If you read my blogs  on Jan 11 and 12 at this website, you will be able to follow my train  of thought.

Dr Van (Anantha Nageswaran),  the Chief Investment Officer, Bank Julius Baer, gave the keynote address to those invited to the gourmet lunch.

His outlook for 2011  is not too far from that of UBS , such as:

1.       Economies:  The global cyclical backdrop is expected to be more unsynchronized, with a multi-speed growth pattern.  Growth will be predominantly in emerging economies while the Americas and Europe will remain below pre-crisis levels.

2.       Equities: A constructive medium term outlook on equities with a combined  benign  inflation and low GDP growth is attractive for equities, especially in emerging markets.

3.       Money Market & Bonds: Central banks in many emerging economies are tightening policies too slowly in the face of inflationary pressure due to their robust growth.  This overall liquidity backdrop creates a headwind for benchmark government bonds in 2011.

4.       Currencies: The major currencies such as EUR, USD, JPY and GBP would  remain low-yielding in 2011 and perform poorly. This also creates supportive backdrop for carry trade strategies.  The CHF  is expensive but enjoys a solid economic backdrop such as current account surplus and a balanced budget. The CNY would appreciate steadily as the Chinese government reins in inflation.

5.       Commodities: A steady global recovery, liquidity, erratic weather condition should provide support for commodities such as precious metals to energy to agriculture. Gold is still preferred.

Q&A- Moderators: Dr Van & Dr Lee Boon Keng (Co-Head Investment Solutions (ISG) & Dy CIO Asia Pacific, Bank Julius Baer.

Q by me: I made a statement that a couple cannot buy a second home on loan in China to curb the housing bubble.  To circumvent this ruling,  most couples would ‘pretend to be divorced’.

A by Dr Lee: I would like to add to what you said.  Most couples also  resort to  using  their mothers’ names  to buy the second home under loan.

On the question of having children in China, Dr Lee revealed that in the rural areas, there is no restriction but in the urban cities, couples can pay the penalty of USD20,000 to have a second child.

My personal take is that since China is now an economic success story, couples should be allowed to have as many children as they wish as long as they can afford to give them a good standing in life.  Singapore which used to have a 2-child policy has now been more flexible too.

Annoucements:

1.Bank Julius Baer announced today the appointment of David Lim, a Singaporean, as CEO Bank Julius Baer Singapore with immediate effect.

2.Onshore private banking needs “critical mass” to make money, the head of Julius Baer Group Ltd.’s French-speaking region in Switzerland said in an interview in L’Agefi.

“We want to show that an onshore presence can be profitable,” Remy Bersier told the Geneva-based newspaper. “That can only be done in specific markets because it involves a critical mass.”

I shall be attending another such event next week and hope to add more then.

With the game-changers in global markets in 2010,  financial institutions are changing their perspectives in 2011.

UBS is taking the lead to set  up a team to understand the needs of  UHNW  (ultra high net worth) clients in the Asia Pacific region.

With emerging markets in this region, there are now ultra high net worth individuals  who have businesses across the region or globally.   They travel frequently and have a good understanding of investment opportunities.  They usually have family members across the globe, and are very sophisticated .  They require a different level of advice and expertise only available at global integrated banks.

These  UHNW clients fall into three tiers:

1.       Investment

2.       Business

3.       Family needs.

UBS  has this team under Amy Lo,  its Regional Head for UHNW clients.  The team will be specially trained and supported by dedicated UHNW competency teams which leverage expertise across Wealth Management, Investment Bank and Global Asset Management businesses.

She explains that to be competitive, UBS must have a model capable of the following:

1.       Accommodating the local regulatory environment

2.       A broad geographical footprint in key markets

3.       A robust approach to managing risk without sacrificing agility

4.       Access to a  deep pool of talent

5.       A broad product offering

6.       A strong and trusted brand name

She has the vision to translate building a sustainable and high-quality wealth management business which creates value for its clients.

MY  TAKE

With memories of LTCM and the rogue trader of Barings debacles still fresh in our mind, I rate risk and money management top criteria in any investment strategy.

According to Dr Andreas Hofert, Global Head of Wealth Management Research, UBS, in his talk last night at the Ritz-Carlton, he summed up that no investment should be considered ‘safe’ as inflation and currency weakness for indebted nations loom.

Investors have to reorient  their perception of  ‘safe’ fixed income investments.  When the facts change, investment strategies should also change.  As traders, this is what we believe and do too: when the market changes direction, we need to reorient our strategies.  We must use intuition not ‘into wishing‘ , as most novice traders tend to do.

