Observations Looking Forward

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Observations Looking Forward

1. Barometer of increasing uncertainty continues to creep up

2. Money centered banks are largely frozen in their tracks.

In this environment then, why haven’t more people been able to borrow cheap, long-term money? Partly because the decision making process is under assault in large money centered banks. Top management is afraid to make any decisions. It looks more like game of musical chairs if not Russian roulette. The vilification of Jamie Dimon, the nation’s most astute banker shows that Washington would rather throw flames of blame than truly understand the underlying issues. As a result, rational capital allocation is largely paralyzed in the financial system leaving the horizon widely open for hedge funds and private equity firms. 

3.    Ending the big anomaly.

Portfolio managers were rewarded for years for nothing but parking in bonds. Before that, for nothing but liquidity. Now with cash being boring and bonds potentially dangerous, money is going to be rewarded for going back to work. This is happening worldwide. Productivity now really matters, not just being clever.

Perhaps the most important question looking forward is understanding what will foster further economic growth and most importantly employment throughout the world? Why is job growth slow in the western world when interest rates are flat or even negative? Perhaps the answer is that government policies create more confusion hence hesitation when they should be focused on clarity and as a result a sense of opportunity.

4.    The disastrous management of municipal affairs

Puerto Rico as well as Chicago and numerous other cities have shown that elected officials have been unable or unwilling to deal with any serious problems in heavily unionized cities, while elsewhere in Houston, Dallas, Atlanta, Charlotte, and San Francisco, jobs are being created and new entities formed in places where politicians get there act together.

In some ways, US looks like Asia, where different cities have dramatically different prospects- Singapore vs Manila. The difference here is that they all have the same passport and fiscal code. How will democracy deal with it?

5.    Tokyo a role model for Washington?

Historically low interest rates from Tokyo, Inc. and Washington, Inc. are making NPV calculations of future interest rates almost meaningless. Central banks have run out of ammunition. Traditional tools of monetary policy are exhausted. Quantitative easing and bond buy backs may no longer be effective options. Does anybody have experience, understand the impact of negative interest rates? This is an economic vortex.

6.    Management focusing on distractions

In many areas we see evidence that management is focused on distractions - tinkering at the perimeter rather than focusing at the core. Airlines charging extraordinary premiums for anybody who dare change their mind. Cable and phone companies with bills that are so complex with so many lines of service fees that citizens simply cannot comprehend but they are paying for basic services. Many of these actions produce minor revenue gains but are in fact distractions and serve to alienate customers rather than embrace them.

8.    Environment

The politics of environmental thinking is likely to get larger. Witness Leonardo DiCaprio’s impassioned speech when he won the Oscar for Best Actor.

9. Status Quo No More

The astonishing developments in the U.S. primary elections suggest that people are fed up with the status quo and are looking for something that they can believe actually works. This can have very interesting implications if played out across the political arena. The ability to finance and finesse deficits by kicking the can down the road has meant that the politicians have not been adroit in resolving but rather adroit in sidestepping major issues. Is it true that the population in the USA is getting fed up with their politicians ??? Finally??

The Wall Street Journal’s editorial addressed it with a new insight bypassing partisan politics calling it the increasing distance between the protected and the unprotected. “The protected make public policy, the unprotected live in in. The unprotected are starting to push back, powerfully.” The article continues, “more to the point, the protected are protected from the world they have created.” Voters across both sides of the aisle have noticed and are venting their frustrations not only in the unprecedented dialogue between Bernie Sanders and Donald Trump but also in Europe, UK and increasingly so in China. History has showed us that long standing political rivalries (ex. Tory vs Whig) can disappear and new ones sprout out of popular awakenings. When I was a child the only political party defined by a color was Red - Communism. Who would have thought that a brand new color choice could define a political consensus – Green. A political power base that transcends national boundaries with unprecedented efficiencies.

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What We Have Learned

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What We Have Learned

1. Libraries

For millennia, information in books was physically located in libraries - from ancient Alexandria to colonial Boston. Access to acquired intelligence was constricted by physical access to the building. Now, the means of delivering knowledge has exploded exponentially2 thanks to the internet. Think of what libraries have contributed to mankind’s development, and now what the internet can do, as not only sources of information, but a destination for the congregation of talent and opportunity, resourcefulness, scholarliness and plain hard work. Despite the velocity of change, we’re just at the beginning to harvest the benefits of wide spread dissemination of knowledge. In automotive terms, despite all the progress of the last decade or two, we’re still on the horse drawn carriage stage.

2. Stupidity and Complacency

Amazingly, these are still a problem. There are far too many outdated ideas, policies, and procedures working hard to maintain dysfunctional order. These are still powerful beasts manifesting themselves in the protection of inherited inefficiencies and the pursuit of privileged restraint, rather than the benefits of enlightenment. How many government agencies, corporations and other institutions around the world are staffed with thousands of people who can say no to an idea, and so very few who can say yes? Think about the power of yes.

