The Finance Book Club

Chapter 5 - The World Hierarchy

-Who runs the world? Surely the USA
-This implicitly assumes the world order is not anarchic but run in an orderly way
-The USA can manage events in its favour but the chaos around the world clearly shows that’s not the same thing as managing the world
-Norfield uses five measures to gauge a country’s econo-politico status:

- economy size

- ownership of foreign assets

- international prominence of its banking sector

- status of currency in FX trading

- military spending

- Few countries have much power or influence outside the G20
-Norfield cites mountains of tiresome data to support this point - IMF reports, GDP, FDI, Bank of International Settlements data, UN security data

His conclusions, not surprisingly support the Anglo-American alliance idea.



My only question is if China is now in #1 or #2 and is Japan still in top 5?

Capitalism and the state
-Deciding the ownership of multinational corporations is tricky
-BP is only 40% owned by British residents so is it still ‘British’?
“In the past two decades, it has been common for all major stock exchanges to encourage listings and share offerings by companies seeking large volumes of funds from international sources. For this reason, London’s FTSE 100 equity index does not represent the domestic British economy or even consist only of British companies. “
-Despite this ambiguity, there is still a core of companies that a nation-state will tend to back as they are viewed as ‘their own’
- This doesn’t make capitalist companies patriotic or sentimental about ‘home’
-Despite globalisation corporations still depend on national power to resolve disputes. You can’t call McDonald’s to assist you with copyright infringement, or if IBM China gets in trouble you can’t call the Chinese president for help, or call Microsoft to secure sea lanes in the Pacific.
-More powerful capitalist countries set the terms of business
-Corporations headquartered somewhere tend to be the main beneficiaries of national attention
-The more resources a national-state can marshal, the more powerful the ‘national’ capitalist can become

The State and Finance
-The state determines frameworks for the national monetary system, like deciding what is ‘legal tender’
- Before central banks, states regulated everything but now CB’s are the main state tool for managing the monetary system
-The earliest CBs were private companies with government backing - Sveriges Riksbank and Bank of England
- Instability of a private banking system led to central banks taking on the role of ‘lender of last resort’ - in the US in 1913
-”Whatever the fantasies of ‘libertarian’ pundits in the US, no major capitalist company wants to operate in an economy where every bank issues its own currency, or where the paper currency issued has to be fully backed by gold to prevent ‘corruption’ by the government.”
- Private capitalist banks have special access to central bank credit but are regulated. Lending is lightly regulated while taking deposits has more rules.
- “My argument is that imperialism is not the same thing as colonial rule, and should not be understood only in terms of some countries dominating others through military or political pressure. A country does not have to rule politically over another for it to be imperialist, and imperialism did not die out with the end (almost) of colonialism.”
-Imperialism is:

- economic privilege reinforced by monopoly control of industry

- backed up by powerful states

-When the media talk about an ‘international community’ keep in mind the chart in 5.1

Monopoly and Imperialism

1. Dominant country capitalists have many means to exploit weaker countries
   1. Undermining industries
   2. Restricting exports
   3. Subsidies of their own exports
   4. Undermining governments (easier than ever with social media!)
   5. ‘Regime change’

   
   

2. Lenin believed imperialism is the monopoly stage of capitalism
3. Price fixing, price gouging, are some tools of monopoly
4. IN 2014, 41% of phones were made by only 3 companies, Samsung, Apple, Microsoft (very curious what that looks like now)
5. The formation of ‘global value chains’
   1. International companies employ foreign suppliers to deliver goods/services for use in final production
   2. Apple -> Foxconn

   
   

6. Monopoly power is good for the monopolist but less good for the national economy where it operates
7. So usually there is a regulatory body to limit abuses of market power
8. Sherman Anitrust Act of 1890
   1. Rockefeller refined 80% of US oil and dominated production, transport for energy

   
   

9. UK ‘Competition Commission’
10. These agencies have done little to stop the drift towards monopoly power
11. Samsung is singled out by Norfield
12. State-backed company rescues have promoted mergers and takeovers
13. Norfield singles out G4S, the world’s largest security company for criticism, citing its failures at the 2012 Olympics
14. States naturally don’t care about its own market domination internationally, only domestically
15. The EU has adapted anti-monopoly legislation with the EU area, which has taken some action against price fixing

Monopoly today

1. “Worldwide production of most of the key commodities of modern capitalism, and the provision of most of its key services, is today dominated by a small number of companies.”
2. 2011 auto production: ⅓ is from GM, Volkswagen, and Toyota
   1. 13 companies account for ¾ of output

   
   

3. Norfield goes on to list many monopolies.
4. He cites the example of Glencore, the largest Swiss company, who controls more than half the tradeable market in zinc, copper, and ⅓ of seaborne coal.
   1. Its CEO Marc Rich, was indicted for tax evasion and for making oil deals with Iran
   2. He was pardoned by Bill Clinton on his last day in office. (lucky!)

   
   

5. Big companies in turn own large chunks of other companies, further concentrating power

World projection of power

1. A defining feature of imperial capitalism is nation-states supporting their ‘own’ large corporations by protecting intellectual property rights and fronting trade delegations
2. Monopoly capital accumulation is the normal result of capitalist business development
3. This ability to secure protection from a nation-state is more important to define imperialist companies than their size, wealth or or global importance, but usually the largest companies are the ones that can do this

6. Profit and Finance

1. In an academic treatise like this it takes a whole paragraph to say that profit is important for capitalism.

Thanks Captain Obvious.

