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Private and Confidential

August 2005

The following sections are now delivered through Astraea. The links below will take you to those sections.

Is this our wake up call?


August is a time when many people stop working, sometimes for weeks, although it is in some ways the busiest time of the year.  Certainly the harvest season kicks into full gear and we also review investment portfolios because it suits financial market cycles.  This year, death seemed to be a recurring topic in August.  At the beginning of August a 60 year remembrance of Hiroshima reminded us of the power of nuclear weapons and the ongoing nuclear proliferation.   Fires in Portugal, floods in ventral Europe, and thousands of people were killed or had lives destroyed by Hurricane Katrina.  This followed bombings in London so death was on our minds. Katrina may be the wake up call that we need.  There will be a lot more said in the coming weeks.  Hopefully we will see the better side of human nature emerge.

Rereading Cradle To Cradle reminds me that "ignorance is death" - a lack of knowledge or awareness or a failure to heed warnings can be fatal - in Cradle to Cradle this focusses on the challenge to redesign living space and appliances so that they are not toxic since we consume their particulate emissions daily.  And, personally, one of my leisure readings was Reaperman - a philosophical challenge (such as would you want the death of death?) wrapped in an amusing story.

The impact of cogitation on death has been principally twofold.  First, we can not control risk, including the risk of death, we can only prepare for risk and manage it when it happens. Second, our unwillingness to face death has negative consequences on our emotional wellbeing  - because we fear something we do not understand, and on our livelihoods - because we make decisions that incorrectly value risk and return.  What we can do to deal with these two challenges is firstly recognise that risks are there, are part of life and may be managed in natural ways without depleting our emotional capital.  Secondly we can bring death closer to home and discuss it to reduce our fear of it.  We can learn to see it as part of life - as in the compost heap in the garden where dead plants are transformed in to the magic that will produce vibrant crops next season, death can be a time of cleansing, reflection, reevaluation and rejuvenation. Of course it takes a more enlightened spirit to give up the yearning for life, but cognitive awareness of life's risks helps to bring a balanced perspective.

For the first 20 seconds or so of seeing news footage of New Orleans in late August, I thought it was Baghdad.  Then I realised that the people looked a bit more American than Iraqi.  The devastation of New Orleans is a tragedy of unexpected, even Biblical, proportions.  It is difficult to avoid the comparison with fables of "the Hand of God" punishing the wicked. But that is just fantasy.  The truth is more painful, and will become more painful as the next few months reveal the loss, the pain and the mistakes. 

Perhaps truth will be the victor for once and we and our leaders will stop hiding behind lies.  It may be human nature to lie, as Scientific American has show in its recent repot "Mind", but that is a symptom of Pleistocene era behaviour, not the post-modern world of science and technology.  Truth, like Death, plays an emotive role in our society and it is time to upgrade our stories.  My children, on the suggestion that the make to figurine characters in their game liars, chose the "King" and "Prince" because "leaders are always mean to others"!  Oh dear.

Some of the early Katrina reports are discussed below in our section on Risk and Terror, where we like to remind ourselves that risk is not just man-made but also natural.  And here below are copied two reports from observers to remind us what it was like in New Orleans in the last days of August.  What is lacking now is compassion and aid from around the world.  We may all feel a little complacent because the big rich bully got hurt for once, but that is not appropriate if we are to move on from petty schoolyard politics to an enlightened culture in which love and sharing replace greed and fear.  Greed and fear have led to rape, murder and pillage in America.  This is not the world we want and we must nurture our most wholesome values to help our neighbour.

The two following comments paint the picture as Katrina passed New Orleans. One from political blogger Andrew Sullivan, and the other from a physician stuck in NOLA. 

Sullivan: "I have to say this seems to me to be a new situation. This has morphed from a natural disaster into a social meltdown. The Louisiana governor seems overwhelmed (Barbour seems much more effective); New Orleans' civic authorities seem non-existent (and bear responsibility for the insufficient preparation for this potential and widely predicted nightmare); and the president's response has been decidedly weak. His call to restrain from using gas was, well, Carteresque.

