11:45    Registration opens, buffet lunch opens

12.20    Paul Gambles, Economic Update with a focus on Thailand

12.40    Carey Ramm, Economic Update with a focus on Australia

13.00    Question and Answers

13.30    Session Closes 

The session title is  “Board Room Brief: Australia, Thailand and world economy.” 

More than ever the imbalances that plague the global economy are causing chain reactions across all continents and all countries. Will Thailand and/or Australia be adversely affected by this? What are the opportunities here? To find out the full answers you’ll need to attend the event – contact us here at MBMG or contact AustCham for full details. Enjoy your day!

14 December 2011

D-Markation

Many MBMG Update readers have recently requested a guide to the EuroZone problem and to the recent manoeuvrings. Here goes:

Post 1945 Europe had to rebuild after the devastation of two world wars (in which Europe was the primary battleground) that straddled the Great Depression. Capital Wealthy America funded the recovery of Europe and Japan plus the emergence of newly independent countries in Asia and Africa.

The universal mood focused on desperately avoiding further wars at all costs. Allied to the distribution of the prosperity dividend this helped bring about a collaborative Federal Europe. At the core of this federation was Germany, with France attached at the hip to its erstwhile adversary. This symbiosis reflected French deeply embedded suspicions and German war guilt. In both countries the ravages of war dominated the thinking of successive generations.

Ironically Germany’s engine of growth, which drove much of the post-war prosperity, dated back to the 19^th century harnessing of phenomenal natural and human resources in a powerful and energetic young country and fuelled the over-exuberant economic development and ambitions that ultimately caused World War I.

The EU grew out of a primarily Franco-German trade and tariff organization for the steel industry that expanded to include the whole manufacturing sector in the post-war era. Harmony and homogeneity were initially and subsequently far from universal – military regimes prevailed at various times in Spain, Portugal and Greece whilst the Iron Curtain cut a line between central and Eastern Europe that provided the starkest aftermath of WW II long after Western Europe had rebuilt, with Germany itself once again divided and a small corridor providing the only access to the western sector of Berlin.

 The same urge that eventually unified Germany also drove forward the creation of a federal bloc that ultimately became the largest economic entity on the planet, despite a bureaucratic administrative system that famously interfered in every aspect of life.   

Pythagoras’ theorem                  24   words

Lord’s Prayer                                66   words

Archimedes’ Principle                 67   words

Ten commandments                  179   words

Gettysburg address                   286   words

US constitution                        7,818   words

EU rules on cabbage sales     26,911   words

  

To serve its relative prosperity this Franco-German alliance sought the continuing evolution of the fragile Federation, which remained divided by national borders, languages and currencies. A single currency was conceived twenty years ago and introduced a decade ago as a way of keeping alike the twin dream of a perpetually fast growing federation bounded by homogeneous fiscal, monetary, political and social standards. This is where the wheels started to come off. In fact, there had been clear warnings when the likes of the UK had shown themselves unable to operate within the structures of the Exchange Rate Mechanism (ERM) that had preceded the currency itself.

Stark national and regional differences continued in many ways to grow ever wider. Giving previously unimagined access to cheap and easy capital to those EU members whose economies featured a structural lack of competitiveness merely facilitated a transfer of wealth to the more productive core and a transfer of debt to the less competitive periphery. Borrowing was suddenly so cheap and so easy for countries that had previously experienced difficulties raising capital because the myth was propagated that lending to all EuroZone members was the same: When the bonds of the GIPSI countries (Greece, Ireland, Spain, Portugal and Italy) were each rated as being similar to German or French bonds,  institutional buyers such as banks and pension funds bought the higher yielding but apparently equivalent risk GIPSI bonds in preference to lower yielding Teutonic ones. This caused the market price differential (the spread) between them to narrow to the point that it virtually disappeared altogether, further embellishing the myth that leverage had created uniform prosperity across the EuroZone, whereas for the periphery the leverage had really only begat a series of bubbles.