Return on equity and leverage

1. Capitalist owners measure the performance of the money they invest in their own enterprises using Return on Equity (RoE)
   1. Measures net profit after interest on borrowings divided by the company’s equity capital

2. If the interest rate is < profit rate of new investment then it makes sense to borrow from banks or to issue bonds
3. Borrowing has an inherent risk
4. From 2001 to 2010 the average leverage used by manufacturing companies was less than the value of the equity capital - the ratio was less than 1.
5. Also true for mining, and wholesale trading companies
6. In contrast consumers buying property or taking on credit card debt increased their borrowing
7. Higher leverage usually means higher volatility
8. Financial companies have higher leverage ratios than non-financial ones
9. It is considered ‘normal’ for banks to have a leverage ratio 20x the size of their equity
10. Hedge funds can also do this but by borrowing from banks or trading on margin
11. Banks earn a profit from the difference in the rate charged to borrowers and the rate charged to lenders. If interest rates decline, that profit margin necessarily decreases.
12. In 2006 net interest margins fell from 4-4.5 % in the 1990s to less than 3.5%. A drop of 5-10 million per billion loaned. This encouraged banks to step up their lending and overleverage.
13. In the early 2000s stable economic growth rates made higher leverage among banks seem less risky
14. Lower bank returns led to explosive growth in derivatives
15. The search for acceptable yields spurs ‘innovation’ and ‘madcap speculation’, “that sooner or later turns investment geniuses into morons.”
16. Example of the ‘London Whale’ in 2012
    1. JP Morgan hired a trader in London named Bruno Iksil.
    2. Successfully bet on credit derivatives in 2011 making hundred of millions $
    3. He began to double up on his positions (never do this-unless it’s part of your system)
    4. “This was much worse than betting $200 on red in roulette after losing the previous $100 bet. A roulette wheel will continue to give you the same odds of just less than half that red will come up next time. But the credit derivatives market is very small, and other traders had an idea of who was doing what because a gigantic whale-like position could not be hidden in such a small pond.”
    5. Other traders smelled blood in the water and bet against him.
    6. JPM loses more than $6B

Comparing Profits

1. Marxist analysts tend to overlook financial markets (no kidding!)
2. A whole chapter noting that rates of return for banks can’t be compared to rates of return of a ‘real’ company like a steel manufacturer because banks can make profits out of thin air whenever they want
3. Banks and investment banks must be licensed to accept deposits
   1. This helps them maintain a monopoly position in money markets and security markets
   2. Despite the excess profitability of the banking sector, in recent decades few new banks are set up
   3. Metro Bank, established ca. 2010 is the first new High Street bank for 100 years and it took 18 months to be granted a licence for deposits.

Financial assets and derivatives

1. Bank loans often have little to do with financing productive or commercial investment
   1. Banks provide finance for private equity funds or hedge funds that buy equities, bonds, securities but these have nothing to do with investment in the economy

2. Large corporations don’t depend on banks for loans. They sell their own shares. Or use retained profits.
3. Financial companies can accumulate financial assets by issuing their own new securities
   1. Well-known example of CDOs in 2008 that had started in late 1980s.

4. Banks also create securities known as derivatives, for hedging and speculation
   1. Interest rate swaps
   2. Futures
   3. Options on interest rates
   4. Options on currency

5. Banks earn fees when they buy or sell derivatives
6. They are business dealings but they are not capital but they do show up on the balance sheet as an asset or liability
   1. If the value is positive it’s an asset and if it’s negative it’s a liability
   2. This makes sense if you’re an accountant but it is strange for an asset to fall below zero and become a liability - usually it would just become worthless
   3. Similarly it’s not usual for a liability to become an asset in the future

“I have personally created both derivative assets and liabilities for banks as the market values of the derivatives in which I traded moved from positive (asset) to negative (liability) and vice versa. For example, when dealing in money-market derivatives, my position was registering a loss just ahead of the release of some important US economic data. The loss got worse as the seconds ticked down to 1.30 p.m. London time (8.30 a.m. New York time, when the US data were released). Suspecting that some banks in the market were trying to push prices to levels that would make others capitulate, I held on, thinking that the price move did not make sense, given my understanding of market conditions. After the data were published, a dramatic move in prices left me with a profit on my position, as much by luck as by judgement. The gods – Mammon, at least – had shown mercy to one unfaithful to the creed, and the bank now had an asset on its books. On other occasions, I created new assets or liabilities for the bank I worked for simply by doing a deal with another bank on the interbank communications system, or with the broker on the futures exchange who was employed by the bank I worked for. Creating assets with a telephone call is how the magic of the financial markets can make you ‘productive’!”

 

1. Banks can buy derivatives that will both rise and fall with interest rates, much like ‘hedging’ a position in a trade. These counteract each other and increases the size of recorded assets and liabilities but they are not ‘capital investment’ or investment assets as we understand them
2. Bank loans for mortgages or consumption are not capital investments either
3. The large volume of assets recorded by financial companies, especially by banks, will mainly reflect their loans to each other, as well as their holdings of financial securities, derivatives.
   1. Maybe 15% is used for actual productive investment? That is my interpretation of chart 6.1 which I won’t bother reproducing here as it’s huge.

Financial revenues, surplus value and securities

1. Finance does not produce new value
2. Neither does it transfer value from operations to commodities
3. All of its profits and costs are a deduction from the total surplus value produced elsewhere
4. Even revenue from worker’s wages, such as interest from on loans or mortgages, the ultimate source is from surplus value from the productive sector of the economy
5. Securities can rise in value even when the productive economy is in tatters
6. Security prices are not really a ‘zero sum game’ since if the stock price rises the company that issued stock doesn’t really lose the difference in the share price if they had waited longer to issue, instead they gain financial power, prestige and the value of future issues increases. Everybody (issuing company and shareholders) wins when the price rises, and everybody loses when the stock falls.
7. Bonds are not much different
8. Security prices are mainly calculated from future financial flows discounted by market interest rates, profit expectations
9. Financial trading revenues are real if they are received as money and then they are a claim on society’s resources even if no extra resources have been created.
10. As fictitious assets however, the price is based on perceived value, and real wealth can disappear in a crash/flash

The rate of profit and capital’s limits

1. Financial crises can be caused by excessive speculation or excessive debt

“Even when the financial system appears to be the cause of a crisis, a closer look at the background would reveal how its origins lie in the trouble capitalism has generating enough profits. This raises another question: what if capitalism has a systemic problem with generating sufficient profits? Such a problem does tend to emerge, and this is the driving force behind major capitalist crises.

Marx argues that there is a ‘progressive tendency of the general rate of profit to fall’ and this is ‘just an expression peculiar to the capitalist mode of production of the progressive development of the social productivity of labour’. Elsewhere, Marx states that this is ‘in every respect the most important law of modern political economy, and the most essential for understanding the most difficult relations’.”

