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Private and Confidential

November 2006

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



What do you think of the state of world right now.

Chopra: It's divisive, quarrelsome and idiotic.

Q: Does it trouble you?

Chopra: It's where we are as a species, you know. So we need to improve. It doesn't bother me, I mean the universe is 13.8 billion years old; human beings have only existed for 200,000 years, so we are in the infancy of our evolution and we can be a little patient with those of us who are still not in our teens. Humanity hasn't even entered its puberty yet.


A couple of areas seem to predominate in November.  One is the growing role of China, in particular its diplomatic and trade missions to Africa and India which will underpin investment and trade without north America or Europe in future.  The other topic is the destruction of marine life, as a number of reports were released all saying similar things.  It also seems that the interconnection between Investment and Climate Change is very strong in this edition.  A number of reports in the Climate Change section have direct impacts for business and investment, and a number of issues raised in the Investment Section are direct consequences of climate change.  The signals will only get stronger, but the conclusion is not going to change.  Decision makers who wait much longer to exercise their green credentials may not get the opportunity to do so.  The market will correct.



Investment, Finance & VC

See our notes on Milton Friedman in Geopolitics for some good capitalist religion.

A quick observation: almost all of the investment commentary that we read in November discusses the possibility and timing of a pull back in the US economy between Q2 and Q4 2007. Now that isn't "research" of a fundamental or technical kind.  But experienced investors will know that it is foolish to fight market sentiment, even if analysis suggest you should.  Investors in the dot.com boom knew that when the market was riding exuberance from 1998 - 2001, but might forget it when the tide turns.


The US economy performed better than first expected in the three months to 30 September, according to revised figures from the Commerce Department.  It now says the US economy grew in the third quarter of 2006 at an annual rate of 2.2%, up from an initial 1.6% estimate. The numbers, which come after recent poor data, show the economic slowdown is not as bad as feared. This picture was echoed by the Fed's Beige Book survey, which gives an economic overview of the economy, showed that economic growth was solid in October and November. The Commerce Department's revised growth figures were considerably beyond the 1.8% expected by Wall Street.  These kind of numbers will pump the stock market and may encourage inflation which will lead to further rate hikes.  But this is likely just to be lagging reality.

And then US consumer confidence fell more than expected at the end of November, as the housing market continued to weaken.  Figures from the University of Michigan showed the index edging downwards from October's reading of 93.6 to 92.1. 

The US housing market is dropping and we believe will retard the US economy next year.  For a chart filled rationale read Gary Shilling's review of US housing shared by John Mauldin.

A drop in the number of homes being built and a decline in the average house price have raised concerns about the world's largest economy. Consumer spending accounts for about two-thirds of economic growth, and the entire economy could suffer if the weakening of consumer sentiment translates into lower sales at Christmas. In October, the number of new US homes being built dropped to a six-year low, according to the Commerce Department.  About 1.48 million houses started being built in October, marking a 14% slump from the month before and 27.4% lower than a year ago.

As John Mauldin notes:
We are seeing inventories of homes for sale rise. And it could get worse, as foreclosures in sub-prime loans are rising. The mortgage bond market is showing some signs of strain. About 3.3% of sub-prime mortgages made THIS YEAR are now delinquent by more then two months. Think about that for a second. Borrowers or lenders could not see (or did not care about) problems coming even a few months in advance.   About 38% of the most common sub-prime mortgages this year were for the full value of the home, up from 31% in 2005 and 21 percent in 2004, according to Bear Stearns. Sinha said 45.5% of the loans this year required "low documentation" of borrower income and net worth, up from 44.5% in 2005 and 40.1% in 2004.

One of the keystones that is crumbling is the sub-prime mortgage market which we highlighted in February this year.  A number of analysts, including Shilling and Mauldin, have now drawn attention to this segment of the housing market which is far more vulnerable and bigger than has been realised.  The inevitable collapse of the market will hurt these borrowers the worst and this will knock-on to social unrest in the run up to US elections in 2008.  Be ready for a choppy ride.  But if you are an international player, risks will be moderated by integrated global markets which will shrug off the US recession.  (For example, note the switch of funds flows from US to Europe illustrated by the Economist here.)