Like all bubbles, these fed in a virtuous cycle: spiraling asset prices fuelled high growth rates. However like all leveraged bubbles, the debt levels eventually started to impact on growth and asset values when slowdown set in. The process of deleveraging caused these bubble economies to slow even further. This coincided with the bursting of America’s bubble, further showing European growth, further exacerbating the debt burden and suddenly leaving Ireland, Greece and Portugal struggling to service their existing debts in an environment where capital became much more difficult to access.

Shackled by a currency whose strength was far more to do with Germany’s positive current account than the budget deficits of the smaller, weaker economies, it was impossible for these economies to grow their way out of trouble.

 The heart of the federation’s economic system, The European Central Bank (ECB) began providing short-term solutions to immediate cash flow deficiencies in 2008 whilst failing to address the structural imbalances. Despite astonishing endeavours by the likes of Ireland to cut spending, the shortfalls have persisted strangling these economies into the recessions that persist today. Less imbalanced larger economies, such as Spain and Italy, took a little longer to reach the same point.

Having now reached that point, the crisis is of such a scale that the entire EuroZone is in recession, the Euro banking system appears grid-locked by mistrust and on the back of a liquidity crisis where the ECB seems to be the primary source of bank funding and the domino ripple of sovereign defaults still appears imminent, despite the agreement that each country can now work around the EU’s own founding treaties and constitution to do whatever bilateral deals are necessary to secure short and medium term funding requirements. Ultimately capital is still available from the ECB via the core, from America (whose own financial system might not be able to withstand Euro defaults) or possibly from Asia, where neither Japan nor China want to see Europe slow down any further. However, neither big bazookas nor tiny pea-shooters of short-term liquidity will fix structural insolvency and imbalances. It will merely delay the inevitable. Beyond short term remedies, there are 2 structural solutions:

1.      Countries revert to appropriate national currency policies. ASEAN 1997 is the playbook for this – Europe 2011 faces the added headache of a world that, except Asia, may well already be in recession (and Asia may not be so far behind). GIPSIs can however choose to debts in Drachma, Lira, Peseta, Escudo and Punt allowing for a much quicker healing after a period of initial extreme volatility.

2.      The core countries, primarily Germany, can point enough Euros to plug the Euro 5 trillion holes in Europe’s financial system, investing this as permanent capital in assets that will depreciate sharply in value, along with a much weaker currency. This might work. However to create a sustainable solution, it requires a homogeneous EuroZone to be created.

 

  

To create equivalence across the EuroZone may well be possible especially after the monetization of the German balance sheet by printing an unprecedented amount of currency to swap back some of the core’s ill-gotten gains from the Euro experiment back to the periphery.

                                                    

                                     http://www.dcs-digital.com/moneychannel/program.php?listid=9 

                                             ( Click on 9^th December and advance the slide to 50 minutes )

 

But to my mind it’s far likelier to result in equivalence being achieved by reducing the competitiveness and standards of Germany down to the levels of Greece than by improving the standards and competitiveness of the GIPSIs in line with the core. To that end the recent agreements amount to little more than further kicking the can down the road with the added caveat that in recent weeks the EU has supplanted democratic processes in Greece and Italy (in the  words of Eric Rosenkranz “Germany’s just chosen a new Prime Minister….for Greece”) and also abrogated its own constitution. This “democratic deficit” to use Nouriel Roubini’s description, may well be a long-lasting problem, well after the warm glow of the short term fix has worn off. 

 

8 December 2011

DELTA MALES AND GREEK ALPHA BETS

A trenchant recent observation by MBMG’s affiliated portfolio manager Scott Campbell of Miton Optimal followed on from UBS-gate, where a trader’s mistakes threatened to undermine one of Europe’s biggest banks:  

 ‘We have written in the past that not all Exchange Traded Funds (ETFs) are created equal and due diligence is just as important as with hedge funds or other collective investment vehicles. Well UBS shareholders discovered some of these risks when 31 year old trader Kweku  Adoboli lost US$2.4 bn of the banks money. He worked for Delta One and as one city analyst noted, most CEOs of investment banks could not explain what their Delta One team are actually doing!  

