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Friday, July 6, 2012

A Financial Lexicon

Like everything in the financial world, language is something not intended to convey meaning, but to obscure meaning.  Here are some current terms in heavy usage, along with their real meaning.

Hedge:  Risk.  When a bank or a Hedge Fund, refers to a Hedge, they are referring to an extremely risky gamble.  The word Hedge implies the defraying of risk.  In current usage it means the adopting of extreme risk.

Alpha: Risk.  Creating Alpha, delivering Alpha, searching for Alpha make it sound like Wall Street is doing something very sophisticated, when in fact, it just means taking on tremendous risk in the hope of great rewards.

Political Will: (to deal with debt.)  Political Will in this case is a code term for the will to take on infinite new levels of debt.  You'd think it would mean the will to suffer a draw down of debt.  In fact, it means just the opposite.

Back Stop: (ie the debt crisis):  Create infinite amounts of new debt.

QE, Quantitative Easing: Creating tons of New Debt.  You can think of it as "printing money"
which is a quaint industrial age equivalent.  But printing money means creating debt.  

Free Market: The Free Market is a mythological financial beast, admired by the hopelessly naive much in the way that unicorns are admired by young girls.  All economies are controlled by Central Banks.  Central Banks control the issue and distribution of all money/debt.  What's "free market" about that?

Diversified Portfolio.  A diversified portfolio means you simply buy a little of everything available.  It is a term meant to signify a complex and sophisticated investment strategy, when in fact is it a most simple minded and naive strategy employed by those with no investment point of view.

Uncertainty: as in "the markets hate uncertainty," or "business hates uncertainty".  In a financial sense, Uncertainty is synonymous with "The Bogey Man."  Any time the market outcome is not what one would prefer, you can always try to sound intelligent by blaming "Uncertainty," because, after all, the future is always uncertain, 100 percent of the time.  

Clarity:  When a particular issue is resolved in exactly the way a particular commentator desires this is said to produce "Clarity."   Supposedly the markets, and business like Clarity.  And in a linear, two dimensional world where issues occur and are solved one at a time, this might be true.  Unfortunately, that world doesn't exist.

Liquidity Crisis vs Solvency Crisis:
In current terms, Liquidity refers to Central Banks keeping rates artificially low or negative to create easy access to new debt.

Solvency refers to the fact that debt levels are so high that no amount of "liquidity" has any real effect on the economy.

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