 

1. Competition between companies forces them to cut costs
   1. Cutting pay
   2. Moving production to low-wage areas
   3. These strategies can only take you so far

2. The only solution is to raise productivity
   1. More commodities needed (raw materials, machinery, tech) compared to the number of workers employed and their labour time
   2. Marx called this a rise in the ‘technical composition’ of capital
   3. The value of means of production will also rise
   4. Foxconn for example had to increase its robot labour force 100x to lower its unit production cost
   5. Organic composition of capital:
      1. Refers to the process of capital accumulation where both technical and value compositions rise together

“While the number of hours of surplus labour determines the amount of capitalist profit, the rate of profit is measured by the amount of profit divided by the value of the total capital invested. “

1. Productivity increases lead to decreased wages, because the commodities the worker needs cost less because the time to produce them has also fallen (???)
2. There is no limit to the raw materials or machinery that a worker can work with (?????) but there is a limit to their time (only 24h in a day) so over time, the profitability of a worker will tend to rise slower than the value of the capital invested in the means of production
3. The rate of profit per worker falls through the whole capitalist economy
4. This is moderated by many factors
   1. Improved productive systems
   2. Improved efficiency of systems
   3. But these effects inexorably wear off as machinery and materials volume rises

5. Over time the rate of profit falls
   1. As it does, the tendency of capitalist crises increases

Outcomes

1. The long term trend to lower profitability has 2 consequences
   1. Profit becomes a barrier to improving productivity or even producing anything at all
      1. “What is produced is not determined by what society decides democratically or by what science is capable of engineering. It is only a question of whether an investment will make a profit, not a question of delivering what society needs with the resources it has available.”
      2. Making money in finance begins to look like an easier option than trying to make a profit via capitalist production, especially in countries that are in the privileged position of doing so.

2. “The financial illusion of creating value out of nothing, particularly by extending credit, can work for a while. But when there is insufficient new value produced on which the illusion can feed, the world is then confronted with an increased burden of debts that cannot be repaid.”
3. The problem of debt repayment plagues the world today
   1. Greek crisis
   2. Collapsing property bubbles

4. It’s not really a problem of debt, just a sign that the economy’s production of value cannot sustain the illusion of wealth
5. Economic crises are not ‘mistakes’ but play a vital role in capitalism
   1. They are the culmination of economic trends
   2. They provide the means that the profit rate can be restored to levels where investment and growth can resume
      1. If capital values are widely destroyed, the few capitalists still standing can buy means of production cheaply and to secure a higher rate of return on investments
      2. This is what happened WW2
      3. Rich countries are naturally reluctant to allow crises to get to the point where they can do much good, fearing social turmoil
      4. The alternative is to put in place huge debt levels

   3. The destruction of capital values is one classic mechanism for dealing with a crisis but hasn’t yet come into play (since 2015) (maybe now??)
      1. Instead central banks have chosen QE and low interest rates
      2. Weaker countries bear the brunt of the damage

   4. Another solution is to increase exploitation of the workforce
      1. Cut real wages
      2. Impose onerous new conditions
      3. In rich countries this has only been attempted in piecemeal fashion
         1. IN the UK 2010-2014 the number of people on ‘zero hour’ contracts with no guaranteed hours quadrupled to 2.3% of all employees
         2. Poorer countries have taken more drastic measures (not explained)

   5. Third policy is the elimination of ‘waste’
      1. Education - why bother when we can import educated workers?
      2. Health and Welfare - added expenses
      3. This is the reality behind austerity policies
      4. Even middle class professions are coming under attack now

Profits, financial and global developments

1. Measuring profit on capitalist investment is tricky
   1. Accounting tricks
   2. Giant corporations with their own supply chain prices
   3. Low-wage countries
   4. Many companies have both productive and unproductive operations
   5. Big profits might have no connection to productivity
   6. Norfield doesn’t actually think a measurement is possible, at least as it was understood by Marx
   7. However he produces this chart that shows all measures of profit rate going down

1. Note that profit was rising from 1980-2000 at least in the US
   1. One reason might have been an attack on working class conditions by using migrant labour and marginalising labour unions
   2. Low cost products from foreign investment with low-wage countries, especially China
   3. Lower interest rates
   4. Financial rescue from the US Federal Reserve
      1. In 2015 the Fed had $2.5B Treasuries and $1.7B mortgage securities on its books

   5. Other central banks have done similar shenanigans

Moribund Capitalism
“Attempts by the governments of the major powers to ameliorate the many problems caused by the wreck of their [capitalist] system have had little effect.This is a socialisation of capitalism’s chronic liabilities by the capitalist state – a means of trying to rescue private capitalism, and pretending that a failed system can overcome its problems to the benefit of all. Such policies have produced only mediocre results at best, and still leave hundreds of millions of people’s lives destroyed. This evokes Lenin’s description of imperialism as ‘moribund capitalism’.”

Chapter 7. The Imperial Web
“In 2009, Rolling Stone magazine’s Matt Taibbi described Goldman Sachs, the US investment bank, as a ‘great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money’.”

Currency, trade and seigniorage

1. For international deals the USD is the main currency used
2. For domestic deals it’s less risky to use the local currency especially if currency rates are volatile
3. The US gains from having the reserve currency, because international commodities are priced using it
   1. In this way the exchange rate risk is always on the the foreign party
   2. If the dollar’s exchange rate goes up, it’s still less risky for dollar-based companies to manage

4. Because paper notes only cost a few cents to print but have big nominal values, they gain from issuing their own currency - this is ‘seigniorage’.
5. The USA, when it pays for imports with its own currency, is exchanging resources for paper, so unless the dollars end up being exchanged for US goods or services at some point, the US economy benefits by not having to exchange its own resources for imports and it means it can chase value elsewhere.
6. Because the dollar is the most widely accepted currency it has an imperial advantage that lends it stability
7. Nearly 60% of all USD in circulation, circulates outside the USA
   1. $500B out of $829B in 2007
   2. 3% of US GDP
   3. Some part of this is used in illegal deals
   4. Many governments have withdrawn high-denomination bank notes because they make it too easy to smuggle large sums

