Author Archives: Modestas

Tulip Mania in the 17th century as the first financial bubble in history

By Antanas Jablonskis & Krišjānis Krakops

When most people think about the Netherlands, they think about, among other things, the tulip. So, it may come as a surprise for many to find out that not only does the tulip not originate from there but was also responsible for the first financial bubble in history. In the years 1634-1637, the tulip market experienced a drastic increase in prices followed by a sudden crash in February 1637. Until recently, the story of “tulip mania” has been presented as a parable about human greed and market irrationality, brought up whenever there is trouble in the economy. But some have suggested that view might not be true and that our perception of this period in history is largely misconstrued, based upon later, exaggerated stories. This article explores the environment in which the bubble took place, what made the tulip ripe for such a bubble, and how these events are perceived today.

European Investing Climate After Brexit – Ideas And Suggestions

On March 29, 2017, the British voted to leave the EU. As a consequence of that political decision, London, currently the financial center of Europe, is likely to lose some of its influence and possibly even give up its title. Which cities are to gain because of Brexit? What will attract the investments from London to other cities, that remained in Europe? What makes a good investment climate in general? We will try to answer these and related questions in our article.

How To Survive The Next Recession

An overwhelming amount of economists are currently talking about the next recession and when, why and how it might hit. While there aren’t as many gaping holes in the current world economics as there was in 2008, there still are potential problem hot-spots which could lead to a recession with severe consequences. Since the recession of 2009, the world has been on one of the longest rallies with S&P, DOW and NASDAQ composite on a steady climb. While this is only one indicator, it serves as a good introduction to the overall global trend of economic improvement and uptrend. However, as it is a common belief that good times never last, the majority of the biggest economic newspapers such as Time, Economist and Forbes and experts of economics alike have already started to push out predictions about the forthcoming recession. While one can never be certain when, how and why the next recession might hit, it is good to look at the potential indicators and reasons for a potential slowing or crash in global economics in the near future. Here are our top reasons for why the next recession might happen:

The Borrowing Streak of Rising Economies

Since the last recession of 2008 and 2009 many emerging economies such as China and India have been on somewhat of a borrowing binge with external debt on a stable rise every year. The expansion of external debt for these countries combined with the overall increasing impact and importance of these countries on the global economy might prove to be a potential weak spot in the world economy as the debt becomes larger and harder to repay. And it seems that harder to repay it will become as the US Dollar is strengthening and thus making it harder for these countries to repay their further expanding external debt.

The US-China Trade War

Another catalyst for the next recession might lay in the further increasing trade tensions between world economies. The cause behind this tension can be explained by the fact that for a long time China has had an export surplus in trade with the US. This has lead to a trade imbalance which the Trump Administration is aiming to “fix”. The fix comes in the shape of trade tariffs on certain Chinese goods to which China has already responded with similar tariffs on US goods. This trade war in total has resulted in the strengthening of the US economy and thus the strengthening of the US Dollar. Which in result contributes to the problems of debt for China and other rising economies.

The Geopolitical Risks

With the US-China trade war only to escalate it isn’t hard to see why it is an economic risk not only for the two super-countries involved but for the whole world too; however, there are other political risks brewing in parallel in seemingly more stable parts of the world too. For example, a key problem in the Eurozone is related to Italy and its external debt problem as Italy has become the first country in the history of EU for its budget plan to be rejected by the EU due to the large spending plans and further increasing external debt. This has created noticeable tension in the EU and is to be considered as a major potential weakness in the EU’s economy. Other problems such as Brexit and the current refugee situation has also put a strain on the EU both economically and politically.

How to Spot the Recession When It Hits?


So the recession is certainly not beyond the realms of possibility, and when it finally hits, you’ll easily notice that, for sure. But how could its advent be spotted in advance? There are several major indicators that may help you to get prepared in time.


Firstly, it’s the yield curve. This indicator is mentioned by all the major analytics who are writing on the issue of the next recession. Essentially, it is a comparison of short-term interest rates and long-term ones. One should watch out for negative values of this indicator – it correlates well with recessions (the inverted curve was observable before all the recessions since 1960, according to Marketwatch) – although, of course, it’s not advisable to base one’s judgments on this indicator alone. What does the correlation stem from? Crudely simplifying, negative values of the index mean that it’s not profitable for banks to lend; and this sort of circumstances is clearly well-tied to economic downtrends.

Another harbinger of recessions is the decline of consumer sentiment. The same picture was observable both at the beginning of the Millenium and in 2008: the index goes down, then the recession strikes. There is no particular value of any indices that measure consumer sentiment to be feared, but the overall trend should be monitored so that the early signs of coming recessions could be spotted.

Finally, one should better keep a close eye on sudden spikes in the share values of large companies. Even though almost nothing can be told from observing one particular company’s price, sudden spikes are no good for the overall state of the economy. They may (or, of course, may not) be signalizing about very high volatility, speculation, and overvalued assets – the array of factors broadly associated with recessions. It was discussed in our previous article – one should watch out for the patterns similar to the ones of the dot-com bubble.

