Non-Tax Regulation Threats
While most commentary on new hindrances to global trading have rightly focused on the potential disastrous consequences of a financial transaction or Tobin tax with extraterritorial impact (being proposed by 11 Euroland countries), the trend toward ill-considered regulation goes much further. One concern is that trading in derivatives should not only be done only by designated market intermediaries, but also that it should be done within the geographic entity where the trading partners are from. Getting over-the-counter bilateral deals moved to an exchange from the telephone makes sense given the difficulty of tracking, clearing, aggregating, and overseeing huge volumes of untrackable trading done off exchanges, a subsidiary cause of the global financial crisis.
But designating where the exchange used must be located when trading repos, swaps, options, bonds, CDOs, etc sounds like bureaucratic overkill. At the Paris Europlace conference on Monday, at a panel discussion over deriviatives, there was a sharp division between the so-called Anglo-Saxons and the French.
Banque de France governor Christian Noyer, who also sits on the board of the European Central Bank, called for housing EU-based derivatives trading within the Euroland currency bloc. He argued that the ECB needs to have "oversight authority over the infrastructure with direct and permanent powers so it can compel [the clearing houses] to take measures to guarantee its security and efficiency." He wants these instruments to become more standardized and then be cleared within the eurozone, and not in London or Chicago. They need to always be marked to market, presumably at the end of the trading day.
Ah, oui. Paul Tucker, Deputy Governor of the Bank of England, the UK central bank, begged to disagree, arguing that a more "realistic" goal would be "aggregated information rather than details" of derivatives trades. Gov. Tucker warned that "unlike the last derivatives crisis, the next one will includee China and India". This means "the regulators have to bring people together" and harmonize capital markets rather than setting rules which become obstacles to global trading and needlessly reduce volumes.
Not too surprisingly, his view was backed by Michael Bodson, CEO of the US Depository Trust and Clearing Corp. Of course his firm makes money by selling aggregated information on trades it books, netting offsetting trades, and offering collateral and margin cover to traders, as well as collecting a toll from traders on its system. Mr. Bodson argued that the DTC is something like a utility.
More today in our last blog of the week with 3 companies reporting and lots of news from Canada, Britain, Sweden, Belgium, Israel, So. Korea, Australia, India, China, and Japan, mostly from the biotech sector. I am off to Spain to cover the crisis and the abandonment of austerity there while also attending the Oxford Reunion this weekend (accompanying my husband), to be followed by visits to Portugal, and London.
France A Hard Sell
Ah, France. The land of bolshie unions, opposition to genetically modified food but not to horsemeat, 75% income tax rate plans, a 2% tax on financial trades, long bibulous lunches, 4-week paid vacations for all, movie and sports stars escaping into tax exile, scandals over political donations left and right, and a fumbling Socialist government focused on keeping anyone from ever again getting fired and incapable of stimulating growth.
France is a hard sell. Yesterday your editor headed for the NYSE with the worst security clearance procedures in NYC for the Paris Europlace Financial Forum. This annual attempt to lure US investors to the Paris bourse was a hard sell, what with the new taxes and concerns about the solidity of the French economy and the wretched euro. Moveover the French taste for "dirigisme", government controls, dates back to before the French Revolution. Most of the PR failed to convince. However, I liked one presentation on French boutique funds doing oddball quantitative-style high-tech investing.
There is a history. France has long offered asset management services, starting with the Ancien Régime (with the Caisse de Dépôts). Its modern incarnation manages pension plans by investing some 5-10% in every major French listed company, often alongside banks which do the same on a smaller scale-- indexation with a vengeance, and hardly appealing to foreign investors. But with over 600 French asset managers doing this and close to $3.5 trillion under management, French AUM is comparable to what German-, and British-based run.
The fund management industry is strongly regulated against conflict of interest, too much risk, and investor protection.
Prudent French citoyens save a whopping 17% of the country's gross domestic product. Financial assets held by French households amount to an average of 30% of their wealth, but invested in boring indexed asssets.