3. Creativity and Clarity

Creativity is intelligence having fun.
— Albert Einstein
There are painters who transform the sun to a yellow spot, but there are others who with the help of their art and their intelligence, transform a yellow spot into sun
— Pablo Picasso

ARE YOU HAVING FUN YET?

4. Pick the Right Problem

The world is full of managers diligently solving inherited problems without regard to whether the problem is still relevant. I have been thinking about the few instances where enlightened leaders have been redefining problems and therefore redirecting enormous amounts of energy to more productive means; Google to advertising, Amazon to retail, Instagram to sharing photographs, 20 years ago, China to manufacturing. We’ve only just begun….

5. Opt-in vs. Kept-in

For centuries, economies protected themselves by drawing circles, building walls, and making it difficult for any form of competition to survive. It was about keeping it all inside the circle. What we’ve seen in the last few years is the power of doing the opposite. By not opting-in but keeping-in, Kodak forced image-makers to use chemicals because Kodak was a chemical company. Then popped up Instagram and helped image-makers do what they wanted to do - take pictures and share them with friends ASAP anywhere in the world with incredible ease, and for free! Kodak lost a hundred year leadership position in a hundred days. The economies of opting-in, (Facebook and Twitter, to name a couple), foster immense connectivity and remarkable equity valuations. It’s certainly more fun, more fair, more profitable and more democratic. How many more opt-in experiences are there?

6. 'Japanization' of the West?

On the economic front, there are many things to watch. But I’m going to suggest perhaps the most significant might be whether or not Western economies will follow Japan’s path - a prolonged period of low interest rates, immeasurable rounds of quantitative easing and political process engaged in gridlock and unable to deal with obvious problems until recently. How many years of denial did it take before economic activity started to rebound recently? One might hope and suspect that the Western world might react faster. Maybe we should start by looking at France - clearly one of the most sophisticated Western economies. How fast and how agile are they at adapting?

7. Velocity of Change

Think about Sweden and San Francisco among others. Technology crashed in 2000. No longer is technology primarily about hardware or software, it’s about providing solutions to everything we think about, touch, do, consume, etc. Northern California hit the ropes, now it’s booming. The evolutionary change happened very fast. Consider Sweden and how quickly it has migrated from the crisis in the 1990s to become one of the most vibrant, entrepreneurial countries in Europe, if not the world. Sweden has some of the lowest tax rates in Europe, an advanced civil society, a profound entrepreneurial hub and amongst the best sense of design in the world. Their velocity of change is a lesson the rest of the West is learning. My sense is that the velocity of change is going to be much quicker in many sectors than we might anticipate.

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Is Print Journalism Dead?

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Is Print Journalism Dead?

Print is DEAD.  Or at least that is what seems to pass as the consensus opinion of many across the media industry the past few years, and with 400 newspaper closings in the last five years, it seems like a logical statement.  It’s been twenty years since the Palo Alto Weekly became the first newspaper to publish all its content on the Web and about fifteen years since Craigslist began its expansion across the US, helping to accelerate pressures on the newspaper industry.  

Print-first newspapers and magazines continue the search for a successful and profitable formula for online journalism, with mixed success.  A new generation of online and mobile-first journalism sites are experimenting with new approaches in an attempt to jumpstart a new era for journalism, and they appear to be having some success.  

In this month’s edition of Red Bag Insight, we take a closer look at these developments before coming to the conclusion that the outlook for the journalism industry just might be the brightest it has been in years.  As investors, how can we make money off this?  As business owners, how will this impact how we reach customers?  As consumers, what will our options look like in the future?  Good questions….we’d be interested in hearing your thoughts after reading…..

Click here to read full issue

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Emerging Markets Set A New Course

Independent, interdependent, emerged and emerging.

We’ve recently seen a dramatic shift in oil prices and the outlook for emerging markets.

While the near term volatility of oil prices is unpredictable, the long term prospects of emerging markets are more profound. In our December issue of RedBag Insight, we talk about how emerging markets are already home to the majority of the world’s population as well as the majority of the world’s economic growth.

This is long term and sustainable trend. Between 1980 and 2010, developed economies added 160 million non-farm jobs, while emerging economies generated 900 million. Let’s think about that math.

I hope you enjoy our recent issue. Wish everyone the best for the holidays and coming year and as always welcome your views.

 

The 60 Second Skim: 
RedBag Insight December 2014: Emerging Markets Set a New Course

The flow of money from developed markets in and out of emerging economies has established a record of upside excess and downside stresses. Recently, emerging economies have taken things into their own hands, creating institutions, alliances and cooperative enterprises that could get them past their dependence on developed economy resources. As these emerging economies develop their own “financial architecture,” they will be on more solid footing, leading to important implications for business owners and investors alike.

 

Click Here to Read Full Issue

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Save The Date! November 17th - RedBag Insight Webinar

We've been listening, thinking, and writing.