Well the ETF connection is that the not all ETFs are ETF’s. In fact, most are ETN’s which stands for Exchange Traded Notes which are not Funds at all. These are promissory notes from an investment bank giving specific performance of an index or asset or commodity to investors. The Delta One team is responsible for trading the banks’ money to ensure that they can meet this promissory note. Any excess profit (or loss) generated from managing the risk (or creating it) in a cost efficient manner, is kept by the bank. JP Morgan predicted last year that Delta One would be a prime future source of revenue for global investment banks. “What were they smoking?”  

When investing in an ETF you are buying an underlying basket of assets in a fund that happens to be listed. When you buy an ETN you are buying the promise of an index return by an investment bank. As many found in 2008 with the ETN’s backed by AIG, who nearly went bust, these promises can have very different volatility profiles. Given all the other eerie 2008 correlations going on, ensure you know your F’s from your N’s, as not all is equal. 

Source: MitonOptimal.com Global Weekly Comment – Week 39 – 30 Sep 2011

6 December 2011

Congratulaions to our affiliated portfolio managers

MitonOptimal, the specialist global multi asset management company with a presence in Guernsey, South Africa and Asia who recently announce the launch of its South African institutional asset consulting business. MitonOptimal has an impressive 15 year track record of global multi asset management in very adverse conditions.

Part of this expansion sees the appointment of Professor Evan Gilbert as a director and Head of Institutional Asset Consulting from 1 September. Prof Gilbert joins from Cadiz Asset Management and was formerly at UCT and the University of Stellenbosch. He completed his Ph.D at the University of Cambridge in England. He has a wealth of experience in asset allocation research, trustee training and has written many academic papers on portfolio management and related subjects.

"I am very excited about joining Scott, Roeloff, Joanne, Cherie-Lee and the rest of the team at MitonOptimal. They are an asset allocation specialist and have a partnership culture with a real desire to produce investment results in all aspects of their portfolio management. I strongly believe that the value proposition of active asset allocation and implemented consulting, combined with multi management, can only continue to gain immense traction in the local market" added Prof Gilbert.

Scott Campbell, Managing Director and fund manager at MitonOptimal added "since we founded this business we have believed that the value proposition in portfolio management is global diversification and the ability to add asset allocation alpha by tactical decision making and timeous implementation. The team led by Prof Gilbert and ourselves has the pedigree and enthusiasm to create a new force in the South African Institutional industry. Asset Allocation is shown by academic research to attribute 90% of variance in portfolio returns and our experience to date with institutional schemes is that they do not diversify this most important decision. The real risk faced by trustees is not moving to multi manager, but not having any diversification of consultant. Overemphasis has been given to actuarial static asset allocation and manager search which is the remaining 10% of risk attribution. The US implemented asset consulting market has grown to US$200bn since 2004 and the local industry is also changing quickly. Balanced multi asset managers are the best placed to deliver forward focused performance in the future.

"Scott was recently in Bangkok to celebrate MBMG’s 15^th anniversary celebrations at which he showed his audience by announcing that his almost decade long love affair with gold is coming to an end. “There’s still upside but maybe another 10% or 20% or so, perhaps a bit more. But really that’s just nickels in front of bulldozers when gold has already been an 8 – bagger since we first bought in at around $250 per ounce”.  All good things come to an end that will include gold’s bull run and then gold could be expected to cyclically languish for the next 30-40 years at as much as 75% below today’s levels.

1 December 2011

Banana Republics of America and Europe

Check this before read :  Banana Rebuplic Lyric  

The biggest single structural defect facing the US economy night now is the widening gap between rich and poor, reshaping the U.S.economy, leaving it more vulnerable to recurring financial crises and less likely to generate enduring expansions. 