To break the mold, a new seeding fund has been created (with government help; this is France!) Emergence aims to find innovative, entrepreneurial, and quantitative asset managers to change the way French pensions and funds invest, calling home part if the French fund management diaspora from the Middle East, the US, Britain, and Shanghai. They get an offer of money to manage, and back office support and top technology so they can do their investing. Over 120 applications were weeded down to 5 managers, each set up with euros 30 mn (c$40 mn) from the fund but also sometimes backed by others as well.
I met 4 of the young boutique managers at the NYSE. They all received funding from Emergence which is headed by a more senior experienced bourse veteran Alain Leclerc. US investors except via funds cannot join in the game. However foreign institutional investors have added to the assets under management of the funds and presumably after yesterday, there will be more. Here are the funds.
*Tobam is a former Lehman Bros. asset manager bought by the employees out of bankruptcy and with Calpers as a minority shareholder since 2011. It has $3.4 bn under management for institutional investors apart from Emergence, using 13 patented "anti-benchmark" strategies to maximize diversification. Its head is Yves Choeifaty.
*KeyQuant, also est. 2009, uses probability to spot trends globally, and achieved a 15.2% annual rate of return in the 2010-March 2013 period, pas mal. It was founded by Robert Baguenault de Viéville and Raphael Gelrubin, who invented a system for systematic R&D in futures risk at Man Group.
*Older Finaltis created c$330 mn of listed funds by networking. It seeks out management talent and then kick-starts their investment operations by fund-raising on their behalf. It is currently raising euros 150 mn for niche private investment funds. Very international it invests also in Japan.
*Finally, Eiffel Investment Group, also older, was funded by former Louis-Dreyfus head Jacques Veyrat before Emergence invested. It is challenging the French bank lending culture by creating new corporate finance vehicles based on strong research and stock-picking, like bonds, convertible stocks, etc. A third of its shares are owned by staff and it has $400 mn under management. With offices in Paris, Luxembourg, and Amsterdam, it is regulated by all three. Chairman Fabrice Dumonteil first got Emergence funding a year ago.
All 4 funds are run out of the Emergence HQ at 63 ave. des Champs-Elysées, 75008 Paris, France. I discussed the venture with A. Michael Lipper (whose fund data and rating site is now owned by Thomson-Reuters). He said: "with one home-run funds will rush to invest with them."
More for paid subscribers from Brazil, Israel, Britain, Finland, Belgium, Sweden, Switzerland, Greece, and The Netherlands including a new stock trade and a report on Q1. I will file tomorrow before flying off to Spain but there may be no blog on Thursday and Friday.
Tobin Taxes in Euroland: Part 3
The Euro-plot by 11 countries to create a financial transaction tax with extraterritorial impact has, finally, garnered more criticism. Your editor met a lawyer for one of the US depositary banks during her stay in London last December and more or less broke the story of how the 11 countries wanted to impose a tax on the trading of stocks of companies incorporated in their countries wherever it takes place. This is called a Tobin tax after the economist who first proposed it decades ago.
The Group of 20 which met in Washington DC last week was warned that a "Tobin tax" would violate the terms of the finance ministers' group by mutual funds. "Now is not the time to experiment with polcies that will fragment markets, increase market volatility, harm savings, and impede growth," the unidentified funds wrote, according to The Telegraph (UK).
ICI Global today along with other fund managers noted that the FTT could cost US mutual funds as much as $35 bn if they enter into covered repurchase agreements with banks in France and Germany, two of the 11 countries planning the tax. To cover for the tax, the cost of 7-day repo funding at current yields would rise 5000% at current interest rates. And even for longer maturities, the costs would be prohibitive.
Of course, US mutual funds would not do such expensive repo deals if the tax is imposed. But that means it will not achieve its objective, to raise money. ICI Global is the London arm of the US Investing Co. Institute, the fund lobby. It has taken the lead in getting UK newspapers active against the tax proposal.
More for paid subscribers follows including a good quarterly report from one of our companies, and word from Canada, Britain, Israel,
Brazil, Belgium, Singapore, and Japan.
Performance Tables Posted
The tables have been posted on www.global-investing.com and subscribers can view them all; presubscribers can only see the closed-positions table showing our performance over the past few years. Note that clicking "printer-friendly" will let you view the spreadsheets more easily.
Can Japan join the easy money world without triggering a trade war? So far Japan has convinced the world it is not pursuing "beggar-my-neighbor" devaluations. As Japan does not operate a reserve currency like the US it has to win foreign support.