8. Other countries benefit from seigniorage but to a lesser extent

Exorbitant Privilege

1. The US can fund its external deficits by borrowing at a low cost in its own currency
2. It can also earn excess returns on net foreign assets
3. Most foreign currency users don’t hold the physical cash
   1. They hold a bank account or securities denominated in that currency
   2. They receive interest or dividends - so this is not the same as seigniorage
   3. But the USA always has access to cheap, low risk finance
      1. The USA can draw upon world financial resources
      2. Example of Asian central banks buying large amounts of US treasuries
      3. 2000-2007 US current account deficit was $4.7T or 6%GDP
      4. During the same period China increased its foreign reserves to $1.4T
      5. If ¾ of that was held in USD then China by itself funded ⅕ of the US debt

   4. Demand for USD is so high that US yields actually fall
      1. Borrowing costs of the US gov declined by 80bp for ten year debt

4. By issuing debt in USD the USA avoids major foreign currency risk
   1. In a US-centric crisis the USD might fall against other major currencies but the state itself has very little foreign-denominated debt so it faces negligible liabilities from this source
   2. Non-imperialist powers don’t have this luxury
      1. They therefore face a higher borrowing cost as they’re considered more risky

5. US interest costs on US foreign borrowing have been far < returns on US foreign investments
   1. Enables the US to maintain +ve net investment income despite persistent large net deficit on foreign investment positions
   2. 2013 US net foreign investment stock position was negative $5.45B
   3. Foreigners owned this much more of assets in the USA compared to US ownership of foreign assets
   4. 2013 US net investment income was positive $209B due to its ability to pay very low interest on the large US gov debt
   5. Norfield notes that many economists try to hand-wave this advantage away by saying foreigners pay a premium for services - calling the extra value ‘dark matter’ but Norfield asks what ‘dark services’ they are getting in return, especially in the Middle East, Africa, Latin America, Asia

Running the world banking system: US dollar power

1. The USA is a global banker of sorts given that most world trade and finance is denominated in USD
2. Example of a Chinese company that wants to buy Venezuelan oil
   1. “At first sight, no US company, still less the US state, would appear to be involved in this transaction, and neither country has a friendly political relationship with the US.
   2. Nevertheless, a US-based company will normally be involved in the deal and US state acquiescence is necessary. This is because oil is priced in US dollars and the payment, for example $50m, will go through the US banking system.
   3. "The Chinese company does not post dollar cash from Beijing to Caracas in a large envelope!"
   4. The companies in each country will likely have a US dollar account with their local banks. However, these accounts will be held in the US monetary system, possibly via a US ‘correspondent’ bank with which they have dealings or the US branch of the relevant Chinese or Venezuelan bank, if it is allowed to operate in the US.
   5. The Chinese company will tell its bank to credit the Venezuelan company’s dollar account with $50m, either by deducting the sum from its existing dollar account or by asking the bank to exchange the appropriate amount of its local currency into dollars. In either case, it is the US-based bank that will, on behalf of the Chinese company, transfer $50m to the account of the Venezuelan company at another US-based bank.
   6. The dollar transfer between banks is made via a payments system based in the US, either the Fedwire Funds Service, which is under the direct supervision of the US Federal Reserve or, more usually, the Clearing House Interbank Payments System, a privately run international bank-owned system whose US membership is regulated by the US government.
   7. If the Chinese and Venezuelan companies did not want to use the US banking system, they would have to agree on a separate, nondollar-based means of transacting. This could be done, but it would mean agreeing on another currency basis for the deal, for example either Venezuela accepting China’s renminbi (ISO dealing code CNY) in payment, or China agreeing to pay in terms of Venezuela’s bolivar (ISO code VEF). This would mean that the Venezuelan company would end up with CNY, which it may have little use for and which it might then need to exchange into VEF. Or, the Chinese company would have to buy VEF to deliver to the Venezuelan company.
   8. There is a relatively active foreign exchange market in USD versus CNY and in USD versus VEF, but the foreign exchange costs of dealing in CNY against VEF are relatively high, given that very few banks do this, and it may not be easy to do such a deal in terms of market liquidity, making it commercially unattractive.
   9. In any case, in existing financial market conditions, the CNY-VEF exchange rate transaction would probably be done via the US dollar as the intermediary currency (sell CNY and buy USD, then sell USD and buy VEF). But of course this would return the transaction to the US system! The consequence of all these aspects of currency dealing is that even the opponents of US imperialism tend to fall under its commercial rules.”

3. 2009 Russia and China plan to bypass the dollar but the US still has ‘astonishing power’ to economically isolate its foes (best believe Russia and China are ramping up the timeline(s) for this deal)
4. Example of Iranian sanctions - banks outside the USA learned there is a heavy cost for being cut off from the US banking system (best believe if Russia gets cut off from SWIFT it will have dire impacts)
5. “Being cut off from the US banking system would severely damage a major company’s international business operations, so the real power of this sanction is that it rarely has to be implemented.”

Financial Services Exports

1. Exporting a service just means that a foreign buyer pays your for the service; you may not have to travel to another country
2. The US is the world’s largest exporter of financial services
3. Luxembourg is held up as an example of a financial service exporter - a ‘paragon of parasitism’
   1. Large financial sector
   2. Produces nothing of its own
   3. Similar to Switzerland
   4. They both benefit from their status as a tax haven
   5. Hong Kong - after return to Chinese control it is now the financial operations centre for China, almost an experimental staging area where mainland China has been slow to open up
   6. Singapore - uses sovereign wealth funds to manage national financial resources
      1. Known for their aggressive dealing

   7. Ireland
      1. 1980 after centuries of economic stagnation it offered itself up as a tax haven
         1. The gap between GDP and Gross National Income (what is retained in the country) is 19%, the largest in the world. This means that Ireland ends up sending ⅕ work days value abroad in the form of investment income payments
         2. This shows that economic imperialism is not equivalent to simply having a large financial centre.

