The Weekend Economist "Quaerere Verum"

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Wednesday, December 29, 2010

2011 annus horribilis?

2011 annus horribilis?

1. European debt saga continues?
Bailout-Bingo will continue in Europe with Italy, France, and Belgium prime candidates for review.

2. Apple loses it's cool?
Being the biggest player on the block is going to cost them. Investigations, power abuse, shady subcontractors, patent disputes, lawsuits. Nonetheless the earnings powerhouse is sure to continue.

3. China Bubble?
State control and currency manipulation are undermining stability. With millions of smart youngsters unemployed, food prices sky-rocketing and cheap manufacturing spilling over the border, can China keep its cool?

4. U.S Recovery?
Politically and economically America will remain a lame duck. Although corporate profits are promising it has not yet translated in jobs and housing. Joe the plumber, ain't got no cash. If they don't fix the budget, they aint got no credit.

5. Commodity Value
The only commodity becoming worth-less is paper money. The rest is up.
Gold will continue it's upward climb as people try to hedge devaluation.
Oil has been cheap, but so is the dollar, so time for oil and other dollar indexed commodities to go up. BRIC currencies will continue to show strength.

6. Taking the R out of BRIC
Russia will continue to struggle to re-engineer its commodity driven industry. Not enough wealth trickling down and a stagnant population. If it can trickle down the wealth and dramatically improve rule of law and gaping infrastructure then there is promise.

7. Sony's last trick pony
Now that Sony's PS3 gaming and media platform is finally earning money perhaps it can turn around other parts of the business or launch a new one. Divestment or (hostile) take over will be on the minds of the executive board.

8. Real Estate

With bank balance sheets under pressure due to new regulation, lending growth to sectors such as real estate will not pickup in the developed world. This will translate into higher borrowing costs, bankruptcies and restructuring going forward. Deleveraging in banks will translate to deleveraging of both households and business. More equity, more risk, lower asset values.

More on real estate in 2011 friends,

All the best and Quaerere Verum

The Weekend Economist

Tuesday, December 29, 2009

#86 Imagine the possibilities

Most people these days live in three worlds: The real one, outside the door; The virtual one, where you can engage in social networks with (as far as I can tell) real people; And The imaginary, where you and (if applicable) your imaginary friends reside.

Imagination is necessary to improve the real world we live in because our imagination can reflect a better, more desirable situation that we want. Expectations of future occurrences are shaped by our interpretation of the real world by our imagination. However, the world we live in moves so fast and is so voluminous from an information angle that we have little time to absorb, reflect and imagine productively.

We are more and more faced with split second decisions, quick one-sided interpretations, and rewarded by swift action without time for reflection. After all, thinking on your feet and being decisive are just some of the alpha male characteristics that are deemed critical in leadership and execution. Yes, as a surgeon, trader or soldier, these gut feeling reactions are critical to survival; it's what makes us human and how we flourish or fail. There is also something heroic and charismatic about reacting to gut feeling and making split second reactions in the heat of battle.

It's true that when a bus is about to hit you, you make an instant reaction to jump out of the way with a shot of adrenaline giving you superhuman strength. In the end it feels like a rewarding experience because of the raging chemicals inside your body. I guess that is what attracts people to extreme sports and, well, extreme banking and investment management. It now has been proven that testorone plays an important role in risk taking and self confidence. Seems obvious.

My point is that with more reflection and imagination we can avoid getting in the way of a driving bus or not seeing the sheer cliff downwards in the stock market. Avoid the herd, and think for your self.

It is easier said than done. But for experiment's sake, if X is claimed, could the opposite be true, what would have to occur for X not to happen? In any case it reminds me of being in university when the professor challenged us to think and question critically the many maxims we take for granted. By thinking critically, we understood the nature of the phenomenon, rather then treating it as a fact by itself. Imagination here is key again. Because you have to look beyond the reality in your face, and look from more perspectives than the one you current have. That insight comes from imagination.

If we had more time for imagination, we would not have to hire the expensive strategy consultant to tell us the obvious. With imagination we could see more threats and opportunities on the horizon. We could use imagination to design better business processes, perhaps even better businesses.