It seems to me inconceivable that we cannot impose basic law and order in a major American city five days after a hurricane has hit. This is a very basic governmental responsibility and all I can say is that I see no evidence of competence or effectiveness so far. FEMA had no solid evacuation plan? The feds had no plans to maintain order in such a situation? The explosion of complete lawlessness is beginning to make Haiti look like a pleasant place to live. This is America? Where order is so distant that snipers can prevent the evacuation of a hospital? The fundamental reason for my inability to support a second Bush term was his demonstrated incompetence in performing the basic functions of government. It seems to me that the people of New Orleans are now as much a victim of this as the people of Iraq. I guess we can merely be thankful that Rumsfeld hasn't yet appeared to say "Stuff happens." Yes, it does. When your government seems unable to do the most basic things required of it."

Physician email from 30 August: "I am now a temporary resident of the Ritz Carleton Hotel in New Orleans. I figured if it was my time to go, I wanted to go in a place with a good wine list. In addition, this hotel is in a very old building on Canal Street that could and did sustain little damage. Many of the other hotels sustained significant loss of windows, and we expect that many of the guests may be evacuated here.

Bodies are still being recovered floating in the floods. We are worried about a cholera epidemic. Even the police are without effective communications. We have a group of armed police here with us at the hotel that are admirably trying to exert some local law enforcement. This is tough because looting is now rampant. Most of it is not malicious looting. These are poor and desperate people with no housing and no medical care and no food or water trying to take care of themselves and their families.

There are physicians in at this hotel attending an HIV convention. We have commandeered the world famous French Quarter Bar to turn into a makeshift clinic. There is a team of about 7 doctors and PA and pharmacists. We anticipate that this will be the major medical facility in the central business district and French Quarter. and will start admitting patients today.

The biggest question to all of us is where is the National Guard? We hear jet fighters and helicopters, but no real armed presence, and hence the rampant looting. There is no Red Cross and no Salvation Army.

In a sort of cliche way, this is an edifying experience. One is rapidly focused away from the transient and material to the bare necessities of life. It has been challenging to me to learn how to be a primary care physician. I don't know how long it will be and this is my greatest fear. The greatest pain is to think about the loss. And how long the rebuild will [take]. And the horror of so many dead people.


Investment, Finance & V. C.

Oil, Housing, Katrina ... mmm?  Low savings rate, high consumer credit.  Unwillingness to change.  The economic junk food diet is too addictive, but regurgitation is inevitable.  Although turning points are hard to predict - it appears to be accelerating and may occur in the coming quarter. US consumer sentiment seems to be anticipating change - it fell to 89.1 in August, down from July's figure of 96.5, according to the closely-watched University of Michigan guide.  Part of the US problem of low savings rate (0.02%) is encouraged by rising house prices - up 15% to June this year.  The rising asset removes incentives to save income.  Thus a virtual gain in asset values is substiuting for saved value produced.  A recipe for trouble if allowed to balloon.

Greenspan sees increased US trade protectionism and ever-larger budget deficits as the biggest threats to the US economy.  At the Fed's annual Jackson Hole meeting in Wyoming, he said both threatened the US economy's "most valued policy asset" - its flexibility. His comments came in a speech to central bank bosses from across the world.

Germany's performance is now beginning to earn positive reviews from mainstream media.  The Economist ran a cover and special report on Germany's surprising economy.  And value may still be found.  The upcoming election will provide fuel for discussion and potentially liberate new policies, and overall the long term outlook is improving. The acceleration of Germany's economy is underpinned by infrastructural changes and cultural changes.  Tax law liberalisation a couple of years ago has allowed the transfer of cross-shareholdings in conglomerates without capital gains taxes.  A number of groups have taken the opportunity to reorganise to smaller units bringing flexibility and allowing the liquidation of deadwood.  Banks have had a comeback and should continue to improve their risk return profile.  Chemical companies have also improved however this industry in general is exposed to massive medium and long term liability risks of class action suits for failure to disclose; their saviour may only be in transforming to natural design processes and products before consumer awareness breaches the critical mass.  The opening of the culture which has been gestating for over a decade and is now emerging as a more enlightened consciousness will complement Germany's top class research and engineering capacities.  The local talent is now not just based in science and engineering but also business and social equity - the country is well equipped to deliver performance across many fronts, even to tackle massive new phenomena like an ageing population.