Equity markets, financial power and control

1. Equity markets allow capitalist companies to issue new securities for sale to money-capitalists
2. It acts as a means of payment in the event of a takeover
3. Example of Vodafone’s takeover of Mannesmann in 2000.
   1. Mannesmann was an ‘alliance partner’ of Vodafone’s
   2. But then it bought Orange in 1999
   3. This contravened a ‘gentleman’s agreement’ not to compete on each other’s territory
   4. The threat to its own monopoly urged Vodafone to make a bid for Mannesmann
   5. At the time it was the largest hostile takeover attempt - VF offering 59 shares for every share in the German group
   6. The share swap involved no bank borrowing or cash
   7. MM could have counter-bid for VF but it was on the Frankfurt exchange, where VF was on the LSE
   8. The strong links between US and British money-capitalists among VF’s shareholders gave them the balance of power
   9. The point of all this is that corporations based in imperial financial centres have the privilege of using their own equity valuation as a means of payment
   10. The bigger the exchange the more easily a takeover can be done, which makes shares denominated in USD, JPY or EUR advantaged

Carving up the market

1. Prominent financial countries can attract foreign company listings on their equity markets
2. The US equity market in capitalisation and volume is bigger than their GDP would suggest
   1. US if 5x bigger than Japan
   2. UK is 2x bigger than Germany

3. The size of exchanges doesn’t change much with the exception of China’s even though Shanghai and Shenzhen opened as recently as the 1990s.
4. A defining feature of the economics of imperialism is the control of financial securities
   1. Marx called it ‘fictitious capital’ but it has very real power for empire-building and appropriating value

Chapter 8. Inside the Machine
Number Crunching: People

1. Just > 2M people work in finance in the UK
2. 7% of all employment
3. >1M in banking and insurance

Tax revenues

1. 2011-2012 financial services contributed £63B of tax revenues
2. 12% of total
3. A large part of the chronic trade deficit in goods is offset by a surplus in services revenues, and sometimes, investment income
4. UK current account surpluses have been rare in recent decades, last one seen was 1983
5. The deficit on goods has remained constant and reached 6% GDP in 2014
   1. This is offset by increased services revenue in the 1980s

Global capitalism financial broker

1. The UK surplus on financial services is only a bit smaller than the USA’s
2. “London’s dominant position in trading all world currencies has remained intact despite the advent of the euro and the earlier fears of UK authorities that Frankfurt or Paris might erode its market share. The boom in electronic trading has neither undermined the City nor led to a shift of business to cheaper, alternative locations.”
3. Norfield proceeds to go into minute detail on all aspects of British banking, including stats for its assets, liabilities and returns. Does it matter? My current mood says no, but if you disagree, get the book.
4. Analysis of the pattern of returns suggests that the glory days are fading for the UK
5. The UK sensitivity to the funding cost of debt makes it concerned with maintaining a high credit rating
   1. When its rating was cut to in 2013 because of domestic debts, it didn’t have much impact however it outlined a vulnerability to future interest rate rises

The City’s Network, Tax Havens and Global Finance

1. Offshore British financial operations are located in the USA, Guernsey, Jersey and the Isle of Man, also Netherlands, Ireland and Luxembourg
2. The UK banks are better networked
3. UK banks are net borrowers

9. Eternal Interests, Temporary Allies

1. Mark Carney, governor of the BoE suggested that by 2050 Uk-based bank assets grow to reach 9x GDP, ‘safely’ of course
2. These remarks were treated with scepticism by the press
3. Norfield argues it is delusional to think that a finance tax would be able to fund anti-poverty and climate change programs
4. “ If there were new taxes on equity, bond and derivatives transactions, or other measures to constrain financial trading, this would probably curb the growth of the financial sector in the countries to which the measures apply. But financial dealing has not caused the world’s problems, and these measures barely address even the symptoms of the crisis that capitalism faces. They would be less effective in solving economic problems than homeopathic medicine is as a remedy for cancer or a brain tumour.”
5. Even if it were possible it’s not clear how it could be implemented without global agreement, which is highly unlikely
6. The LIBOR scandal changed the company that oversees it, but the calculation and the market are still based in London
7. “Britain is a welcoming haven for foreign financial corporations and financiers, one where the financial dealings and other activities of ‘non-domiciled’ residents receive more favourable treatment from the British legal system than they might face in their home countries. UK courts are often called upon to rule whether a foreign billionaire is right or wrong in his case against another usurper of social wealth. No machine guns, bombs or even bribes are necessary, although substantial legal fees are due to our learned friends in the legal profession.”
8. More loosely related to the UK’s position as a welcoming centre for international finance are the purchases of UK commercial and residential property, football teams, newspapers and other trophy items by Russian and East European oligarchs, Middle Eastern plutocrats and others.10 Economic analysts might find it interesting to work out the ‘value’ of the personal/political security enjoyed by the owner of a prominent UK football team, as well as the opportunities such ownership might give for money laundering. Notably, in the wake of Russia’s incursion into Crimea at the end of February 2014, a UK government policy briefing made it clear that it would seek to exempt the City of London from any EU or US sanctions against Russia: Britain should not ‘close London’s financial centre to Russians’.11 The value of the economic, political and social connections between the UK and foreign financiers was also indicated by the £7bn-plus crisis-related injection of capital into Barclays Bank from Abu Dhabi and Qatar’s sovereign wealth funds in October 2008.” (et quid nunc)
9. Other threats include rising current account deficits
10. Domestic politics
    1. Scottish independence
    2. The Irish question
    3. Brexit

    
    

11. Islamic finance is a growing concern of the City - this despite a political history that hasn’t been very friendly to Islamic countries
12. Something about BRICS - it’s very long and luckily the book is nearly done!

Finance and the rule of capital
“What is or is not acceptable under capitalism today, what looks possible or ‘uneconomic’, is judged by the availability of funds, and the prices and yields on the relevant equity and bond securities. “

“Like others at the top end of the hierarchy, but sometimes with a more diplomatically informed strategy, British imperialism has created a financial machine that functions as a vampire’s blood bank for the surplus value produced worldwide, from every country and in every currency. The City takes a sip from every value that flows through it in the financial deals it makes as a global centre. More than this, the securities traded by the City and elsewhere have a market price that, in terms of economic value produced, is unborn rather than undead. These securities represent a claim on the future value produced in the world economy, but also reveal the present wealth and controlling power of their capitalist owners. In this respect, at least, they have the edge on Dracula. Only a stake in the heart of the capitalist system, not simply in some of its financial forms, will be enough to see an end to the power of the beast.”