I recently debated this point on CNBC with Eric Rosenkranz – http://video.cnbc.com/gallery/?video=3000056592 

Issues like record levels of debt, spiraling federal deficits, and chronic lack of velocity in money circulation are all symptoms of the same disease. 

“Income inequality in this country is just getting worse and worse and worse,” James Chanos, told Bloomberg Radio recently this week. “And that is not a recipe for stable economic growth when the rich are getting richer and everybody else is being left behind.”
 

We’ve been beating this drum a while and we’d thank GMO’s Jeremy Grantham for waking us up to this. 

Since 1980, about 5 % of US annual national income has shifted from the middle class to the nation’s richest households. That means the wealthiest 5,934 households last year enjoyed an additional $650 billion – about $109 million a piece – beyond what they would have had if the economic pie had been divided as it was in 1980, according to Census Bureau data. 

Between 1993 and 2008, the top 1 percent of families captured 52 percent of total income gains, according to a 2010 analysis of Internal Revenue Service tax data by economist Emmanuel Saez of the University of California, Berkeley. 

Disputes over what constitutes economic fairness are moving to center stage amid a near-stagnant U.S. economy saddled with 9.1 percent unemployment yet boasting record corporate profits. President Obama last month targeted “the wealthiest tax payers and biggest corporations’ for higher taxes, saying they should pay “their fair share” - Bloomberg Of course Republicans led by John Boehner, elected on a pledge to an opposite all tax hikes, whether they’re good or bad, sensible or stupid see any suggestions of increases as being unacceptable  – they are probably hoping that the wealthiest  5,934 households influence exert an influence disproportionate to the actual quantum of, votes that they themselves wield, when it comes to the polls. 

A lot of the anger over this banana republic income dispersion fuels the likes of ‘ OccupyWallStreet ‘. 

“We are the 99 percent that will no longer tolerate the greed and corruption of the 1 percent,” US the occupywallstreet.org web site.  

Tax reforms 

Howard Buffett, the Berkshire Hathaway Inc. director sympathizes with this anger. 

Buffett Junior recently told Bloomberg News:“There has never been such a large gap between earnings in this country….There has never been a time in my lifetime when the government is going to cut an incredible amount of programs that support poor people and feed them.” 

Almost half Americans now see their country divided between “haves” and “have-nots,” according to a Pew Research Center poll last month. 

Growing Gap 

“The large and growing gap between the haves and have-nots will tend to undermine growth, both directly and indirectly – including by reducing the marginal propensity to consume and by amplifying the political polarization that has already contributed to poor economic policymaking.” According to PIMCO, CEO: Mohamed El – Erian. 

To us this is the central issue right now. It’s not a specifically American problem, although much of the data and available commentary focuses on the Banana States of America. It’s also very easy to see the evolution of the gap in America. Following WW II, the country unified around a programme of building post-war prosperity in the 1950s. This was so successful that the 1960’s saw radical social change and moves to greater equality encapsulated by the promise of a “grand society”. When times became cougher in the 70’s, the focus on distribution of the spoils once again moved to the fore setting the stage for the what we’ve long highlighted as Art Laffer’s role. 

Since 1968, incomes in the U.S. have become steadily less equally distributed, according to the standard statistical measure of inequality know as the Gini coefficient. The U.S. Gini score rose from .39 in 1968 to .47 in 2010, meaning that incomes were becoming increasingly unequal. 

Bloomberg points out that in the 30-nation Organization for Economic Cooperation and Development, only Turkey and Mexico have more unequal societies than the United States. In the U.S., the rich-poor gap widened by 20 percent since the mid-1980s, more than in most developed countries. “Nowhere has this trend been so stark as in the United States,” the OECD concluded in a 2008 study.  

Economic gains in the U.S. have been spread less equally in recent years as a result of factors including globalization, technological change, the decline of labor unions, changing social norms, and government trade and tax policies, according to Worldbank economist Milanovic . Much of the focus has been on the Gini co-efficient, a measure of personal net worth, but we shouldn’t forget the effect of corporates.