What else should we do? This is the question posed.

2010 was a year of reasonable returns for most investors but the investment environment in 2011  will be shaped by difficult political choices, a choice of three options or ‘trilemmas’ where only two can have favourable outcomes at the same time and where one will have to give.

If political uncertainties exist, some economic certainties remain, as the gap between weaker and stronger economies and their divergent growth paths becomes more evident in 2011.

The US, long the engine of world economic growth, is in the camp of the weak economies, while China and its South-east Asian neighbours are in the camp of  the strong economies, including commodity exporters, Canada, Australia and Brazil.  UK, France and the Mediterranean countries are struggling while Germany, Switzerland, the Benelux countries and Scandinavia are pulling ahead.

Following from this, we see the selection of fixed income and currency investments preferred in stronger economies whereas equity exposure continues to be directed to the world’s stronger growth regions.

Investments into so-called assets like equities, commodities and real estate  could be looked into.  The European debt crises is not over yet and financial markets are dividing debt in the region into safe and unsafe. European peripherals like  Portugal and Greece have small economies and therefore have limited  impact on  the global economy. But the big economies like the US, France, Japan and the UK are worrying. At the other end of the scale, Switzerland, Sweden, Germany and several emerging economies look well prepared for the challenge ahead for 2011.

Stay tuned for more soon.

Two speakers  of UBS flew in : Andreas Hofert  from Switzerland and Yonghao Pu from HK.  They both paint a cautionary tale for 2011 for both developed and emerging markets.

Mr Pu was very humourous  in  his presentation:  digging at Singapore eg: Singapore wants mainland Chinese money     to be spent in Singapore, in luxury goods and especially at the casinos.  The Chinese with money love Singapore for its good infra-structure and clean air but HK  has more ‘life’  and this poses a dilemma where to invest in a second home!

Another dig was at the world accusing the US, Western countries , Tokyo of printing more money; but no finger was pointed at China which was also printing money like the others.

The best joke was about China prohibiting married couples  from buying a second property on loan ;  the smart ones ‘pretend to be divorced’ to circumvent this rule and to buy a second property on loan!  The audience was in stitches.

Now to the serious notes.

Views By Andres Hofert:

Deflationists camp stress points to the lingering credit crunch from stressed financial sectors, the conspicuous slack in economic activity due to rising unemployment.

The inflationists camp stresses the impact on prices of surging government debt and overactive money-printing.

Both scenarios present opportunities and risks, and it is vital to understand which asset classes tend to outperform under each condition.

One can say that an investment that is positive in an inflationary environment is negative during deflation.

Those who expect inflation are best to stay with consumer-discretionary and capital-goods stocks, inflation-linked bonds and the euro.

Those expecting deflation will benefit from healthcare, energy and insurance stocks, nominal government bonds, the dollar and the yen.

Gold should prove resilient either way, given its status as an alternative currency.

Against this backdrop, global investors should diversify, as not all markets and regions experience the same level of inflation.

Investors in the West may want to invest in emerging markets in Asia, which reflects inflationary trend.

Views by Yonghao Pu:

Both East and West can take advantage of this investment opportunity. Those who believe in deflation have sheltered in government bonds, while those in the inflation camp are venturing into risky assests eg stocks, gold and real estate.

He believes the more accurate scenario is the world is now in a ‘coflation’ period; developed markets suffer deflation and inflation, while emerging markets experience inflation.

Investment opportunities exist across the board with a clear bias towards emerging markets.

Real estate is most likely to perform best as it is the least affected by global factors. Favourable local conditions have a positive effect on property prices, and with low interest rates, investors in emerging markets are likely to channel funds from deposits to property.

Result: virtuous circle of rising asset prices reinforcing local inflation, and high inflation expectations spurring buying activity.

Emerging market stocks should also strive such as department stores and automakers and luxury goods companies.

Fixed-rate credits, will prove attractive amid falling government bond yields.

Growing emerging market demand does not translate to higher commodity prices eg crude oil. Some agricultural commodities have good prospects, eg gold, with its safe-haven status.

Selective currencies eg from China resists appreciation while that of India is more tolerant.

Caveat:

If inflation rises in emerging markets as deflation ends in the developed world, aggressive monetary tightening in both economic regions will follow.

This will lead to high borrowing costs and end the liquidity-driven asset-price inflation in emerging markets.

The Fed will probably raise rates when it sees an end to deflation.

This is the key development to watch out for.