College is the best time of our life because it is then that we can afford to use our imagination. How strange it is then that if we are to be life long learners, that there is so little time to imagine.

Imagine the possibilities.

Monday, December 28, 2009

#85 In hindsight we all need umbrellas

There is no better time than Christmas to look back and reflect. Given the spectacular market recovery, the gifts under the tree will no doubt have recovered. As has confidence on Wall Street, where "God's Work" is paying off profitably. In hindsight, not the wisest of comments by the CEO of Goldman Sachs (need I mention any names?).

Christmas is a time for humility and reflection, if not to ask forgiveness for those we have neglected inadvertently (tax payers anyone?). Obama was elected partially to give that message to the "fat cats" of Wall Street. Despite his television appearance, a generic hallmark Christmas card probably made more of an impression.

Instead of focusing on banker's bonuses, the real focus should be on the economy. Markets are supposed to reflect the barometer of the economy, with economic weather men telling the masses wether we are in for rain or sunshine. Whether it be sun or rain, umbrellas seem to be in short supply. But then again who needs an umbrella when you can rely on the weather forecast. After all, the representatives of God's work are always right in hindsight. And yet in hindsight we all needed umbrellas.

Many claim they saw storms coming. Why did we all go outside without an umbrella then? I've got one now, but I am tempted to trade it in for sunglasses with the market looking so upbeat. No need to stay indoors. Take a little gamble, the masters of the universe sell on NBC & Bloomberg; buy gold, time for value investing, just look at those juicy p/e ratios, etc, etc. One compliment to the financial weathermen; they sure know how to sell compared to those weight loss exercise gear that one sees advertised on television. I guess that is the real difference between no education and a Harvard education.

Lose 20 pounds in 2 weeks for sixty dollars, or balance your portfolio the right way and see it all evaporate in front of your eyes in a matter of months. "Results in the past are no guarantee for future expectations." If you want to sell dishonestly, turn off someone's common sense. You can fool anyone if you turn off their common sense. That's why you always have to Quaerere Verum: seek the truth. Instead of our human flaws, easily exploitable through suggestion, insecurity and plain old greed.

Truth is, all you need is common sense. When you're leaving the door, do you ask yourself if you have your keys, wallet, umbrella, etc? Consciously or subconsciously you do. That's common sesne. Now when checking the weather, do you have blind faith in the prediction of sunshine when you see clouds outside? Probably not 100%; not having blind faith is also common sense. So why do you let someone turn off your common sense when reading or watching the financial tell-sell on the TV, Internet or newspapers? I don't have an answer to that right now but let's not do it again. The rain makes you wet faster than the it takes the sun to dry you. That too is common sense.

So when cheap money pours in again to inflate asset prices beyond the sun., think about Icarus and your umbrella. You don't need an MBA for that.

And remember, better grumpy and prepared, than insanely unprepared.

Wednesday, April 8, 2009

#84 Wall Street Socialism

Who would have thought that the collapse of the American housing market would signal the end of an era for the world's most prestigious investment banks? The U.S is in-between a rock and hard place to rescue the financial sector of the world's largest, most important and most competitive economy. At what cost? We are, according to Nassim Taleb, the prolific black swan visionary, socializing losses and privatizing profit. That is the world of capitalism turned on its head.

The crisis goes fundamentally deeper than the interconnected failure of banks and other financial institutions in an increasingly interlinked and globalized world. We need a collective re-examination of leading economic, finance and management theory and practice in order to evaluate where and why it has gone wrong.

It is far too easy to blame greed on Wall Street. Greed is healthy; without it we do not have the Darwinian economic animal spirit of capitalism. Without greed we would not have banks, health insurance or even mortgages for that matter. Greed is a force for innovation, hard work and ambition. The blame lies in the sharing of risk and reward. Institutions have become too big to fail. Without economic Darwinism, the rotten survive, and with it bad practices and empty suit risk/reward models.

The problem is that greed and risk management do not mix well with current investment banking models. They are in fact creatures whose interests, even though they pretend to speak the same language, are juxtaposed. Risk management in itself is almost an impossible venture because:

a) Risk is too complex and interconnected in a globalized world for any human being to comprehend accurately and effectively, b) Unknown and unexpected events with previously unrecognized connectivity spring up from places where we never saw them coming (black swans), c) Risk managers are rarely appreciated or understood, and d) Assessing the correct value, impact and occurrence is almost pseudo-science.