On November 17th (Monday) at 10am EST, the RedBag Insight team will be hosting a webinar to go over the four recent publications and the insights we are seeing. Please join us for an interesting hour of discussion, insight and acumen. We will send out an agenda in the week to come.

RSVP for Webinar 

RSVP for Webinar 

If as you read these four insights, you have questions or suggestions, please send them to us ahead of time to info@redbaginsight.com. We will also have time for live questions on the 17th.


Here's our most recent publication and a summary of the three others we shared in recent months. We've made it even easier for you to read - only one click away..

Our most recent publications:

Brain Based Computing: The Next Computer Revolution 
Scientists are beginning to use evolutionary processes to create a computing revolution. The current transistor based computing architecture has some apparent limits in speed and power because of what might be the greatest challenge to current computer architecture: language sequencing. Some researchers in artificial intelligence (AI), who have heretofore sought to mimic human intelligence using the computational machines, have now switched metaphors from the machine-based model to a brain-based model. As a result of that shift, they are making rapid progress in creating a new computing architecture taking place around areas of human mental capabilities: Brain, Thought, Intelligence and Consciousness.

RBI cartoon 3.png
Click to read full issue

Click to read full issue

Dealing with Surveillance and Terrorism: What Nature Can Teach Us

The risks of surveillance and the dangers of terrorist attacks have become part of the fabric of American society the past several years. A look into how elk and deer responded to the reintroduction of grey wolves in Yellowstone National Park will provide some perspective into how terrorism has altered Americans’ behavior and whether recent revelations about the government’s response to terrorism are likely to provoke additional changes.

Click here to read full issue

Click here to read full issue

China Has a Brand Strategy, Do You? 

Revlon announced back in December that it was leaving China and letting go of 1,100 staff, including 940 beauty advisers. Bosideng, a Chinese company unknown to most Western investors, built the most expensive fashion retail store in London in 2012, at a cost of over £30 million. Meanwhile, in January, Nu Skin Enterprises learned that the Chinese government would investigate its operations, after a report in the state-run People’s Daily claimed that the skin-care and nutrition company operated as a “Suspected illegal pyramid scheme.” Are any of these related?Evidence is mounting that China has a very specific consumer brand strategy, and is intentionally creating challenges for foreign brands while benefits accrue to indigenous companies. How will foreign companies decide to respond?

Click to read full issue

Click to read full issue

What’s Wrong With Kids Today? 

Six years after the Great Recession started, the economic fortunes of young adults continue to lag behind those of society overall. These young adults’ educations do not fit employer needs; their salaries are actually decreasing; their financial wherewithal is contracting; and their options for the future have not opened up. As a result, they are creating a new set of Operational Priorities that are making young adults harbingers of where society as a whole is headed.

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Click to read full issue

Click to read full issue

The World’s Waistline Expands…Except in the US 

In the US, a combination of Americans’ focus on living healthier lifestyles and an ongoing social and political conversation about obesity has helped the US adult obesity rate to finally reach a plateau. At the same time, many emerging markets with a growing middle are needing to deal with the realizations that come with consuming more calories and leading a more sedentary lifestyle. Opportunities and risks are large (and growing).

Click to read full issue

Click to read full issue

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Brain-Based Computing: The Next Computer Revolution

Scientists are beginning to use evolutionary processes to create a computing revolution. The current transistor based computing architecture has some apparent limits in speed and power because of what might be the greatest challenge to current computer architecture: language sequencing. Some researchers in artificial intelligence (AI), who have heretofore sought to mimic human intelligence using the computational machines, have now switched metaphors from the machine-based model to a brain-based model. As a result of that shift, they are making rapid progress in creating a new computing architecture taking place around areas of human mental capabilities: Brain, Thought, Intelligence and Consciousness.

Click here to visit RedBag Insight for full issue.

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What Nature Can Teach Us - Dealing with Surveillance and Terrorism

I visited Google’s campus in Mountain View, CA, earlier this week and was once again astonished at their ability to reinvent themselves and rethink the questions that matter most. The extraordinary diversity of issues Google is addressing and the talent they are harnessing redefines what it means to be relevant in today’s world.

Yes, almost everybody used public transportation or rode a bicycle. 98% wore t-shirts and yes, I was one of the 2% minority that wore a collared shirt. But this didn’t matter.

Google

They didn't take work home because there it was on the cloud waiting for them, wherever they might be. The energy in the air was palatable - as sharp as any college campus I've ever seen. And the combination of abstract, theoretical, practical and pragmatic gives real hope for the future of the global economy.

Their focus on consistently questioning and rethinking what matters most has been a real inspiration for me and many others. The issues they are identifying and the solutions they are bringing to bear would have been almost statistically impossible to contemplate a mere decade ago.