Concerns over this reorientation of global capital market activity have been addressed by US Treasury Secretary Hank Paulson. Speaking to New York's Economic Club, in his first major speech since he left his job as head of investment bank Goldman Sachs to join the US Treasury, Paulson said the 2002 Sarbanes Oxley Act, passed after a wave of corporate scandals, did not need changes, but that the way the law was enforced needed to be changed.  He noted that the US will review financial market rules to ensure the nation can still compete globally.  Some analysts fear that the rules have become burdensome, making it harder for the US to compete internationally and has underpinned the NASDAQ bid for LSE.  However, the US should not give up its reputation for financial propriety too quickly; as Paulson notes implementation is a better remedy.  (The lessons of Iraq on reputation should have been learned.)


Analysts say China's banking system continues to have widespread problems that could ultimately threaten country's breakneck economic growth. China's big banks have made too many loans for political or social reasons, rather than commercially sound ones, that may never be repaid.  While the government has sought to ease the problem by spending $400 billion since 1998 to cover bad loans, fears remain that banks are still burdened with many more troubled loans than they acknowledge. One example is the dispute between China Construction Bank and senior risk adviser who was fired in July and who repeatedly told top executives that up to $3 billion in bad loans might have been intentionally hidden from auditors.

Some of world's largest financial institutions are buying stakes in Chinese banks despite concerns.  And in November, a Citigroup-led investment team won the 24.3 billion yuan ($3.1 billion) bid for control of Guangdong Development Bank, capping a battle for the troubled southern China lender that lasted for more than a year. Citigroup and its partners, which will take a combined 85.6% stake in the Chinese bank, beat France's Societe Generale in a drawn-out process that tested Beijing's long-standing limits on foreign investment in its banks.  Citigroup is expected to take over de facto control of GDB but that could not be confirmed. Citigroup, top life insurer China Life Insurance Co. and China's State Grid Corp are each taking 20% stakes in GDB, making the issue of control a sensitive topic, particularly in China.  International Business Machines will take a 4.7 percent stake, while China's CITIC Investment and Puhua Investment will take respective 12.8% and 8% stakes.  GDB said it will work with Citigroup on eight areas including risk management, corporate governance, asset and debt management, human resources and financial innovation. GDB had more than $6 billion in bad debts at the end of last year which makes for a non-performing loan ratio of 25%(!), versus a country average of 8%.  Despite the loan problems, bidders were attracted by GDB's more than 500 branches and its foothold in Guangdong, which borders Hong Kong and is China's richest province. Citigroup already has 13 mainland outlets, including six branches. Citigroup  beat France's Societe Generale in a bid mostly driven by politics and tricks instead of business.  Some would say that this case shows that US business may understand Chinese politics and unofficial rules better than French, but the proof will be in the pudding - how many bad debts Citi will have to eat in order to digest their investment.  


Japanese consumer prices rose for the fifth consecutive month in October as unemployment fell, signs that its economy continues to strengthen.  But core consumer prices - excluding volatile fresh food prices - rose less than expected at 0.1% year on year. Japan's economy seems to be recovering after years of deflation and some analysts predict that Japan could raise interest rates before year end.  The Bank of Japan will be meeting in December, which could see the interest rates raised from the current 0.25%, set in July. The rate had been zero for six years before that as the bank struggled to counter the effects of deflation. Now, though, economic data looks healthy, with unemployment now at 4.1% and industrial output reaching a record level in October as it rose 1.6% from the previous month. 


Eurozone economic growth slowed in the three months to the end of September, according to revised official figures.  Q3 growth fell to 0.5% from 0.9% in the previous three months. The annual rate was unchanged at 2.7%, 0.1% higher than forecast. Analysts said that the growth rate, though slowing, was still strong enough to prompt an interest rate increase.  The European Commission raised growth targets, while higher rate of inflation was forecast in November.


In the UK, the government's Insolvency Service said between July and September 27,644 people went bankrupt or entered into Individual Voluntary Arrangements to manage debts. Overall, insolvencies are 55% higher than during the same three-month period in 2005 and are widely expected to top 100,000 for the entire year. Experts have blamed greater personal debt for the rise in insolvencies.   Also significant, the insolvency figures show that the proportion of people taking out IVAs has risen relative to those going bankrupt. 15,416 people went bankrupt,and 12,228 people entered into IVAs. A year ago, just over 12,000 went bankrupt and fewer than 6,000 entered into an IVA. The sharp rise in IVAs has been controversial. Some debt charities have criticised IVA providers for marketing them to people who would be better off either going bankrupt or coming to an informal arrangement with creditors.  There is little regulation and intermediaries, who get a fee, have been pushing them.  Comments at the end of this linked report offer good advice to those in difficulty.


