Thursday, March 29, 2007

Universe - an observation

I find it fascinating that in 50 billion years the processes which give birth to new stars will come to a hold; there will be no more fuel to make new stars, and old stars will die out, turning into oval clusters of cool gas.

The universe and all potential life in it has a finite life period. No matter how far away that period is, it is first of all extraordinary that it has been measured by humans with a lifespan of 70 years. However, more importantly, it is the final concluding argument to the fact that everything has a beginning, and everything has an end. Nothing is infinite, except space, emptiness, and perhaps uselessness.

My point, everything has an end for a reason; the reason being that we must all use the time we are allotted as wisely as we can. Regretting your past at the last stages of life may be the most aggravating and miserable way to live. These may seem like common sense words, but to me, taking the universe-wide scale into account makes them that much relevant.

We are not special, we are not alone, we have limited time; use it wisely!

As Globalization's Benefits Grow, So Do Its Skeptics

Free trade in decades past wasn't sold so much on the economics but as a way to achieve a foreign-policy end. After all, the economics of trade have always been a hard sell. Even its most fervent admirers concede trade creates winners and losers. Franklin D. Roosevelt's secretary of state, Cordell Hull, led the pre-World War II effort to lower tariffs because he believed trade led to peace. After World War II, the European Union was created to avoid another war between France and Germany, and the U.S. pursued trade deals to win the Cold War. And while President Bill Clinton talked loudly about the jobs the North American Free Trade Agreement would create, his Treasury secretary, Lloyd Bentsen, saw the trade pact as a way to assure a pro-U.S. regime in Mexico.


While economists argue whether technology, globalization, deregulation or changing social mores are most to blame for the widening gap between economic winners and losers, the public has no such doubt. It's far easier for an American worker to damn the Chinese for his falling wages than to damn the personal computer in his den. "In public perception," says Mr. Irwin, "we have widening inequality, a widening trade deficit and trade is a greater percentage of the economy. It's easy to say trade is part of the problem. So it's part of the solution."

The changing nature of trade plays a role, too. Technology makes it cheap and easy to hire workers in, say, India to do tasks once done in the U.S. and to ship the work back to the U.S. by fiber-optic cable or satellite, a phenomenon likely to grow in years to come, as Princeton University economist Alan Blinder points out loudly. This production of services at a distance makes it easier for owners of capital in the U.S. to reap the rewards of globalization even if many American workers do not.

The issue, in this light, isn't whether trade makes the world as a whole richer. It does. The issue is the distribution of those gains. If American workers sense they are at risk of being losers -- even if those fears are overstated or ignore the benefits they get from imports as consumers -- the political consensus for encouraging further globalization will evaporate.

Wednesday, March 28, 2007

Market developments in the past few weeks should be seen as a warning. What has been evident for a number of months is that, in the US, we are seeing lagging inflation and slower growth. Whether this means that we are going to have to fend off recessionary tendencies is not yet clear. However, what is clear to me is that in the next year a material correction in the markets will occur.

During the last big adjustment that started in July 1997 in Thailand and spread to a number of Asian economies including South Korea, followed by Russia in 1998 – and led ultimately to the bail-out of Long Term Capital Management, the US hedge fund – a number of today’s large market operat­ors were not yet in the mix.

Today, hedge funds, private equity and those involved in credit derivatives play important, and as yet largely untested, roles. The primary worry of many who make or regulate the market is not inflation or growth or interest rates, but instead the coming adjustment and the possible destabilising effect these new players could have on the functioning of international markets as liquidity recedes. It is also possible that they could provide relief for markets that face shortages of liquidity.

Either way, this clearly is the time to exercise greater prudence in lending and in investing and to resist any temptation to relax standards.

The writer is senior vice-chairman of Citigroup, and chairman, president and chief executive of Citibank

Financial Times

Saturday, March 24, 2007

Why Kosovo breakup is a bad idea

So it is significant that Mr Holbrooke adds what many suspect: if Russia blocks a new resolution, Kosovo will declare independence anyway—and the Americans will “probably” recognise it. Many Muslim countries will follow, though Mr Holbrooke thinks most EU countries may not. Without a new UN resolution, diplomats say the choice is not independence or not; it is between “controlled” and “uncontrolled” independence.

One of the few times that I will have to strongly disagree with the Economist, and so will be forced to write a counter-argument.

First of all, it is without doubt that Russia is using this issue to drive further diplomatic wedges into the EU and into the relations between the EU and the US. The longer the disagreement carries out the more influence Russia will have on the resolution on the issue. A similar strategy is being pursued on Iran.

