Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 48

The F words: an irregular, irritating series of dictionary narratives

F stands for …*   

Financial system, that is already far too large and powerful. Former US president Eisenhower’s prescient warning about the rise of the Military/Industrial Complex would today be about the danger of the Military/Financial Complex instead. Finance has become too important to be left to financiers. Countries need financial systems that provide savings, credit, insurance and pensions, but limited and controlled lest other nations end up like Britain – a rentier society producing few real goods and services and where talent is sucked into unproductive finance. The UK politician Peter Mandelson rightly recognised that “we need fewer financial engineers and more real engineers.”

Free markets, of which there are none and should be none. Adam Smith’s hallowed name is called on to justify so-called free markets, yet he well understood that if left to their own devices, markets will ineluctably result in collusion and corruption. Markets are, as the US finance writer Richard Bookstaber argues, a “demon of our own design” and we must learn to manage and control them lest they distort society even further.

Fines, more of which should have been levied on Wall Street’s denizens, along with prison terms.  J P Morgan did eventually pay a fine of US$13.8 billion (a dollar for every year of the universe’s existence) but only after delaying it long enough to see many householders, the potential beneficiaries of these payments, go bankrupt.

FVA, a 'correction’ to the price of derivatives, is the latest piece of creative accounting from, you guessed it, J P Morgan. ‘Funding Valuation Adjustment’ is a fiddle none seem to understand and fewer respect. The Financial Times rightly called it “a new earnings-distorting acronym in an industry plagued with them.”

Fees, eternally problematic, and made more so by simplistic instructions such as “you should only worry about after-fee performance”. Though true, that finesses the fact that (base) fees are certain and controllable, while performance is uncertain and at best only partly controllable. Low signal/noise ratios and information asymmetry ensure that the quality of financial products and investment strategies cannot be assured. So, as with high-priced haute couture fashion, lower fees will be interpreted as signalling lower quality. Indeed, investment banks do put their fees up when demand falls … and it works.

Fashion, drives decisions in our industry and for the same reason it does in the rag trade, because paradoxically we like to be with the crowd and yet show that we are ahead of it. Hedge funds have yet to promote themselves as a fashion statement, but it will come to pass. Rely on Oscar Wilde to pithily capture another human absurdity, “Fashion is a form of ugliness so intolerable we have to alter it every six months.”

Fixed income, technically and mathematically far more interesting than equities, yet before the 1990 movie The Bonfire of the Vanities made bond traders fashionable, bonds were boring and traded by eternally pessimistic nerds. This raises two intriguing (to me) inter-related questions. First, is the asset class, swamped as it is with derivatives, effectively immune to the corrosion of diseconomies of scale? Second, to what extent do the prognostications of investment management giants such as PIMCO and BlackRock actually influence the Fed’s decisions? About 20 years ago James Carville, an adviser to then president Clinton, said that he wanted to be re-incarnated not as the president but as “the bond market” so he could then “intimidate anybody.” (See Financial system.)

Fallacy, of composition is something that is frequently heard yet infrequently exposed. A common instance, much used by business leaders, is the assertion that “industry must cut costs” (code for reducing wages), which ignores how one firm’s costs are another’s revenues. So the net effect of such cuts is a weaker overall economy. Keynes’ paradox of thrift is of the same ilk: it is prudent for each person to be thrifty, yet if we all are “enterprise will surely fade”.

Fiddling, an identifiable, common source of failure for investment strategies. Generally, for most organisations and strategies, fiddling destroys value but can be fun and reassures our guardians that we’re doing something. In most other areas of human endeavour, activity is seen as the true path to adding value. Investing is uniquely different. Its default stance should be “don’t just do something, sit there.”

* F also stands for Fantasy, Fidelity, False, Funds, Fear, Failure, …

Click here to read Jack’s previous dictionary article ‘The C words’ in Cuffelinks on 8 August 2013.

 

Dr Jack Gray is a Director at the Paul Woolley Centre for Capital Market Dysfunctionality, Faculty of Business, University of Technology, Sydney, and was recently voted one of the Top 10 most influential academics in the world for institutional investing.

 

  •   7 February 2014
  •      
  •   

 

Leave a Comment:

banner

Most viewed in recent weeks

It’s time for LICs to die

A high-profile dividend cut and a prominent fund manager’s apology have reignited a long-running debate. If investors can access similar exposures more cheaply and efficiently elsewhere, what exactly is keeping LICs alive?

Testamentary trusts survived the trust tax. The drafting battle has just begun.

The fight over testamentary trusts looked settled. Then the draft legislation arrived. Hidden in a technical detail is a question that could force many families to rethink wills they thought were already future-proof.

Is it time to bail on Australian stocks?

For generations, Australian investors have backed banks, miners and dividends. But has that loyalty come at a cost? A look at the numbers raises an uncomfortable question about where future returns will come from.

The new capital gains tax trap for your portfolio

Investors have long accepted one portfolio rule without much question. A major tax shift could change that calculation entirely, forcing difficult trade-offs between risk, discipline and an overlooked cost lurking beneath.

How the typical Australian Family could save $844,350 in taxes

The value of a testamentary trust is not determined by wealth alone. Depending on circumstances, it can reduce the tax burden on inherited income, create efficiencies and help build intergenerational wealth.

The housing slide could become a crash

House prices are sliding across Australia, yet the most dangerous ingredient for a housing crash is still missing. If job losses surge amid growing economic risks, today's correction could become a historic property downturn.

Latest Updates

Retirement

The retirement scorecard: how many of these questions can you answer?

From the maths of retirement, estimating spending and picking the right asset allocation to survive a poor decade, here are the questions every retiree – current or future – should be able to answer for themselves.

2026 is not 1999

The US market looks eerily similar to the dot-com era with soaring AI spending and tech giants dominating returns. But one difference separates today’s boom from the dot-com bubble and it could determine what happens next.

Planning

Taxing time for trusts

Trusts are facing a shake-up, but an overhaul may not be necessary. Families can explore restructuring strategies that preserve succession and the asset protection benefits that have made these structures valuable.

Economy

Why the US economy is stronger than you might think

War, inflation and higher rates were expected to derail America. But has the market got it wrong? Three forces are driving the economy beyond expectations, revealing implications for stock prices and portfolio positioning.

Gold

How much trust is in your portfolio?

Everyone talks about diversifying assets. Far fewer think about diversifying trust. As inflation, debt and market assumptions collide, the question is whether portfolios need greater protection from unexpected outcomes.

Retirement

Retirement in reality - 7 months in

Seven months into retirement, I'm still uncovering surprises. This month was spent reflecting on the slow pace of health change, the myth of neatly scheduled part-time work and the unexpected persistence of retirement guilt.

The new geography of technology leadership

The next chapter of technology may not belong to the companies or business models many expect. As the landscape shifts, some opportunities are emerging in places that remain surprisingly overlooked by global markets.

Sponsors

Alliances

  • ASA-Logo-RGB-ActiveGreen-web.png

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.