“In the aftermath of the 2007-2009 financial crisis, the fortunes of labor and capital have diverged. After plunging in the two years leading to December 2008, total corporate profits have roared back to a new high of $1.5 trillion, 6.5 percent above the previous peak reached in September 2006. “ – BloombergCorporate balance sheets are stocked with cash due to these imbalances while US consumers are drowning under seas of debt. The typical American household’s median income of $49,445 at the end of 2010 remained below the level reached in 1997.

Societies with a narrower gap between rich and poor enjoy longer economic expansions, according to research published this year by the International Monetary Fund. Income trends in the U.S., where the wealthy have pulled away from the rest of society, mean that future U.S. expansions could last just one-third as long as in the late 1960s, before the income divide began widening, said economist Jonathan Ostry of the IMF.

“Expansions -- or what Ostry and coauthor Andrew Berg label “growth spells” -- fizzle sooner in less equal societies because they are more vulnerable to both financial crises and political instability. When such countries are hit by external shocks, they often stumble into gridlock rather than agree to tough policies needed to keep growth alive.” – Bloomberg

Stumble into gridlock?   Sound familiar?  Just to be clear, this is no bleeding heart liberal socio-reforming agenda – we’re looking at economic efficiency and socio economic sustainability as our main concerns.

“Very high levels of inequality seem to be associated with slower economic growth,” agreed Michael Feroli, chief U.S. economist for JPMorgan Chase & Co, echoing, Raghuram Rajan, the IMF’s former chief economist who says countries with high levels of inequality tend to produce ineffective economic policies and that political systems in economically divided countries grow polarized and immobilized by the sort of zero-sum politics now gripping DC.

The 30.5 million American households that earned less than $25,000 in 2010 were almost seven times the number making more than $200,000, according to new Census Bureau figures. In 2000, the ratio was 5.6-to-1.Even Ben Bernanke last year told CBS’s “60 Minutes” that rising inequality was leading to “a society which doesn’t have the cohesion that we’d like to see.

”As I said earlier, this isn’t an uniquely American problem. Bloomberg reports that “European capitals, including London, Madrid and Athens, have witnessed street protests in response to reduced government spending and subsidies.” While New York Mayor Michael Bloomberg agrees that persistent unemployment could spark social unrest. 

Like us, Bloomberg sees echoes of the past. During both the 1920s and the most recent decade, the extremely rich enjoyed large income gains, much of which were made available to the working poor and middle class via credit channels. Politicians encouraged the resort to credit as a way to bridge the gap for those struggling to sustain living standards amid flatlining wage income, according to Rajan’s 2010 book “Fault Lines.”

As a result, household debt nearly doubled in both periods, setting the stage for the Great Depression and the most recent financial crisis, says a December 2010 paper by economists Michael Kumhof and Romain Ranciere of the IMF. That increasing debt burden left the economy exposed to widespread defaults when a financial shock hit.

In Europe, this has played out in a Euro context, with the GIPSI countries encouraged to borrow at low interest rates while the real accumulation of wealth took place at the core.

For many consumers, easy access to credit today is a thing of the past. Government fiscal policy -- in the form of payroll tax cuts and transfer payments -- is filling the gap between income and consumption the way easy credit did during the boom years.

“The missing credit temporarily is being filled in by fiscal measures,” said Feroli. “But we have yet to understand or see how a post-leverage, post-fiscal support household sector will behave.”

The government’s response to the financial crisis may also have exacerbated the rich-poor gap by shifting liabilities from private banks to taxpayers. Households and businesses have trimmed their debts since the 2008 peak while government borrowing -- to recapitalize the nation’s banks and battle the recession -- has exploded.  

As a result, total domestic nonfinancial sector debt in America topped $36.5 trillion at mid-year, compared with $32.4 trillion in mid- 2008. And that massive load leaves the economy vulnerable to future shocks.

Banana Republics, they’re all Septic Isles……. 

30 November 2011

Tongue - thaied ?

28 November 2011

Ted the Bear says Euro banks' survival is no picnic,