Predicting the outcome of "Abenomics" is hard. Japan thus far got other industrial countries to back its programs at the recent Washington D.C. Group of 20 meeting. Japan avoided causing upset by not doing anything unexpected.
Japan first surprised the world after the Meiji Restoration when its leaders copied western railroads, roads, and department stores, and inaugurated land reform. In the late 19th century Japan modernized its education system, importing teachers, sending smart local students to study abroad. The government took the lead in allocating resources and the public sector created shipyards and factories, often sold off for a pittance to the forerunners of the later conglomerates or keiretsu, ancestors of the Mitsubishi-Mitsui-Sumitomo-Dai Ichi Kangyo-Sanwa which still dominate the Japanese economy.
Japan's modernization was agressive. Its defeat of Russia in 1904 War fed military expansionism, culiminating in the Pearl Harbor atttack against the US and the outbreak of World War II.
Its economic "miracle" during the Occupation and the Korean War turned Japan away from military spending, while its labor costs were still well below US. Japan's agriculture and industry were protected from foreign competition by tariffs, habit, different standards, and a low yen.
This let to an aggressive US exchange rate move in 1971 intended to hurt Japan. Richard Nixon took the US off the gold standard hoping to cheapen US exports to increase American jobs at the expense of its trading partners. It didn't work against Japan.
The Japanese rolled up their sleeves to defeat Nixon's currency ploy. Companies cut costs sharply to maintain exports. Workers in its consensus culture, guaranteed lifetime employment, cooperated with management for Japan's sake and didn't press for wage rises. Japan developed innovative products like the Walkman and electronic goods, optical equipment and cameras, the world's most reliable autos, robotics, and even toys the rest of the world couldn't resist.
The result was that the yen moved up against the dollar. With that nominal GDP per capita swung to a level roughly comparable to the USA. Credit was easy. An asset bubble began in real estate and hit shares. At one point a small area near the Royal Palace in Tokyo was worth more than the State of California. Speculation was rife.
Then came the inevitable bust. For the last 20 years Japan has been stuck in an economic funk. Japan never recovered from the burst bubble despite taking prescribed economic measures in the subsequent two decades: high government deficit-financed spending, quantitative easing, fiscal stimulus, monetization of the debt, all central bank tricks being tried now by the US and being preached also at other countries.
American policy-makers from Ben Bernanke down argue that Japan pulled back too soon. They didn't drop yen bills from a helicopter. Recall that in 1991 when the Japanese bubble bust, nobody really knew how to deal with a collapsed bubble.
Japanese easing caused misallocation of private investment and government spending. Low interest rates led to excessive debt fed by high domestic savings rates. Japan, unlike the US, doesn't borrow from foreign banks or foreign countries. So Japan escaped market discipline over its bad funding habits. It also avoided any need for writing off dud debts. Too many factories with a low rate of investment return were financed by generous bankers to related companies while fewt start-ups and small companies got funding (excep Softbank.) Innovation fell.
Complacent taxpayers let the government build dozens of bridges to nowhere. Facing low domestic demand, Japan depended increasingly on exports. Japanese savers, older conservative people, accepted low returns out of home bias. The celebrated yield seeking Mrs. Watanabe, the housewife managing her family's finances, was hopping from Brazilian to Polish to Turkish bonds. But most of Japanese debt was held inside Japan. .
Today Japan is trying more vigorous fiscal stimulus. Post-tsunami levels of public spending will be kept in place for the next 5 years, at Yen 5.3 trillion/yr. Normally, Japan would have moved to tightening by now. PM Minister Shinzo Abe set a specific 2% inflation target to be reached, as in the US, by open-ended asset purchases. It may be reached by 2014. He aims to raise Japan's debt to 200% of GDP.
Even harder will be the fiscal reconstruction target, halving the budget deficit level from 2010 levels by 2015 and reach a surplus by 2020. Frankly, it cannot be done unless fiscal stimulus plans produce exceptional growth.
Abe's Third Arrow is trade deals like the Trans-Pacific talks announced by Pres. Obama. Abenomics mixes deficit spending with structural reforms: weakening cartels, allowing imports of foreign rice. This may smooth relations with foreign countries, but will be hard to implement.