How could anyone be so naive as to think that capitalism could be ‘killed’ any more than human nature can be conquered? This is the classic problem with Marxists, but I suppose this debate is better saved for another book, maybe a Smithian perspective? And maybe after we’ve looked at books that actually involve trading, as I initially thought this one was.

Next up: New Concepts in Technical Trading Systems by Welles Wilder. Yay, another TA book!!!

Link to Google Docs version with footnotes

Welles Wilder's New Concepts in Technical Trading Systems

Don't let the 'new' fool you, this book is a classic, dating back to 1978. The recommended tool for use with this book isn't a computer, but a programmable calculator!

If you haven't heard of Wilder before, he's quite a character, and is probably one of the 'fathers' of modern technical analysis. Probably 1/2 of all the bunkum bogus and silly theories that people on trading forums still believe in are his brain children.

I'm going to skip his biography though and go straight to undoing his decades of influence.

1. Welles Wilder (WW from now on) begins by reassuring the reader who is concerned that too many people trading one of his systems will cause a concentration of orders at the exact same point, resulting in bad fills (bad news - this is happening anyway because all retail traders trading with indicators do the same thing, and it gets worse from there, because it’s not a bad fill you should be concerned about but the fact that dealers are going to take the other side of whatever direction you’re all trading)
   1. To solve this he offers a ‘range of parameters’ for every system
   2. He also offers worksheets, calculator programs, and a few other accessories for a ‘nominal fee’ (WW is in business, but not necessarily the business of trading)
   3. WW reassures the reader that his values are part of a normal distribution (which concept he goes on to explain) and that he has selected the best range from hundreds of different commodities. “The differences in the end result are insignificant” (likely true, but then why would anyone think these ‘insignificant differences’ would save them from a bad fill or failed trade?)

Basics
Wilder defines what I call ‘relative extrema’ but he calls them LOPS and HIPS. These are actually useful concepts! Maybe one of only 2 useful things to know about ‘price action’.


LOP = low point, you might know it as a swing low, or a bottom fractal
HIP = high point, you might know it as a swing high or a top fractal

SIP = significant point
You can have HI SIPs or LO SIPs
HI SIP = highest point achieved while in a long trade
LO SIP = lowest point achieved while in a long trade

SIC = significant close
HI SIC = highest favorable close in a long trade (that you can expect to realistically get I suppose?)
LO SIC = lowest favorable close in a short trade

SAR = stop and reverse
This is the point at which a long trade is exited and a short trade is entered or vice versa. (not the indicator I assume, which WW probably invented)

Technical trading plans have 2 parts

1. Technical trading system
2. A capital management technique

Trend following systems tend to give back their profits in sideways ranges (true).
An anti-trend, congestion phase system is profitable in sideways markets, however smaller frequent trades makes trading costs a factor. And when the market trends it becomes unprofitable. (true)

WW has never seen any one system that is consistently profitable in all markets (@me!)

The solution is to rate each commodity of interest in terms of whether it is trending or ranging. We also need to consider if the market is volatile and the margin requirements and commissions of the security.

All four factors are weighted and combined in the ‘Commodity Selection Index’ (CSI)
The highest rated will

1. Have high directional movement
2. High volatility
3. Reasonable margin requirements
4. Reasonable commission rates

So far so good - next: The Parabolic Time/Price System

We wait, with bated breath, lol.

EDIT: Your posts above must have taken some time to copy paste, thank you, an 'interesting' read. : )

Actually I do trust the settings, and I dont trust the settings.....here's the thing, first of all I follow your thread and use some of the tools very successfully, but I dont need to understand everything, I test until I gain trust by live trading.....small to start, increasing as confidence grows. Now back to Ichimoku, I know this was constructed before 24 hour trading, before 6 days trading, or 7 days in the case of Bitcoin (the originator would throw up his hands) so how do the standard settings work overall.....I would have to say awful if you use it during Asia, you can loose your ass during London, but NY is another matter...the results of money movement during Asia and London set the parameters for NY in my opinion.

If you break it down to just the NY sessions you will find by experience ichi can provide a very clear roadmap for intraday trading, like today for example and even using the 5 min chart (ouch you say). Now, I add a few things that are significant in NY, the big round numbers, the 50 percent retrace from a day before if a strong move etc....but I don't know how clear you have to be to stay on the right side of a trade using the chart below....a clear example of what I have experienced over and over and over.

To sum up, yes we can trust the settings, with certain criteria, that being the NY session only for me....

ps.....if it is inappropriate to post charts here just tell me and I will erase, I just felt it necessary to answer Parisboy...whom I respect a great deal.

Yes, all on-topic views are welcome. And we are in agreement re: PB. It is interesting that you find a difference between sessions and would be worth thinking about what could be the cause for that.

The Parabolic Time/Price System

Its name derives from the parabola shapes that it makes when charted. It allows the trade some room to move initially and then gradually ‘closes in’ forcing it to exit or to move in the desired direction. The stop is moved not only according to price, but according to time.

WW refers to fig. 2.1 throughout the description

1. He enters long on day 4
2. The stop is set at the SIP (recall that it’s the extreme price point of the prior trade) and you can see the low of the LOP is at the same level (50) as the stop ‘dot’ on day 4.
3. Every time a trade is stopped out it reverses the trade direction of the next trade
4. Each stop point is called SAR (stop and reverse)
5. To calculate the stop for the following day, take the highest price reached on day 4, subtract the SAR from day 4, and multiply this distance by the ‘acceleration factor’, 0.2 and then add this amount back to the SAR for day 4. The result is the SAR for day 5.

SAR₅ = SAR₄ + AF (H₄ - SAR₄)
If we use 50 as in the day 4 value we get

SAR₅ = 50 + 0.2(52.50 - 50)
= 50.05

The AF (acceleration factor) is also increased by 0.02 each day that a new high is made. Its max value is 0.2 (so 10 steps)

The general equation is

Where EP = Extreme Price point for the trade made so far. If long, EP is the high for the trade, and if short it is the low.

Luckily for us, WW invented the PSAR indicator (https://en.wikipedia.org/wiki/Parabolic_SAR) and we can probably use the one that comes with MT4 if it seems to behave the same way as described, and I believe it does - but we’ll check to make sure.