Japan's recovery looks on course to continue, with growth remaining solid and the number of bankruptcies falling. The economy expanded by 0.3% in the three months to June, which would mean 1.1% growth for the full year. A full year of growth would mark Japan's return to something approaching economic health. Several other indicators seem to point to better times ahead too, such as a reduction in the debt of companies going bankrupt by 16% from the previous year, falling joblessness, and a rise in corporate investment and private consumption. This last trend is seen as vital in a country where domestic demand, dogged by falling prices and a precarious employment market, has flagged for a decade or more.

China's biggest lender, Industrial and Commercial Bank of China (ICBC), is selling a 10% stake to Goldman Sachs, Allianz and American Express.  The deal, said to be worth more than $3bn (1.7bn), is just the latest example of Western financial houses investing in Chinese banks. Analysts estimate Goldman Sach's stake in ICBC to be worth about $1.6bn, with Allianz on $1bn, and American Express between $200m and $300m. Last month the Royal Bank of Scotland announced it was investing $1.6bn to lead a consortium buying a 10% stake in Bank of China for $3.1bn.  In June, Bank of America paid 3bn for a 9% stake in China Construction Bank. Beijing is preparing to fully open its banking sector to foreign competition in 2006, as a precondition to its admission to the World Trade Organization (WTO). At present foreign companies can hold just 25% of a Chinese bank's shares, with an individual overseas firm limited to owning a 19.9% stake. The Chinese banking sector is estimated to contain $1.5 trillion in personal savings. But be wary of the risks.  This is a bubble.  Bedlam Asset Management paints a clear picture:

One of the earliest players was Hong Kong's Hang Seng Bank. In 2003, together with the finance arm of the World Bank and the Government Investment Corporation of Singapore, it plonked down $324 million for a 24.9% stake in China's Industrial Bank. Its parent, the better known HSBC, subsequently shelled out $1.75 billion for a 19.9% stake in the Bank of Communications. Both these two banks have an economic imperative and a level of knowledge of how to work in difficult Asian countries, which means they might even make a small return on capital, one day. For almost all other major banks, there must be considerable doubt. As well as the deals mentioned above, Dutch-based ING Groep bought a 19.9% stake in the Bank of Beijing for 166 million. Newbridge Capital of the US bought 18% in the Shenzhen Development Bank. Those who have started looking at major bank or asset deals include the Commonwealth Bank of Australia, Britain's Standard Chartered Bank, JP Morgan, Credit Agricole, Morgan Stanley, Bank of Nova Scotia and more.

Most leading western banks now want to be in China, seemingly irrespective of the price, because of its rapid growth. They cannot resist the lure of potentially 1.3 billion savers and borrowers. They have swallowed the myth that the balance sheets of China's financial institutions have been cleaned up. All claim to be playing the long game, that their expertise will improve the domestic banks, i.e. that they can break the thousand year old Guangxi system. It may be that some actually believe they know the true balance sheets of the banks they are buying. But remember the Chinese invented quadruple accounting; a true set for limited internal use, another for the government, one for the investors and then one for their wives. You should be cautious that keen western bankers, whose sights are fixed on 1.3 billion consumers and their near-term bonuses, rather than the $750 billion worth of bad debts in the system, can see through these multiple fictions.That China is wandering into a banking crisis is a certainty; we don't know when it will start, or how, but it is inevitable.

