The Risk Black Book

07/06/2022

Mohit Arora
Mohit Arora
• 1st
MD Capital Pros & Credit-Cue | Author of The Risk Black Book
6d • Edited • 6 days ago

If you're the head of a state facing double-digit inflation not seen in 40 years, would you impose an embargo on your main energy provider, which diminishes your manufacturing competitiveness and raises costs for your citizens, 1 in 5 of whom are already poor? Pourquoi?

EU just did this.

Europe's myths and maths. Country Risk: Rethink.

Inflation in the EU exceeded 8% while the EU simultaneously declared new restrictions on Russian oil! This level of inflation hasn't been seen since 1983.

All this while sanctions oddly benefit Russia.
-Its currency is the world's best performer, its current account surplus is likely to double, & its central bank is cutting rates as inflation falls. Poverty is 13%, half the EU rate.

How would the EU actually overcome Russia? The EU does not benefit by pressuring Russia to sell cheap oil to its competitors (China), which are fast infringing on the EU's market share in basic commodities & high-tech industrial goods from Germany.

The EU is more than it reveals.
Want to uncover more... take a 10-question quiz to gauge where you are on the EU...

1: Name the country that holds the top global spot in Wealth (not income) Inequality?

- Netherlands

2: Name the only global new airport project that took about 2x the time & 3.5x the initial budget that Euronews called "a machine eating taxpayers' money”.

- Berlin

3: Name the country which faced possibly the largest tax fraud in recent times that accounts for over 6% of the EU budget.

- Germany – Cum ex trading - $60 billion may have been taken from state coffers

4: Name the country that hosts the world's richest family (not the US with Jeff Bezos or Elon Musk).

- Sweden

5: Name the country that hosts Europe's largest & most experienced army within Nato but still sits outside of the EU.

- Turkey

6: Name the number of active separatists movements & few such regions in the EU.

- 15. Catalonia, Wallonia, Basque Country, Bavaria...

7: Name the budgetary item that is still the largest sink hole for subsidies in EU Budget.

- Food & agriculture at $72 billion

8: Name the 2nd major economy where the debt/GDP is now ~120% (seen only in the likes of Portugal & Greece) & recent presidential debate involved tough arguments over middle school children not achieving "elementary proficiency" in their own language. This language is also a beacon of global culture.

- France and the French language

9: The only major central bank not to raise rates or reduce money flows amid double-digit inflation (exld. Turkey).

- ECB.

10: Since 2017, overland transport time between the EU & this country has decreased by 50%, and over 3000 trains have run.

- China

EU is the best example of how strife-ridden states (East Europe) can be transformed in a few decades.

What are we missing...

{Excerpts from The Risk Black Book | What They Still Don't Teach You at Banks. https://lnkd.in/d_8gpfvv}

The Risk Black Book: What They Still Do Not Teach You at Banks and Business Schools

01/06/2022

Mohit Arora
Mohit Arora
• 1st
MD Capital Pros & Credit-Cue | Author of The Risk Black Book
1mo • 1 month ago
Guess the country where medical care leads with humanity not budgetary allocations or big science.

Healthcare With Humanity: Does it Still Exist?
Mohit Arora on LinkedIn • 2 min read
The budgetary allocation or per capita capital expenditure incurred by a country on healthc

