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Archive for the ‘Finance and Economics’ Category

We finance folks have the propensity to confuse the heck out of everybody on simple terms (or issues) relating to finance. We will sit around talking derivatives lingo and other market issues like its alien- speak to others – it really, is not! I usually say to people:

•It is not that difficult

•If I cannot explain my model, in words – i.e. what the model is, what is does and how it does that, I have no business just plugging in numbers, “letting it calculate”, then looking at a number and saying “Well, this number means XYZ” – that is utter nonsense and is one of the reasons why the financial mess in 2008 happened – people not knowing more than just “that number”!

•You must interrogate what the terms and ensuing numbers and operations mean – if you don’t understand exactly what an ABS (Asset Backed Security) is, what it does, how it works, what the end result is intended to be, variations to, relation to other market variables – seriously, you have no business, just “doing ABS “on the quantitative front – because really, what the heck are you doing?

•The market place is very dynamic; what worked in 2007, might still be relevant today (or not), but certainly needs analyzing to ensure it still fits! That business of “this is how we do it” – yah, that doesn’t hold water for serious minds.

Simply stated at first – and I intend to go into detailing in subsequent posts to explore the different facets pertaining to hedging. (I hope to be a better blogger in 2013 – because I am always writing something, someplace anyway!)

So, Hedging:

What is? Hedging is simply the practice (art and/or science) of minimizing losses in your portfolio. It will mean, you make an investment of some kind to ensure that the value of your assets is protected from adverse price movements in the market.

Simple!

All you are trying to do is ensuring that at the end of it all, your $1 is at least still equal to $1 and not $0.98. The goal of course, it to ensure that your $1 yields some profit, but at the very least, you are not trying to lose any money, no matter what the market dynamics are.

Why?

We hedge because of imperfections in the market; ideally, prices should adhere to demand and supply forces. They do not (sometimes, most times actually!) and there is therefore, the potential to make lots of losses if we do not employ strategies (hedging), to accommodate for the volatility in the markets. We therefore hedge to minimize risk exposure in markets (and hence maximize opportunities presented by these very same financial risks, while factoring in the cost of the hedge). We hedge to manage market risks – in a nutshell.

What do we hedge?

Commodities (agricultural or non-agricultural), credit risk, currencies, interest rates, weather (yes, we do have weather derivatives) etc.

How do we hedge?

First you must consider the general organization’s policy and objectives on risk management. This would include types of hedging employed, limits and other guidelines that define the what to do and what not to do as far as hedging is concerned. This is absolutely important, because hedging can never provide cookie-cutter solutions; it is a subtle balancing between market dynamics and organizational objectives. It must be what works for you (which is why as a consultant, I can never, ever recommend generic hedging strategies for a company without understanding the key underlying issues of that company, in relation to market dynamics at a particular point in time while anticipating expected future results and trends)

Then, you develop a strategy that works or you (and I will be detailing specific hedging strategies in follow up posts), and implement and monitor said strategy (usually will be a combination of various methods). You will need to have a strategy that is viable both qualitatively and quantitatively – Like I observe, if doesn’t make sense in words, it probably will not in numbers!

I find that proper documentation of hedging (and risk management strategies as a whole) is imperative to ensuring constant review of implementation, controls and adjustments.

Some forms of hedging will include (but not limited to): futures contracts, options, swaps, forward contracts, EFTs etc) as applied to commodities, currencies, interest rates etc.

My next post will focus on better definitions of some of the terms referenced to in this post……Then we will keep going. Happy 2013 folks!

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Apparently or evidently, trying to explain, not the definition kind of explaining, but the “what exactly does that mean kind of explaining” on different issues in futures and commodities trading, in Kenya, can take one 3 years – and counting.  Quite understandably so because: Unless you have had an opportunity to have a hands-on experience with issues in Futures/Commodities trading, all you will have is theoretical know-how – which will not really translate to much in the short term. But folks aren’t even trying – and that’s what’s exasperating! Let’s all take that theory from finance and MBA classes and begin to understand it!