Some so-called gurus claim that risk management (in hindsight) should have given investment banks the knowledge (foresight) to steer away from the iceberg of doom. Risk Management is always a science that relies on (biased/faulty) hindsight in order to attain foresight that we can never accurately interpret or understand. Furthermore, us mortal humans lack the objective internal stochastic instruments to judge the real-life world in terms of potential/real events/impacts.

Banking in the future will inevitably be increasingly socialized and/or nationalized at a higher cost, with potentially the same risks and (moral) hazards if we fail to learn from the past. I think it's time we start teaching students and practitioners the history of finance and financial economics. Let's start with Financial Meltdown Economics 101.

Friday, April 4, 2008

#83 Japan’s Prodigious Quest for Energy Independence

Dependant on foreign sources for 96% (87% when including nuclear power) of its primary energy needs and practically 100% of its oil and gas supply, Japan is in a unique position. Rising demand for energy resources and increasing volatility in their supply are contributing greatly to Japan’s concerns. Only natural, then, that Japan should seek to secure its own energy interests. But how realistic is this in today’s world?

A major target of Japan’s May 2006 New National Energy Strategy (NES) is to have the ratio of oil developed by Japanese upstream firms ("Hinomaru oil") increase to 40% of Japan’s oil imports by 2030, up from around 15% in 2005. Japanese oil companies are scrambling to meet this seemingly unobtainable target, coquetting potential partners in Africa, Russia, Central Asia and the Gulf. Just how difficult attaining this objective is can be seen in the failure of the Japanese-owned Arabian Oil Company to renew concessions in the Neutral Zone (also known as “Divided Zone”) between Kuwait and Saudi Arabia in 2000 and 2003. The Azadegan oil field in Iran, where Japanese oil company Inpex’s 75% stake was slashed to 10% by the Iranians in October 2006 and eventually frozen, is another case in point. Meanwhile, voices calling for a boycott of Sudanese oil are getting louder and Japan’s projects on the island of Sakhalin have been undergoing some serious turbulence. The news is not all bleak, however. One major success was scored in October 2005 when Japanese oil firms beat their international competitors in bidding for exploration and development rights in six Libyan oilfields; this was the first oil-exploration concession ever given to Japanese firms in Libya.

Another goal of the NES is to lessen Japan’s dependency on Middle Eastern oil. Here too some progress is being booked, with 84.3% of oil imports originating from the Middle East in November 2007, compared to 90.3% in September 2006. However, the figure has been edging back up in the past few months to 86.7% in February 2008.

One way in which Japan is seeking to realize the goals of the NES is by increasing government involvement in the acquisition of energy resources. To offset the advantages enjoyed by state-sponsored Chinese oil firms, the Japanese government is now seeking to increase subsidies (raising the upper limit of its funding to 75% from the previous 50%) to Japanese oil firms such as JOGMEC – which is slowly becoming a carbon copy of the old Japan National Oil Company. Additional assistance is to come in the form of more favorable loans and investment guarantees. In other words, there is little to be left of the free market policies and non interference from the government that former Prime Minister Junichiro Koizumi’s liberalization policies set out to engraft.

Despite being the world’s second largest net importer of oil, the third largest consumer of oil, and the largest importer of Liquefied Natural Gas (LNG), Japan’s demand will continue to decline relative to that of emerging markets such as India and China. With the relative decline of Japanese demand come decreases in Japan’s purchasing power, further undermining its position in the international energy market.

This leaves Japan with two options, namely seeking alternative sources of energy and improving energy efficiency. It is in both of these areas that Japan has booked its most impressive results. Energy conservation and environmental protection have improved significantly, leaving Japan with one of the lowest energy intensity levels among the advanced OECD economies. Similarly, Japan has been able to move considerably in the direction of nuclear and LNG derived power, reducing its dependency on oil. The price, of course, has been increasing dependency on gas.