And, of course, apart from the graphs – it’s always a good idea to be aware of what happens around the globe, paying attention to the developments of the CN-USA Trade Wars and other aforementioned risk factors. Could one really predict the arrival of a new recession on the basis of the indicators that we brought up in the article? It may be doubtful, but using the combination of curves monitoring and economic thinking, one might find itself in a better spot than in 2008 when the world’s economy eventually stops its growth.

Authors: Hleb Birylau, Raivo Lismanis



Financial Leverage: The Good, the Bad and the Ugly

All financial institutions live and die by liquidity. We are a financial institution.

The fact that many people don’t think about it is beyond me. It is the essence of what we do.

–Ken C. Griffin

For consumers, debt can help them move into a bigger home or buy a new car, something they would need a lot of time to save the necessary amount. For a lot of people, managing their finances are hard and they live paycheck to paycheck; having a relatively small payment every month would make large purchases more available for them. The same could be said about companies, they need money to be able to grow their revenue/market share or release a new product line. This growth creates jobs and boosts the economy. Borrowing money is, first, cheaper than financing with own’s equity, second, better than diluting shares with outside capital. Borrowing can be done but with one condition – debt needs to be managed well.

Because of the pressure from investors and the need to perform better than competitors, managers of publicly traded companies are prone to take on more debt in order to grow revenue and increase profit margins.

To evaluate a company’s obligations, raw numbers can be used but they don’t say very much. Instead, ratios are favoured by analysts because they make it easier to compare companies and industries.

A debt to equity ratio (D/E) takes short and long-term debt a company has and divides it by stockholder’s equity, a manageable D/E ratio is between 1 and 3. But debt is not free, there is interest that needs to be paid. Banks use the next ratio before lending money – interest coverage ratio, the bigger it is, the better, but it should not be less than two. This ratio looks at current earnings before interest and tax (EBIT) and divides it by interest payment for the loan to see if interest payments would not be a burden for a company. Another ratio used is the current ratio, it measures company’s ability to pay the short-term debt (accounts payable) with current assets (cash and cash equivalents, accounts receivable and inventory). A good range is from 1.5 to 3, lower than that and company could run into problems covering their short-term liabilities, too high and management is inefficient in using current assets, but this ratio’s average value varies over industries. All three ratios are base for soundness and longevity of a company. Liabilities are like a double-edged sword, they can boost earnings, but they can also amplify losses.

If we look at one of the largest and well diversified companies Johnson & Johnson’s annual report for 2017 [1] we can extract necessary numbers for calculations for these three ratios:

D/E = (30,537+30,675)/91,714 = 0.67

Interest coverage = (17,673-934+385)/934 = 18.9

Current ratio = (17,824+13,490+8,765)/30,537 = 1.3

From this we can conclude that Johnson & Johnson has healthy amounts of debt, they easily cover interest expenses and can cover current liabilities.

When we look at Radioshack’s results for 2013 [2]:

D/E = (613.0+584.6)/206.4 = 5.8

Interest coverage = (-344-52.3+2.2)/52 = -6.6

Current ratio = (179.8+211.9+802.3)/584.6 = 2.0

It is visible that there is a huge debt burden and a net loss, which results in them not being able to cover interest payments. But the current ratio seems in a normal range, that might be explained by a huge inventory of possibly unsold goods. No wonder why Radioshack has filed for bankruptcy several times by now.

In a downturn, revenues for a company might drop by a significant amount; S&P 500 sales growth in 2009 reached a trough of -16.6% [3] and was in the red for almost a year. On average companies listed on S&P 500 saw a drop in operating margin from 9 to 2.5% [4]; consumer discretionary (non-essential goods) manufacturers were hurt the most, while healthcare was not affected at all.

These events can jeopardise the liquidity even for market leaders. But when a company is operating with a loss that does not mean that it will go bankrupt. For example, Tesla has been losing money for several years now, vastly expanding their production and revenues, but they also have had several injections of capital to stay solvent. To see if losses will be a problem, the place to look at is cash and cash equivalents, these will keep a company afloat for a moment when the management is trying to restructure their debt burdens and cut costs (e.g. lay off people and close down locations). When a company is over-due on their payments and the money has ran out, they either need to sell their assets or hope to be bought out or the worst case scenario – file for bankruptcy.

But this behaviour of over leveraging is seen also in “betting” on companies in retail trading, sometimes with money they cannot afford to lose. As said before, profits and losses can be magnified by leverage, this is one of the beginner mistakes made by traders because they think they can beat the market.

If there was one thing you should take from this article, it would be this: everyone should learn money management, whether you are a student, retail trader or a manager of large corporation. It will greatly benefit you making better decisions while managing your own finances. I know, I know a grey Bentley Continental GT looks nice on the driveway, but is it really worth the stress of not being able to pay the monthly loan payment when the going gets tough?

Authors: Elvis Dredzels, Dmitrijs Sokolovs