Rules
Entry:
Enter when price penetrates the SAR

Stop and Reverse( SAR)
(we’ll just let the indicator handle this)
Except we’ll add section C - never move the SAR into the previous day’s range or today’s range

1. If long, never move the SAR for tomorrow above the previous day’s low or today’s low. If it is, use the lower low between today and the previous day.
2. If short, never move the SAR for tomorrow below the previous day’s high or today’s high. If it will be, use the higher high between today and the previous day as the new SAR.

I don’t know, maybe the PSAR indicator already handles this logic? It seems to do.

WW goes through a detailed and lengthy explanation of how to do this manually but in the era of computers that would be madness. Let’s just put down the PSAR with default settings on D1 price history of our choice using EURUSD, the old standard.

I’ll use 2021.01.01 and test for a year to start, as per usual.

WW adds a couple of additional wrinkles though, as system designers are wont to do.

To find where to begin trading this system (since it is always in the midst of a trade or beginning a new one) we use this method:

 

1. If the trend is UP go back ‘several weeks’ to a HI SIP on the chart and make a paper trade short entry on the most significant down day within 3-4 days after the HI SIP.

Of course, having the indicator we needn’t do all that but simply wait for the next SAR change and enter at that point. Which is what happens January 08. Trading is so much easier than it used to be, amirite?!! (sarcasm)

WW also tells us we can use the ‘directional movement index’ to take only long trades when movement is UP and only short trades when movement is DOWN but haven’t been introduced to it yet, so I’ll skip that for now.

WW is also a bit vague about exits as is usual for trading book writers, but I’ll try to use ‘common sense’ to sort out any difficulties.

Here is the first trade: (update: in fact the entry I show here is a little late as the PSAR dot that was broken would not be the last one showing but the one that isn't shown, because direction has flipped - if you were trading this live either at the open or close of each day you wouldn't ever make this mistake as the indicator would clearly show the most current dot.)

The high of the penultimate bar in this trade doesn’t quite touch the SAR point, and so I exit at the open of the new bar, because the putative SAR point will be beneath the price, though the indicator doesn’t show it as it has already flipped. This trade is a success

The next trade will of course be long.

Attached Image (click to enlarge)

It is a worse loss. I can tell you having traded this system and many other ‘always in’ systems that it is statistically more likely for the trade after a win to be a loss than simple random chance would dictate, for many reasons that are beyond the scope of this book summary. It is one of several reasons I stopped trading systems like this one.

We enter short immediately, as WW hasn’t given us any reason not to do so, but you see how the height of the candle in question is all-important because this is a terrible short entry price, since price has already fallen so much.

Attached Image (click to enlarge)

Despite this, the trade would have soon been profitable but it exits too late as the SAR point is a bit laggy. Some PSAR indicators let you mess with the period of the SAR but then it really is not much different from a Moving Average, and as WW himself has said, in a trendy environment it will do exceptionally well and in a range it will return all its gains and more.

But let’s not be too negative until we finish the yearly test.

So how did it do from 2021.01.03 to present day (I forgot to stop at the end of 2021)?

Not bad - more than 1,000 pips in 15 months. This reminds me of the performance of something like PEIRSE. However this was a period with many good trends. Note that WW's post-mortems all use charts that look like this:

I will leave it as an exercise for the reader to try it in 2012-2013 when price was considerably flatter.

I'm sure you can think of ways to improve this but for now let's move on to the next Wilder invention: the Volatility Index.

Swede thanks for the remarks about the session.

I never was impressed by Ichomoku because there is no explanation of why we have to use such mysterious settings Moreover all the (french) users , unable to explain something shot me on sight " do not touch something unbeliever !"

Any way I can produce my own Cloud / Kumo (SMA 16,32)

I can even add some FLD (Future Line of Demarcation) FLD 64 - Price offsetted 32 Time Units in the future - and generate a Simplified Parisian Ichimoku. Chart

May be I could sell seminars, publish a newsletter, organize conferences.

IMHO all that is possible because, quotlng Jim Hurst, structurally, by construction, Moving Averages are so"robust, but not bad" a tool ( a frequency filter) that when using almost any setting combination you can get useful information for trading and even generate some profit.

I thought you might challenge the standard Ichimoku, you didn’t let me down!

“profit?” Are we still doing that?

Swede no need for anybody to challenge the Standard Ichimoku.

IMHO Ichimoku is just a complex mix of Moving Averages, accomodated with a pinch of Hurstlike tools : some MA forward , some MA backward.

Nothing really new under the Rising Sun!

New Concepts in Technical Trading continued
Section III - Volatility and the Vol index

WW asks a very sensible question that most trading book writers don't ask, maybe because it seems too simplistic, but in fact, it's fundamental to good trading.

What is volatility?
Not hard to answer, but for ten different traders you might get 7-8 different answers.

For WW volatility is about 'market action'. If a market is active it's volatile. If a market is inactive, it's non-volatile.

Something that is directly proportional to volatility is the range of a security’s price. We can define range as the distance the price moves per increment of time.

Since WW was writing this book mostly for futures traders he added some extra definitions to account for days when price is limit up or limit down. We won’t get into that in any detail, but here are the definitions.

The ‘True Range’ is:

1. The distance from today’s high to today’s low (what we expect)
2. The distance from yesterday’s close to today’s high (only relevant to FX traders if there’s a gap)
3. The distance from yesterday’s close to today’s low (again if there’s a gap)
   Attached Image (click to enlarge)

   
   

To work on WW’s preferred daily timeframe we need more than one day’s measurement as fluctuations are the standard market modus. So we consider an average of the true range measured over a period of days.

How many days should we use for the period? Of course Parisboy would be able to give us a very specific figure for any instrument, using his arcane wisdom, but WW gives us an arbitrary figure that is good enough for most anything. 14 days (2 weeks).

WW tells us that we use the VI (volatility index) along with the DMI (directional movement index) to get the CSI (commodity selection index).

TR = today’s True Range

Next: the Volatility System

The Volatility System
WW uses a 7 day range for the Volatility system, not 14, because we need a ‘faster acting’ average true range (ATR) (Sound familiar? Yes WW invented the ATR also! No wonder he’s a legend.)

This system is another trend-follower, and another ‘always-in’ stop-and-reverse system.