With that spirit in mind, in the next few weeks, you'll receive an invitation to join a webinar where we discuss live some of these observations and insights that we think are relevant to investors, business leaders, thinkers about things and forward looking politicians. If in the interim you have observations, suggestions or brilliant insights to share, email us at info@redbaginsight.com.

This week, we are writing about a topic that's on everyone's minds - what nature can teach us, dealing with surveillance and terrorism.

 

Click here for full article of RedBag Insight:

Dealing with Surveillance and Terrorism: What Nature Can Teach Us

The risks of surveillance and the dangers of terrorist attacks have become part of the fabric of American society the past several years. A look into how elk and deer responded tothe reintroduction of grey wolves in Yellowstone National Park will provide some perspective into how terrorism has altered Americans’ behavior and whether recent revelations about the government’s response to terrorism are likely to provoke additional changes.

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It’s the Unpredictable That is Likely

It’s the Unpredictable That is Likely

Sometimes the most unusual things occur right in front of our eyes and pretend to be normal. Apple announced that forward orders for iPhone 6 dramatically exceed their capability to deliver. Do they still have the magic? Google’s unparalleled success identifying new business opportunity by sculpting new industry out of empty space is now being challenged by the German finance minster in Brussels as monopolistic. Hello? China, as you’ll see in our September RedBag Insightissue, has a new brand strategy - it seems to very specifically target creating challenges for foreign brands while benefits accrue to indigenous brands. Yin and Yang. It seems we have tremendous forward looking forces in the global economy but at the same time tremendous resistance. This is a major dichotomy underway.

At the same time, from Scotland to Catalonia to China, Balkans to Kazakhstan, and on and on around the world, we have politicians who think the solution to their economic problems is to separate and others who think it’s to integrate. Likely much of this frustration comes from anemic global growth particularly in the western world. So rather than foster policies of growth and job creation, many politicians are busy finding someone else to blame. Meanwhile, right under our eyes we do, touch, feel, consume and experience enormous improvement in the capability, durability, economic sustainably of just about everything we encounter.

Yin and Yang. Makes you wonder what would happen if there were concerted effort by the next generation of political leadership to understand their job is to foster growth and economic opportunity of all the citizens. If they get it right?

As the world has largely exhausted the benefits of fiscal and monetary stimulus which were so powerful in the past few decades, we have to think what will unleash that next new chapter of gains. And I think it’s got to focus on increased productivity. Monetary policy even at these historically low interest rates is not enough. This month's inSIGHT talks about how this is played out in one market, China. It’s interesting to compare the conclusions of this insight with the earlier chapter in China’s growth when they understood it was selling to foreign consumers that will drive domestic economy.

RedBag Insight September 2014 -

inSIGHT: China Has A Brand Strategy, Do You?

Revlon announced back in December that it was leaving China and letting go of 1,100 staff, including 940 beauty advisers. Bosideng, a Chinese company unknown to most Western investors, built the most expensive fashion retail store in London in 2012, at a cost of over £30 million. Meanwhile, in January, Nu Skin Enterprises learned that the Chinese government would investigate its operations, after a report in the state-run People’s Daily claimed that the skin-care and nutrition company operated as a “Suspected illegal pyramid scheme.” Are any of these related? Evidence is mounting that China has a very specific consumer brand strategy, and is intentionally creating challenges for foreign brands while benefits accrue to indigenous companies. How will foreign companies decide to respond?

Click here to read full issue

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Announcing New Venture!

Insight and Acumen

How to identify it?

How to access it?

How to distill it?

How to stay on the path of good ideas?

Facts and figures are very helpful but left to their own devices, they become libraries of accurate but not very useful information. Imagine how helpful, or not, is a large and ancient library of phone directories in today’s world?

We’ve living at warp speed on one hand and on the other, we’re evermore appreciating sincerity, and the importance of understanding context, meaning, value, integrity, honesty, clear thinking, open minds and clean hearts.

For those of you who have been fellow companions on this journey, you know that for decades we’ve been looking, distilling, questioning, adapting, reversing, being reversed, and being propelled forward. And in the midst of it, we have created a continuing interchange of ideas and hopefully a vortex distilling what matters more, what matters less and what doesn’t matter any more, even if it is accurate.

I’m thankful for the many years living abroad for JP Morgan in Madrid and Mexico City, followed by opening one of the first multi manager platforms at Winter Capital, and later as the chief global strategist for Citi. Most of all I am grateful for having come to know so many diverse and successful savvy investors around the world.

I’m now proud to announce a new, hopefully ever more valuable, venture - RedBag Insight – to help navigate through an overflow of information while distilling insight and detect early significant changes both in our business and personal lives.

Please click on this link, Red Bag Insight, for our 1st Issue on “The World’s Waistline Expands…Except in the U.S.” and “What’s Wrong with Kids Today?” 
Looking forward to your thoughts.