High-income earners are being preferentially targeted by online "phishing" scams.  Phishing involves using e-mails with links to fake websites to trick people into revealing bank account numbers. The study, by Gartner, found that people who earn more than $100,000 received nearly 50% more phishing e-mails than lower earners. It also found that those on higher incomes lost on average four times more money than other victims.  Overall, the number of US adults who have received a phishing e-mail has doubled from 57 million in 2004 to 109 million in 2006. Overall losses from the attacks have risen to $2.8 billion. "The good news is that, this year, fewer people think they lost money to phishers, but when they did lose, they lost more," said Avivah Litan, vice president at Gartner. "The average loss per victim nearly quintupled between 2005 and 2006, and the thieves seem to be targeting higher-income earners who are also more likely to transact on the internet."


This piece of interesting research would be appreciated by Jim Montier, the top investment psychologist.  Research by Kathleen Vohs, assistant professor of marketing at the University of Minnesota, and colleagues, was reported in Science.  They conducted a series of nine experiments in which people were asked to do puzzles or other tasks and the behavior of people exposed to money was compared to others who were not prompted to think about it.  The two groups acted differently. "The mere presence of money changes people," Vohs said. Carole B. Burgoyne and Stephen E. G. Lee of the University of Exeter in England said in a commentary on the paper."Exposure to money, or the concept of money, elevates a sense of self-sufficiency, and can make people less social. Subjects exposed to the idea of money subsequently show more self-reliant but also a more self-centered approach to problem-solving than subjects exposed to neutral concepts".  It seems that the principal difference is that if money is on the mind people are individualistic, but if it is not, they cooperate - an interesting parallel to today's geopolitics.

Responsible Investing

The Economist delivered a welcome report on investing in clean energy. The hike in energy prices has launched this sector on a new trajectory, such that mid-western farmers are becoming biofuel energy barons, but the ride will be choppy as capacity grows. Don't ignore the risks is a key message and the report is worth a view.


A new report urges companies to pay closer attention to the value of nature's services, lest they suffer “major economic losses".  Natural systems provide a wealth of tangible and intangible services to business:- some $33 trillion worth of "free" deliverables a year, say experts. Those services include fertile soil, fresh water, breathable air, pollination, species habitat, soil formation, pest control, a livable climate, and a host of other things most companies take for granted.  The study indicates that many companies recognize the risks associated with degrading ecosystems and are trying to adapt accordingly, but most fail to associate healthy ecosystems with their business interests.  It warns that companies must transform business models and operations if they are to avoid major economic losses caused by the current degradation of ecosystems and the vital services they provide. Ecosystem Challenges and Business Implications, produced by Earthwatch Institute (Europe), the World Conservation Union (IUCN), the World Business Council for Sustainable Development (WBCSD), and the World Resources Institute (WRI), is based on global scientific facts and projections from the UN's multi-year Millennium Ecosystem Assessment and interviews with a range of business leaders to assess the implications and strategies needed to respond to environmental challenges.


Last week Merrill Lynch and the World Resources Institute (WRI) issued their second joint auto sector report in the Energy Security and Climate Change series, this time subtitled Alternatives for the Clean Car Evolution. As with the first, the report harnesses the strengths of both organizations. Fred Wellington and Britt Childs of WRI's Capital Markets Research team provide a comprehensive, in-depth overview of recent regulatory and market developments. Analysts offer perceptive investment insights and recommend specific stock plays in the auto sector in light of energy security and climate concerns.  The report is reviewed here by Social Funds.


The Global Exchange for Social Investment and VantagePoint Global published the final report “SIRIF Investment Risk Study”. The SIRIF study – an analysis of development investment risks and risk mitigation mechanisms – identified and tested risk mitigation mechanisms that could catalyze an increase in private sector capital in small and medium size enterprises and social enterprises  in emerging markets.