WW assures us it is ‘extremely simple’ to follow but if you lived in the late 70s or 80s you would have to go through pages of explanations of how to derive the equations for calculating the ATR. Luckily for us WW invented an indicator that we will use instead.

The final step of the equations is to take the ATR value and multiply it by a constant, C, to get the ARC (average range x constant).

WW tells us the best constant to use is 3. (Which is interesting because before I read this book I always instinctively chose 3 as the multiplier for any ATR calculations that needed to be done in my own systems. Is there something important about 3? Three standard deviations maybe?) So, ATR(3.0) = ARC.


Recall that SIC = significant close, the most favorable close price in the prior trade. However here the SIC is simply the high from the past seven days. What this is telling us is that there is basically a band placed around the price range equivalent to the ARC value. (I wonder if there are ARC bands indicators?)

We exit and reverse a position at a distance of one ARC from the SIC, whenever price exceeds the ARC in one direction.

We take the high close price of the SIC and subtract it from the ARC value to get the SAR value to use for day 8. Then on day 9 price retraces and closes below the SAR, reversing the direction of the trade to short. We add the ARC value to the close price of day 9 to obtain the SAR for the short trade on the 10th day. If price fortunately continues to move down we continue to measure the ARC distance from the lowest close made while in the trade until we are stopped out on the first close above the ARC.

In some cases volatility will increase and push the SAR further away from price the next day. This is allowed. The point of this system is that it compensates for volatility, widening when price speeds up and contracting when price slows down.

System rules:
Definitions
The True Range is the greatest of

1. Today’s high to today’s low
2. Today’s high to yesterday’s close or
3. Today’s low to yesterday’s close

ATR - Average True Range

1. Initially obtained by adding the true ranges over 7 days and dividing by seven
2. The latest ATR is obtained by multiplying the previous ATR by six, adding today’s true range and then dividing the total by seven (we’ll just use the indicator, thanks!)

C- Constant - any number between 2.8 and 3.10 (we’ll just use 3)

ARC - the ATR multiplied by C

SIC - the significant close; the extreme favorable close price reached while in a trade

SAR - the stop and reverse point, defined by the ARC distance from the SIC

Rules:

1. Entry is made on the close when the price closes contrary to the SAR
2. SAR
   1. From long to short: on the close when the close is below the SAR
   2. From short to long: on the close when the close is above the SAR

   
   

WW tells us this system trades less frequently than others in the book. It is designed to pick up and hold on to long-term moves. So it should only be traded on instruments that are high on the CSI, which is explained in Section IX.

Next: I can’t wait to test this elegantly simple system that uses an indicator that actually has a defined purpose - the ATR! No wonder this book is a true classic of TA.

It's clear that to do this manually is going to be tedious so at the risk of introducing some error, I'm going to try coding an indicator that reproduces the SAR points according to the maths such as I understand them.

update: I've done that and it is attached if you wish to try this out, and/or see if I've stayed true to the book. Guaranteed not to be bug-free.

Attached Image (click to enlarge)

So how did it do in 2021?
The results are not encouraging. It seems to perform worse on the same history than the Parabolic system. It does place fewer trades, as advertised, but it doesn't seem to keep us in trends much more than PSAR.

The solution? Change the ARC factor (increasing it seems to make things worse), or trade the weekly timeframe (you'd still be enjoying a single huge win with a positive swap differential if your broker is honest) or change the ATR period? Who knows? The only way to be sure is to perform experiments. That's the fun in farming as my dad used to say.

WW has the audacity to offer this as a sample trade:

As for me I'm reminded why I moved on from Wilder & Sons whimsies, produced by the bushel and sold at a discount. They seem innovative and interesting, not based on any prior art of Technical Analysis, but ultimately they're usually not much better than what you can come up with using a little experience and common sense.

If you're going to ride a trend, ride it until you hit the range; why do you need an indicator to tell you when that's happened? Don't start until price is near an opposite extreme point (dip or rally) in its range. Have some maximum/minimum drawdown and some average values from past history. Get out when it seems to be doing something historically unprecedented.

Next: the Directional Movement Index

Section IV - Directional Movement
WW claims this is the ‘most fascinating’ concept he’s ever studied. He claims that defining it is tricky, and I’m sure you’ll agree when you see his solution he does make it tricky. However there are many other ways to do it, too, like distance from a Moving average, which seem to me at least, simpler.

It’s clearly desirable to trade the instruments that are moving fastest.


In fig. 4.1 the movement is up and the magnitude is the difference between points C and A. This is today’s high minus yesterday’s high and this is noted as PLUS DM (+DM). Since the move was upwards only the highs are measured.


4.3 same idea, but downwards, so only lows are measured. This is (-DM). However 4.4 shows an outside day where the downward movement exceeded the upward so this is also -DM. DM must always be up or down never both. However it can be neutral (zero) on an inside day.



To summarize this principle in all circumstances:
“Directional movement is the largest part of today’s range that is outside yesterday’s range.”

If the largest part of today’s range is above yesterday’s range that’s +DM, and if it is below that’s -DM.

We express DM as a function of True Range, as part of its increment. We divide DM by TR to get the Directional Indicator or DI.


Where the subscript 1 means this is the measurement for 1 day.

Again, as with True Range we obtain the sum of the DIs for a period of time using a 14 day average.


Again there is a page with equations explaining how to calculate this but once again there is already an indicator that handles this, in MT4. It’s clear that while Bill Williams gets his own folder in MT4, Welles Wilder deserved one too.

The real breakthrough WW tells us, is that true directional movement is the difference between +DI14 and -DI14. The more directional the movement of an instrument the greater will be the difference.

The Directional Movement Index (DX) is obtained by dividing the DI difference by the sum of the previous differences. This is either multiplied by 100 or the decimal point is dropped so that the result is always between 0 and 100. The DX is movement type agnostic, that is, it doesn’t matter whether the move was up or down, a high number indicates more movement.

A 14 day period average of the DX gives us the ADX, which is the indicator we’ll use. We’ll go long when +DI crosses over -DI and short when -DI crosses over +DI and we’ll only trade the highest ADX instrument.

WW gives us another measure to use for this purpose called the ADXR. This is ADX today and the ADX 14 days ago divided by 2.