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.

 


 

Leave a Comment:

     
banner

Most viewed in recent weeks

Pros and cons of Labor's home batteries scheme

Labor has announced a $2.3 billion Cheaper Home Batteries Program, aimed at slashing the cost of home batteries. The goal is to turbocharge battery uptake, though practical difficulties may prevent that happening.

Australian house prices close in on world record

Sydney is set to become the world’s most expensive city for housing over the next 12 months, a new report shows. Our other major cities aren’t far behind unless there are major changes to improve housing affordability.

4 ways to take advantage of the market turmoil

Every crisis throws up opportunities. Here are ideas to capitalise on this one, including ‘overbalancing’ your portfolio in stocks, buying heavily discounted LICs, and cherry picking bombed out sectors like oil and gas.

An enlightened dividend path

While many chase high yields, true investment power lies in companies that steadily grow dividends. This strategy, rooted in patience and discipline, quietly compounds wealth and anchors investors through market turbulence.

Tariffs are a smokescreen to Trump's real endgame

Behind market volatility and tariff threats lies a deeper strategy. Trump’s real goal isn’t trade reform but managing America's massive debts, preserving bond market confidence, and preparing for potential QE.

Getting rich vs staying rich

Strategies to get rich versus stay rich are markedly different. Here is a look at the five main ways to get rich, including through work, business, investing and luck, as well as those that preserve wealth.

Latest Updates

Property

Australian house prices close in on world record

Sydney is set to become the world’s most expensive city for housing over the next 12 months, a new report shows. Our other major cities aren’t far behind unless there are major changes to improve housing affordability.

Strategy

CBA, AUSTRAC and our Orwellian privacy laws

Imagine receiving an email from your bank demanding to know if you keep cash at home and threatening to freeze your accounts if you don't respond in seven days. This happened to me and it raises disturbing questions. 

SMSF strategies

The ultimate superannuation EOFY checklist 2025

Here is a checklist of 27 important issues you should address before June 30 to ensure your SMSF or other super fund are in order and that you are making the most of the strategies available.

Shares

Why 'boring' Big Four banks remain attractive

Despite a brief correction last month, Australian bank share prices have continued their impressive run. Recent results show the banks remain in good shape though some are faring better than others. 

Investment strategies

Ophir on Trump, constant improvement, and Life360

In this interview, Ophir’s Andrew Mitchell outlines how he’s handled recent Trump-fuelled volatility, his three key criteria for picking stocks, and why he thinks Life360 is set for much bigger things.

Investment strategies

Investor warns of danger in Big Super’s pet asset class

Dan Rasmussen says the capital pouring into private assets outstrips the opportunity set and the economic substance of most companies being bought and lent to. The true test will come when inflows turn to outflows.

Economy

Government investment is remarkably effective

A new study challenges the notion that Government spending is wasteful - public investment can yield major long-term economic gains, often outperforming private investment in driving GDP growth.

Sponsors

Alliances

© 2025 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.