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8 Observations for 2014

As We Head Into 2014…

Perhaps one of the most interesting and intriguing aspects of our times is that, unlike many previous centuries, in the 21st century, citizens at all levels of society are also given the opportunity, if not forced, to make many, many decisions. Transparency, accountability, and excess information have made it imperative to try to figure out what matters more, what matters less and what doesn’t matter any more. This includes the infinite distracting options in our everyday life on the internet.

One of the great changes of the 21st C is that people worldwide no longer trust those in authority to make decisions for them. They want to make their own decisions. Arab Spring is one example, internet newspaper, another, as well as the investment community’s continued shift from defined benefit to defined contribution. After the crisis of ’08, people learned that they are better trusting their own decisions than taking someone else’s.

The world is changing. If Bill Gates’s predictions are right, “by 2035, there will be almost no poor countries left in the world” (2014 Gates Foundation Annual Letter). Disruptive technology was one of the main focal points during discussions at Davos this year. Marissa Mayer, chief executive of Yahoo, noted, “we really are living in a hyperconnected reality, which while it can be disruptive can also be incredibly productive” (World Economic Forum). More people will have more access to unprecedented opportunities than ever before.

If I were to put it in a few words, empowering people to make their own decisions is powerful, and it works. Perhaps here I can share a few observations about opportunities we are missing and opportunities to come.

1. Libraries

For millennia, information in books was physically located in libraries - from ancient Alexandria to colonial Boston. Access to acquired intelligence was constricted by physical access to the building. Now, the means of delivering knowledge has exploded exponentially2 thanks to the internet. Think of what libraries have contributed to mankind’s development, and now what the internet can do, as not only sources of information, but a destination for the congregation of talent and opportunity, resourcefulness, scholarliness and plain hard work. Despite the velocity of change, we’re just at the beginning to harvest the benefits of wide spread dissemination of knowledge. In automotive terms, despite all the progress of the last decade or two, we’re still on the horse drawn carriage stage.

2. Stupidity and Complacency

Amazingly, these are still a problem. There are far too many outdated ideas, policies, and procedures working hard to maintain dysfunctional order. These are still powerful beasts manifesting themselves in the protection of inherited inefficiencies and the pursuit of privileged restraint, rather than the benefits of enlightenment. How many government agencies, corporations and other institutions around the world are staffed with thousands of people who can say no to an idea, and so very few who can say yes? Think about the power of yes.

3. Migration

How do we learn to continually think like an immigrant? For those of us in the U.S., think of the highly motivated Indian or Korean immigrants. The first thing they do on arrival in the U.S., is find the best possible education for their children. The second thing is to observe what’s going on here, what’s working in the economy?  With absolutely fresh eyes, they say, “I am going to get into that business.” They don’t look for annuities, protection, or privilege. They look to smartly figure out what works the best. They are the first to join that train and ASAP lead it.

4. Creativity and Clarity

“Creativity is intelligence having fun.”

– Albert Einstein

“There are painters who transform the sun to a yellow spot, but there are others who with the help of their art and their intelligence, transform a yellow spot into sun”

– Pablo Picasso

ARE YOU HAVING FUN YET?

5. Pick the Right Problem

The world is full of managers diligently solving inherited problems without regard to whether the problem is still relevant. I have been thinking about the few instances where enlightened leaders have been redefining problems and therefore redirecting enormous amounts of energy to more productive means; Google to advertising, Amazon to retail, Instagram to sharing photographs, 20 years ago, China to manufacturing. We’ve only just begun….

6. Opt-in vs. Kept-in

For centuries, economies protected themselves by drawing circles, building walls, and making it difficult for any form of competition to survive. It was about keeping it all inside the circle. What we’ve seen in the last few years is the power of doing the opposite. By not opting-in but keeping-in, Kodak forced image-makers to use chemicals because Kodak was a chemical company. Then popped up Instagram and helped image-makers do what they wanted to do - take pictures and share them with friends ASAP anywhere in the world with incredible ease, and for free! Kodak lost a hundred year leadership position in a hundred days. The economies of opting-in, (Facebook and Twitter, to name a couple), foster immense connectivity and remarkable equity valuations. It’s certainly more fun, more fair, more profitable and more democratic. How many more opt-in experiences are there?

7. 'Japanization' of the West?

On the economic front, there are many things to watch. But I’m going to suggest perhaps the most significant might be whether or not Western economies will follow Japan’s path - a prolonged period of low interest rates, immeasurable rounds of quantitative easing and political process engaged in gridlock and unable to deal with obvious problems until recently. How many years of denial did it take before economic activity started to rebound recently? One might hope and suspect that the Western world might react faster. Maybe we should start by looking at France - clearly one of the most sophisticated Western economies. How fast and how agile are they at adapting?