Enjoy

http://www.socionomics.net/hhe/video/stream/flash/default.aspx?page=2

Introduction & Closing video clips at MND for Phillips Capital yesterday
http://www.youtube.com/watch?v=LkqE5K9ouNQ
http://www.youtube.com/watch?v=RmNeB1u6_rc

Also at
http://www.facebook.com/pages/Dame-Anna-Wang/122670284422930?ref=s

Bob Eisenbeis is Cumberland’s Chief Monetary Economist. Prior to joining Cumberland Advisors he was the Executive Vice President and Director of Research at the Federal Reserve Bank of Atlanta. Bob is presently a member of the U.S. Shadow Financial Regulatory Committee and the Financial Economist Roundtable. His bio is found at www.cumber.com.  He may be reached at Bob.Eisenbeis@cumber.com.

On April 12, David Kotok penned a commentary about the runs and shifting of euro deposits from Greek banks to other euro zone banks where the questions about the ability to honor guarantees are less problematic.  He pointed out the importance of credibility in honoring those guarantees, by contrasting depositor reactions in the UK and US with the destructive policies followed by Argentina as they abandoned their currency peg and devalued their currency.  Another historical aspect of US deposit insurance policy is relevant to the current Greek problem, and that’s our experience with state-sponsored deposit insurance funds.

The US has had a long history, going back into the early 19th century, with decentralized state-sponsored deposit insurance systems that were not backed by the federal government.¹ This includes the New York safety fund system; funds in Vermont and Michigan that were established in the 1800s; and funds in Oklahoma, Kansas, Nebraska, Texas, Mississippi, South and North Dakota, Ohio, Maryland, and Rhode Island that were put in place in the early 1900s.  All of these programs failed within a few years.  Most recently this happened to the Maryland and Ohio deposit insurance systems in 1985 and Rhode Island in 1991.  In each instance the schemes were unable, because of numerous critical design flaws, to meet their promised obligations when faced with unusual demands for funds when either a large financial institution failed or numerous smaller institutions simultaneously experienced difficulties.

First, the systems tended to be critically underfunded. Second, they were undiversified, either because the institutions were confined to a relatively small state and hence were vulnerable to regional business cycles or economic shocks, or because the failure of one or two large institutions was sufficient to bankrupt the funds. Third, they often had poorly designed governance systems, and this was particularly the case in the privately sponsored plans. Finally, when threatened with collapse, there was not the recognition that what provided credibility to the plan was not so much the size of the fund but the willingness of the sponsoring entity – in each case, the particular state legislature – to make good on the guarantees the fund offered.

Many of the same design flaws in these state-sponsored systems appear to be inherent in many of the systems that have been put in place in the European Monetary Union.  Any fund whose insured base is not adequately diversified or that does not have the ability or willingness to use taxpayer resources, should fund resources be depleted, will not likely stand up to the costly failure of a few large banks.  There are numerous European examples, both inside and outside the EU.  These diversification issues are especially important in those EU countries with only one or two major institutions, where the failure of even one might endanger the entire fund.  Smaller countries, in particular, with only a few relatively large institutions are more likely to experience funding problems than larger countries.  At a minimum, this means that reliance upon private or quasi-private deposit insurance systems, which the EU directive permits, seems extremely risky.  Moreover, even when a fund is private, this may not insulate taxpayers from fiscal responsibility, especially when the fund is jointly managed with both private and public officials from either the central bank, ministry of finance, or supervisory authority.  Government involvement – either explicitly or implicitly – raises the perception of implied government backing, even without official recognition of that responsibility.

What most architects of deposit insurance schemes seem to miss is that it is nearly impossible to determine ex ante whether a fund is adequately funded. More importantly, what gives the fund credibility, especially when the financial problems in one institution threaten to spill over to others, is not the size of the fund per se but rather the willingness to make good on the guarantees, should the fund run out of resources.  The differences in arrangements within the EU raise considerable questions about how responsibilities will be handled in the event that a fund gets in trouble.  For example, some schemes are supposedly fully funded, some are only funded with ex post premiums or levies, some can make special assessments on their members over and above normal contributions, some can borrow from the public or central bank, and some funds, such as in Latvia, have an explicit provision committing the government to provide funds.

In the case of the Ohio Deposit Guarantee Fund, Professor Edward Kane points out that political waffling and legislative delay was a major problem.  But delay and avoiding recognition of losses applies to federally sponsored programs as well, as the US experience surrounding the eventual collapse of the Federal Savings and Loan Insurance Corporation demonstrated. The protracted negotiations over the Greek situation reflect just such delay and avoidance on the part of the Greek government to confront realistically its fiscal situation, and this has cast doubt over its ability to meet its deposit insurance commitments.  Reports now suggest that the Greek rescue package may involve up to 90 billion euros, which indicates that Greek financing needs may be greater than required to simply roll over its debt.