21/05/2022

Published on April 20, 2022

Mohit Arora
MD Capital Pros & Credit-Cue | Author of The Risk Black Book
3 articles
Following
The budgetary allocation or per capita capital expenditure incurred by a country on healthcare is not a starting point in evaluating the healthcare sector of a country. Why?
By this time, we know that regardless of a country’s wealth, it’s the simple availability of beds, medical workers, general level of hospital occupancy and insurance premiums––all moderated by the societal tolerance of political corruption and cronyism in the sector that determines the actual capacity to respond to a health crises.
However, what truly matters in the end is whether the country has the maturity to continue to treat humans with humanity despite changes in its economic or political landscape. Humanity cannot be replaced by money or technology and lack of it gravely diminishes the two. This factor is often ignored while comparing effectiveness of healthcare in many countries.
Now, in the current pandemic, I ask you to imagine a country where the government's medical staff calls you within a few hours of you being tested positive, and then promptly, without your asking, they arrive at your home with some of the world's best antivirals for free.
They also guide you to government healthcare apps where you can video call doctors at your convenience. The staff periodically call on you and hand over their WhatsApp numbers. The neighbors will happily bring you groceries while you are home quarantined.
Furthermore, surprisingly, despite a severe bout of infection, the antiviral medicine gets you up and running in just 1-2 days. The vaccines continue to be freely available for all, including migrant and expatriate populations, and everyone mostly wears mask as a courtesy to others. Public hospitals continue to be fully functional and efficient despite a large population and over 10 million poor immigrants that the country hosts.
Does such a country exist?
Yes it does and its Turkey.
My and my family, who live in Antalya, Turkey, took the brunt of an infection, and the above is our personal story. We are not aware of other such countries; perhaps they do exist, but the incidence highlights what I mean by humanity for humans regardless of economic considerations.
Do the other countries have the maturity to listen? The next wave will tell.

20/05/2022

The Economist has just said what we said 2 years ago in our post!
Take a look at our vintage post "Money Printing 5 Nobel Questions | What the World Might Like Like Without Central Banks" in 2020.
The facts are in our face.
The key missing piece in our common thinking and analysis: two largest economies have printed currency that is about three times their tax collection.
Why compare it with tax collection?
Tax collection and debt are the legitimate cash sources of a country, not currency printing, but there are no constitutional limits on currency printing as opposed to debt and budget deficit ceilings. Why?
What would be the threshold for this as the printing still goes on?
Critically, most, if all almost majority of financiers and economist overlook the fact that the total currency printed exceeds the combined equity of the financial industry in some major countries!
However, it is just adequate to look at this from the sidelines and blame the central banks. Why didn't we see it coming despite it being in plain sight? What is the impact of this on our societies and economies? Are commercial banks truly in good health if their trading counterparts the central banks are storing questionable assets?
How should risk managers respond to this? Why wasn't there awareness of this? What else are you missing?
When it comes to missing tools to respond to this... there was much to say from restating basic financial ratios to our new proprietary predictive algorithms to cognition development.
So we wrote a full book!
The above post, along with other similar posts, has been structured in my upcoming book titled "The Risk Black Book | What They Still Don't Teach You at Banks and Business Schools?
The book not only fundamentally redefines the root tool of risk management, keeping central banks at the center, but also develops a 13-fold framework for forensic understanding of the operating environment that, perhaps for the first time, links banking, economics, taxation, money printing, crime, ecology, anatomy of sovereign states, and sensuality into a canvas that is not just revealing but provides an implementable DIY risk forecasting tool kit that you don't find elsewhere.
Take a look. A 500 page book that is broken into easy and engaging 20 minute reads!
The book was also peer reviewed by some of the seniormost industry sources. Click here to see what they say!

17/05/2022

Inflation is high, but higher may be the fundamental flaws in the basic pricing mechanisms that inflation hides.

3 arguments | 2 min

Flaw #1:
Does financial trading drive prices more than end users and still cause market dysfunction?

While the physical buyers/sellers put down 100% of the price in cash, the derivatives trades need only a small fraction of the price to work the market. A 5% margin requirement gives financial traders 20x the market power of physical end-users. This margin is often paid via bank guarantees, not in cash. Is this not a fundamental flaw in the price discovery mechanism?

Then, the volume of derivatives in most commodities exceeds the physical interest by 25–50x+. So how will the physical buyers and sellers, especially the smaller ones that do not have the cash or bank lines or margin money, be part of price discovery? If large one alone drives markets, is that a fair price discovery?