Sunday, January 27, 2008

#82 The Palestinian Conflict and Public Opinion

The conflict between the Arab and Jewish inhabitants of Palestine is certainly not new. It started long before the creation of Israel. And the basis of this conflict, the claim on the same piece of land by two nations, has not changed through the years. The violence produced by this conflict has also been present since the day the first Jewish settlers arrived in what was then an Ottoman province. The number of casualties was lower, but only because the population itself was smaller and because their weapons were less effective.

What has changed is the public opinion expressed by the tone of the UN and the media coverage related to the conflict. At the birth of the State of Israel and until a number of years after the 1967 War the media had a positive attitude towards Israel. It painted a picture of a small country surrounded by far larger enemies that threatened without cease to annihilate it; in this view, brave little Israel was depicted not only as a courageous survivor, but also as a successful reproduction of Western social-democracy and human rights in a sea of despotism. The subject of Israeli-Arab conflict had not yet apportioned to itself more media attention and UN scrutiny than its relative importance implied it should.

The Arab Palestinians that became refugees as a result of the Arab-Jewish struggle for possession of the Holy Land in 1947-8 were the real victims of policies instituted following the war. The policy of the Arab states was to leave the problem unresolved – thereby leaving the question of Palestine open - and Israel could and would not permit the return of large numbers of refugees as such a policy would have undermined the character and security of the nascent Jewish State. The UN has created a special organization, the UNRWA, to aid the Palestinian refugees next to the UNHCR that aids all other refugees with an independent budget larger per capita than that of its sister organization.

Significant interest in the plight of the Palestinian Arabs and changes to the media’s portrayal of the refugee problem began materializing in the seventies. The figure below shows the sharp increase in the percentage of country-specific United Nations General Assembly resolutions concerned with the Middle East in 1970 and continuing over subsequent decades. In 2006 the number of resolutions related to the Palestinian conflict amounted to more than a quarter of all resolutions. During the same period of time the media gradually changed its tone, first depicting Israel as an occupying and aggressive state and later even as an apartheid state and worse. The proportion of anti-Israeli and pro-Arab Palestinian reporting increased, with some news outlets becoming effectively PR agents for the Arab view of events. This change was evident in the many reviews of the Six Day War published in 2007 and is evident currently in the way that the Gaza conflict is being reported. A clear example of such one sided reporting took place in the wake of Israel’s military operations against Qassam rockets in Gaza on the fifteenth of January; in clashes, an estimated seventeen Hamas militants were killed. Media outlets throughout the world were quick to report Palestinian claims of a massacre in Gaza, failing to note entirely or relegating to a trivial detail the fact that these were armed combatants and not civilians. Moreover, they died fighting, so the appellation massacre, although good propaganda, was not appropriate.

The reasons for this change are manifold; most have little to do with the conflict itself. The main contributors are the change in the moral perception of armed conflict by the general public in the west, the intrusiveness and ubiquity of emotive reporting, and the increasing strength of the Arab world and its PR savvy.

When Israel was established, the Second World War has just come to its end and the notion that wars could be just and necessary was still very strong in the public consciousness. There was also a deep feeling of guilt in the West with regard to the Jewish people which made it difficult to criticise the Zionist desire for an independent Jewish state. Furthermore, for nations with Christian cultures the connection between the Jewish people and the land of Palestine was quite obvious. In the 50s and 60s the western public was exposed to a series of independence wars in the European colonies and conflicts like the Vietnam War. The new generation began associating war not with heroic struggles against evil like the Second World War, but rather with petty and cruel conflicts in which superior Western powers sought to crush miserable locals struggling for a better life. For some, it became axiomatic that the West only fought wars to oppress just national liberation struggles out of racist and exploitative motives. When the Six Day War produced enormous territorial gains for Israel, it was easy to associate it with what was now considered despicable colonialism in the Western mindset and to interpret it as an act of premeditated aggression rather than as a defensive war. The rise of a Jewish settlement movement in the conquered territories further reinforced this association. Pro-Palestinian propagandists exploited this development to depict the whole Zionist movement as no more than an instance of Western colonialism. Interestingly, the territories that are now called ‘the occupied territories’ were occupied since 1948 by Arab countries yet never referred to as such until after they passed into Israel’s hands.