But then maybe it will not be a banking crash but a tech crash ... Yahoo acquired a 40% stake (35% voting position) in China-based B2B website operator Alibaba.com for $1 billion in cash. The deal is part of a larger strategic transaction that Yahoo values at $4 billion. Alibaba.com, which also runs online auction site Taobao, raised $82 million in Series D funding last year at a post-money valuation of approximately $182 million, from Fidelity Investments, Goldman Sachs, Granite Global Ventures, Softbank, Investor AB, Transpac Capital and Venture TDF. Alibaba, founded in 1998 as a portal for buyers and suppliers of Chinese products, is China's largest e-commerce website.  That's a lot of cash for goodwill.  Not enough top rock the market, but a big step in that direction.

James Montier (of DKW) has written recently on investor mistakes and offers a couple of excellent charts that show we tend to forecast according to history, despite the constant lesson that history does NOT predict the future!

Responsible Investing

Genetically modified seed has been cleared for release in Europe.  This is devastating news for naturalists and scientists who know that the destruction of habitats will soon follow.  The timing of this coincides with a peak in class action lawsuits in the US.  The synchronicity is reminiscent of tobacco industry law suits beginning 20 years ago.  But this could be much worse and all those connected with allowing the spread of what amounts to a weapon of mass destruction may face consequences in law.  Monsanto, the leader of the gang is most certainly willfully neglecting its responsibilities of information disclosure as well as managing business risk.  And leaders who allow volatile biological agents loose in their states must face the consequences.  The prognosis for companies engaged in these activities is dangerously risky - they exhibit "Enron risk".  The timing of a sustained correction is approaching sooner than we had thought.  Prudent, long term portfolio managers should evaluate the rising risks of businesses exposed to industrial moral hazard.

Harrington Investments Inc. (HII) filed a shareowner resolution with Monsanto asking its board to create an ethics oversight committee of independent directors to monitor compliance with laws as well as the Monsanto Pledge and Code of Business Conduct. The resolution recounts the company's $1.5 million settlement with the US Department of Justice (DOJ) and Securities and Exchange Commission (SEC) in January 2005 over violations of the Foreign Corrupt Practices Act (FCPA)because a senior Monsanto manager authorized a $50,000 bribe to get a senior Indonesian Ministry of Environment official to repeal a 2001 environmental impact assessment decree obstructing market entry for genetically engineered crops.  "Although the payment was made, the unfavorable decree was not repealed," notes the SEC enforcement document without commentary on this irony. "In addition, from 1997 to 2002, Monsanto inaccurately recorded, or failed to record, in its books and records approximately $700,000 of illegal or questionable payments made to various Indonesian government officials."  Such breaches of corporate ethics are unfortunately not anomalous. "Bribery is illegal, and Monsanto's violation of federal law and the company's own voluntary code of conduct prove that management cannot be trusted to protect shareholders," said John Harrington, CEO of HII, a socially responsible investment (SRI) firm. "Monsanto's management has once again shown its disregard for its fiduciary duties and for U.S. law."  The DOJ/SEC settlement requires Monsanto to retain an independent compliance expert. A search of SEC filings posted on Monsanto's website since January 6, 2005 did not disclose the retention of an independent compliance expert, so it is unclear whether the company has fulfilled this requirement.  The Monsanto Pledge, which is "the foundation of all that we do," states that "integrity includes honesty, decency, consistency, and courage." The Pledge also commits the company to several intentions, including transparency. "We will ensure that information is available, accessible, and understandable," the Pledge states.

Recent research suggests that candidates applying for jobs at finance firms are increasingly likely to lie on their applications. The Risk Advisory Group reports that a quarter of CVs contain incorrect or false information. Based on a study of 3,000 CVs, the group found the biggest lies involved academic qualifications, previous jobs, gaps in employment and directorships.  It found incorrect CVs now had an average of three pieces of misleading information on them.   Ethics is not part of the job requirement (even if its in the job description) for most finance firms.

Hazel Henderson's new financial TV series Ethical Markets is now airing on PBS stations in the USA.  The series covers clean,green, LOHAS markets, SRI and CSR. Details of the shows are at www.ethicalmarkets.com.  Brasil is the first licensee  Also there is a mini-series on " Reforming International Finance" moderated by Hazel with guests, Ken Rogoff, former IMF chief economist, John Perkins, author of Confessions of an Economic Hit Man and Sakiko Fukuda-Parr, lead author of the UN Human Development Report.  This should be excellent!