8. Velocity of Change

Think about Sweden and San Francisco among others. Technology crashed in 2000. No longer is technology primarily about hardware or software, it’s about providing solutions to everything we think about, touch, do, consume, etc. Northern California hit the ropes, now it’s booming. The evolutionary change happened very fast. Consider Sweden and how quickly it has migrated from the crisis in the 1990s to become one of the most vibrant, entrepreneurial countries in Europe, if not the world. Sweden has some of the lowest tax rates in Europe, an advanced civil society, a profound entrepreneurial hub and amongst the best sense of design in the world. Their velocity of change is a lesson the rest of the West is learning. My sense is that the velocity of change is going to be much quicker in many sectors than we might anticipate.

Watch for some exciting news from us in coming weeks.

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The Magic Wand... the Fed’s and Others’?

It seems that for forever, the Fed and Central Banks around the world have had a magic wand. Forever means about 30 years.

Whether ironic or not, this time encompasses the working career of almost everyone involved in capital markets nowadays. When Volker’s interminable battle against the demon -inflation- was silently victorious, most people didn't notice; and there was no bell-ringing.

For several decades, the magic wand was accompanied by fiscal discipline and the recognition that long-standing policies were no longer functional. In the U.S., it was called free markets and deregulation, but it happened at the same time in other countries under different names. The early days of Deng Xiaoping’s, “Great Leap Forward,” in retrospect, involved the same verbs, adjectives and adverbs. What they have in common is the shift away from dogmatic policy to the pursuit of opportunity. Tens, if not hundreds, of millions of Chinese marched from economic exile into economic prosperity.

Socialists, Capitalists, Communists, Republicans, Tories, and the Labour Party, were elegantly accompanied by the magic wand of apparently ever-declining interest rates and the benevolent mathematics that followed suite. Greenspan and company didn’t have to be articulate. They could mumble because they still had ammunition; and the financial system was largely corralled by riding herd on the worldwide commercial banking system.

Race forward a few decades and look at Japan. Interest rates couldn’t go any lower so they increased the purchases of JGBs. Not many years later the Fed and emerging market Central Banks are doing exactly what the Japanese have done - increasing demand by buying the bonds themselves. QE 1, 2, 3 have been effective, but they have consequences. Look at the Japanese economy for the past 25 years. While they can keep buying, they can’t lower interest rates. So the reversal of interest rates will have the same mathematical effect that the decline in interest rates had earlier.

We’ve seen it in the last few weeks and potentially there will be much more to come. What’s left in the Fed’s bag of magic tricks? Talking. Nowadays you see the Fed’s presidents on TV all the time. They are holding press conferences and trying to be articulate, when over the years they always preferred to obfuscate rather than be transparent. The missing ingredient, in the Western world at least, is confidence in “Authority’s” ability to reinstate a sense of opportunity. If leaders as diverse as Volker and Deng Xiaoping could do it three decades ago, why can’t today’s generation rise to the occasion? The ping-pong of gladiatorial politics is missing the point. What a different world. The magic wand of enlightened leadership is lying on the ground ready to be picked up.

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Pizza, Paella, Souvlaki… Precursors to Apple Pie?

Italy, Spain, and Greece – what can we learn? Are there inevitable lessons for the U.S.?

On a recent trip to Europe, a metaphor became increasingly apparent. It seems clear that the national debates in the Parlamento Italiano, Cortes Generales, and Hellenic Parliament are about how to divide a finite resource and come away with more than one’s fair share. There are finite number of slices in a pizza, paella or souvlaki. They cannot be divided indefinitely… at one point it becomes fruitless.

During the period of expansion, fueled by apparently ever declining interest rates, legislators and lobbyists thought their job was to wrangle resources from a central pool primarily comprised of other people’s money (OPM). Using Washington as an example, it’s as if everyone thought their job was to go to Washington and come back with more slices of the pizza pie than corresponded to their electoral representation. Lobbying, gerrymandering, and appropriations were all refined tools actively used to get others peoples’ money to pay for your own projects.

Meanwhile, legislators seem to have forgotten about baking more pies or preparing the paella or souvlaki. For that matter, figuring out who is going to own the oven. In the interim period, emerging markets, principally led by China, managed to build and own most of the manufacturing base. In Greece, and likewise in Italy and Spain, much of the domestic production capabilities stand dormant while unemployment is rampant. No more pizza, paella or souvlaki to divide… it’s all been eaten. Can there be endless supply of American apple pie? The dream? Yes. The pie? No.

Clearly we know that while the situation is far more complex, how can we progress if the political conversation continually revolves around spending the spoils rather than increasing the productive capacity? Knock knock?

A number of companies have quietly figured this out and are acting aggressively to increase their productive capacity. Many of them are privately held and are able to make the right long-term decisions without fearing short-term negative consequences. A few publicly traded companies, most notably Google, is actively involved in rechanneling spending across the board to bring ever more efficient use of resources. They have tackled advertising and telephony. What about when they address automobiles and flow of traffic? Are you ready for Google health care? There are so many other sectors of the economy that are awaiting that same process and on route… somebody new is going to own the pizzeria, the paella bar and souvlaki taverna. I’m interested in investing with those who are going to be successful. Nominations please?

