FaceBook

an article from Bloomberg Businessweek on FB, it just hit its all time low since IPO in May. in HK IPO shares are locked up at least 6 months and no waiver, how this would happen in the US, I really dont know.

read section in blue with red highlight.

Facebook (FB), you surely know, is now chiefly synonymous with IPO disaster. Brokers and market strategists drop the word alongside “Libor” and “Flash Crash” to explain Mom & Pop’s disenchantment with the market. California says its tax revenue is at risk because of the Silicon Valley company’s stock’s swoon. The social network’s dud IPO has also poked millions of francs of red ink out of UBS (UBS), the biggest Swiss bank.

Facebook shares closed down 4 percent Thursday at another all-time low of $20.04, compared with their May initial offering price of $38, amid ongoing fallout from the company’s underwhelming first earnings report as a public company on July 26. The stock has its show-me work cut out for it just a red flags and obstacles keep popping up. On Wednesday, a couple of senior Facebook executives—Katie Mitic, former director of platform marketing, and Ethan Beard, head of platform partnerships—said they’re leaving to pursue other opportunities. In June, the company’s chief technology officer, Bret Taylor, announced his departure. Facebook’s operating margin and sales growth have both declined. And the number of ads it delivered in the U.S. fell 2 percent last quarter even its daily user count jumped 10 percent, management revealed on last week’s call.

“Ad impressions continued the recent trend of growing more slowly than users as more of our usage is on mobile devices,” said Chief Financial Officer David Ebersman. “This trend is particularly true in markets such as the U.S., where smartphone use is expanding rapidly.” Facebook announced its debut mobile-advertising platform just six months ago.

The social network still carries a not-insignificant market capitalization of $49 billion (down from a peak of $104 billion on its first day of trading) and a price-to-earnings ratio that is at least twice that of rival Google (GOOG), according to Bloomberg data. But as Business Insider’s Henry Blodget explains here and here, concern and confusion over Facebook’s actual share count is not exactly inspiring Dodd & Graham value types.

And as “you bought, they sold” remorse still accompanies the ticker FB, there’s a ton more yet coming to market for sale. On Aug. 16, 271 million “locked-up” shares held by insiders and early investors will be freed up for trading. On Oct. 15, another 249 million shares will be added to the mix—then another 1.32 billion on Nov. 14. And 149 million shares for sale on Dec. 14. Just in time for Christmas stocking stuffing.

Bloomberg Businessweek Senior Writer Farzad covers Wall Street and international finance.

Wilbur Ross, the Bank Eater

What we learnt now in Oct 2011, the HK market rebound 4000 pts from low point to get to almost even before the Aug/Sep fallout. What we dont really know is a story about Northern Rock of UK has a new investor - who is it? This might have triggered the broad rally and confidence for Wall Street insiders.

Read story below [section in red in particular].

Younger readers should read it in more detail so you know how you can become successful. History does not repeat itself exactly, it does repeat in a different context and with some twists, those who become successful get there not by luck alone but by learning history and how to interpret them in the current context and act accordingly and decisively.

 

Bloomberg Businessweek Magazine

Wilbur Ross, the Bank Eater

By Devin Leonard on January 05, 2012

Early one October morning, Wilbur Ross sits before a dozen or so colleagues at the head of a long table in his Manhattan office, considering in his quiet way the purchase of a business worth more than a billion dollars. Ross, 74, is the chairman of WL Ross & Co., among the largest and most active firms specializing in the purchase of distressed companies; in other words, he is a vulture, albeit a well-dressed one, favoring crisp pinstripe suits and freshly shined shoes.

His investment committee is presenting the final details of the firm’s $1.2 billion bid for Northern Rock, the English bank seized by the British government in 2008 after panicked depositors withdrew their funds. WL Ross is partnering with Richard Branson’s Virgin Money.

“Who is our competition?” asks Pamela Wilson, a WL Ross managing director.

“J.C. Flowers is always our competition on everything,” says Stephen Johnson, one of the firm’s vice-presidents, referring to J. Christopher Flowers, another private equity investor. Johnson adds, “The word at the moment is that he won’t be able to bid on this.”

That leaves the field open for Ross, who describes himself as “a guy who likes to run into burning buildings” and who has been running into a lot of them lately. The committee spends much of its time talking about the need to structure the bid so it won’t embarrass the British government, which has spent an estimated $2.2 billion on the Northern Rock bailout. The firm plans to offer the Cameron administration a slice of the proceeds if it takes the bank public.

Ross himself says little, and when he does, he does so in his characteristic near- whisper. It would not be overstating it to say Ross coos. He scrutinizes a pile of documents before him. From time to time he asks a question. He wants to make sure there will be no last-minute regulatory issues. Finally, he says, “I think we are ready to vote on this.”

On Oct. 25, Virgin and WL Ross make their offer. Three weeks later, the British government accepts it and controversy soon follows. Ed Balls, the Labour Party’s shadow chancellor, assails England’s Conservative Party leaders for taking a loss on the bank. Ross arguably makes matters worse by telling British reporters that he hopes to make a substantial profit—unless, of course, Northern Rock is swamped by the European financial crisis that enabled him to buy it so cheaply in the first place. This is a familiar scenario these days. Ross stands to make a lot, if he doesn’t lose even more. 

Since 2008, Ross has invested $1.8 billion in faltering banks, a major play by a high-profile player. Ross is an investor’s investor; he’s not a household name like Warren Buffett or a constant presence on the cable channels like Pimco’s Bill Gross, but he’s revered and followed in his field. “He’s charming, and he’s smart,” says Steven Kaplan, a professor of finance at the University of Chicago Booth School of Business. “And he has been brilliant and contrarian in discerning opportunities.” He is also worth an estimated $2.1 billion, according to Forbes.

His firm was one of four private equity groups that paid $900 million for the failed BankUnited, a large Florida thrift, purchasing it from the Federal Deposit Insurance Corp. in May 2009. He has taken stakes in ailing institutions such as Oregon’s Cascade Bancorp (CACB), New Jersey’s Sun Bancorp (SNBC), and the union-owned Amalgamated Bank in New York, all of which required his financial aid after writing down bad real estate loans. Ross has also looked abroad for bargains—and not just in England. In July he and four other investors spent $1.6 billion to buy 35 percent of the Bank of Ireland (IRE).

In the U.S., Ross argues that the smaller banks he has bought will outperform their larger competitors, such as Bank of America (BAC), which he sees as hobbled by their size and their need to comply with new regulations aimed at the mega banks. Richard Bove, a banking industry analyst, says Ross’s thesis is shrewd: “His timing is pretty good. I would expect he is going to do well.” Indeed, Ross says he and his fellow private equity stakeholders in BankUnited recouped their entire investment when they took the bank public in January 2011.