 

We have been expecting to have a Futures Market in Kenya since 2009 – word has it, we will have one “soon”. Whatever that means! So the CMA has somewhat restructured to be in line with this “soon deadline” by appointing a manager for the upcoming Futures Exchange. As of April 2012, the search for consultants to draft trading and oversight rules for the proposed exchange was still on. Again, a move I can understand because unless the Exchange is well structured, in line with International Best Practices (pardon my use of MBA – type redundant terminology like “best practices”!), we probably will not achieve much from it.

 

Maybe, instead of trying to find “a” consultant to structure the entire exchange, the CMA could, break down the different facets comprising an Exchange and find consultants for those. An exchange will need to define everything from front to middle to back office and different things must be addressed: structuring of contracts (pricing, contract types, how they trade, expiration, margining, clearing, reporting, delivery, settlement etc) regulatory structures, taxation issues etc.

 

In my opinion too, the CMA will need an “arm” that will, solely be tasked with addressing issues of the exchange – something like the NFA (National Futures Association) and CFTC (Commodity Futures Trading Commission) in the US. The complexity of issues in futures and commodities exchanges, mandate separation of regulatory mandate, if full benefits of the exchange are to be accrued by participants.

 

As we contend with the pre-Futures Exchange issues, we will continue to grapple about price volatility, price discovery, price risk management (hedging), lack of another asset class presented in a futures exchange etc – things the current market will not adequately address with the absence of a well structured and regulated Futures Exchange.

 

In the meanwhile, I still continue trying to explain that a CTA (Commodity Trading Advisor) is not a Brokerage Firm. A CTA will generally give advice on trading of futures and options (for compensation) including but not limited to having actual trading rights on client accounts.  A Brokerage on the other hand will be the “facilitator” between the CTA’s, CPO’s (Commodity Pool Operators) and other individual and institutional clients AND the Futures Exchange. In the US, this would be a FCM (Futures Commission Merchant). We need to get this right, because we will need to be registering come CTAs, CPOs, and FCMs etc.

 

The Bourse Africa – that is to be the 1st Pan African bourse for commodities and derivatives will commence its operations in October 2012 (finally!). Maybe, the CMA, can go on down to Botswana for some “best practice” knowledge share?

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Clearly, I am not a very serious blogger! This is my first post this year and the year is not exactly young! It called having a lot to do ( ok, everyone I know has a lot to do), but really, for me I think it is a lot to do compounded with the fact that I have been forced to be a lot like an Octopus since mid last year. I have no complaints because I have been stretched as a person – and I have grown (cliché, but no so much so)

So much going on, but some things I have realized about some of the experiences I have been through is that:

One – there is a special place in hell for doctoral supervisors (I kid you not! I’m sure some day I will have some candidates saying that about me, but at least I will not believe its just hot air – they actually do have valid arguments for),

Two – I am a capital markets girl – give me a treasury department, derivatives, liquidity management, ABS/MBS issues, Foreign Exchange Issues (hedging, transactions, sweeps etc). Stress testing, financial modelling and a fast paced multi cultural environment and I will FIT right in! It has been a time of balancing my passion and my abilities. I have a knack for financial market issues that is just inherent and I am no longer “scared” to admit that! So feel free to share – that there is a woman I happen to know that loves market issues hook, line, sinker!

Aside: The recent spike in gas/fuel prices in Kenya by at least Ksh 10 prompted very spirited debates between my friends and I on various social media networks. At one such discussion, a “prominent” business journalist gave a very simplistic, almost dismissive remark about who we should blame. He simply said, there is a need to realize its all about taxation and blame should be solely on government. Maybe – but that’s an answer you expect from those “tunaomba serikali (we ask the government)” mindsets – NOT a business journalist! Very annoying! And embarrassing.

As one who has worked in global financial markets to include a long stint in Oil and Gas…..I was very perturbed, shocked or whatever that such a callous remark can originate from a business analyst that a lot of Kenyans look to for analytical perspectives! And who doesn’t know that when it comes to crude oil, so much more is at play than just government and taxation? (Maybe I will write a post of this!)