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Observations in 13Q1

Here are some of our observations from the 1st quarter of 2013. Please provide a few of your availabilities for a 20 minute conversation with Clark to Minki Jung minki@clarkwinter.com. We look forward to hearing from you.

1.    Barometer of increasing uncertainty is decreasing slightly.

Apart from the tragic events in Boston, money is increasingly inclined to go back to work. Still, it is important to remember we are merely back to where we were pre ‘07-08.

2.    Money centered banks are largely frozen in their tracks.

In this environment then, why haven’t more people been able to borrow cheap, long-term money? Partly because the decision making process is under assault in large money centered banks. Top management is afraid to make any decisions. It looks more like game of musical chairs if not Russian roulette. The vilification of Jamie Dimon, the nation’s most astute banker shows that Washington would rather throw flames of blame than truly understand the underlying issues. As a result, rational capital allocation is largely paralyzed in the financial system leaving the horizon widely open for hedge funds and private equity firms. 

3.    Ending the big anomaly.

Portfolio managers  were rewarded for years for nothing but parking in bonds. Before that, for nothing but liquidity. Now with cash being boring and bonds potentially dangerous, money is going to be rewarded for going back to work. This is happening worldwide. Productivity now really matters, not just being clever.

Perhaps the most important question looking forward is understanding – will growth and employment increase to such a degree that FED will have to curtail stimulative policy or will the US economy show bifurcating evidence of growth in a few sectors and lack of resolution in others?

4.    The disastrous management of municipal affairs

Detroit, Chicago and numerous other cities have shown that elected officials have been unable or unwilling to deal with any serious problems in heavily unionized cities, while elsewhere in Houston, Dallas, Atlanta, Charlotte, and San Francisco, jobs are being created and new entities formed in places where politicians get there act together.

In some ways, US looks like Asia, where different cities have dramatically different prospects- Singapore vs Manila. The difference here is that they all have the same passport and fiscal code. How will democracy deal with it?

5.    Tokyo a role model for Washington?

Historically low interest rates from Tokyo, Inc. and Washington, Inc. are making NPV calculations of future interest rates almost meaningless. Central banks have run out of ammunition. Traditional tools of monetary policy are exhausted. Only quantitative easing and bond buy backs remain as options. How long can this go on?

6.    Management focusing on distractions

Lots of management is focused on distractions -- hoping to improve profitability by charging for pillows on airlines rather than increasing quality of service. These actions evidence minor revenue gains but, in fact, they are distractions from dealing with opportunity at hand.

7.    Where will the money wind up?

Cyprus. The idea of taxing depositors may come back in another form. Why? Remember, Willie Sutton’s answer of why he robbed banks – “that’s where the money is." If these fissures remain unresolved, need to be alert on its impact on the two very large reservoirs of liquidity -- Russian and Chinese offshore investors.

8.    Environment

Overall concern about he environment is increasing, particularly among younger people. While this is not new, the direction continues and is important to monitor. The horrific images of contamination and pollution in China, and the inability of the government to suppress those pictures are putting tremendous pressures on the new Chinese government. London had similar pressures early in the 20th century with the infamous London fog, which we now know is carbon, not water vapor. Ditto Pittsburg, and other cities. The Politics of Environmental thinking is likely to get larger.

9.    Mexico

In one continent alone, we see demagoguery on the rise (Venezuela and Argentina), and continued productivity from governments dealing with reality (Mexico, Chile, and Peru). These issues alone can be a long conversation.

Within emerging markets, however, I think Mexico is particularly interesting. The previous two presidential administrations did not succeed in establishing investor confidence. Particularly among Mexicans themselves. They saw the benefits of Brazil’s dramatic reform and the massive wealth creation in bordering Texas through the complete restructuring of their oil industry. The new administration in Mexico is aggressively attacking the monopolistic inefficiencies. The recent restructuring of telecommunication will be followed by increasing efforts to nationalize Mexico’s vast oil exploration and distribution industry. In the interim, opportunities in Mexican equities, Peso fixed income and private equity restructuring and infrastructuring are likely to remain strong.

10. Status Quo No More

10 years after the US invasion of Iraq, there is an increasing awareness that the efforts in that country and Afghanistan as well have not produced the idealistic results. That the early protagonists claimed would happen. The recent success of two movies- Argo and Zero Dark Thirty- show the effectiveness of covert action rather than broad military action. It suggests that people are fed up with the status quo and are looking for something that they can believe actually works. This can have very interesting implications if played out across the political arena. The ability to finance and finesse deficits by kicking the can down the road has meant that the politicians have not been adroit in resolving but rather adroit in sidestepping major issues. Is it true that the population in the USA is getting fed up with their politicians ??? Finally??