PM Abe wants Japan to take the lead in developing energy to cut global warming and greenhouse gases, including nuclear (despite Fukushima), wind, geothermal. Abe called for a restart of the Japanese nuclear electricity production in his campaign platform. A national day-care system will be set up so more women can work. Female labor participation rates in Japan are among the lowest for developed countries.
The main economic program means Japanese are being led to spend their money now before it is worth less because of inflation and more expensive imports, boosting consumption. Yields on both short and long term yen deposits are miniscule, controlled by the Bank of Japan to encourage spending. Low yields further weaken the yen which is approaching the 1 US cent level from before the global financial crisis, the standard back in the 1990s. A falling currency helps exports because foreigners can buy more Japanese goods for the same dollar or euro.
Corporations will invest more too if they are convinced growth is on its way and also boost hiring. Now large companies are offering preventive salary increases to their staffers to cover the eventual 2% inflation in advance. As always, smaller and medium-sized enterprises cannot follow.
Export growth feeds corporate profits so Tokyo's stock market is soaring with other assets. So maybe households will be quicker to spend money and Mrs. Watanabe will go shopping.
So far, Abenomics has been successfully presented as like US fiscal policy, undertaken for the good not only of Japan, but for the world. No hostile Nixon-style reaction yet. A yen devaluation is backed by the US which wants Euroland and Latin American central bankers to also adopt US-style quantitative easing and fiscal spending. If enough countries join the dance, there will be no currency war or inflation contagion.
More on Japanese and Asia risks for paid subscribers follows, along with results from The Netherlands and Singapore, and news from Argentina, Canada, Ireland, Brazil, Britain. Cheer up. Monday's blog will be short as I am attending the Europlace events at the NYSE.
Watch That Underscore
Watch out for the underscore. Shortly after Monday's Boston Marathon bombing, a new Twitter account appeared, @_bostonmarathon, which sought funds for victims of the atrocity. The real site for collecting funds is almost the same, @bostonmarathon/ writes the Neue Zuercher Zeitung. Cyber criminals jumped into action almost immediately after the bomb attack, according to Michael Molsner of the Kaspersky Internet Security (of Woburn MA). After signing up on the underscore site you get e-mails with links to YouTube videos. But visitors logging on to the site and staying about a minute wind up with a trojan on their computer, which sends data to servers in The Ukraine, Argentina, and Taiwan. The trojan is PSW.Win32.Tepfer
At underscore Boston Marathon is only one of the 125 domains registered since Monday, among them: 2013bostonbombing.com, 2013bostonbombs.com, and bostonattack.com. The sites are trying to collect money from web surfers who give credit card information to make donations. Don't. These fake sites usually are taken down in a few days, but not before collecting some dough.
Beware also facebook or social network links to a Boston Marathon charity. Once a person's email has been hacked, his or her whole phonebook is easily captured by facebook which is set up to force you to "friend" anyone you ever exchanged emails with.
To protect yourself, to avoid shortened Internet addresses showing up on sites like twitter. Write "Long URL please" before you give in to your charitable impulse. Don't click on shortened addresses to websites in emails even if you know the sender. That is how viruses are spread. (On the interest, you can force revelation of the long URL and you almost instantly see the hidden international address from which the email came.)
Google and search engines are not safe either because their algorithems place sites higher based on the number of clicks achieved. Networked bad guys can generate a lot of clicks and move up in rank. Ranking by clicks means sites visited by recipients of faked emails from friends rise in the ranking.
The next step is often "scareware". When you realize you have been hacked, you are then victimized by free offers to clean up the malware from your system. The least harm is to then charge you for removing an infection you do not have. Real pirates go further, and install a trojan while doing the free search. (Note: Kapsersky also offers a free scan but it may be safe. I have no idea.)
The first Palestinian marathon is planned for April 21 whose destination is Bethlehem. West Bank athletes will compete but Israel is not letting Gazans including former Olympic racer Nadar Al-Masri cross its territory to reach the site. The Palestinian Olympic Committee has asked Jerusalem to reconsider the ban.
More for paid subscribers from Finland, Canada, Brazil, Greece, Switzerland, Britain, and Singapore including a stock sale.