When the Palestinians of the West Bank and Gaza came under Israeli rule, media interest in and access to them increased greatly and their plight was publicised internationally. As a consequence of the violence of the Second Intifada, the Israeli security establishment enacted harsh measures to prevent terrorist attacks. Palestinian freedom of movement within the territories was severely curtailed and access to Israel for work or trade restricted. Life in areas under Palestinian control suffered from infighting and occasional Israeli incursions to limit terrorist activities. Due to the fact that these incursions frequently took place in densely populated residential areas, there were civilian casualties despite efforts to avoid this. Natural sympathy for the weaker party and pictures of seemingly ragtag Palestinian fighters and stone throwing youths confronting an apparently first rate Israeli army created a rich pasture for reporters, producing interesting, often one sided stories that moved public opinion away from Israel. The huge influence of such representations on public opinion is also recognized by the Palestinian PR machine, which has been caught staging scenes and feeding them to media outlets in order to fan hostility against Israel.

An important development of the seventies was the realisation in the Western World that it was strongly dependent on Arab oil. This recognition strongly influenced European Middle East policies and their positions on the Palestinian conflict. Moreover, the emergence of a unified block of Islamic nations under the aegis of the OIC (Organization of the Islamic Conference) mobilized the political clout and voices of over a billion people against Israel. These voices were strongly reinforced by the left which has made Israel one of the classics of their ideological struggle, casting it as the evil western/white power against the innocent non-western/non-white power. As a consequence, the Arab Palestinian cause became an integral part of all of their activities, mainly demonstrations and conferences, which are not related at all to Palestine (e.g. anti globalization). Another active channel to anti Israel opinions in the west is created by the millions of Muslim immigrants. All these voices are in turn broadcast through the media and impact public opinion.

Israel is unable to move public opinion towards a more balanced view of the conflict in large measure due to the fact that it is an open society. There is absolute freedom of speech in Israel and thus the views expressed by the media and individuals are very diverse, reflecting not one but many different understandings of the conflict. Instead of providing a clear Israeli position, Israeli society provides a multiplicity of positions which precludes the effective propagation of an official narrative for PR purposes.

As long as there will not be significant changes on the ground (like the establishment of an Arab Palestine living peacefully side by side with Israel), one can expect to continue seeing the shift of public opinion away from support for Israel.

- This article was written for and provided to the Weekend Economist by Tamara Fai

#81 Maghreb: The Neglected Terror Base

In an article, "#58 The North African Breeding Ground for Radical Islam," published here in April last year, specific mention was made of the fact that little to no attention was being given by mainstream media to the terrorist bloodshed occurring in the Maghreb region, particularly in Algeria. It appears since then little has changed. Just a few weeks back, on 02 January, 4 police officers died when a car bomb exploded near a police station in Naciria, a town east of the Algerian capital, Algiers. A much more deadly attack occurred less than one month earlier in the capital, when two suicide bombings targeting U.N. offices and a government building killed at least 37 people. As if this were not enough, in July 2007 a suicide bomber blew up a truck inside a military barracks southeast of Algiers, killing 10, and later in September, at least 28 people died after an explosives-packed vehicle rammed into a coast guard barracks in the northern town of Dellys. All attacks were claimed by a local al-Qaeda branch.

The argument used last time that ignoring these events when engaging in a so-called war on terror is not only dangerous but downright harebrained continues to hold true, but this has somehow not yet reverberated on Western leaders. This time around there is new data to highlight the importance of North Africa in the fight on terror. In a recent study, U.S. Military Academy researchers found documents that show 112 of the 595 foreign nationals who entered Iraq between August 2006 and August 2007, or 19%, were Libyans, compared to no more than 4% in previous research. The majority still come from Saudi Arabia, but countries like Libya, Algeria and Morocco are increasingly sending more fighters. In fact, basing its information on the same research, the Washington Post reported that overall, North Africans account for 40% of the foreign fighter ranks.

It is incomprehensible that the issue of terrorism in North Africa is so low on the list priorities of anti-terror units, when statistically there is a rapid increase in attacks, a growing effect on other hotspots in the world in the way of recruits, and geographically the most pertinent threat to Europe other than threats from within. Even more striking is the lack of media attention generated by the attacks themselves. Hopefully attitudes will change soon, because if not, we are silently witnessing the maturing of the next batch of enemies that need to be fought.