Across the Atlantic, Ross is buying larger banks. Ross says the plan for Northern Rock is to combine the traditional bank’s 75 branches with Virgin Money’s Internet operations. It’s a good strategy, says Howard Wheeldon, a senior strategist at BGC Partners (BGCP) in London. However, he says, Virgin Money and WL Ross got Northern Rock at a discount because of the inherent economic risks.

Ross says he paid 36 percent of book value for his stake in the Bank of Ireland, which he considers a steal. He believes Ireland will be among the first of the European countries to recover from the euro crisis and applauds its citizens for supporting austerity without taking to the streets: “There have been no riots, no picketing, no car burnings, no nothing.”

Naturally, some question Ross’s bank-buying spree. The Irish government announced in December that the country’s gross domestic product declined 1.9 percent in last year’s third quarter compared with the one before, the worst drop since early 2009. “The figures put a dent in hopes that Ireland was starting to reap the rewards of its economic reforms and austerity measures,” says Jonathan Loynes of Capital Economics in London.

Unlike Northern Rock, Bank of Ireland still holds many of its bad loans. Chief Executive Officer Richie Boucher says the bank passed a stress test conducted by the Irish central bank in March and started selling its problem loans before other euro-zone banks. “We decided to set up our stall at the fair pretty early,” he says. “There’s a couple of guys who are only starting to build their sheds.” It’s a good line, but it’s hardly comforting if the best the Bank of Ireland CEO can say is that his institution is in a slightly better position than banks in Continental Europe.

Stephen Kinsella, a lecturer in economics at the University of Limerick, finds Ross’s acquisition of the Bank of Ireland baffling. “The bank is in deep trouble,” he says. “It’s interesting that some vulture fund would want a stake in it. This is for all intents and purposes a zombie bank.” For his part, Ross is used to doubters. In 2003, when he was buying shuttered steel mills, Businessweek asked: “Is Wilbur Ross crazy?”

“My wife still isn’t sure that question has been adequately answered,” he says.

“We have some new jewelry on display, and I don’t want you to miss it,” says John Loring, the former design director at Tiffany (TIF). “It has no equal anywhere in the world—like the people in this room.” Nearly a hundred fashionable guests are gathered on the second floor of Tiffany’s flagship store on Fifth Avenue in New York for a party celebrating New York New York, a book of portraits by former Life photographer Harry Benson. Ross’s third wife, the social columnist Hilary Geary Ross, wrote the text. Many of Benson’s subjects are present, such as KKR (KKR) Chairman Henry Kravis, designer Tommy Hilfiger, writer Erica Jong, and News Corp. (NWSA) CEO Rupert Murdoch’s spouse, Wendi Deng, who in the book is captured lounging on a sofa in a short, translucent dress.

Ross, who is bald and slightly stooped, bears a certain resemblance to Charles Montgomery Burns, the billionaire tycoon on The Simpsons. His face seems to coalesce naturally into a look of profound skepticism. He’s actually quite sunny. Ross and his wife are fixtures on the New York social circuit, and he often celebrates powerful friends with customized doggerel that jokes about their wealth and, in some cases, their trophy wives. “It’s nice to know that he can get/the senior rate on any jet,” Ross wrote in honor of the 60th birthday of Roberto de Guardiola, an investment banker. “And then to cope with aging’s ills/how about some bright blue pills?”

“He has a great sense of humor,” says his close friend, Richard LeFrak, the New York real estate developer, who has invested in banks with Ross.

Ross stands with his elbow on a jewelry case, sipping a glass of red wine. “I thought this would be good for you to see,” he tells me. “It’s another side of me.”

Many of the revelers pay their respects. “I just read about your latest deal,” gushes a woman with whom Ross exchanges air kisses. “You are so humble. It’s rare for people in your field.” Ross looks delighted to hear it.

“The thing about Wilbur is, he keeps it all up here,” says Cary Thompson, vice-chairman of investment banking at Bank of America Merrill Lynch, pointing to his head. “You go to other buyout shops, and you’re talking to 20 different people.”

“I’m always happy to be seated next to him at a dinner party,” says author Amy Fine Collins, who covers style and fashion for Vanity Fair. “He’s a lot of fun.”

Ross disappears in the crowd and returns with interior designer Mario Buatta, “the prince of chintz,” whose clients include Barbara Walters and Mariah Carey. “I’ve done all his apartments in New York, Southampton, and Palm Beach,” Buatta says. “He’s great to work with as long as you get it done on time.” He gazes around the room at the other guests. “They’re all like that,” he sighs.

“He’s one of the best bottom feeders in the business!” says Leonard Stern, the billionaire real estate mogul.

“I only told him good things about you,” he says to Ross. “You owe me 50 bucks.”

“How ’bout 25?” says Ross.

“Forty,” says Stern.

“Thirty,” says Ross.

Ross grew up in North Bergen, N.J., the son of a municipal judge. He went to Xavier High School, a Jesuit military academy in Manhattan, where he was captain of the rifle squad. He never wore earplugs and damaged his hearing. He hoped to become a writer but found he wasn’t suited for the craft early on at Yale University. “Every single morning, you had to deposit 1,000 words of creative writing into a little mail chute,” Ross recalls. “I found that after three weeks, I was totally out of material.”

He discovered his true calling during a summer stint at a money management firm in New York. He spent hours at the public library researching companies and found that he loved it. “I’ve always been a bit of a bookworm,” he says. After earning an MBA at Harvard Business School in 1961, Ross got a job at Wood Struthers & Winthrop, another Wall Street money manager. He was given the task of salvaging the company’s troubled venture capital investments, such as its bet on a startup founded by an entrepreneur who thought he could make world-changing transistors from cellulose. (He couldn’t.) It forced Ross to learn how to deal with banks, creditors, and Chapter 11 proceedings.

These skills helped when Ross got a job at boutique investment bank Rothschild in 1976. There, he created a niche for himself as a bankruptcy adviser. When the junk bond market collapsed in the late 1980s, he helped bondholders recover their investments in Donald Trump’s Taj Mahal and T. Boone Pickens’s Mesa Petroleum. His office is full of cut-glass tombstones commemorating such deals.

Ross made enough money to underwrite an unsuccessful 1998 campaign to become governor of New York by his second wife, Betsy McCaughey. Their subsequent divorce, however, forced Ross to liquidate his collection of American Pre-Raphaelite paintings. (Ross declines to discuss any aspect of his second marriage.) The nuptial drama came at a time when Ross was becoming restless at Rothschild. It bothered him that he was making tens of millions while his clients were making hundreds of millions. In 2000 he and his entire team (including the mail clerk) departed amicably from Rothschild and formed WL Ross.