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Electoral Calendar

At his second inaugural, U.S. President Barack Obama harkened back to some language of the original framers of the American Declaration of Independence from Great Britain and the constitution they created after they gained their liberty. “Each time we gather to inaugurate a president,” he reminded his audience, “we bear witness to the enduring strength of our Constitution. We affirm the promise of our democracy. We recall that what binds this nation together is not the colors of our skin or the tenets of our faith or the origins of our names.

“What makes us exceptional, what makes us America is our allegiance to an idea articulated in a declaration made more than two centuries ago. We hold these truths to be self-evident, that all men are created equal. That they are endowed by their creator with certain unalienable rights, and among these are life, liberty, and the pursuit of happiness.”

But then he veered off to note the increasing polarity of the world, and even of the increasing gulf among Americans. “Today,” said Obama, “we continue a never ending journey to bridge the meaning of those words with the realities of our time. For history tells us that while these truths may be self-evident, they’ve never been self-executing. That while freedom is a gift from God, it must be secured by his people here on earth.

“That is our generation’s task, to make these works, these rights, these values of life and liberty and the pursuit of happiness real for every American. Being true to our founding documents does not require us to agree on every contour of life. It does not mean we all define liberty in exactly the same way or follow the same precise path to happiness. Progress does not compel us to settle century’s long debates about the role of government for all time, but it does require us to act in our time.

“For now, decisions are upon us and we cannot afford delay. We cannot mistake absolutism for principle or substitute spectacle for politics, or treat name-calling as reasoned debate. We must act. We must act knowing that our work will be imperfect. We must act knowing that today’s victories will be only partial, and that it will be up to those who stand here in four years and 40 years and 400 years hence to advance the timeless spirit once conferred to us in a spare Philadelphia hall.”

In other words, as we have said many times, committing to democracy and the rule of law is hard, continual work that is never finished. 

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A View From The Top of a Mountain

I recently went skiing, going up and down the same mountain many times a day.

When the sun was shining every aspect of the terrain was alive with music making it easy to choose a path with confidence, clarity and conviction - to accelerate and enjoy the dance of gravity, nature and being alive. Later in the day, as shadows and fog rolled in, the very same familiar slopes were fraught with uncertainty, demanded caution, and eliminated confidence.

This shift, not in terrain but in perception, is an unfortunately accurate analogy for what has been going on in the world economy. Interest rates are about as low as we're ever likely to see in our lifetimes yet economies worldwide are struggling. Decision makers at major banks are enveloped by uncertainty and therefore the flow of credit to the economy is distorted at best. In many parts of the world governments are hogging an increasing share of what's available. Many of the businesses that do indeed have access to new credit have been using the money more to shore up their balance sheets rather than expand their production.

The recent annual meeting of the World Economic Forum at Davos provided some clues about how the world’s political, economic and business leaders view the weather. Though the mood was generally dour, there was less focus on prices and more on opportunity, at least on the necessity for a reemergence of opportunity as a driving force in expanding the global economy. One thing that seemed clear was that the continued focus on monetary and fiscal policy won’t create opportunity. What is needed is the confidence that the sun is beginning to shine again - that initiative will be rewarded and that the bell has rung and it is time to move forward with confidence.

In line with this, I heard somebody say on CNBC the other day that he was astounded by how much now depends upon what happens in Washington, D.C. Astounded? The rest of the world has always operated that way, with business and economic decisions dependent upon how governments behaved – or didn’t behave. The heated partisanship that now annoys and dismays so many Americans is commonplace to all parliamentary democracies, and political factionalization is the rule in all but a few societies. Putting political and ideological purity ahead of economic needs is one of the causes of increased instability around the world. In the U.S., we have traditionally tried for a level playing field, where economic and social needs are held to be equally important, and where political ideology has taken a back seat to the needs of the country. Perhaps if we saw things a little more clearly, we might return to that way of looking at the path ahead where political ideology has taken a back seat to the needs of the country. As I write this, I am once again baffled by the election process underway in Italy. Political theater has reached a level unimagined even in the most memorable Italian operas. Oh, that the protagonists on the world's stage would recognize their responsibility to cast light on the terrain ahead and do their best to provide the confidence, clarity and conviction rather than offer up avalanches of fog and noise. Then the path ahead could be remarkable. Who is going to rise to the task? 

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What We Have Learned

  • The Global Engines of Growth Are Beginning To Move Again, But Questions Remain 

  • Was The Global Recession Cyclical, Secular or Structural? 

  • Monetary Policy Is A Good Temporary Fix, But Dangers Lurk 

  • Fiscal Policy Can Cut Waste, But One Man’s Waste Is Another’s Muscle 

  • Structural Changes Will Have A Profound Impact On The World As It Recovers 

  • The Current Problems Are Like The Story of The Blind Men And The Elephant 

  • The “Elephant” Exists In Many Different Forms 

  • The Challenge Is To Create New Institutions Capable Of Moving Humanity Forward 

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