Then there is volatility. Commodity exchanges themselves may have become a source of price and counter-party risk. The LME's 2-week-long incapacity locked up the nickel markets. The exchange has been gripped by confusion since March, which sent the 3-month nickel price to > $100K/ton from its historic average of $15K to 20K, leading to the suspension and cancellation of trades. Also, can you really cancel trades without taking sides?

Such pricing flaws may also explain rapid and immediate price increases in oil and gas. We often overlook that the daily demand for oil has varied only by 5-15% over the last few decades, but the price swings experienced have ranged from 1-2x or more. Headlines trigger leveraged paper trades that impact prices for real users, who are often far away from paper trades and have no mechanism to protect themselves.

Why do the gas stations not sell 3 year oil forwards to retail customers?

The open interest in oil (presently 1.730 billion barrels) far exceeds daily oil consumption of 80-100 million barrels. Such pricing flaws may also explain why gold, a symbol of enduring value, has languished despite recent market turmoil in G7 treasuries and currencies.

OK, derivatives markets still provide a fair hedging mechanism, don’t they?

One of the largest oil and gas producers (my former client) in a G7 market did not hedge at all and went with spot markets! They came out on par, if not better than their peers.

How does one expect the prices of basic materials to reflect fair levels if financial trading, which often costs only a fraction of full price, continues to dominate the markets?

Flaw #2:
Does the majority of value belong to intermediaries and not to principals?

We generally agree that anything that costs more than 5-15% as a cost of intermediation is excessive. Higher intermediation costs also reflect lower efficiency and dilution of principals. Then why do we consider countries where government taxes account for 40-50% of the GDP as developed and free markets (such as Germany, France, or Denmark) as opposed to emerging market governments that take only half as much to run their countries?

They also have much larger populations. Many such smaller markets now offer superior hard and soft infrastructure.

Additionally, in the new technology-driven platforms, 30% of gross sales has become the norm for offering simple distribution of goods or services. We forget that the vast majority of producers and corporates that sustain our society with real stuff live off of only 15%–20% gross margins! They will now need to add 30% in digital costs to their sales.
How does one expect the prices to reflect fair levels if the intermediation and governance often cost half the value of trade?

Flaw #3:
Are we addicted to debasement and rearranging the value of stored human endeavor as opposed to creating new value?
We all know that the value of stored human endeavor is reflected in the hard savings of a country. Without this, there cannot be sustained growth or infrastructure buildout and devaluation of this leads to increase in prices via debasement of currency.
The value of the stored human endeavor is eroded and is moved away from the originator to the corporates when the retail interest rates do not reflect markets rates or inflation. At $40 trillion in global savings, a 5% erosion via rates over 5 years is about $10 trillion of erosion, equivalent to a quarter of the stored value. Simultaneously, the value of future human endeavor is also underpriced when wages do not come close to matching true inflation.

On top of that, when countries print money, they incorrectly move the value away from savers to others who are higher in the asset hierarchy. At around $25 trillion, global currency printing now accounts for more than half of global savings! The printing also unfittingly increases the governments' taxes, which are usually a percentage of the economic activity even though there is no extra contribution from the governments during price spikes.

Thus, in conclusion, is plain old-style hard work still an answer to an individual’s fortune or to what is needed for the restitution of a society? Or does much more need to be done to address fundamental flaws in the mechanisms that drive prices of goods and services in so-called free-markets? Perhaps starting with a sincere review of what it will take to restore the value of human endeavor—both stored and future—is a worthy starting point.

Mohit Arora

{Excerpts from The Risk Black Book | What They Still Dont Teach You at Banks and Business Schools}
Link to the Book
US: https://www.amazon.com/dp/B09SLVF2WJ
India https://www.amazon.in/dp/B09SLVF2WJ
UK: https://www.amazon.co.uk/dp/B09SLVF2WJ

The Risk Black Book: What They Still Do Not Teach You at Banks and Business Schools eBook : Arora, Mohit : Amazon.co.uk: Kindle Store