Following on from my last two articles that went from the very factual release of the Basel-III announcements to the theoretical potential of market-based capitalisation ratios, I thought I would round this off with a little bit of sci-fi:
The year is 2101 and you and your family have decided to buy a house. This is an exciting time for everyone in the family. You are about to take a front and center place within the economic world and build a long-term sustainable shelter for you couple and your potential future descendants. Much as the generations before you, you are faced with some hard choices as to the where and how of your residence. You want a place that represents safety but also value, after all, this is one of your single largest lifetime financial decisions. You find your dream home and begin the purchasing process:
You contact your local mortgage broker who at this point reaches you directly via a neural plug to your subconscious and telepathically goes through any potential background checks, no moral hazard available in regards to misleading factors as, for a brief period of time, the broker becomes you and vice-versa, a true contractual meeting-of-minds is made.
Once the initial contact made, the broker reviews your submission and prepares a relevant security for your mortgage. Within two seconds of the property being verified, valued and surveyed by the realtime 3D Google terra-survey database, your mortgage is out and listed on the the new PAN-ASIA-PAC–GLOBO–EURONEXT 24/7 exchanges as a discrete security.
You are so excited that you decided to google the bing over the securities and Re-Bark its release over your local psycho-social network. Your friends, colleagues, family are all notified of your new entry into the market and their automatically rebalanced retirement savings investment algorithms lock on to the security’s bid within their current preference settings for social ethical support mandates and help smooth the yield over your new mortgage security.
Your enemies, professional rivals, and former heartbreaks also hear of your access and decide to take a negative short view over the listed security. An ensuing trading turnover commences where investment algorithms are locked, bid and offer, against each other, ensuring continual optimal price discovery and smooth entry into your new street’s, neighbourhood, city, and country’s real-estate indexes. Upon your entry, institutional investors decide to rebalance towards a long-term hold until maturity view offering yet more liquidity into the market.
As is now common practice in 2100, much as home and contents insurance became the norm in the late 20th and 21st century, you decide to take a dynamic short position over your own house through the use of physical short positions and related derived synthetic positions over your local street, neighbourhood, city, country and global real-estate indices.
This short position is directly weighted against your upfront deposit, calculated in real time through a live market analysis margin calculation system, and set to offer you an ongoing optimised protection over your deposit and ensure an optimised return on your housing financing costs.
Wait, Is This Science-FIction Or Recent History?
Didn’t We Just Have A Securitisation Breakdown.
Okay, so we know about Asset Backed Securities, Mortgage Backed Securities, Collateral Debt Obligations, Collateralised Loan Obligations, housing churn, Adjustable Rate Mortgages, Fannie Mae and Freddie Mac, and the list goes on. After all, we just had this right? We’ve just had a market go amok and not quite work?
Well, and you can quote me on this if you want to take the viewpoint that this is the understatement of the century, yes we have and there’s been a slight downturn in this market. But, if the history of capital markets is anything to go by (insert usual caveat about historical performance do not guarantee future returns) then this downturn will not lead to the dissipation of securitisation nor an end to growing liquidity in the housing market.
Quite to the contrary, it is proving a new dawn for the erstwhile opaque industry. Markets, at times, can end up falling into the shadows, lose sight of the value of openness and transparency and become locked into obscure practices. This can lead to unfortunate situations as the recent three year history firmly demonstrates.
Out Of Darkness Comes Light
But out of the dark comes light and, much as in another good book, Fiat Lux can make for a very exciting new start to any chapter. The open review of the mortgage and securitisation industry will, and already is, enable us to move towards better practices and better norms. Indeed, it is the stepping stone towards sustainable growth.
Some Past Examples of “Obscurity to Light” Market Developments
Remember end of 2000 and early 2001, when every stock investor, broker and pundit swore never again to go near a .com tech stock? Remember how we criticised and condemned the practices of so called “growth” companies that never actually paid any dividends and therefore could never reliably produce value for their owners? Move on a decade and the tech sector proved to be one of the most resilient equity models out there.
Flagships such as Google and eBay continue to derive value from their growth models, counting year on year of reinvested profits into their brands and corporate entities still without providing any dividends to their holders. Other tech companies have also broken new grounds, sometimes off the listed markets but with listed partners: Facebook, Twitter, MySpace. Apple continues to try and innovate and remains looking cool and seductive to teenagers at the mature age of 36 and counting.
Oh and from a societal point of view, take internet ubiquity, newspapers on your ipad, video cell phone calls and always on, always moving technological carriage. So much for a tech bubble, it seems as though it was more of the initial wave crashing through our piers, at first we were afraid of that sea but now we see…
Okay, so you say that this past example is different, it is based on engineering substance more than just financial innovation and economic liberalisation. Alright, so remember the smartest guys in the room? Remember how they provided the trading and securitisation infrastructure to convert electricity wattage into a distinct security? Remember the uproar against the rolling blackouts in California and the anger that an arbitrageur might have been behind it? Or the anger behind a company where earnings were based on a discounted cashflow model over future energy carriage: ie on something that can not be touched or captured rather than something that could be held right-here, right-now?
Alright, now take today, with energy and power grid futures across global markets, around weather derivatives and their association with wind and solar centers to provide a more fluid and constant renewable energy price discovery mechanism. Take oil future trading growth and the new renewable energy trading certificates market mechanics. I’m not saying that all the solutions are nicely ordered out and that their operations are smooth or that ongoing vigilance is not a core prerogative for any market participant but markets do learn and they provide strong incentives towards those that follow the lessons of past mistakes. Incentives matter, they drive people.
Our market developments can be vicious and the shakes and moves that we encounter moving ahead are difficult at times but, in case you were wondering, the Case & Schiller Home Index is up over GLOBEX in futures and options format, the Australian RP Data-Rismark Home Value Index is coming up on the ASX as a Property Indexed Contract, and that’s not science-fiction, that’s today.
- Background Links:
Minority Report Trailer
Legal Principle: Consensus ad idem
A Future Real Estate Valuation and Surveying Database?
Bloomberg listing of largest Asia-Pacific stock market indices
CME GLOBEX: 24/6 Electronic Market
EURONEXT: Europe wide integrated stock market
Google or Bing:Who will be the next market data provider?
Trends Monitoring on Twitter
Wikipedia: Algorithmic Trading
Algorithms explained: The Iceberg order
New York Times Article on the GS Abacus Team
Bloomberg article on Mr. Lippman
“Dude I’m Short Your House” T-Shirt on zazzle.com
S&P Case Shiller Home Price Index
FT Lexicon: Ethical Investments, Short position, listed security, Asset Backed Securities, Mortgage Backed Securities, Collateral Debt Obligations, Collateralised Loan Obligations, Adjustable Rate Mortgages, Fannie Mae and Freddie Mac “growth”
Some More Tech Companies: Facebook, Twitter, MySpace, Apple
The unfortunate history of Enron: smartest guys in the room, the rolling blackouts in California, Enron’s Business Model
CME introduction to the energy hedging market
CME introduction to the power market
CME Weather product line
CME Green Futures
SFE renewables and energy markets securities
CME: Case & Schiller GLOBEX FUTURES
RP Data Australian PIC launch