Three – In life, you can’t be scared/ashamed of re – aligning your priorities or business models when you realize things aren’t quite working as you wanted or expected them to. It takes a brave soul/spirit to embark on plan C,D, E or even F – they could be detours that will the IT!

Lastly, my apologies to all that have contacted me personally via email concerning one or two issues on this blog – Please bear with me and you will be getting a response in a day or two. I am humbled that though I don’t publish much these days, someone still finds something relevant on my blog! I want to remain relevant to myself, my readers and to current happenings in our beautiful lives.

Great week to everyone!

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If you ask me – Kenya is ripe for a formal Futures and Commodities Market/Exchange.

It was reported (and I paraphrase), that we have had a 561% increase in milk production since 2003 – exponential growth! The milk handling agencies are hard pressed as to what to do with all this milk ( Duh – seriously!!!!!) There is talk of an expected bumper harvest in Eastern Kenya (note that this is an area that is usually drought- stricken, but thanks to donor seed provision programs, people are actually talking about bumper harvests), prices of food are falling due to surplus in markets and farmers are complaining of losses……

Flip- side: People are dying of hunger in some areas in Kenya.

Where is the balance? Isn’t it about time we had a Commodities market in Kenya? I believe so….

For those that know I am out of Financial Markets for a minute working on something that is near and dear to my heart. For those that do not know – this post here will help shed light on that….

I have put Margin Analysis, trading account structuring, Month End Close Cycles, Reconciliation and what not on hold for the minute I am “away” from financial markets – for now! I know I will work in Financial Markets sometime soon or in the future in some capacity, because after all, I have a flair for (I am just saying lol! :D), but my attention right now is focussed elsewhere and I intend to give that 110%, heart and soul.

Nway – that being said – I find it entirely difficult to dis-engage myself from what is going on in markets, or my friends make it difficult for me to do so hahaha! Someone ( I will not mention names :-)), told me I have 2 options concerning my “relationship” with markets – either get a restraining order or get married to them…..I chose neither and instead decided I will have an “affair” with markets ( NYSE, Futures, Commodities and Derivatives et al) and hope “my guy” ( what I am currently immersed in) , doesn’t get jealous.

If you are a proactive mind out there that believes we can get to getting to a commodities market – please begin the “Think- Tanking” Process and holla at me to join you. Seriously! I know for a fact that I do have something significant I can contribute towards that end….

There is not a good reason for having such losses and food asymmetry in the country when we can manage our resources, potentially very effectively with a commodities market.

Please take a minute to read my blog post on Futures Markets in Africa and subsequent comments and I think a lot of us think its about time – now for some action!

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I read in the Daily Nation that the Central Bank of Kenya intends to bring into effect an automated check clearing system with the maximum value of checks being capped at Kshs 1 Million as from October 1st 2009.


This will effectively reduce the number of days it takes for a check to clear from four to one – I like! When I worked in Banking in Kenya a while back, and on those days when I had to cover for someone in the Clearing Department, one of the most common occurrences was people constantly stopping by to check if their checks had cleared ( e-banking, mobile banking etc had not quite hit yet and to think that was just a few years ago!) This will definitely lead to efficiencies and also curtail check kiting to a large extent.

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Many people were Skeptical when the Check Clearing for the 21st Century Act (Commonly referred to as Check 21) was signed into law in the US 2003 and ultimately became effective end of 2004.

Around this time I was working in banking in the US and yes, we underwent all kinds of training, trouble shooting, etc to address the upcoming switch.

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Check 21 basically enhances the efficiency of the check clearing process in the US banking system. The law facilitates check truncation by the creation of substitute checks and process check information electronically. Substitute checks can still be sent to parties that want to receive paper copies and they are deemed legally the same as the original checks. This is only applicable to US based checks – foreign checks still have to go through the foreign collections process through intermediary banks.

What this basically means is the time that it takes for checks to clear is significantly reduced. In the US, under Regulation CC – Availability of Funds and Collection of Checks , banks have the right to place checks presented under “holds” up to 11 days until the funds clear, as long as the 1st $100 is made available next day ( I am paraphrasing this Reg coz I don’t want to go Fed Reserve Legal Jargon!