Venture Capital

Both CalSTRS and Calvert see efforts to identify emerging money managers as smart business and socially responsible as well. The California State Teachers' Retirement System launched a new initiative to leverage the value of diversity in investment management firms. CalSTRS, the third largest US public pension fund with $129 billion in assets, is partnering with a New York City-based consulting firm specializing in identifying undiscovered, underutilized, or undercapitalized investment firms.   http://www.socialfunds.com/news/article.cgi/article1776.html

New Energy Capital, a portfolio company of VantagePoint Venture Partners, yesterday announced the start of construction of a 40 million gallon per year ethanol production facility in Rensselaer, Ind., named the Iroquois Bio-Energy Co. New Energy provided most of the project's equity, secured a $38.6 million loan from Farm Credit Services of Mid-America and will undertake financial and asset management for the approximately $70 million project. Other backers include nearly 300 local farmers and businesses, Fagen Inc., The Andersons Inc., Noble Americas Inc. and Indeck Energy Services Inc. In addition, the U.S. Department of Energy provided a grant. www.newenergycapital.com

A briefing note on The Trouble with Venture Capital is available here.


Interest Rates and Currencies

The US interest rate continues its upward trend and recent comments by the Federal Reserve suggest that this will continue, particularly in light of concerns about a housing bubble.  The housing bubble may be only in certain pockets, but it is felt to be widespread enough and deep enough to be a serious concern.  It may be that economic dampening from the devastation of Katrina will achieve the Fed's goals in which case rates may stabilise in three months; but wait at least a month to see.

The imbalances in the global economy, such as the US deficit, are not dissipating despite market signals and data.  Part of the reason has been the housing boom that has kept consumption high and reduced the effect of rising interest rates on consumer spending.  There is no simple solution to this although the shock of Katrina may prove to be the crisis that helps people in America focus on more soulful consumption than the stock market, SUVs, brand names and social cosmetics. 

Trade and FDI

"This is this world:  We have poor and homeless people.  We have a couple of billion people who are not adequately clothed.  And mountains of sweaters, shirts, etc are piling up in European warehouses" from a exasperated trade observer.

The apparel industry faces turmoil as orders placed in China can't now be imported because limits agreed by Brussels have already been exceeded in just two months. When existing textile quotas were lifted at the start of 2005, the volume of Chinese textile imports into Europe rose dramatically. Many companies went to China, sourced suppliers and committed to orders. New European Union quotas to limit the explosive growth of Chinese clothing imports have already been exceeded, just weeks after they were agreed with Beijing, leaving some retailers worried about shipments they have already paid for but not received as the busy autumn-winter season gets under way. In Germany, the threat has already led to a warning from Economy Minister Wolfgang Clement that the limits on soaring imports of textiles and clothing from China could seriously harm German companies.  The European Union's trade chief has begun moves to free up Chinese garments held at EU ports in the row over quotas.  Chinese state media has demanded an immediate end to quotas, accusing the EU of protectionism.  With around 50 million sweaters and 17 million pairs of trousers detained at European ports, stores across the continent are anxious that the clothes are released in time to prepare for the Christmas rush. "It is very possible that towards November or December you will see prices rising simply because there is not enough capacity now to produce the kind of cheap goods that China has excelled in," said Alisdair Grey, from the British Retail Consortium.  Despite widespread claims that China is flooding western markets with cheap goods - some manufacturers worst hit by the quota system are actually owned by European firms.