BankTrack, a nonprofit network monitoring the private financial sector, has published a manual offering the "do's and don'ts of sustainable banking", which  seeks to answer the question "what does a really sustainable bank look like?" according to the group. It follows the outline of the Collevecchio Declaration, released in 2003, which calls upon financial institutions to embrace six commitments (to Sustainability, to Do No Harm, to Responsibility, Accountability, Transparency, and Sustainable Markets and Governance). The group says the new manual should be seen as the updated implementation guidelines to the Collevechio Declaration, incorporating the latest thinking and expectations of civil society groups on the subject.

According to a report by consultants Ernst and Young and RDC-environment for the European commission's environment directorate, the European market for environmental goods and services is worth € 227 billion, equivalent to 2.2% of the EU's GDP.  The report estimates that the EU's environment industries represent around 3.4 million jobs. Traditional activities such as waste management continue to account for the vast majority of expenditure on resource and pollution management. This market is increasingly mature and is dominated by very large firms. More recent markets such as renewable energy and eco-construction are growing fast but remain fragmented, except for the wind power sector, which is being taken over by global energy firms. See here for the executive summary and full study.


UK consumers are spending more on ethical products - such as organic food and green energy - than on beer and cigarettes, according to the Ethical Consumerism report by the UK's Cooperative Bank.  The amount spent on ethical products hit £29.3 billion ($ 56.7billion) in 2005. The increase compares with retail sales of £28 billion for beer and cigarettes. Total "ethical spend" in 2005 grew by 11% on the year before, much faster than the growth of just 1.4% in overall household expenditure. Despite the rise, the proportion of ethical goods when viewed in the context of the typical shopping basket spend, remained small at 5% leaving lots of room for more growth.  Breaking spending down, ethical food, which includes organic food and free-range eggs, saw a notable increase, rising 18% above 2004's level to reach £5.4 billion. Spending on energy efficient electrical items, such as wind turbines and other green energy goods, climbed from £3.8 billion to £4.1 billion in 2005. The report was based on figures from the Office for National Statistics.

Last month's Business for Social Responsibility annual conference brought together 1,200 corporate responsibility professionals, mostly from large companies, to ponder the state of the art and the future of their field. As is increasingly the case, a variety of organizations used the event to launch their own reports and initiatives. And so we have The Conference Board’s survey of 198 medium to large multinational companies, stating that that corporate citizenship and sustainability are major sources of business opportunity and not only sources of business risk alone. And an annual corporate reporting award handed out by the UK consultancy SustainAbility, who also issued a report on the state of the art of corporate reporting, produced with UNEP and Standard & Poor’s. It found that the field of reporting is “extremely dynamic,” with new entrants publishing high-quality reports.

Tomorrow's Value is the fourth biannual report from SustainAbility that ranks companies according to their governance, strategy, management, and presentation of sustainability issues.   The ranking of leading companies, based on the quality of their sustainability reporting, has identified a shift from risk management towards an "entrepreneurial approach" to sustainability. UK telecoms firm BT headed the list of 50 leading reporters, half of which were new this year. A small but growing group of non-OECD companies made a strong showing, with two companies – South African miner Anglo Platinum and Hong Kong transport firm MTR – ranking in the top 10, compared with zero in 2004. While the majority of the leading 50 companies identified in the report still take a conservative, risk-focused approach to their sustainability strategies, 14 companies are developing and disclosing strategies that aim to exploit market opportunities.

Up until early November, UK companies were not required to file CSR reports. With the passing of the Companies Act; the largest bill to pass through Commons, directors will have to report on what they are doing and therefore, having to consider how it affects the community and environment. The Companies Act, some of which won't come in to force before 2008,  makes it mandatory for business to report anything concerning the welfare of the employees, community, environment and the company itself. It will allow shareholders and the general public to judge companies' performances.

