March 30, 2017
What We’re Reading This Week
It seems like when I read about theft in modern finance it revolves around electronic fraud or *ahem* bitcoins. Rarely do I get to read about an actual theft. Like people breaking into somewhere and taking something, Ocean’s Eleven style. Well, these German (maybe?) criminals have retained their old-fashioned sensibilities and stolen a 221 lb. gold coin from Germany’s Bode Museum. Affectionately, the coin was named the “Big Maple Leaf” because it was minted by the Royal Canadian Mint and had, well, maple leaves on it.
Earlier, I said “Ocean’s 11 Style.” What I mean by that is: “A ladder was found by nearby railway tracks,” which sounds low tech until you think about the logistics of carrying a 221 lb. gold coin up a ladder. As much as I enjoy this crime, I have more questions than answers. Questions like, why would one make a 221 lb. gold coin with maple leaves on it? Apparently, a limited number of these coins were created by the mint to promote a new line of bullion in 2007. I did not even know you needed to advertise gold bullion outside of AARP catalogues and standing on the street corner waiving a sign that says “gold” on it.
I also have questions like, what does one do with a 221 lb. gold coin? I mean you cannot spend it. It is literally worth millions of dollars, $4.5 million to be exact. Moreover, it has a giant (life sized?) portrait of Queen Elizabeth II on one side. Really, all you could do is melt the coin down and sell it. However, I would think if you know someone that would buy $4.5 million of melted gold piles then you probably know someone that would buy a 221 lb. gold coin.
What is in a Name?
A lot apparently, as a recent study from the University of Oulu found. According to the research, hedge fund investors are easily swayed by something as irrelevant as a fund’s name. Names that carry more gravitas – “a combination of words from geopolitics and economics, or suggesting power” – attract more investment and are seen as more favorable to investors. This would hardly be news, if not for the audience. Hedge fund investors are by definition “sophisticated.” At least, more sophisticated than the “average” retail investor. Indeed, I have seen this from both sides of the table. Laypeople tend to assume that hedge fund investors are more knowledgeable regarding financial matters and hedge fund investors tend to think that they are more knowledgeable regarding financial matters.
This is an especially painful lesson for hedge fund investors because the same study found that funds scoring high in “gravitas” tend to underperform their peers while carrying higher than average fees. The research also found that words associated with “weight, influence, authority, seriousness, and good judgement” tend to imply the most gravitas. This suggests that the “Gibraltar Results Expert Power Fund” will do exceedingly well, and you cannot take the name…patent pending.
There have been a number of high profile LIBOR manipulation cases in the news over the past 5 years. The first, and most notable, was Barclays, who ended up paying over $450 million (by my last count). Once Barclays came under fire, other banks were quickly implicated. Granted, this is overly simplistic, but you make money manipulating LIBOR by making investments that will profit if interest rates go down. Then you convince the person at your firm to submit an abnormally low LIBOR rate to the British Bankers Association. After the initial scandal, policies and safeguards were put in place to prevent this from happening again. However, not at Amazon.
“Amazon’s retail business ‘is like this massive slowed-down stock exchange,’ says Juozas Kaziukėnas, founder and chief executive of Marketplace Pulse, a business-intelligence firm focused on e-commerce. The usual market dynamics are at work: sellers entering and leaving the market, temporary scarcity when someone runs out of stock or a manufacturer falls behind, and sellers testing consumers and each other with high and low prices.”
Raising your product’s price unnaturally high can trigger price increases in your competition in an attempt to match your price or even beat it by a small fraction. Once the competition has raised their prices you can dramatically lower yours and become the best-priced seller, if only for a little while. How can that even work? Apparently it does and “wild pricing gyrations resemble a penny stock during heavy trading.”
This sort of manipulation is also akin to high frequency trading and maybe provides a clearer example of how stupid it is. I do not mean to imply it is not lucrative, it is very lucrative, but also very stupid. It is like a game of hot potato where the potato is replaced by a wad of cash. When the music stops, the guy holding the cash wins and the game starts over. It is important to note that the person supplying the cash is you and I, so the game is especially frustrating.
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