It was a good time for talented bottom feeders. The dot-com bubble burst that year and was followed by a recession. Steel companies including Bethlehem Steel filed for bankruptcy. So did textile manufacturer Burlington Industries and mine operator Horizon Natural Resources. Ross snatched them up along with some of their battered competitors. He was able to cut costs by working closely with union leaders. “He had an open mind,” Leo Gerard, international president of the United Steelworkers, says of Ross. “He recognized that workers had more to contribute than just their backs and their arms.”

Some of Ross’s investments, such as his effort to create a global textile leader, lagged. Others made him a fortune. He sold his steel holdings for $4.5 billion in 2005 to ArcelorMittal (MT), the world’s largest steel and mining company. WL Ross’s profit: $2.5 billion. The chairman personally pocketed $300 million from the deal. That was more like it. Ross sold WL Ross to Invesco, a global investment manager, for $375 million the following year.

Ross assiduously promotes his successes and had little trouble raising $4 billion in 2008 to invest in banks on the heels of the financial crisis. In May 2009, WL Ross, Blackstone Group (BX), Carlyle Group, and Centerbridge Partners bought BankUnited from the FDIC. It was predicted at the time that BankUnited’s failure would cost the agency $4.9 billion. As part of the deal, the FDIC assumed up to 80 percent of BankUnited’s copious losses.

The U.S. was still mired in a recession. The country had spent billions of dollars bailing out the banking system and now private equity speculators such as Ross were scooping up banks, apparently taking advantage of the FDIC’s safeguards. On Oct. 22, Democratic Senator Jack Reed of Rhode Island wrote to Treasury Secretary Timothy Geithner and former FDIC Chairman Sheila Bair, urging them to put curbs on such acquisitions. The FDIC issued rules requiring buyout firms investing in banks to hold them for three years and maintain profit-crimping amounts of capital.

So Ross changed his strategy. He funneled money into troubled banks that needed cash but hadn’t yet fallen into the FDIC’s hands, such as Oregon’s Cascade and New Jersey’s Sun Bancorp. “Their stocks were trading at very, very big discounts from book value,” Ross says. “We felt that provided enough cover we’d be O.K. if they had more losses.”

He also began to indirectly invest in banks that had been seized by the FDIC. In April 2010, WL Ross became the largest investor in First Michigan Bank in Troy. It was a tiny institution with only 30 employees. But First Michigan CEO David Provost had grand ambitions. Banks were failing left and right in Michigan. He wanted to buy them from the FDIC. Provost says Ross understood his strategy immediately and invested $100 million of his firm’s money in First Michigan.

On the day First Michigan announced Ross’s cash infusion, it bought CF Bancorp, a bank in Port Huron, Mich., with 368 employees and $1.3 billion in assets. Its collapse had been the largest in the state. First Michigan, now known as Talmer Bank and Trust, has since bought three more failed banks. Provost aims to create a network of community banks that profit from problems in their larger rivals. It seems to be working. Talmer earned more than $40 million last year. “The Bank of Americas get picketed,” Provost says. “The customers close out their accounts. Then they come over and see us.”

In November, Ross crossed the Atlantic to check on his new investment in the Bank of Ireland. When it was time to leave, CEO Boucher offered Ross a ride to the airport. On the way, they made an unannounced visit to a Bank of Ireland branch in a Dublin suburb. Ross spent nearly an hour at the bank, wandering around and asking questions. “It went down extremely well,” says Boucher. “There was a lot of positive buzz among the employees afterwards.”

For his part, Ross can’t understand why anybody at the Bank of Ireland would be surprised by his interest. “We just put a big chunk of money into it,” he says. “It was kind of under the control of the government. I guess the employees weren’t used to the Prime Minister dropping by.”

There is one banking investment of which Ross is particularly proud. In September his firm pledged $50 million to Amalgamated Bank, which is controlled by unions representing hotel and garment industry workers and has become known as the financial institution guarding the deposits of Occupy Wall Street. On Dec. 8, Ross visits the bank’s art deco headquarters in New York to meet with Edward Grebow, its president. Sitting around a coffee table, the two explain how Ross, a loyal member of the 1 percent, came to be interested in the self-styled bank of the other 99 percent. “Well, the bank, like lots of others, made some bad real estate loans,” Grebow says. “That left us of short of capital.”

He knew there were private equity investors interested in banks. There weren’t many, though, who would put their cash into a bank that is not only union-owned but also has a unionized staff. He could think of only two. One was obvious: Ron Burkle, managing partner of Yucaipa and a major Democratic Party contributor. The other was Ross. Grebow knew Ross had good relationships with labor leaders representing steel and textile workers. “We never had a strike at any of our facilities,” says Ross. “For us, there is nothing strange about having breakfast with a labor leader. We do it all the time.” Together, they agreed to put $100 million in the bank. The deal is awaiting regulatory approval, but Grebow is already talking about using the new funds to create progressive products, such as prepaid credit cards for customers with “uncertain” immigration status and mortgages for city sanitation workers.

Then there are the benefits of being associated with the Occupy Wall Street protests that began in September. Grebow produces a chart showing that 131 new depositors signed up online in October, up from 13 the previous month. The influx of new customers was roughly the same in November. “That’s with no marketing,” he says. Ross listens, quiet as ever. He says he has no problem with Amalgamated Bank’s connection to Occupy Wall Street. It’s clearly good for the bank’s bottom line and therefore his investment. “The bank by its nature is a so-called progressive, liberal bank,” Ross says. “Ed Grebow even marched in one of its demonstrations.”

You won’t see the 74-year-old billionaire accompanying him anytime soon, however. Says Ross, “I myself wouldn’t have anything to do with Occupy Wall Street.” Nevertheless, he’s thinking about putting more money into Amalgamated Bank. Ross may not cotton to protesters who want to share his wealth, but his investments are strictly nonpartisan.

Govt Debt - long term view

some research on long term govt debt, the earlier one is deleted as the charts are not able to be transferred.

Hoisington Quarterly Review and Outlook

Second Quarter 2012

Interest Rates and Over-indebtedness

Long-term Treasury bond yields are an excellent barometer of economic activity. If business conditions are better than normal and improving, exerting upward pressure on inflation, long-term interest rates will be high and rising. In contrary situations, long yields are likely to be low and falling. Also, if debt is elevated relative to GDP, and a rising portion of this debt is utilized for either counterproductive or unproductive investments, then long-term Treasury bond yields should be depressed since an environment of poor aggregate demand would exist. Importantly, both low long rates and the stagnant economic growth are symptoms of the excessive indebtedness and/or low quality debt usage.
This line of reasoning also provides an important corollary. If the effects of excessive indebtedness (low growth and low interest rates) are addressed by additional debt, or by debt utilized for investments that cannot produce an income stream to repay the obligations, then this even higher level of debt will serve to perpetuate the period of slow economic growth and unusually low bond yields. This proposition has importance for investors since the quarter end 2.75% yield on long-term U.S. Treasury bonds may, in the future, look as attractive as the 5% yields registered back in 2007.
The support for this thesis is derived from inferential judgments relating historical interest rate movements to the debt disequilibrium panic years of 1873 and 1929 in the U.S. (Chart 1) and 1989 in Japan. Second, a review of three recent scholarly studies on this subject is particularly instructive, as the research includes the first systematic evidence of the association between high public debt and real interest rates, findings that may be very surprising to some.

