wealth, productivity, private innovation, and global integration. But that same numerology has since crippled our aging financial system and triggered the worst global recession in nearly a century. Perhaps it’s time to reassess the value – and the logic – of bleeding edge finance.

As Professor Janeway points out in the following interview, treating securities like molecules, subject to the same variable distributions, “random walks”, differential equations, and reductionist math simply compounds the short-sighted actions of a few scientists-turned-gamblers. Not only does it greatly overstate the predictive power of econometric analysis, but it also understates the tremendous dangers of financial engineering.…

This paper was written for quite possibly the best combination of professor and class I’ve ever experienced. If only all academic endeavor challenged so profoundly, surveyed so broadly, and bore as much intellectual fruit…

Hegemonic Stability and the Rise of Global Corporations
by Devin DeCiantis

“The logic of markets is borderless,
but the logic of politics remains bounded.”
- Louis W. Pauley, Who Elected the Bankers? Surveillance and Control in the World Economy, 1997

Since their earliest days a rogue asset class — a breakaway tax haven from the archaic world of REITs — income trusts have drawn the ire of free-market economists and the capital of free-wheeling investors alike. The former see the structure as an anti-competitive perversion of natural capital flows, while the latter flock to invest in a sea of premium yields. Traditionally, policy makers have been hamstrung by this natural dichotomy, but with their latest Halloween trick, Flaherty and the Tories have taken a bold step toward a fair and open capital market. Baby boomers may cry foul over their lost pot of gold, and socialists may applaud their conservatives counterparts for a rare shot across the bow of a red hot…

Recent reports have pegged open interest in the world’s largest IPO at nearly US$400 billion. That’s a lot of capital ready to speculate on a still unproven Chinese macroeconomy, particularly in the face of its ongoing structural woes. Could this be the end of the beginning for capitalism in China? Or perhaps the beginning of the end…

The Enduring Allure of China
by Peter Zeihan, Stratfor.com

The Industrial and Commercial Bank of China (ICBC) is expected to raise nearly $22 billion in an initial public offering (IPO) — the largest in history — after shares are made available to retail investors Oct. 27. The ICBC offering is the latest in a series of IPOs involving Chinese banks, into which Western investment firms have poured billions since…

as a primer on basic investment analysis and the ongoing challenge of balancing risk and reward, this email exchange tries to demystify the increasingly lucritive but often frigtening world of “structured finance”. caveat investor…

From: [a good friend]
Sent: December 20, 2005 9:56 AM
To: [me]
Subject: Can you please look at this prospectus?

My father is interested in this but thinks it may be too good to be true. What is your opinion?

From: [me]
Sent: December 20, 2005 11:14 AM
To: [a good friend]
Subject: RE: Can you please look at this prospectus?

it’s called “structured finance”, and it happens all the time. think of the income trust as a really tasty cake. each individual layer of the cake is a different type of security, from presumably government-issued, fully secured AAA-rated debt, to more risky forms of…