50% of marketing and PR management believe that an organization's green credentials are important to customers; and 84% predict this importance is likely to grow further over the next two years as the impact of environmental issues continues to bite, according to independent research commissioned by GreenPortfolio, the environmental relations division of Portfolio Communications.  The research found being green cited as a key issue for staff, with 60% of respondents citing the importance of environmental credentials to employees.  Despite these findings, 72% of companies have no green marketing plans in place and only 33% have senior management buy-in when it comes to going green, highlighting a pressing need for much more green marketing planning.  The research, "Green Relations: the Communication Viewpoint," is based on 125 interviews with UK organizations. It reveals that being green is rapidly becoming a marketing 'must', with 58% of marketing and PR professionals believing this provides competitive advantage. Nearly half (48%) of the communication industry also believes customers are prepared to pay more for environmentally friendly products and services. Even so, legislation is seen as the biggest driver when it comes to improving environmental footprints with 80% of respondents believing organizations only take this seriously when they are legally required to do so, despite 97% feeling there is a moral duty to be environmentally friendly.

UK managers believe their current non-financial reporting systems are failing to focus their reporting enough on the 'most important' risks facing their organizations, according to new global research from Lloyds Register Quality Assurance. A mere 36% of UK businesses claimed their social, environmental and governance reporting is focused on the "most important" risks, a finding which raises questions for ethical investors about the quality and reliability of the current non-financial reports.  This continues the critical improvements highlighted by Paul Hawken in his review of SRI last year. In fact, according to the report , the research highlights the reactive, PR-led nature of current reporting:

  • Just 68% of UK companies believe their social, environmental and governance reporting is producing accurate data

  • And just 64% overall say they report good news and bad news in equal measure

  • One third (32%) agree that they currently report on too many issues

  • Just 54% of UK companies believe their business has a rigorous process for deciding what to report on.

Deborah Evans, head of corporate reporting and assurance at LRQA, said: “The business and investment community need non-financial reporting systems which allow them to accurately assess the real risks and how business is reducing them. Investors don't need data dumps and greenwash, but that's what many are still getting. "

A new survey finds that many UK pension schemes are not disclosing their socially responsible investing policies and practices, according to FairPensions, a coalition launched in 2005 including Amnesty, Oxfam, and WWF. The survey finds that only five of the UK’s 20 largest pension schemes disclose policies on social and environmental responsibility and only of 20 discloses proxy votes.

BP has been in the news because of a Texas refinery explosion that killed people, and, like the spill in Prudoe Bay, was caused by poor maintenance.  BP, whose profits have ballooned in the last three years like all oil companies, obviously has a culture focused on profit to the exclusion of care.  The company deserves to be disciplined because it has put profit before people, and that is to be blamed on the top management who must take responsibility for the company culture.  Unfortunately, as usual, the gang leader will get away with the gold, while the troops (employees) and allies (shareholders) suffer.

Dexia Asset Management published their quarterly newsletter “Looking Ahead” which focuses on SRI and sustainability analysis.

BusinessWeek carried a special report on microfinance prompted by the Nobel award to Mohamed Younis  You can read it here.  For your information we also have some microfinance resources here.

Venture Capital

Hedge funds have been under scrutiny for some time now, and as performance drops they are becoming a less hyped opportunity.  Private equity firms are also getting increasing scrutiny as regulators question the ethics of their market behaviour.  In early November the UK FSA, a well respected regulatory authority issued a report on PE firms.  While it sees the need for closer surveillance of the biggest firms and in certain areas, it sees no great risk to the market.  Similarly the European Central Bank is concerned over the exposure of some banks to buy-out vehicles, but believes it is not of a scale to warrant regulation yet. 

The following list is extracted from the Ethical Corporation Special Report on Financial Sector Responsibility, published in November 2006. The full report, sponsored by PricewaterhouseCoopers, can be downloaded for free at: www.ethicalcorp.com/fsr   They ask if financiers are Villains or angels?

· Hedge funds are growing in size and power, buoyed by institutional money.

· Not all funds fit the mould of destructive wheeler-dealers but some raise concerns about stock price fluctuations, transparency, and short-termism.

· Critics of the industry are demanding greater transparency and regulation.

· Private equity firms have benefited from short-termism, snapping up companies that want to escape public markets.

· The jury is still out on what private equity means for corporate responsibility, but the indications from some companies are not promising.