Excessive Debt Leads to Extended Episodes of Low Interest Rates

After a massive buildup of debt to finance the railroads, supplier industries, asset speculation and over-consumption in the late 1860s and early 1870s, the bubble burst in 1873. The panic of 1929 resulted from an even higher debt to GDP ratio than existed in the 1870s. The cause of the debt buildup in the 1920s was different, yet similar to the one four decades earlier. The earlier panic was prior to the creation of the Federal Reserve, yet government incentives and guarantees greatly encouraged overbuilding of the railroads.
In the 1920s, the new central bank unwisely made money and credit available, and then stood idly by as questionable lending financed over-investment and consumption, as well as rampant asset speculation. In Japan, public and private debt surged from 357% of GDP in 1979 to above 540% in 1989. This 183-percentage point escalation far outstripped the 100-percentage point rise in U.S. debt to GDP ratio from 1998 to 2008. In these ten years the Bank of Japan followed the same type of policy the U.S. Federal Reserve did in the 1920s, and again from 1998 to 2008. These earlier episodes have many parallels to the circumstances in the U.S. during the mid to late 1990s. Unable or unwilling to see these similarities, the Federal Reserve made money and credit overly ample, and then failed to use regulatory powers to check the unsound lending and the concomitant buildup of non-productive debt.
Part of the problem was two federally sponsored housing agencies that openly encouraged massive extension of housing related debt, just as governmental institutions played a central role in the creation of excessive railroad debt in the 1860s and 1870s. The debt disequilibrium panic years of 1873, 1929, 1989 and 2008 are uniquely important because each of these events resulted from extreme over-indebtedness, as opposed to lack of liquidity or some other narrower precipitating factors. For example, in 1907 the third largest U.S. bank, Knickerbocker National Bank, failed, causing a severe lack of liquidity. This event is credited with leading to the establishment of the Federal Reserve, but the underlying cause of the panic of 1907 was not over- indebtedness, so this and other panic years are excluded from our historical evaluation.

In the aftermath of all these debt-induced panics, long-term Treasury bond yields declined, respectively, from 3.5%, 3.6% and 5.5 % to the extremely low levels of 2% or less in all three cases (Chart 2). The average low in interest rates in these cases occurred almost fourteen years after their respective panic years with an average of 2% (Table 1). The dispersion around the average was small, with the time after the panic year ranging between twelve years and sixteen years. The low in bond yields was between 1.6% and 2.1%, on an average yearly basis. Amazingly, twenty years after each of these panic years, long-term yields were still very depressed, with the average yield of just 2.5%. Thus, all these episodes, including Japan’s, produced highly similar and long lasting interest rate patterns. The two U.S. situations occurred in far different times with vastly different structures than exist in today’s economy. One episode occurred under the Fed’s gu idance and the other before the Fed was created. Sadly, there is no evidence that suggests controlling excessive indebtedness worked better with, than without, the Fed. The relevant point to take from this analysis is that U.S. economic conditions beginning in 2008 were caused by the same conditions that existed in these above mentioned panic years. Therefore, history suggests that over-indebtedness and its resultant slowing of economic activity supports the proposition that a prolonged move to very depressed levels of long-term government yields is probable.

Recent Academic Evidence

Three recent academic studies, though they differ in purpose and scope, all reach the conclusion that extremely high levels of governmental indebtedness diminish economic growth. In other words, deficit spending should not be called “stimulus” as is the overwhelming tendency by the media and many economic writers. While government spending may have been linked to the concept of economic stimulus in distant periods, such an assertion is unwarranted, and blatantly wrong in present circumstances. While officials argue that governmental action is required for political reasons and public anxiety, governments would be better off to admit that traditional tools only serve to compound existing problems.
These three highly compelling studies are: (1) Debt Overhangs: Past and Present, by Carmen M. Reinhart, Vincent R. Reinhart and Kenneth S. Rogoff, National Bureau of Economic Research, Working Paper 18015, April 2012; (2) Government Size and Growth: A Survey and Interpretation of the Evidence, by Andreas Bergh and Magnus Henrekson, IFN Working Paper No. 858, April 2011 and (3) The Impact of High and Growing Government Debt on Economic Growth – An Empirical Investigation for the Euro Area, by Cristina Checherita and Philipp Rother, European Central Bank, Working Paper Series 1237, August 2010. These papers reflect serious research by world-class economists from the U.S., Europe and Sweden.

Debt Overhangs Past and Present

Reinhart, Reinhart and Rogoff identified and examined 26 post 1800 economic episodes of advanced economies that met the criterion of having public debt to GDP levels exceeding 90% for at least five years (a standard the U.S. has not yet met). Such a standard, therefore, serves the highly important role of eliminating purely cyclical or other temporary increases in debt that are quickly reversed. They confirm that debt overhangs are associated with a 1.2% lower GDP growth rate than during the low debt periods. The new finding is that the duration averaged 23 years, and that negative growth effects are significant, even in many cases when debtor countries were able to secure “continual access to capital markets at relatively low real interest rates. That is, growth-reducing effects of high public debt are apparently not transmitted exclusively through high real interest rates.” This finding seems entirely reasonable since debilitating effects of the debt aris e from taking on debt that either does not increase the future income stream, or even reduces the flow of income. This reduces GDP growth, widens the output gap, slows inflation, and thus lowers long-term interest rates.
They write: “The long duration [of the debt overhang] belies the view that the correlation is caused mainly by debt buildups during business cycle expansions. The long duration also implies that the cumulative shortfall in output from debt overhang is potentially massive.” Indeed, they find that at the end of the 23-year average episode, real GDP is 24 percent lower than for the baseline. To drive home the adverse consequences, they quote from one of the most famous passages in literature, T.S. Eliot’s The Hollow Men: “This is the way the world ends, not with a bang but a whimper.” This reference is entirely appropriate since excessive indebtedness serves to hollow out economies.
Reinhart, Reinhart and Rogoff also document the first highly organized link between high public debt and real interest rates. Their conclusion: “Contrary to popular perception, we find that in 11 of the 26 debt overhang cases, real interest rates were either lower, or about the same, as during the lower debt/GDP years. Those waiting for financial markets to send the warning signal through higher interest rates that governmental policy will be detrimental to economic performance may be waiting a long time.”

