The good professor has this article on his blog http://blogs.ft.com/maverecon/2009/07/does-poverty-give-a-country-the-right-to-pollute-the-atmosphere/#more-4091 .(The professor is one of the best Economics bloggers around and one of my favourites.)
Usually, I try to resist the chip-on-the-shoulder response to articles on the western media, but this time I thought the article was painting a wholly inaccurate picture and chose to comment. My comment was as follows
Dear Sir,
An interesting article. But unlike your usual articles, there are some specious bits of reasoning which are thrown in into the mix here. 1. You say that the NBP's are wrong to say "your ancestors broke it, you fix it". Mainly because their ancestors dramatically increased population.
Your exact rant reads thus - The logic in the argument of the NBPs comes unstuck especially badly here. If the overdeveloped world is held accountable for the choices of past and present generations that produced large past emissions of CO2E and resulted in today’s high atmospheric concentration of CO2E, then surely today’s inhabitants of China and India should be held accountable for the individual and collective choices of past and present generations of Indians and Chinese that have resulted in the oversized populations of these countries? The selective application of the ‘your ancestors broke it, you own it’ logic by those who advocate special lenient treatment for today’s poor countries in global efforts to reduce greenhouse gas emissions is deeply intellectually dishonest.
Sir, I cannot imagine you actually drew out this comparison. The previous generation of OECD's pillaged the world. The previous generation of NBP's had kids (because they were poor and did not know about contraceptives, by the way). I agree with your original contention that inter-temporal punishment is morally unjustifiable. But your counter-argument is built on spurious ground.The argument from the NBP's need not be stated as "It is our turn to pollute". It can be interpreted as "You have taken the lead in polluting, now take the lead in cleaning up". A stance that I find very justifiable, morally.
2. You set out to try to establish that per-capita comparisons are incorrect. Your passage says - First, the externality associated with greenhouse gas emissions relates to the total amount added to the atmosphere, not to the amount emitted per capita. A given quantum of CO2E emissions does an equal amount of global harm, regardless of whether it is produced by 2 over-fed Americans or Europeans or by 100 under-fed Indians. Those who bang on about per capita emissions appear not to understand the ‘technology’ of the global environmental externality created by CO2E emissions.From here on you draw the conclusion that per-capita emissions are an inaccurate measure.
It is undeniable that overall emissions matter to the world's well-being and per-capita is but a diversion. But when on the issue of determining how we can morally justify how much EACH country can pollute, per-capita measure is perhaps as good as any other. Would the world stop writing articles on global warming if India were broken down into 30 smaller countries, each not being big enough to be part of your global 20?
3. When you start your argument, you get in your disclaimers early; and further hedge your positions well by citing the precautionary principle. I guess George Bush's justification for the Iraq war could have been constructed on similar grounds. 1) Weapons of Mass destruction are a bad thing 2) Human-made WMD are capable of destroying the world (and very quickly) 3) That WMD can be created by some dictator-run state is a reality. Invoking the precautionary principle, one should attack everyone in sight. The green-mongers have succeeded in depicting anyone debating climate-models as someone who is out to destroy this world.
The debate on how much we need to do is very crucial to the debate on who has to do what? In the current setting, the way you have put things, it appears as if the OECD countries have woken up to the threat posed by global warming, have taken a lead in cleaning the act for the world and given the time constraint everyone (read NBPs) has to chip in. An alternate interpretation could be, the OECDs have had their fun, now that they are losing out, they are throwing the toys out of the pram. The NBPs perhaps have this view.
OECD carrying the moral high-ground on the global warming debate. Now, that is hilarious.
In case it was not obvious, I am from one of the NBPs that you have mentioned. And although I am sceptical of the climate models (from a scientific point of view), I agree to the premise that the entire world must pull together to reduce emissions. I also agree that India and China should do more to reduce emissions. What I disagree with (and vehemently) is that the OECD countries should be pontificating on moral high ground.
My stand on this global warming debate is straightforward. India should fight tooth and nail against any restrictions, be it on geopolitical or moral grounds. I belong to the Henry Kissinger school of thought - His guiding philosophy was that foreign policy should serve the national interest.
On the more global issue of global warming, I think the debate should cover the grounds on which scientists are claiming that the world is heating rapidly. Invoking the precautionary principle in defence of going green is unacceptable in a world full of vested interests. As a student of science, I am inclined to give credence to scientists' claim that the globe might be warming. On the same basis, I think there should be room for healthy scepticism for the scientists and their models.
The world is already reeling under the impact of one group of self-appointed geniuses believing the infallibility of their models; we can ill-afford another screw up like this. Let us by all means reduce CO2 emissions; but let the freedom to question these models not disappear either.