But, unfortunately for some Kremlin critics, this is only Russia's supplementary benefit from pursuing such a policy. Granting Kosovo's independence on a unilateral basis, with harsh opposition from Serbia itself, will undoubtedly boost the moral of EU's foreign influence. But what message will it send? That the EU unilaterally has the mandate to establish borders in Europe? In my opinion, this will bring even more disagreements into the Balkans, where most countries are not members of the EU and NATO. Would the EU as a result of its policy like to see nationalistic governments pop-up in both Serbia and new-Kosovo? And for some strange reason no journalist attempts to remember the Helsinki accords of 1975, the dominant clause of which was the "territorial integrity of states" (referring to Europe at the time). Since then Europe has seen the voluntary breakup of the Soviet Union, Czechoslovakia, uniting of Germany. The breakup plan that is being put forward to Serbia should have no force, even if it is approved by all governing bodies of the world; unless Serbia gives a green light, Kosovo should not be granted independence.

Of course for Russia there is another aspect in the issue. What is Russia? A country where Russians represent more than 70% of the population. The others are ethnic minorities, mostly living in tightly-linked "autonomous republics" as provided for in the constitution. Some, like the Tatars, living in Tatarstan, a predominantly Muslim republic inside Russia, that is very rich in oil-resources is dwelling on independence status at least once a day. It has been given so many rights by the Russian government, just to put a lid on its independence hopes. In total, there are close to ten of such minority regions in Russia, most of them with natural resources, and the ability to sustain themselves as an independent country. When things go sour in Russia, and they surely will some day, they will be knocking on the independence door. The Russian government is of course completely paranoid with such a scenario: the removal of election of regional heads, the increasing shift of funding distribution rights to the center, and other reforms all served that purpose. Having a precedent of Kosovo will put those republics in the problem radar, it will put Chechnya in the radar as well.

Friday, March 23, 2007

Thursday, March 22, 2007

Russia's Far Abroad

There are several telling examples of how Russia exploits EU divisions to its advantage. The planned Nord Stream pipeline under the Baltic Sea, contracted between Russia and Germany without an EU consensus, epitomizes Russia's approach. Nord Stream serves four objectives: to limit Russia's reliance on transit across Central Europe; to deepen West European dependence on Russia; to generate disputes between Germany and Poland; and to marginalize the Poles and Baltics within the EU by depicting them as incorrigible Russophobes.

The Kremlin not only manipulates divisions between older and newer members. It also aims to forestall any common policy among EU newcomers. Hungary and Bulgaria have become the primary targets among former Soviet satellites. The Kremlin is capitalizing on longstanding personal connections with Socialist officials in these countries to construct pipelines and distribution points that will pre-empt Europe's energy diversification.

Friday, March 16, 2007

The Long View: Spectre of income inequality haunts investment bankers

Financial Times analytical article:

Sometimes the stuff of populist politicians, or even revolutionary theorists, can look a lot like investment strategy. Look at a pressing subject for investors – inequality.

Who, for example, said this? “Society as a whole is more and more splitting up into two great hostile camps, into two great classes directly facing each other.”

And who said this? “The world is dividing into two blocs – the plutonomy and the rest. The US, UK and Canada are the key plutonomies – economies powered by the wealthy. Continental Europe . . . and Japan are in the egalitarian bloc.”

The first is from Karl Marx and Friedrich Engels’ Communist Manifesto, the second from a strategy note by Ajay Kapur, until recently the chief global equity strategist for Citigroup, the world’s biggest bank.

Here is another thesis on the same lines. “There are two Americas, not one: one America that does the work, another that reaps the reward.” That is from the stump speech of John Edwards, a candidate for the Democratic presidential nomination.

Meanwhile, “we find that low-income Americans have been in a recession all this century”. That is from a research paper by UBS, the biggest Swiss bank. UBS also asserts that from 1997 to 2001, the top 0.1 per cent of Americans saw their incomes increase almost as much as the cumulative rise received by the bottom 50 per cent.

The investment bankers do not use the same language as revolutionaries and politicians, but their version of the facts seems identical.

It is their job to make money for their clients, not to change society. But inequality matters to investors, deeply. In the very long term, it could lead to the dialectical reaction that Marx predicted.

For the moment, a key implication of Kapur’s “plutonomy” thesis is that global imbalances – the huge indebtedness of the US combined with the apparently excessive reserves held by Asian central banks – is easier to explain than first appears. As he put it: “In plutonomies, the rich absorb a disproportionate chunk of the economy. Their decision to lower their savings rate has a massive negative impact on reported aggregate numbers.”

The balance sheets of the rich are in great shape, according to Kapur, and their behaviour overwhelms that of the hypothetical – and indeed, non-existent – “average” consumer.

So he contends that a minus 10 per cent savings rate for the wealthy – in which they spend 10 per cent more than they earn for the year – would have a trivial impact on the growth in their net worth. Thus global imbalances are more stable than first appears, and the saving rate in the main “plutonomous” countries can continue to fall while equities do well.

But there are also more negative implications. Aggregate economic data for the most “unequal” economies is virtually useless.