Government Size and Growth

Reinhart, Reinhart and Rogoff dealt with the idiosyncrasies of countries of different sizes and their abilities to engage in different policy actions (such as devaluations and subsequent inflation) by limiting their samples to advanced countries. In the second study “Government Size and Growth”, Bergh and Henrekson found that to the extent there are contradictory findings of the relationship between the size of government and economic growth they are explained by variations in definitions and the countries studied. The Swedish economists focused their study on the relationship in rich countries by measuring government size as either total taxes or total expenditures relative to GDP. Using a very sophisticated econometric approach under this criterion, they revealed a consistent pattern showing government size has a significant negative correlation with economic growth. Their results indicate “an increase in government size by ten percentage points is associated with a 0.5% to 1% lower annual growth rate.”

The Impact of High and Growing Government Debt on Economic Growth

In the third study, Checherita and Rother investigated the average effect of government debt on per capita GDP growth in twelve euro area countries over a period of about four decades beginning in 1970. They confirm and extend the finding by Reinhart and Rogoff in their 2010 NBER paper that recognized a government debt to GDP ratio above the turning point of 90-100% has a “deleterious” impact on long-term growth. In addition, they find that there is a non-linear impact of debt on growth beyond this turning point. A non-linear relationship means that as the government debt rises to higher levels, the adverse growth consequences accelerate. The Checherita and Rother results “show a highly statistically significant non-linear relationship between the government debt ratio and per-capita GDP for the 12 pooled euro area countries included in our sample.”
In addition to their finding concerning non- linear effects beyond the turning point, they find that, “Confidence intervals for the debt turning point suggest that the negative growth effect of high [government] debt may start already from levels of around 70-80% of GDP, which calls for even more prudent indebtedness policies.” Checherita and Rother make a substantial further contribution when they identify channels through which the level and change of government debt is found to have an impact on economic growth. These channels are (1) private saving, (2) public investment, (3) total factor productivity and (4) sovereign long-term nominal and real interest rates. They write, “Overall, a robust conclusion of our paper is that above a 90-100% threshold, public debt is, on average, harmful for growth in our sample.” The question remains whether public debt is indeed associated with higher growth below this turning point. For the first two channel s – private saving and public investment – their evidence suggests that the turning point seems to occur much below the range of 90-100%. They find that government debt depresses economic growth. Accordingly, it is our interpretation that government debt is negatively correlated with long-term interest rates. This is entirely consistent with Reinhart, Reinhart and Rogoff’s point that those waiting for the detrimental aspects of extreme government indebtedness to be apparent in interest rates will have to be very patient indeed.
These three recent academic studies, accompanied with the empirical observations of the panic years of 1873 and 1929 in the U.S. and 1989 in Japan lead us to the proposition that economic growth is destined to be subpar in the next several years.

Abysmal Times Confirm the Research

In the eleven quarters of this expansion, the growth of real per capita GDP was the lowest for all of the comparable post-WWII business cycle expansions (Table 2). Real per capita disposable personal income has risen by a scant 0.1% annual rate, remarkably weak when compared with the 2.9% post-war average. It is often said that economic conditions would have been much worse if the government had not run massive budget deficits and the Fed had not implemented extraordinary policies. This whole premise is wrong. In all likelihood the governmental measures made conditions worse, and the poor results reflect the counterproductive nature of fiscal and monetary policies. None of these numerous actions produced anything more than transitory improvement in economic conditions, followed by a quick retreat to a faltering pattern while leaving the economy saddled with even greater indebtedness. The diminutive gain in this expansion is clearly consistent with the view that governm ent actions have hurt, rather than helped, economic performance.

Economic conditions have been worse in euro-currency zone countries, the UK, and Japan. All three of these major economies have also resorted to massive deficit financing and highly unprecedented monetary policies, and all have substantially higher debt to GDP levels than the United States. The UK and much of continental Europe is experiencing recession to some degree. Whether Japan is in or out of recession is a pedantic point since the level of nominal GDP is unchanged since 1991. Even such prior stalwarts of the global scene such as China, India, Russia and Brazil are plagued with deteriorating growth. In such circumstances a return to the normal business cycle of one to two rough years, followed by four to five good years, remains highly unlikely in the United States or in these other major economic centers.
Based upon the historical record of effects of excessive and low quality indebtedness, along with the academic research, the 30-year Treasury bond, with a recent yield of less than 3%, still holds value for patient long-term investors. Even when this bond drops to a 2% yield, it may still have value in relation to other assets. If high indebtedness is indeed the main determinant of future economic growth and further government “stimulus” is counterproductive, then a prolonged state of debt induced coma may so limit returns on other riskier assets that a 30-year Treasury bond with a 2% yield would be a highly desirable asset to hold.
Van R. Hoisington
Lacy H. Hunt, Ph.D.

REAL ESTATE in HK

Many readers have been asking about this for a long while.

Real estate is no different than the stock market. The stock market shows you the way the real estate market is heading, but there are bumps too because the economy is impacted with very low nominal interest rates and negative real rates.

Negative real rates provide support to hard assets like real estate and commodities, then why commodities are falling - the reason is when demand is falling because of high debt in China and elsewhere, commodities fall too, but real estate still provides some positive yield of at least 3% or more with current rental market conditions.

Unless we see sudden economic shocks that pull down the economy sharply such as

• a retail chain filing for bankruptcy
• a listed company unable to pay its debt hitting one or more banks hard with debts to be written off
• euro zone breaking up or some southern countries have to restructure their debt hitting banks and investors
• substantial rise in interest rates although this is not likely for the time being since we are in deflation mode
• subsequent unemployment increases to uncomfortable level

then we will see adjustment of the real estate market.

The RE market lags behind the stock market by 18-24 months, it will take quite some time before you see material adjustments.

Simply say, the RE market is more sticky and not as elastic. The HK situation is that supply of rental apartments is not sufficient to satisfy demand at the moment, so the adjustment process will be slow and it will take a much larger economic hit to lower the demand and get it in balance.

Democracy, Healthcare, Banking, Tax and Spend

DEMOCRACY
Democracy fails badly in the western world for the last thirty years or so because democracy encourages liars (politicians) and irresponsible voters as well as entrenched interests like civil service and business interests that resist change and reinforce bad practices.

Greece is a good example having expanded civil service badly prior to joining the eu and the decade after that change is now difficult to achieve.

Governments simply cannot promise good life without putting in hard work for all. Many in the western world will only find this out the hard way as no one wants to sacrifice until the system breaks down.

HEALTHCARE
Healthcare is the most abused system in many economies esp those with universal coverage like UK AUST CANADA. You would like to think that having contributed so much in payroll taxes, healthcare coming as free or at a small price is a given. But queues are building up at every channel - lab tests, specialist care, surgery etc, WHY? Because your legislators councillors, civil servants are the priority clients at the front, so normal citizens are pushed further to the back of the queue.

BANKING
The LIBOR incident tells you that banks and central bank are not trustworthy.

We are already into the 4th year since the crisis begins and still no end in sight, therefore we might see further downside for the stock market and economy.