After all, it was only 35 years ago when the world was damn scared of the Ice age; and even these scientists will tell you that climate changes will take a century to take shape.
Monday, July 27, 2009
Financial Sector participants – II
Bunch II – Guys who work with the markets
This category comprises of two sub-sections, buy-side and sell-side. The buy-side is the one that buys/sells securities. These groups manage funds, invest in equities, debt etc and try to generate returns. Sell-side firms are the ones that work for a commission. Whenever buy-side firms trade anything, they do through a broking firm, paying anywhere between 10-45 bps for this transaction. This commission is the key revenue line for sell-side firms. In other words, buy-side firms generate on fund-based income, sell-side firms generate fee-based income.
Sell-side firms have 3 kinds of participants – analysts, sales guys and traders. Analysts are the ones that sweat over balance sheet, P&Ls and the like, come up with recommendations for stocks and supposedly uncover value in equities. Sales guys propagate these ideas. They call up assorted buy-side firms and ask them to buy stocks which they (analysts and sales) think are undervalued and sell those which they think are overvalued. Traders are the guys who actually put orders through. They understand the mechanisms of the market and can get a sense of which direction the market is headed merely by watching the order book.
Analysts agonise over small details and generally pontificate about specific industries. They are the most pseudo-intellectual of the lot. They generally do not have the courage to put in any trades on their own but take great pride in sharing anecdotes about how they helped a client make lots of money. Particularly bitter analysts have a habit of recalling stories where a client lost money after having not listened to the sage advice from the analyst himself.
Sales guys have the individuality of a log of wood, a particularly uninteresting one at that. They peddle analysts’ views with any market flavour they can pick up. Sales guys spend hours on the phone recalling funny anecdotes from stories they heard while they were spending hours on the phone talking to other clients. Sales guys swear by the flavour of the season and pride themselves on knowing the pulse of the market.
Traders live for/in the moment. If they see a big buy order they conclude markets are indefinitely going up. If they see no activity in a day, they are generally depressed. These guys rarely care about anything beyond the immediate future.
On the buy-side, there are analysts and fund managers. Analysts are generally flunkeys who interact with fellow analysts in sell-side firms, provide internal research to fund managers, and generally do anything that helps them in their eternal quest to impress fund managers. Fund managers are the guys who manage portfolios, the ones who take the decision to buy/sell/not buy any stock. They are paid on the basis of their funds’ performance.
Now, where is the catch? If this is such a well-structured industry, where is the problem?. The problem stems from the fact that everything in the industry is relative or hidden. And every participant is allowed to hide behind some smokescreen. Cover-thy-ass is the underlying theme amongst all participants. Any research report will be littered with the following phrases – “in our view”, “we believe”, “increasing likelihood” etc. Now, equity pricing is an inexact science, so there is nothing wrong in getting things wrong. Except that, the pay packets of the participants hardly acknowledge the fact that this is an inexact science. Markets are random, investors bear the brunt of this, but employees are hardly affected. And, in my view that is wrong.
Imagine going into a hospital and the doctor says – “Look, in my view, you should take these tablets. There is a likelihood that these might help you” and follows up with – “ I must disclose to you that I might or might not have a stake in the pharma company that sells these tablets”. And for good measure, you find out that the doctor himself would never take these tablets. Not because he does not trust them. No siree. But because he wants to diversify his professional and personal risk. As in, if the tablet turns out to be bad, even if his professional reputation is ruined his personal health at least would remain. Remember, doctors generally earn about one-fifth of financial consultants globally.
Both diagnosis and stock-picking are inexact sciences. It is just lamentable that we set two standards for these two. The more crucial between doctors and analysts is set the more onerous set of restrictions, judged harder and has to get by with far lesser pay.
Now, coming to the part where the industry participants hedge their bets. Sell-side guys are in the business of generating commissions, not returns. So, they do enough to create chatter. According to the sell-side, the actual job of picking the right-stocks is with the buy-side. The motto is simple – Ours is not to buy or sell, ours is but to peddle (paraphrasing Alfred Tennyson). Even within this, the structure helps these guys out. The research analysts are slightly reticent; while the sales guy is at liberty to say whatever he wants, because in the end he is just providing market view (albeit with a bias). On the buy-side, the analysts do not take any calls, so it is impossible to blame them. The fund managers, who are the only ones who can be pinned down to something (because they have a clear P&L) have numerous ways of getting away with it. Fund managers are generally measured only relative to the market. So, their play is simple – allocate 85% of portfolio to the standard stocks (market), have 4 companies where you have inside information, park 10% of your portfolio here, and place 5% of funds base on your analysts’ recommendations and blame them if things go wrong. Everyone is happy this way.