The McKinsey Quarterly published an interesting paper on family businesses.  It says that family-owned companies run by outsiders seem to be better managed than other businesses, while family-owned companies run by eldest sons tend to be more poorly managed. These are among the findings of a McKinsey study of 700 manufacturers in France, Germany, the United Kingdom, and the United States. Moreover, the relatively high share of family-owned businesses managed by eldest sons in France and the United Kingdom accounts for a sizable proportion of the lower level of managerial quality (and perhaps of performance) than in the United States and Germany. Family-owned businesses should pay more careful attention to succession planning and resist the temptation to hand over control to a designated heir.  Closer examination of the paper indicates that the variability of performance os greater for family run business, than non-family run family business.  This suggests that professional training and selection of the heir results in better performance than non-family run family business, but entails the added diligence early on.


The Times reports that early two thirds of companies based in the United States that have listed on the Alternative Investment Market over the past five years have lost money for investors.  Only 17 out of the 46 companies from across the Atlantic that raised capital on London’s junior stock market between 2001 and July this year are currently trading above their issue price. While America’s post-Enron Sarbanes-Oxley legislation has widely been seen as positive for the City in driving US business towards London, The Times’s analysis lays bare the heavy cost for burnt investors. US companies raised £1.8 billion of new investment on AIM.


Which element is matching gold for price appreciation?  Hedge funds are quickly making uranium the energy investment of choice as a worldwide shortage and growing demand pushes its value beyond its six-fold gain since 2001.  Nuclear power producers are paying record prices for the ore that fuels 16% of the world's electricity. The spot price of uranium has advanced an average of 45% per year over the past five years, based on data from Georgia-based Ux Consulting Co. Experts forecast that uranium, valued at a record $60 per pound last week, may break $70 by this January as a renewed interest in nuclear power worldwide drives demand even higher. Some forecasts predict uranium's value to hit $80 or even $100 per pound.


Blue Horizon Organic Seafood Co., an Aptos, Calif.-based supplier of branded and private-label seafood from environmentally-sustainable sources, has raised an undisclosed amount of private equity funding from Greenmont Capital Partners. 

Hawkeye Holdings Inc., an Iowa Falls, Iowa-based ethanol producer, has withdrawn registration for a proposed $350 million IPO. It previously had postponed the offering, with CEO Bruce Rastetter saying: "We have decided to temporarily delay our IPO in light of current conditions in the equity markets, and the recent pullback in the energy segment in particular, which are not conducive at this time to achieving appropriate valuation." Credit Suisse, Morgan Stanley and BofA were to serve as co-lead underwriters, while Thomas H. Lee Partners holds a 79% pre-IPO position.


Interest Rates and Currencies

While it is unlikely that US rates are going to be increased again (although that might make the currency more attractive) it is unlikely that they will be reduced soon because inflationary pressures remain. The US economy is under pressure as manufacturing and housing seem depressed with inventory buildups.  It is a difficult path to walk when stock markets are up and housing is down, when manufacturing is under pressure but inflation is also felt.  Fortunately, the increasing diversity of the US economy and its integration with global markets will take some volatility out of the economy, but it remains that asset allocators should be selective and focus on risk management rather than solely high returns.

The dollar plunged to its lowest level against the euro since April 2005 amid concerns for the US economy.  Lurking behind the dollar’s depreciation is the expectation by some that a slowing American economy will force the Fed to begin cutting rates next year.  The euro surged past $1.30 against the dollar, with many other currencies following suit. Sterling rose almost 1% to $1.93, the yen hit a two-month high and Russia's rouble rose to a seven-year high.  Expectations that the European Central Bank is once again about to raise interest rates gave a lift to the euro.  Recent figures showing an unexpected rise in German business sentiment - its seventh quarterly rise in a row - also helped. So did French data showing that business confidence held at five-year highs in November. Against the backdrop of a European Central Bank that seems likely to tighten rates further next year, the appeal of dollar-denominated assets is falling as the prospect of higher returns in Europe rises.

Speculation has intensified recently that central banks could begin selling off dollars to avoid being burned if the dollar collapses. It is said that foreign central banks have too much at stake to allow a rout in the dollar to develop. But there are other views. Most central banks do not own US dollars as an investment but as liquidity insurance; they are less concerned about swings in the value of foreign exchange as long as they still provide liquidity insurance. Central banks who do care about volatility may consider that they are part of a "game" where their losses are maximized if they are the last one holding dollars and minimized if they get out first.