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What this has translated to is this: Using Checks these days is becoming more like using your Debit Card for a vast majority of merchants. For example – at Wal-Mart, Kroger etc, people will present checks, cashiers will run the check through scanners that will record the check info via the MICR ( Magnetic Ink Character Recognition), hand the paper check back to the customer, have them sign an authorization slip and you get home, check your balance on-line and the check has been processed!

Effective and efficient – give or take! But, in my opinion the good outweighs the “bad”. Plus I know that most senior citizens with grandfathered accounts still need their paper checks sent to them – cant blame them – its what they were used to for as long as they had banking going on.
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In my opinion, Check 21 is a success and I hope the Central Bank of Kenya’s automated check clearing system will be a resounding success!

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I have a personal philosophy; I believe that you cannot change a society by mere giving – I believe that you change a society by enabling its members to be participants in economic development. I believe that you can only effect sustainable development by building capacities in men and women in ways that will ensure they are able to earn their own livelihoods. This is my cornerstone for my passion for entrepreneurial activities, entrepreneurship research and specifically female entrepreneurship.

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Many years ago, fresh from high school, equipped with a diploma in computer studies, I had an opportunity to work for an entrepreneurship development center in Kenya as I got ready to go to college. The center basically did project proposal appraisal, but mostly geared its efforts towards issues facing women entrepreneurs in one rural part of Kenya. I was immediately drawn into that vision and that sparked my interest for business, entrepreneurship etc.
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For undergrad, our Business class was required to write a thesis/paper either based on our industrial attachment experience or on a business area of interest to you. I didn’t really gain much from my internship experience so I wrote a 120 page paper on Integration of Women in Entrepreneurship and did a case study of one specific Metropolis in Kenya. I knew that this was just the beginning of things to come – and I was right.

When I was working on my MBA a few years ago – my focus on what it is that I wanted to do say 20 years from today was even further accentuated….Not that I am going to write it here….Lol:-)

All, all and all need to know are that I have an immense zeal for female entrepreneurship activities in Kenya – name it – R&D, training, understanding role conflict, motivation for business, issues in running businesses, success factors, micro financing, public private partnerships etc and all those other things that will ensure that women are well placed to be able to engage in entrepreneurial activities.
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A while back I read Prof Muhammad Yunus’s, Banker to the Poor and was totally floored. Honestly, I had heard only briefly about the then, Dr Yunus and his Grameen Foundation and the work they were doing among women entrepreneurs in Bangladesh. After reading the book, then listening to a series of interviews he did after that, I totally understood why he had won the Nobel Peace Prize.
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One of my favorite books is End of Poverty, Economic Possibilities for our time by Jeffrey Sachs – Prof Sachs simply says that we CAN alleviate poverty, and do it in our time, not our great great grand children’s times – paraphrasing the book would be an insult – its one of those you have to read to draw your own paraphrases. He stresses the need to work towards attaining the MDG’s – Millennium Development Goals, among them Eradicating extreme hunger and poverty – no man, woman or child should die because they are hungry or because of Malaria 😦
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I have a hypothesis – hear me out:

Attaining the MDG’s first has to begin with an empowered society. I believe that sustainable development requires a fully participative population – that you have men and women that are WILLING and ABLE to earn their livelihoods in some way.

Aside:
You know when people talk about earning a livelihood – most people have images of people waking up, dressing up in suits and going to a job or driving an expensive car or sending their kids to the best schools in the country. Well, fortunately, that is not the case being referenced to as far as the MDG’s are concerned.