Service notice: Tomorrow's blog will be short because I am invited to the Europlace Financial Forum at the NYSE, a lousy venue for events because of security. But you can't talk the French out of holding events at the Bourse. I leave next Weds. night for Spain and Portugal where I will be doing field work on the soft underbelly of Europe and attending an Oxford Reunion in Madrid. I then will hit London for a conference.
This Time Is Different
The K-Street consensus against deficit spending arose to deal with emerging market crises, adopted by the experts of the World Bank and the International Monetary Fund (IMF). The consensus was that when deficit spending continued following a financial crisis, it would inevitably hurt the countries doing it. The K-Streeters said debt causes recession and imposed austerity with abandon on Asian countries in during the "Asian contagion" when a Cuban-born American economist named Carmen Reinhart and Kenneth Rogoff were on its staff.
K-Street was why nasty medicine, drastic cuts in government spending, was forced on developing countries by the IMF in recent crises. Deficit spending, above all by the US, was adopted by developed countries in the wake of the global financial crisis (GFC) in 2008-9. Then Keynesian critics of the K-Street view of the world pointed out that policy makers could change their spots depending on whether their home country or some bedraggled outpost of empire was the deficit-spender.
In fact, during the GFC, the cost of sovereign debt has been extremely low because the government turns out to be the only borrower, with corporations and households gun-shy about debt.
But no one questioned the theory that there is an inevitable link between soaring deficits and slow growth. In fact, the K-Street consensus made a comeback, thanks to a treatise against state debt written by Reinhard and Rogoff, now both Harvard professors, late in 2009 during the height of the GFC, "This Time Is Different: Eight Centuries of Financial Folly" (TTID).
TTID wrote that history proved that a country's government debt once over 90% of gross output (Gross Domestic Product or GDP) would eliminate growth and lead to an actual decline of output in subsequent years. The outcome was the same whether the deficit-spending country was developed or developing. This was called a "debt trap."
The RR argument covering industrialized countries had an impact on current economic policy. TTID also led to slow or reluctant deficit spending in Britain and western Europe in the wake of the GFC. The IMF actually published studies based on the R&R thesis last year.
"This Time Is Different", the most dangerous words in the English language, became a shibboleth of opponents of quantitative easing and increased government debt. The term is ironic reflecting the R&R Harvard prof authors' conclusion that the current crisis is not different at all.
Now the K-Street apologists have been attacked not by Keynesian activists supporting central bank activism, but by close examination of the statistics the Harvard profs used to justify their conclusions. The negative impact of deficits turns out to be based on bad statistics according to a group of researchers at the very non-Ivy League University of Massachusetts at Amherst. In fact, 90% deficit countries achieved an average 2.2% positive growth rate, according to the UMass re-examination.
The Reinhard-Rogoff numbers were fiddled with "selective exclusions" and "unconventional weighting" as well as plain coding errors. As a result, the Harvard economists produced "serious errors that inaccurately represent the relationship between public debt and GDP growth."
"The average real GDP growth rate for countries carrying a public debt-to-GDP raio of over 90% is actually [plus] 2.2%, not [minus] -0.1%," wrote Thomas Herndon, Michael Ash, and Robert Pollin.
The real reason to worry about activist deficit spending and quantitative easing is that when they come to an end (as they must eventually), the impact on economies and markets can be severe. That is all the more reason not to hold back for fear of deficits when they are necessary.
Typically mining stocks rose before metal price did in previous gold price recoveries. This Time Is Different, because there are now so many owners of gold exchange-traded funds, not available when gold last fell sharply from its 1979 peak. Some ETFs are bought on margin and have to be sold. ETF sales feed directly into the price of bullion rather than to gold mining share prices.
Central bank bullion buying may help gold this time if CB's decide to reconstitute their suddenly lower gold reserves while gold is cheap and borrowing costs low. The last time gold plummeted interest rates were prohibitive as Fed chief Paul Volcker was squeezing inflation out of the system with high cost money.