Interbank markets are no longer working as stated earlier in this blog, so credit extension to bank customers are drying up too, the economy is doomed. The result is that many banks in Europe might not be around when the trough is finally here some time in the future.

TAX and SPEND
Countries like Japan UK USA still want to raise taxes to balance their budgets, what they should do are
- cut back spending
- cut civil service
- cut summit meetings
We cannot find evidence in modern economy that raising taxes can boost growth, it will only get spending more entrenched. History indicates otherwise, Great Britain is a good example as they raised personal taxes above 50% back in the 70s and their economy is going nowhere. Sweden also experienced overspending because of high taxes and ended up almost bankrupt two decades ago.

3 events, Google Tablet

after two trips away, three events worth noting:

1. there is seizure of land below market price by officials from citizens in beijing!!!
2. the upcoming CE in hk is embroiled in media frenzied stories on illegal structures at his home on the peak
3. h5n1 bird flu high season in hk extended beyond the normal winter season into almost summer.

you should be able to draw conclusion from the above, if not, email me.

google unveils a tablet recently, this is nothing special, but what is important here to note is it is made in usa. eventually china will lose its dominance in electronics manufacturing if the qualtiy can beat those made in china. this does not bold well for the china economy with such excess capacity built up over the years in electronics manufacturing, even japanese, with their currency so high who cannot manufacture salable items inside japan can then outsource to usa if the google tablet becomes a success after launch.

Guesswork

The below are my hunches only, no research done or from chart observation.

Greece
This country is a bunch of crooks, no one paying taxes, unbelievable pension plans for civil servants and industries, but they still want other Euro countries to give them money so they dont have to go through hard times. Yet even Golden Dawn party get elected, they dont want to severe the euro tie so dont expect a Greece exit soon, GD will likely negotiate their way to buy time, but time is not on their side as they soon will have no money to pay a lot of things including civil service pay.

Gold
Why is gold not falling given the strong USD, people are likely buying gold instead of 1.5% 10 year treasury bond.

USD
Why is Euro getting stronger recently, there might already be discussion behind the scene on further QE by Ben, thus you wont see much decline in the stock market shortly. Or even if there is a sharp decline, you will see a sharp spike up shortly after.

SLAPPING

if you really hate someone and want to slap him in the face, you must do it in Greece and then hideout for a day, then nothing will happen for a very long time.

WONDERFUL isnt it!!!

read article below:

ATHENS, Greece (AP) — The Greek extreme-right party spokesman who caused an uproar last week by slapping one female politician on live TV and throwing a glass of water on another has sued the two women as well as the television channel that hosted the news show.
The move Monday by Ilias Kasidiaris, the 31-year-old spokesman for the extremist Golden Dawn party, is the latest twist in a bizarre political saga. Kasidiaris himself avoided an arrest warrant for the confrontation last Thursday, resurfacing late Sunday after the warrant had expired.
Kasidiris appeared at an Athens court Monday, flanked by other party members, to submit lawsuits against Communist Party candidate Liana Kanelli and Syriza party member Rena Dourou on charges of alleged unprovoked insults and against Antenna television for alleged illegal detention.
Authorities had issued an arrest warrant for Kasidiaris after he threw water over Dourou and then slapped Kanelli hard three times across the face during a heated discussion on a morning political show Thursday. A video of that show has been widely seen on the Internet.
Under Greek law, an arrest warrant for a misdemeanor must be carried out by midnight the day after the act has occurred, in which case a trial is immediate. If the suspect is not apprehended within that time frame, the case turns into a judicial procedure in which a trial date is set, often for several months or even years later.
Kasidiaris laid low immediately after the incident, but resurfaced Sunday evening at the opening of a Golden Dawn office in an outlying part of Athens. No court date has been set yet for him.
Kasidiaris argues that he was provoked by insults during the television show and that the 58-year-old Kanelli hit him first with a newspaper.
Moments after Kasidiaris hit Kanelli, the channel cut to a commercial break and when the program resumed, Kasidiaris was no longer there. Attempts were made to hold him in an office room while the police were called, but he broke through the door and left.
He said Monday he was also suing a journalist at Antenna for "instigation to abuse of power" for allegedly provoking a prosecutor to order his arrest.
Kasidiaris had also been due to stand trial Monday in a separate case, in which he is accused of participating in a 2007 attack on a student. The case was postponed to Sept 3. In it, he faces charges of assisting in a robbery and bodily harm after his car was allegedly used in the incident.
Kasidiaris claims the accusation is politically motivated by Syriza members.
Golden Dawn, which vehemently denies the neo-Nazi label, has been accused of violent attacks against immigrants in Athens, and its members have also allegedly been involved in clashes with left-wing and anarchist groups. The party insists it is a nationalist patriotic group.
It campaigned on a platform of ridding Greece of illegal immigrants and cleaning up crime-ridden neighborhoods, and advocates mining Greece's borders to stop illegal immigration. Riding a wave of anger over how mainstream politicians have handled Greece's deep financial crisis, the party won nearly 7 percent of the vote on May 6, when no party won enough votes to form a government.
The 21 Golden Dawn deputies elected to the country's 300-member Parliament — a first for the party — took their seats for a day before parliament was dissolved ahead of a new election on June 17. Opinion polls conducted before a two-week pre-election ban projected that Golden Dawn would win enough votes to go above the 3 percent threshold to get into Parliament.

RAY DALIO

Whether you like this guy or not, he made billions for himself and his clients and had a good philosophy for the firm he managed - Bridgewater Associates. Go to his firm's website for more.

Here below is an interview of him by Barron.

| MONDAY, MAY 21, 2012
Dalio's World

By SANDRA WARD | MORE ARTICLES BY AUTHOR
Ray Dalio, fabled hedge-fund manager, says the U.S. has done a "beautiful" job delevering, but sees a 30% chance Europe will stumble badly.


It's hard to imagine anyone navigating the rough seas of the past decade more ably than Ray Dalio, master and commander of money-management firm Bridgewater Associates, which oversees $120 billion for a roster of global clients that include foreign governments, pension funds and endowments.

The Westport, Conn.-based company is the world's largest hedge-fund firm and one of just a handful of players to place more than one fund on Barron's annual Top 100 Hedge Funds ranking. This year Bridgewater's flagship Pure Alpha II and its All Weather @12% global macro funds both make the list, (see below for list.). Pure Alpha has tallied a three-year average return of 22.75% while All Weather gained 17.24% on that basis. BarclayHedge's index of hedge funds returned 9.05% a year in that time; the Standard & Poor's 500 gained 14.11% annually.

The Bridgewater funds make strategic bets on commodities, currencies, bonds, and equities around the world based on analysis of valuations and macroeconomic trends..Dalio, who brings an unusually broad and deep perspective to investing, recently shared his latest views with us.