Also, the argument that the US$ is the quality currency has lost weight because recent US$ volatility, US$ depreciation (which depreciates foreign investors' assets), the fundamentally better structure of the Euro (less correlation among components), the growth in non-US$ oil trade (i.e. Iran and Russia) and inevitable dominance of Chinese Yuan and Indian Rupee.  All these trends will increase in importance and currency holdings will become diversified.  Any flight to quality will not be dominated by US$, except for US investors only, and increasingly the larger ones must diversify currency balance sheets to match international assets.

But it is also unlikely that the dollar will suffer a rout because significant holdings are in the hands of central banks in China, Japan and the Gulf. They are less likely to rush a liquidation than are private investors. In both political and financial terms, they know that a dollar collapse would not be in their interest and they will aim to manage the adjustment in a steady, careful way.

China's huge reserves of foreign currency are now touching a trillion dollars as the country continues to pile up cash from its booming exports. China's reserves are now the world's largest, and some economists blame them for global financial imbalances.  They may also contribute to low interest rates which have sparked property booms in many countries, including Ireland. Instead of spending these earnings at home, China and other Asian nations recycle them back by keeping them in foreign assets, usually US dollar ones, adding to liquidity in the western world and financing US consumption and growth. In November, a Chinese government spokesman promised the country will use its foreign reserves in a responsible manner that will not destabilise global markets.  China will gradually diversify its reserves away from the dollar into currencies like the euro to guard against foreign exchange risks. Inevitably China will also let its currency rise gradually. In fact a US slowdown might be absorbed by China as it might consequently increase domestic consumption.

While the US may stumble next year, do not imagine that US demand is required for the growth of emerging economies like China and India.  Internal demand is high and growing, and intraregional trade is significant.  And these relationships are growing as we see in November diplomatic missions between India and China and between Africa and China.  So a cheaper US would not dampen demand for emerging market production.  It is also unlikely that demand by America for increasingly costly imports will slow much because these emerging economies are still the low cost producer, by a significant margin (say $10 per day vs $ 100 per day).


The Bank of England increased UK interest rates to a five-year high of 5% because of inflation concerns.  Its 0.25% rise was widely expected by analysts.  Inflation, led by higher utility bills, is currently running at 2.4% - more than the government's 2% target.  The rise will be bad news for some mortgage-holders and borrowers, who will see their monthly repayments rise.


Trade and FDI

Leading on from the discussion above, the US trade gap will be one of the major issues that Treasury Secretary Henry Paulson and other top Bush administration officials discuss in December when they travel to China.  Paulson, along with a delegation that will include Ben Bernanke, Fed chairman, is expected to press Chinese officials on a number of economic issues, from cracking down on piracy to allowing the Chinese yuan to trade more freely in currency markets. (A recent speech by Paulson outlining US trade policy is here.)


Big news on the trade front was the China-Africa trade summit and a visit by China's premier to India.

More than 40 African heads of state and ministers met in Beijing for a summit with China on trade and investment.  Trade between China and Africa has increased tenfold since 1995 and China's business with Africa has tripled within a few years, reaching more than $ 40 billion in 2005.  Starting from a base of $ 10 billion in 2000, is expected to touch $ 50 billion this year. Oil, minerals and other natural resources, and Chinese-made weapons make up most of the trade.  China has also used the summit to negotiate several deals with African countries. The Chinese state oil and gas firm Sinopec will start preliminary explorations for oil in Liberia, and China's Sino Hydro Corporation is in negotiations to build a hydroelectric dam in electricity-short Ghana.  Officials have said that up to 2,500 separate business deals could be under discussion during the summit. Many of them are expected to revolve around China's hunger for African mineral resources, particularly oil.  China's supporters point to the fact that it has invested billions of dollars in aid, cheap loans and helping to upgrade roads, ports, railways, telephone lines, power stations and other key infrastructure across Africa. Often, Chinese money is funding projects that Western investors had deemed too risky. Many economists argue that overall, China's growing economic ties to Africa are benefiting the region. China is able to offer African countries loans and contracts at prices greatly reduced compared those available from western lenders.   Indeed, the statistics show that China is already in a strong position. Beijing is Africa's leading lender this year ($8.1 billion), out-stripping the World Bank ($2.3 billion), the US ($3.5 billion) and France ($3 billion). China is one of the continent's top three trading partners and, for many individual African economies, the leader in foreign direct investment.   This leadership position is set to continue and grow. China aims to double its overseas development assistance to $1 billion by 2009, raise trade levels and organise a further $5 billion in loans. What China gets from all this African-Chinese solidarity is pretty obvious – business, trade, exports and access to raw materials and oil free of the problems of the Middle East.