What we need is that people will be able to feed their families, allow children to have some kind of education ( so that they don’t vote for some way ward politician because he has offered them a pack of Unga etc), have access to health care and be treated equally in the things that be…

So back to my hypothesis, it is about time, specifically in Africa that people were able to have a “decent” livelihood going on – something that will only be possible if the WILLING are ALLOWED to earn their livelihoods. By “allowing” I mean, access to resources and an environment that fosters “participation” – just to be short, since this we can discuss for elongated periods of time 🙂
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Dr. Dambisa Moyo, a Zambian Economist, has been fueling some global discussions about Foreign Aid to Africa. A friend recently recommended her book, Dead Aid: Why Aid is not working and how there is another way for Africa to me. I got the book, but I have yet to read it – Yaani I have SO much going on, BUT, I shall be reading the book from next weekend – that has been placed on my calender 🙂 – So I am not going to comment on the contents of the book yet.

I have however, listened to a couple of excerpts from Interviews she has done and read the NUMEROUS reviews about her all over the net.

Aside:

Special note is being made to her being an African Woman FIRST – then being a PhD in Economics among other academic credentials and professional qualifications.
Well – I am glad the world is finally coming to terms with what we have LONG known – that we African women can do whatever we set our minds to do 🙂 – and do it excellently – and we CAN do all that in Stilettos if we choose to 🙂 :-)!

Dr Moyo, basically says – there are other ways that Africa can get on the path towards sustainable development and keep going forward. She advocates such avenues as incentivising poor countries to access finance on international markets, supported by the tripod of micro finance, trade/FDI and remittances – Instead of GIVING, LOAN! I like!

I am not going to say that I buy into her arguments hook, line and sinker; but I do like the central idea which is – don’t just give aid, give aid to the right persons e.g to the entrepreneurs that need capital for raw materials instead of giving it to Governments without PRECISE stipulations on where the Aid money should be used. How many governments in Africa are misusing Aid Funds? Too Many! Mere giving is not going to change Africa if people are not presented with some kind of responsibility.
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I like that idea and like Prof Yunus and Prof Sachs, I know the day is coming when we will see an African Continent that is empowered. I also know that Female Entrepreneurship is well on its way to “officially” becoming the IT, that will transform the lives of so many families in Africa!

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I am intending to make my own contribution to this – as I best know how to 🙂

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Edit:

A friend of mine ( thank you! ), this morning pointed it out that Prof Sachs and Dr Moyo recently had a fall-out as concerns the Foreign Aid Model and Africa. Prof Sachs ( once Dr Moyo’s professor at Harvard), seems to believe that the Model she is proposing i.e not depending on foreign aid for sustainable development is more suited for emerging economies and not the developing nations per se. And we wonder why Africa is still lagging behind in economic development! *sigh*

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I would like to say that my personal opinion is one where Africa will NOT have to depend of Foreign Aid – each Nation will have to curve out its only model to wean itself off Aid, but I believe we need to get away from the just receiving attitude we seem so complacent with and know we CAN use other available investment avenues to get onto sustainable development keep going from there :-). I like what Dr Moyo says, she says Foreign Aid should be short, targeted and finite – not indefinite as we currently have it!

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In Sub-Saharan Africa, President Paul Kagame of Rwanda, has been a strong proponent for African Nations to begin weaning themselves off Foreign Aid by building up Savvy business Ventures and developing and embracing smart economic policy – I like that!

Rwanda may be depending on Aid right now, as does the rest of Africa, but at least we have a President that is thinking progressively and long term in terms of sustainable development for his country. They may not get there today – but it is a commitment they have emarbarked on – Slowly but surely! I can bet in the near future – Rwanda will be so worth watching economically speaking – if it isnt already! I dont care what political views Kagame holds, all I can see is that he is thinking smart policy for his country.

I wish we had more such progressive leaders in Africa!

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So the Fed Reserve reports that the economy is “slowly” getting better. NFP (Non- Farm Payroll) numbers being released are evidencing better than expected results – that, even considering downward prior month (s) revisions and an increase in government jobs (though temporary because this relates to the upcoming US census)

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That is good news, that we have signs of “improving” economic conditions especially considering the bearish sentiments many of us have held for a while and still hold on to.
Now all we need to do is ensure the cyclical factors that promote sustainable economic progression i.e. employment numbers, manufacturing, retailing etc, keep getting better right? – I would say that is just part of the equation. Let me explain:

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Today, driving back to work from lunch (it’s a beautiful day to waste inside eating lunch at the cafeteria downstairs or at my desk. There is nothing quite as good as driving with windows rolled slightly down, moon roof open listening to some IL Divo). Nway, I was driving back and took a little detour to enjoy the fine weather for a little longer and there was a wreck on one of the streets and cops has sealed off part of it – meaning all cars were being re-rerouted into some residences and eventually back into the streets after a series of turns.