This category comprises of two sub-sections, buy-side and sell-side. The buy-side is the one that buys/sells securities. These groups manage funds, invest in equities, debt etc and try to generate returns. Sell-side firms are the ones that work for a commission. Whenever buy-side firms trade anything, they do through a broking firm, paying anywhere between 10-45 bps for this transaction. This commission is the key revenue line for sell-side firms. In other words, buy-side firms generate on fund-based income, sell-side firms generate fee-based income.
Sell-side firms have 3 kinds of participants – analysts, sales guys and traders. Analysts are the ones that sweat over balance sheet, P&Ls and the like, come up with recommendations for stocks and supposedly uncover value in equities. Sales guys propagate these ideas. They call up assorted buy-side firms and ask them to buy stocks which they (analysts and sales) think are undervalued and sell those which they think are overvalued. Traders are the guys who actually put orders through. They understand the mechanisms of the market and can get a sense of which direction the market is headed merely by watching the order book.
Analysts agonise over small details and generally pontificate about specific industries. They are the most pseudo-intellectual of the lot. They generally do not have the courage to put in any trades on their own but take great pride in sharing anecdotes about how they helped a client make lots of money. Particularly bitter analysts have a habit of recalling stories where a client lost money after having not listened to the sage advice from the analyst himself.
Sales guys have the individuality of a log of wood, a particularly uninteresting one at that. They peddle analysts’ views with any market flavour they can pick up. Sales guys spend hours on the phone recalling funny anecdotes from stories they heard while they were spending hours on the phone talking to other clients. Sales guys swear by the flavour of the season and pride themselves on knowing the pulse of the market.
Traders live for/in the moment. If they see a big buy order they conclude markets are indefinitely going up. If they see no activity in a day, they are generally depressed. These guys rarely care about anything beyond the immediate future.
On the buy-side, there are analysts and fund managers. Analysts are generally flunkeys who interact with fellow analysts in sell-side firms, provide internal research to fund managers, and generally do anything that helps them in their eternal quest to impress fund managers. Fund managers are the guys who manage portfolios, the ones who take the decision to buy/sell/not buy any stock. They are paid on the basis of their funds’ performance.
Now, where is the catch? If this is such a well-structured industry, where is the problem?. The problem stems from the fact that everything in the industry is relative or hidden. And every participant is allowed to hide behind some smokescreen. Cover-thy-ass is the underlying theme amongst all participants. Any research report will be littered with the following phrases – “in our view”, “we believe”, “increasing likelihood” etc. Now, equity pricing is an inexact science, so there is nothing wrong in getting things wrong. Except that, the pay packets of the participants hardly acknowledge the fact that this is an inexact science. Markets are random, investors bear the brunt of this, but employees are hardly affected. And, in my view that is wrong.
Imagine going into a hospital and the doctor says – “Look, in my view, you should take these tablets. There is a likelihood that these might help you” and follows up with – “ I must disclose to you that I might or might not have a stake in the pharma company that sells these tablets”. And for good measure, you find out that the doctor himself would never take these tablets. Not because he does not trust them. No siree. But because he wants to diversify his professional and personal risk. As in, if the tablet turns out to be bad, even if his professional reputation is ruined his personal health at least would remain. Remember, doctors generally earn about one-fifth of financial consultants globally.
Both diagnosis and stock-picking are inexact sciences. It is just lamentable that we set two standards for these two. The more crucial between doctors and analysts is set the more onerous set of restrictions, judged harder and has to get by with far lesser pay.
Now, coming to the part where the industry participants hedge their bets. Sell-side guys are in the business of generating commissions, not returns. So, they do enough to create chatter. According to the sell-side, the actual job of picking the right-stocks is with the buy-side. The motto is simple – Ours is not to buy or sell, ours is but to peddle (paraphrasing Alfred Tennyson). Even within this, the structure helps these guys out. The research analysts are slightly reticent; while the sales guy is at liberty to say whatever he wants, because in the end he is just providing market view (albeit with a bias). On the buy-side, the analysts do not take any calls, so it is impossible to blame them. The fund managers, who are the only ones who can be pinned down to something (because they have a clear P&L) have numerous ways of getting away with it. Fund managers are generally measured only relative to the market. So, their play is simple – allocate 85% of portfolio to the standard stocks (market), have 4 companies where you have inside information, park 10% of your portfolio here, and place 5% of funds base on your analysts’ recommendations and blame them if things go wrong. Everyone is happy this way.
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