Hoping to build the relationship between China and India into a more trusting one, the Chinese President flew to India for a four-day visit. Hu Jintao and his wife touched down in New Delhi for discussions of a range of bilateral and global issues. Hu and the Indian Prime Minister, Manmohan Singh, aim to sign around 10 agreements over a range of issues, including trade, education and health. Trade between the two countries will probably exceed € 15.6 billion this year. China has about 30 projects in India, the largest number Beijing has in any country abroad. Talks on the decades-old border row between the Asian giants was also on the agenda and, in an attempt to boost levels of confidence, a so-called hotline between the foreign ministers will be set up. 


Europe is surpassing the U.S. and Japan in the race to reap benefits from the explosion in world trade and investment.  The continent is claiming a bigger share than the U.S. of the increased trade with fast-emerging markets such as Brazil, Russia, India and China, say economists at Goldman Sachs. Companies such as French retailer Carrefour SA and German software maker SAP AG are winning customers in emerging markets at the expense of rivals based in other regions.  ``It raises eyebrows when people hear it, but Europe is doing well from globalisation and greater trade,'' says Erik Nielsen, chief European economist with Goldman Sachs in London. ``It stands to benefit much more in the future.''

Investors have already taken note, with global fund managers naming the dozen-nation euro area as their preferred stock market worldwide for six straight months and forecasting more gains next year, according to findings in a Merrill Lynch & Co. survey published this month.


The Progressive Policy Institute pointed out some interesting facts from the WTO's annual statistical report just released which finds world exports reaching $12.5 trillion last year. This is nearly 30% of $44.5 trillion of world GDP, based on currency comparisons, or about 20% of the world's $65 trillion GDP, based on purchasing-power-parity measurement. Either way, it is the largest ratio yet measured, nearly 50% above the 1980 level.

And surprisingly, Germany is the world's largest goods exporter at $970 billion. The United States is second at $900 billion, and China third at $762 billion. Including services, the United States reclaims the lead at $1.275 trillion, with Germany second at $1.1 trillion, China third at $850 billion, Japan fourth at $700 billion, and the United Kingdom and France roughly tie for fifth at $570 billion. (But if the EU is considered a single economy, it leads the field easily, even excluding intra-European trade - another reason to watch for increasing use of the Euro by central banks.)


Activities and Media

November can be a good month for us because the garden season slows briefly.  However, there are other projects that seem to pick up any slack immediately.  December, which should be quite is beginning to look busy with perhaps more travel than I'd like.

Gradually we are implementing changes to various changes to our website and expect to have new features early next year.

The Mayan Calendar and the Transformation of Consciousness by CJ Calleman is worth the read for the unusual perspective it delivers: that consciousness is affected by cosmic rhythm so much that without realising it we make decisions based upon that rhythm rather than purely what we understand to be free will. Do not be put off by some subjective conclusions but allow yourself to understand the idea he presents.

Also I must recommend Maverick by Ricardo Semler. The story of Semco in Maverick winds down about 1986. At that time I was in the best business school (Wharton) studying management with the best faculty (eg Tiffany) yet not a word was mentioned about these systems that had been introduced and made Semco one of the top performers in Brazil, although its in a tough business with lots of international competition. We now read of some companies, like BestBuy, introducing similar "novel" open strategies. If you want to get a jump on the competition, buy the playbook. Its a fun story too.

There are some video features on Global Warning here: http://www.stopglobalwarming.org/sgw_features.asp

"The Meatrix 2.5" One of the most popular and entertaining flash video series on the internet has just released its third chapter. Watch these colourful cartoon characters uncover some of the major problems inherent with factory farmed meats. http://www.moremeatrix.com/

The Ecologist has loaded a number of interesting podcasts on to its site: http://www.theecologist.org/podcasts.asp  Included topics are nuclear power, why Siberian real-estate might be a good option and Jeffrey Sachs on 'the Search for Sustainable Living'.





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