Remembering that it really is true that there are in effect two different economies in the US, the contradictions that have churned world markets this month are easier to explain. Aggregate data shows the US economy in decent shape with growth in gross domestic product slowing but positive, running at more than 2 per cent.

But inequality is such that it is possible for benign aggregate conditions to co-exist with a recession for a significant chunk of the population. And the crisis for “subprime” mortgage lenders, who lend to those with bad credit histories, is a symptom of this.

UBS points out that the effective inflation rate for the poor is higher than that for the wealthy. The poor need to buy a basket of staples which is inflating faster than the norm, while many of the goods purchased by the wealthy are decreasing in price thanks to technological advances. So inequality is greater than the widening gap in incomes implies.

This has critical implications for debt. Put simply, UBS says “higher interest rates are more likely to hurt low-income consumers”. Debt levels for the poor are increasing, even though their real incomes, given the inflation they are facing, have been falling. The real interest rates they pay, higher in any case because they represent a bad risk, are higher than they appear because their nominal income is growing slowly.

Add to this that low-income groups tended to enjoy less home price appreciation during the good times, and you have all the ingredients for a terrible crisis in subprime lending while the economy as a whole appears to prosper. Note that the overlap between subprime and low-income borrowers is not perfect – subprime loans were concentrated in areas where home prices rose the most – but the link is there.

Last week brought news from the US Mortgage Bankers Association that subprime delinquency rates were rising fast. That sparked a renewed sell-off in world stocks.

“Prime” mortgages did not suffer anything like as much. Several Wall Street banks used their quarterly results to deny they had significant subprime exposures, although many traders remain unconvinced.

But the risk is plain. If subprime losses eventually lead to losses by big banks, and for the investors who hold securities ultimately backed by subprime loans, the troubles of “poor America” could yet have a dire effect on the finances of the wealthy. Karl Marx’s theories will not be necessary – if it happens this way, capitalism will have done the job.

Tuesday, March 06, 2007

Swiss Accidentally Invade Liechtenstein

Filed at 11:13 p.m. ET

ZURICH, Switzerland (AP) -- What began as a routine training exercise almost ended in an embarrassing diplomatic incident after a company of Swiss soldiers got lost at night and marched into neighboring Liechtenstein.

According to Swiss daily Blick, the 170 infantry soldiers wandered just over a mile across an unmarked border into the tiny principality early Thursday before realizing their mistake and turning back.

A spokesman for the Swiss army confirmed the story but said that there were unlikely to be any serious repercussions for the mistaken invasion.

''We've spoken to the authorities in Liechtenstein and it's not a problem,'' Daniel Reist told The Associated Press.

Officials in Liechtenstein also played down the incident.

Interior ministry spokesman Markus Amman said nobody in Liechtenstein had even noticed the soldiers, who were carrying assault rifles but no ammunition. ''It's not like they stormed over here with attack helicopters or something,'' he said.

Liechtenstein, which has about 34,000 inhabitants and is slightly smaller than Washington DC, doesn't have an army.


Sunday, March 04, 2007

Investment banks plunge on investor fears

This week’s market rout and growing problems in the subprime lending market have driven shares in Wall Street’s largest investment banks to their biggest losses in a year.

The sell-off has spread from groups more reliant on capital markets trading, such as Goldman Sachs and Lehman Brothers, to those with more retail businesses, such as Morgan Stanley and Merrill Lynch. It has also driven credit default swaps tied to the bonds of several investment banks to just above junk status.

Taken together, the movements suggest many investors fear the recent run of near- perfect capital markets conditions and bumper trading profits have come to an end.

Financial Times

To me this is the leading indicator of a slowdown in the economy; if not a bearish market, the economy will not experience bullish markets for sure. When a correction occurred last summer, with major indexes taking massive hits, Wall Street firms still continued rising.

Solana said it was "questionable" that there was any current ballistic missile threat to the EU, but the possibility of such a threat emerging in the future was something the bloc would have to take into consideration.

German Defense Minister Franz Josef Jung, who chaired the EU meeting, said the missile defense issue should be discussed between NATO and Russia. Jung and Solana both stressed the importance of maintaining good relations with Moscow.

"The relationship between Russia and the European Union has to be solid," Solana said. "Russia is not a country that is very far from us, it's in our neighborhood."

He said Russia and the EU had to work together on a number of "strategic" issues including Iran, Afghanistan and the Middle East.

Solana said talks between Western diplomats and the Kremlin had helped soothe relations since Russian President Vladimir Putin assailed U.S. foreign policy at a security conference in Munich last month. "I think the situation is now much more calm," Solana said. "I don't think we have to dramatize that."

International Herald Tribune

It often happens when EU interests/views become aligned with Russia questioning US decisions (and they are aligned, despite the diplomatic wording of Mr. Solano) that both are right in the end. The issue is persuading the US to follow.