The circumstances surrounding the ODGF crisis also point to another problem related to the split of responsibilities for systemic risk between the member countries of the EU and the ECB. Specifically, the longer the delay in attempting to deal with the problem, the more likely it is that runs or systemic problems will develop that would convert what might be a problem in one institution into a problem for the deposit system itself.  Individual member nations’ regulatory and legislative authorities, to the extent that they may be reluctant to impose costs on their own taxpayers, have incentives to delay and gamble that a broader authority will step in and assume the responsibilities for a crisis.  In fact, this gamble has paid off – at least temporarily – as Germany and other countries have stepped up.  The current EU problems illustrate what can happen when there is confusion over the role of the central bank – in this case the ECB, which appears to have been marginalized for the moment – and there is no centralized deposit insurance system or federal taxing authority.

In Ohio, the losses to the ODGF amounted to about $170 million, which was more than the state legislature was willing to appropriate to make good on the guarantees implicit in its state sponsorship.  As a result, the FDIC stepped up and institutions were permitted to substitute FDIC insurance for that of the ODGF.  Interestingly, research has also shown that depositors were able to distinguish between the quality of deposit insurance available to them, as Greek depositors are exhibiting today.

The Ohio episode illustrates two facts. First, it is the ability to tap into taxpayer resources as needed, rather then the size of the fund, that provides the credibility of the deposit insurance guarantee. The initial reluctance of the State of Ohio to live up to its commitment provides an interesting comparison to many of the countries currently in or entering the EU.  Ohio’s state gross domestic product (GDP) in 1985 was $176 billion. This is larger than 8 of the original EU countries’ GDP, including: Austria, Belgium, Finland, Greece, Luxembourg, Netherlands, Portugal, and Spain. It is also larger than the real GDP of all the newly admitted countries to the EU.² I would also point out that Ohio doesn’t maintain an army, a navy, an air force or a diplomatic corp., all of which provide additional drains of available public resources.

It is not clear why countries with even smaller resources would be more willing than a relatively richer state like Ohio to honor their deposit insurance liabilities, especially if payments were to be made to resident depositors in other, larger EU countries. The temptation on the part of poorer counties and their politicians may be to gamble, in the hope that they will be bailed out by the ECB should a major crisis arise.  A chief difference, of course, between the resolution of the ODGF crisis and a potential deposit insurance crisis in the EU is that there is no federal deposit insurance fund in the EU to which losses could be shifted.

From an investor’s perspective, how things are playing out in Greece should be no surprise.  The unfolding of the saga and the pending problems in other EU countries show that the recovery has a long way to go, and illustrates why we at Cumberland selectively have shied away from countries like Greece in favor of others like Germany and the Netherlands.

¹This commentary draws extensively upon an appendix in a paper I coauthored with Professor George G. Kaufman entitled “Cross Border Banking: Challenges for Deposit Insurance and Financial Stability in the European Union,” which was presented at the Third Annual DG ECFIN Research Conference, “Adjustment Under Monetary Unions: Financial Markets Issues,” September 7 & 8, 2006, Brussels, Belgium, sponsored by the European Commission Directorate General Economic and Financial Affairs, Economic Studies and Research.

²As of 2008 the GDP of Ohio was still greater than that of Greece.

Bob Eisenbeis, Chief Monetary Economist

A Hearing Case!

I have just been asked to write a short blog as our mentor has a ‘hearing case’!

He just realized that instead of taking 1 tablet every 4 hours, this is his gaffe.

Quote:

One of the tablets is Zovirax which I am supposed to take ONE every 4 fours. Instead today, I took 4 every four hours! No wonder I have been feeling off today! I told Chris, I was feeling off and she told me I was overdosing!  Unquote

This is a common dilemma with students, not ‘listening’  to what should be done not what they do instead….LOL.

My personal feeling is our mentor loves wearing his Bluetooth in his ear which adds to the over  exposure to radiation that we are already exposed to, such as, the electric clock by our bedside, the desktop or notebook, the TV  etc  – we are too wired and this is not good for our health, ask Dr Khoon Ng!

Let us pray that it is a viral infection and not a tumour!  Our mentor has finally put away  his Bluetooth. Tinnitus or ringing sensation in his ear will hopefully go away with the antibiotics.

Please join me in wishing Ray a speedy recovery and a steady not rolling gait!

Just received from Amazon

http://www.snap-scan.com/us_bk_nature+of+trends.html

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