Barron's: You've called the current phase of the U.S. deleveraging experience "beautiful." Explain that, please.

Dalio: Deleveragings occur in a mechanical way that is important to understand. There are three ways to deleverage. We hear a lot about austerity. In other words, pull in your belt, spend less, and reduce debt. But austerity causes less spending and, because when you spend less, somebody earns less, it causes the contraction to feed on itself. Austerity causes more problems. It is deflationary and it is negative for growth.

Restructuring the debt means creditors get paid less or get paid over a longer time frame or at a lower interest rate; somehow a contract is broken in a way that reduces debt. But debt restructurings also are deflationary and negative for growth. One man's debts are another man's assets, and when debts are written down to relieve the debtor of the burden, it has a negative effect on wealth. That causes credit to decline.

Printing money typically happens when interest rates are close to zero, because you can't lower interest rates any more. Central banks create money, essentially, and buy the assets that put money in the system for a quantitative easing or debt monetization. Unlike the first two options, this is an inflationary action and stimulative to the economy.

How is any of this "beautiful?"

A beautiful deleveraging balances the three options. In other words, there is a certain amount of austerity, there is a certain amount of debt restructuring, and there is a certain amount of printing of money. When done in the right mix, it isn't dramatic. It doesn't produce too much deflation or too much depression. There is slow growth, but it is positive slow growth. At the same time, ratios of debt-to-incomes go down. That's a beautiful deleveraging.

We're in a phase now in the U.S. which is very much like the 1933-37 period, in which there is positive growth around a slow-growth trend. The Federal Reserve will do another quantitative easing if the economy turns down again, for the purpose of alleviating debt and putting money into the hands of people.

We will also need fiscal stimulation by the government, which of course, is very classic. Governments have to spend more when sales and tax revenue go down and as unemployment and other social benefits kick in and there is a redistribution of wealth. That's why there is going to be more taxation on the wealthy and more social tension. A deleveraging is not an easy time. But when you are approaching balance again, that's a good thing.

What makes all the difference between the ugly and the beautiful?

The key is to keep nominal interest rates below the nominal growth rate in the economy, without printing so much money that they cause an inflationary spiral. The way to do that is to be printing money at the same time there is austerity and debt restructurings going on.

How do you expect Europe to fare?

Europe is probably the most interesting case of a deleveraging in recorded history. Normally, a country will find out what's best for itself. In other words, a central bank will make monetary decisions for the country and a treasury will set fiscal policy for the country. They might make mistakes along the way, but they can be adjusted, and eventually there is a policy for the country. There is a very big problem in Europe because there isn't a good agreement about who should bear what kind of risks, and there isn't a decision-making process to produce that kind of an agreement.

We were very close to a debt collapse in Europe, and then the European Central Bank began the LTROs [long-term refinancing operations]. The ECB said it would lend euro-zone banks as much money as they wanted at a 1% interest rate for three years. The banks then could buy government bonds with significantly higher yields, which would also produce a lot more demand for those assets and ease the pressure in countries like Spain and Italy. Essentially, the ECB and the individual banks took on a whole lot of credit exposure. The banks have something like 20 trillion euros ($25.38 trillion) worth of assets and less than one trillion euros of capital. They are very leveraged.

Also, the countries themselves have debt problems and they need to roll over existing debts and borrow more. The banks are now overleveraged and can't expand their balance sheets. And the governments don't have enough buyers of their debt. Demand has fallen not just because of bad expectations, although everybody should have bad expectations, but because the buyers themselves have less money to spend on that debt. So the ECB action created a temporary surge in buying of those bonds and it relieved the crisis for the moment, but that's still not good enough. They can keep doing that, but each central bank in each country wants to know what happens if the debtors can't pay, who is going to bear what part of the burden?

Have the French and Greek elections changed the outlook?

They are the latest steps in a long drama that is not in and of itself much more important than most of the other steps. It's normal that the pendulum swings to produce these sorts of changes, and it is to be expected that tensions will increase and agreements will be harder to come by. This will add to the risks over the next year.

So what is the solution to this? How will the European debt crisis be resolved?

What is happening in Europe now is essentially the same, almost totally analogous, to what happened in the U.S. in 1789. It is an interesting comparison.

Post-American Revolution?

Yes. In 1776, the colonies declared independence from Great Britain. We didn't have a country. We had independent states that had a treaty with each other, called the Articles of Confederation, and it was similar to the Maastricht Treaty that created the European Union and the euro currency. The independent states had debt problems and they had tariffs with each other. It wasn't until 13 years later, 1789, that those states started to form a central government, largely because of their debt problems. There was a constitutional convention, and we formed a country and we chose a president. We formed a treasury and imposed central taxation. That gave us the ability to produce revenue for the country and restructure our debts. There was the ability to have taxation and to issue bonds and to borrow. Europe does not have an ability to borrow. It doesn't have central taxation, that's material, and it doesn't have a treasury. It is a collection of countries operating for their own individual needs.

Europe is approaching a decision point. It will have to decide whether it wants to create a sufficient central government that has more than a treaty, that has the ability to collect taxes from the whole and the ability to issue debt that obligates the whole, or whether it does not. That is the crux of this issue. The question is how much pain is it going to cause in Europe, and does the pain cause a collapse before it causes the choices? When a debtor can't print money and depreciate its currency, it will go into a self-reinforcing terrible economic situation. The deleveraging in Spain is just beginning, and they already have nearly 25% unemployment. They need relief.

What does it mean for the world economy if Europe continues to struggle like this?

The ECB has increased the pool of assets that are eligible as collateral that it will lend against, and it could spread out these refinancing operations. The European banks must deleverage at an orderly pace. Wherever they are lending, they are going to be lending less. Countries and those that are depending on borrowing money from European banks will experience a tightening of credit.

Spain and Italy in the periphery and, to some extent, France and even Germany will be hurt by this. Europe will be in a depressed state. Certainly, the peripheral countries in Europe will be in depressions, and there will be high unemployment. But if it happens in an orderly way, which I think is most likely, the repercussions for the world economy won't be intolerable. While the deleveraging of European banks and reduced European imports will be a depressant on the world economy, global markets and economic conditions won't collapse, because countries outside of Europe will be able to replace retrenching European bank lending with other sources of lending. They will borrow from American banks, and you will see the emergence of banks in large emerging countries such as China and Brazil.

Ireland was early to go down this path. What have we learned from their restructuring?

Well, for the most part, the Irish government has taken on the responsibility for most of the debt. Now the government doesn't have enough euros to service the debt. It has a problem. Portugal is going down the same route. And so, the EFSF -- the European Financial Stability Facility -- will loan to those countries as they go through an adjustment process. But the debt will have to keep being rolled and it will be difficult.