The neighborhood was HORRIBLE! But the cars parked on the sidewalks and a tiny parking lot in the midst were EXPENSIVE cars. And, there were Auction Signs by a couple of the houses – that is not even an oxymoron – it is total madness and doesn’t begin to make economic sense! As I finally wound back on the main street – I kept thinking about how badly the banks were blamed in the Sub-Prime Mortgages drama that has changed global financial markets forever!

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Don’t get me wrong – I know now like so many others that there was some “creative finance” going on as concerns lending and hedge fund management, market and financial disclosure, mark to market analysis, regulations, leveraging of firms as concerns equity and the overall financial health of the previously financial giants.

BUT – I also have to go back to the issue that ultimately; things have to begin with personal financial responsibility. I think so many of us are trying to keep up with whatever (coz it really is a lot of things), and then blame everyone else but ourselves when things go south!
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Why would you want to buy a house or a car that you obviously cannot afford and know that you will still not be able to afford 2 years from today no matter what you do? Should it matter that the bank has “qualified” you for $ 300K, yet you only make $ 30K a year? How do you propose you are going to afford to make your mortgage? And why then would you go ahead and get a $ 50K car on top of that because your local car dealer sent you a “pre- approval” thing in the mail? How does a person live in such a neighborhood, yet afford to drive such an expensive car? Kuna Kitu! And in my opinion I choose to, in the spirit of being “nice”, call it BS – people need to get reality checks already!

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Aside:

When I was in grad school – I shared a house with a friend of mine also in grad school and from Kenya – that was the wise thing to do – split the bills, make your tuition and graduate debt- free – and we did just that! After graduation 2 years ago – we both began to live “normal” lives, she moved to a different state for work and we both began doing other things without being haunted for years to come over school loans.

My life was “normal” until I had a case of serious identity theft that put my financial life in a very interesting situation. An employee at my then bank sold info to a third party – that’s as bad as it can get! Basically that means someone has your SSN (Social Security Number), Date of Birth, Address and all those other details they need to be “you”

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One day – I was checking my balance online before going shopping and the balance was in the RED in many digits! ALL the money was gone – e-checks had been presented and paid from both of my accounts and my bank REFUSED to do anything about it!

I still have court cases regarding that to date! (And it’s been two years!) I think I should blog about things I have learned from that experience!

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But seriously that’s what you do – live within your means as you work to expand your means. We can blame the banks for the Sub-Prime, predatory etc lending we have going on – but the bottom line – No-one was forced to take out a loan they couldn’t afford.

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So Geithner and Bernanke are working economics that they have probably not worked before in a bid to ease the effects of the recession, but in my opinion, if the personal responsibility does not kick in real fast – no economic theory – however tried and true and edge cutting will last in the long run.

I can understand the injections into the markets, I can understand why some things have to be reformulated – but I can’t understand why anyone thinks that just because his/her job has been saved – then things are obviously going to get better!

Indices mean a lot on the macro- picture – that’s it. Just because the Dow closed at a decent level, NFP numbers are not so bad, the markets are somewhat bullish, the NYSE is buzzing, the USD is gaining strength etc, doesn’t mean there is going to be food on my table if I don’t do something to put that food there!

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Nway – that’s what I wanted to say today – no economic theories from me. 😉 I hope everyone has a lovely Memorial Weekend/Weekend.

Mine is going to be busy – I have a 4 day “weekend” and I decided I am going to get at least the Introduction to my Comprehensive Research Proposal done. You see, if I intend to move from PhD Student to PhD Candidate anytime soon – I better get some writing going on. So I will be doing just that – personal responsibility!

Have a responsible weekend! 🙂

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