The Report on the Free Movement of Workers in the EU-25 was compiled by the civil rights group European Citizen Action Service, has highlighted the benefits of migrants from central Europe to older member states.  Ireland for example received 85,000 migrant workers from the 10 new EU states following enlargement. The economic impact in Ireland was similar to that in Britain where 175,000 migrant workers, who registered in the year following EU enlargement, generated 500 million in extra economic output.  This economic performance was achieved without boosting unemployment or straining the welfare system.  It has allowed Ireland, in particular, to maintain a lively economy as work ethic and new skills have improved. The report pinpointed Poland, Lithuania and Latvia as the three new EU states providing the highest number of migrants. It also characterised the typical migrant from eastern Europe as a young, male, single worker who sends money back to his home country.  "The scaremongers who had predicted a large influx of cheap labour from central and eastern Europe have been proved wrong," said Tony Venables, director of the European Citizen Action Service, at the launch of the report.  Ireland, Sweden and Britain were the only three states to open their labour markets fully to migrants from the 10 new member states.  Other states, such as France and Germany, which have high unemployment, put restrictions on the right to work for several years to protect their own labour markets. The European Commission will recommend next year whether these restrictions should be shortened.

Oil is traded too, and America imports most of what it consumes.  If oil stays near today's level that would mean over $300 billion per year going outside the US. That is an extra $150 billion over where it would be at $30 oil. Even backing off to $50, that would take an extra 1% of GDP out of the country.


Activities, Books and Gatherings

We all had a few days of difference in August one way or another and that has given everyone new perspectives as Autumn comes on.  Development of our Integral training module went beyond expectations and we are developing a significant capacity in Integral approaches and method.  It is some of the most interesting and rewarding work done and fun too.

We have finally restarted multimedia production efforts.  This sounds rather grand, but only consists of a music video with slides at the moment.  However, the hardware is installed and is being tested and we hope to produce some desk top videos over the coming years.  The first effort is Galliano's Prince of Peace - a reworking of one of two productions that I put together with the help of IMD and Silicon Graphics about 12 years ago!

Reaperman is a must read for anyone with a light interest in philosophy or the Meaning of Life.  Pratchett explores death and human's approach to death in his intelligent, superb prose.  Would you wish for the death of Death?

I will reiterate my recommendation to read Cradle to Cradle, especially if you are in a difficult situation at work.  The book helps understand how foolish some of our knee-jerk solutions are and helps point to natural designs that upcycle waste, i.e. turn it into ingredients for another production, and work.

Emotional Intelligence has also been cracked open.  Daniel Goleman paints a clear picture: humans are physiologically designed to survive in a pleistocene era, but live in a world of international air travel, global communications and weapons of mass destruction.  Anger then saved lives, today it kills.  So we must expand our intelligence to cope with more complex situations.  He offers colour too: nearly 60% of murders of youths 12 years old or less are by parents or step-parents; half of those for minor infractions like soiling a nappy.

You might enjoy the diversion of Rocketboom.com a three minute daily videoblog based in New York City, which covers and creates a wide range of information and commentary from top news stories to quirky internet culture. Agenda includes releasing each new clip at 9am EST, Monday through Friday. With a heavy emphasis on international arts, technology and weblog drama, Rocketboom is presented via online video and widely distributed through RSS.


This report has been prepared for information purposes and is not an offer, or an invitation or solicitation to make an offer to buy or sell any securities. This report has not been made with regard to the specific investment objectives, financial situation or the particular needs of any specific persons who may receive this report. It does not purport to be a complete description of the securities, markets or developments or any other material referred to herein. The information on which this report is based, has been obtained from publicly available sources and private sources which may have vested interests in the material referred to herein. Although GRI Equity and the distributors have no specific reasons for believing such information to be false, neither GRI Equity nor the distributors have independently verified such information and no representation or warranty is given that it is up-to-date, accurate and complete. GRI Equity, associates of GRI Equity, the distributors, and/or their affiliates and/or their directors, officers and employees may from time to time have a position in the securities mentioned in this report and may buy or sell securities described or recommended in this report. GRI Equity, associates of GRI Equity, the distributors, and/or their affiliates may provide investment banking services, or other services, for any company and/or affiliates or subsidiaries of such company whose securities are described or recommended in this report. Neither GRI Equity nor the distributors nor any of their affiliates and/or directors, officers and employees shall in any way be responsible or liable for any losses or damages whatsoever which any person may suffer or incur as a result of acting or otherwise relying upon anything stated or inferred in or omitted from this report.

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