More for paid subscribers from Panama, Hong Kong, Britain, Israel, Canada, Ireland, Mongolia, Myanmar, Belgium
The Boston Marathon has been held on Patriots Day, the 3rd Monday of April, since 1897. The event, the oldest and most prestigious US race, starts in Hopkinton west of the city and runs through Newton where my son and his family live and yesterday cheered on the runners. It ends at Boston’s Copley Square and attracts some half-million spectators and about 20,000 racers every year. Two bombs exploded on Boylston Street near the finish line some 3 hours after the fastest runners had long since left the area. The bomb victims were dogged amateurs and the families and friends who cheered them on.
By then Ethiopia’s Lelisa Desisa and Kenya’s Rita Jeptoo had long since won the men’s and women’s events respectively. The number of dead and injured is growing and it now appears that there were ball bearings mixed amidst the explosives which went off.
My Boston grandchildren now have to be told about evil people, hardest on Jules, 5.
Was this Al Qaeda? Boston was where one of the 9/11 hijacked flights originated. A marathon features runners in what Islamists would consider immodest dress, particularly for women. Like the former World Trade Center here, Boston's marathon symbolizes American openness to the world. Hitting it could be viewed a blow to US pride and illusions of security.
But it might also have been an Oklahoma City-style home-grown US nut. We should pray for healing for the wounded in body and spirit, and in memory of the dead.
But I am also a financial reporter with a beat. So with embarrassment, here is my guess: gold and defense shares will go up today particularly if there is any hint that the horror was planned from abroad.
Citigroup which is in the depositary receipts business published a note by an expert on the Swedish financial transaction tax experiment. The FTT would make hedging costlier and increase asset price gaps. Trades that require central clearing would become more costly, so would shift back to being done by banks. Raising money would move from bond markets to bank finance, making banks vulnerable to unsecured funding. Corporate credit would become more expensive because of liquidity premia, and peripheral government debt would be harder to raise.
More for paid subscribers follows from Brazil, Spain, France, Canada, Australia, Britain, Singapore, Israel, Belgium, Ireland, and Denmark.
Not so precious metals
The gold price drop has picked up momentum over the weekend and in overseas markets today. Then bad numbers on US retail sales and homebuyers' confidence plus slower Chinese growth weighed in. I tend to be skeptical of trend investing, particularly over gold, in many ways a fashion item, not just jewelry and glitter, but also the mode of commodity-themed exchange-traded funds. These ETFs went into fashion and out of in the past few months. The gold price is now below $1400/ounce.
For the record (again) the end of Fed quantitative easing will not mark an end to gold's appeal as an inflation hedge. The US will exit QE if and when employment figures improve, but this stage probably will be marked by inflationary wage pressures.
And you don't even have to wait from unemployment to fall. In Japan, large companies are volunteering to raise wages to match the government 2% inflation target, part of Tokyo's own version of QE.
INK Research, a Canada tracker, is reported in today's Globe & Mail to have reported for Toronto-listed gold and precious metals stocks, there were 7x as many with insider buying as selling. This kind of imbalance is usually a mark of a turning point in markets. The number of buyers to sellers was half as high, at 3x, at the start of this year.
The last time there was such a huge lopsided move to buying by gold and silver mining insiders in Canada, it was at the peak of the 2008-9 financial crisis. Insiders tend to be contrarian, buying when they think their companies' stocks are undervalued. Insiders are also prone to being early, followed by the market overall with a 3 to 6 month lag.
While he is not a precious metals insider, Bill Gross of Pimco today tweeted that he "would still buy gold here" this morning, citing "world reflating". Of course Mr. Gross famously also recommends buying bonds which would suffer in renewed inflation, so maybe he wants to offset the risk.
Your editor got hauled over the coals for calling the Colombian rebel movements' bombing of pipelines "political risk". According to my critic, political risk is not guerilla actions but only "tax changes from the government." He adds: "Political risk is not present in Colombia." Presumably the 2006 surprise government decision to tax investment corporations does count as political risk, in politically "safe" Canada. Under the rules of the Overseas Private Investment Corp., an "independent" US government body which insures foreign investment, war and terrorism count as political risk.
Capriles did far better than pollsters and the press predicted in grief-stricken Venezuela, and Nicolas Maduro's 50.6% victory may be subject to a recount, presumably complete with hanging chads.
More on Colombia from our Cali-born reporter Frida as well as on Chile, and more on gold, Ireland, Italy, India, Israel, Sweden, and Britain.