It will be a very long, difficult period for Ireland, and it will be a very long, difficult period for Portugal, and it will eat away money from the EFSF. It will be spread out over a long period of time. But in those cases, it is governments dealing with governments. In the case of Italy and Spain, most of the debt is still in the hands of the debtors and the banks and hasn't been put on to the government, because the resources, the sizes of the problem in Spain and Italy, are much bigger and more difficult for them to be handled in the same way as Ireland and Portugal.

And so?

So the main picture I'm trying to create is there could be a shock. I would say that there is maybe a 30% chance in the next six-month to two-year period of a really bad shock from Europe. And that shock is made worse because there is no clarity of who has got authority or control. When you have a centralized government and you have the ability to enforce laws, you can resolve problems. There might be a lot of arguments, but ultimately decisions can be made.

There are no provisions in the Maastricht Treaty for the breakup of the monetary union. There are no rules, there are no means. If a country is exiting the monetary union and then says I'm going to pay off the debt in my local currency, how does that work? The Maastricht Treaty doesn't have any provision for any country leaving the monetary union. It doesn't say if this happens, then that happens. There is a question of enforceability.

Every society has to have the ability to enforce laws. How does Germany actually force Italy to pay? It isn't clear. Supposing Spain decides they want to exit the union. The unemployment rate is terrible. That's a very scary thought. Maybe they say, "We're going to pay you back in Spanish pesetas even though the contract is for euros." That's the history, by the way: Argentina and Brazil and Mexico did that.

Yes, but local currencies no longer exist.

That's the whole other complication. There are good incentives not to take that course, and yet there are also big problems if you don't take it. In any event, there isn't a good decision-making process. There isn't a single means of achieving resolution in Europe, and that's the big problem here.

Again, how do you see world markets behaving as a result?

At the moment, there is a tipping toward slowing growth and a question of whether there will be a negative European shock, and that will favor low-risk assets. But to whatever extent we have negative conditions, central banks will respond by printing more money. There will be a big spurt of printing of money, and that will cause a rally and an improvement in the stock markets around the world. It's like a shot of adrenaline: The heart starts pumping again and then it fades. Then there is another shot of adrenaline.

Everybody is asking, "Are we going to have a bull market or a bear market?" I expect we will have both with no big trend. Typically, in these up and down cycles, the upswing will last about twice as long as a down swing. We are now in the higher range of the up-cycle.

What will this mean for U.S. Treasuries?

The printing of money has the effect of negating deflation. It doesn't produce high inflation and it makes it difficult for the economy to have a sustained upward move. If you have too much printing of money, then you'll begin a bear market in bonds.

We are now neutral on bonds. Over the next couple of years, long-term bonds will be a poor investment because the government will print money to leave real interest rates low. It doesn't mean that bonds will go through a big price selloff anytime soon. It's more likely the yields provided will be too low relative to inflation and growth to provide an adequate return.

What's your outlook for the U.S.?

The economy will be slowing into the end of the year, and then it will become more risky in 2013. Then, in 2013, we have the so-called fiscal cliff and the prospect of significantly higher taxes, as well as worsening conditions in Europe to contend with. This is coming immediately after the U.S. presidential election, which makes it more difficult. This can be successfully dealt with, but it won't necessarily be successfully dealt with. We have the equipment and the policy makers, and as long as policy is well managed, we'll be okay.

What of China and the emerging economies at this point?

They are doing much better in the following way: They were in a bubble, and when I say a bubble, I mean a debt explosion. Their debts were growing at a fast rate. Their debts were rising relative to income and they were growing at rates that were too fast. Those growth rates have slowed up significantly and probably will remain at a moderate pace. They are in pretty good shape but will be subject to the deleveraging of European banks.

What about commodities?

I'm not very bearish or very bullish on commodities in general. There is now a moderation of demand.

Are you still a fan of gold?

Longer term, yes. It could temporarily be a bumpy ride because Europeans will have to sell gold in order to raise funds because they are squeezed. Most people should have in the vicinity of 10% of their assets in gold, not only because I think it will be a good investment longer term, but because I think it is a very effective diversifier against the other 90%.

And are you treating it as a proxy for eventual inflation?

I'm treating it as an alternative currency. The big issue is debtor-developed countries, the U.S., Europe, and Japan, all have a lot of debt and will have to print money or they will have credit problems. I don't want to have all of my money in those currencies.

What is the asset class you expect to perform best in the next year?

It very much depends on the European monetary system. I believe the ECB will print money, and that will most likely alleviate concerns and produce another rally in stock and credit markets. But this is a tougher time to be very confident about that scenario.

It's amazing to think that four years into it, the world is still deleveraging.

Deleveragings go on for about 15 years. The process of raising debt relative to incomes goes on for 30 or 40 years, typically. There's a last big surge, which we had in the two years from 2005 to 2007 and from 1927 to 1929, and in Japan from 1988 to 1990, when the pace becomes manic. That's the classic bubble.

And then it takes about 15 years to adjust.

Thanks so much, Ray.

Europen Chaos 2

if an individual has low income, a lot of debt and then go to a bank for financing, what interest rate do you think they will charge comparing to a guy with good credit and high income or even a professional by employment. it is obvious that the rate is higher for the low income/high debt guy than the good credit/high income customer.

the same is happening for the PIGS countries, they must wind down the debt and cut off improper subsidies so they become more competitive in terms of wage and salaries ie productivity. but many of their citizens refuse to accept these facts.

the loss in trust and confidence is mounting between the following parties:

• bank and bank - there is no interbank lending or swaps done since settlement in different time zones will increase risk, libor or euribor no longer is working properly
• customers and their banks - customers are afraid their countries will exit the EU and/or limit withdrawals, so greek customers are pulling their deposits out from banks and move them elsewhere, Spanish customers are pulling their deposits from weak banks and so on.
• super rich and their politicians - the super wealthy is afraid of nationalization and exchange control, so they too pull out their deposit from EU or their country and sell off stocks too since there wont be much support at the last minute.
• country and country - the strong countries do not want to be piggy banks for the weak countries so they can withdraw money from when in crisis, the weak countries also do not want to cut back welfare and reform their labor or pension practice.

and will only get more serious.

there is no credit creation in EU for a few months already and velocity of money might be slowing much faster than anticipated, all these factors are not good for EU and the rest of the world too esp china.

for eu countries and EU in general as a whole, there are too many objectives to achieve or interests [including voters] to protect and please so coming to conclusions or agreement will need a major jolt ie a financial crisis of historic proportion.

we cannot be too optimistic until we see the following:

• some form of common euro bonds - to lower interest rates on bonds of weak countries;
• a serious fiscal [budget controls] union - to avoid flashy spending, too much welfare or too good to believe pension plans;
• some form of deposit protection and recapitalization of weak banks across the union - to stop customers withdrawing deposits.

all the above measures mentioned are aimed at closer political and fiscal union which aren't measures to get more votes from the voters, so brace yourself for more turbulent times from now on and the next year or two.