Parivartan Information

The free market and the market economy are the ‘acceptable’ names of capitalism. But whatever the economic system that now dominates the world is called, it is now facing a very big test of its effectiveness.

The price of the most fundamental driver of the modern economy - energy - is now at its highest ever price. And while the price of oil may fluctuate in the short and medium term, it doesn’t seem likely that it will return to the days of being cheap. $10 oil is not coming back.

The test for capitalism is whether it responds to the price signals. Very high prices should lead to innovation; to new products; to new energy models.

There are those tipping that the next big thing for venture capitalists and the stock market is new forms of energy.

The next few years will tell. If the market does not respond the world may have to search for another economic system.

Making phone calls applying a broadband Internet connection, known as VoIP (Voice over Internet Protocol), is becoming very popular with enterprises of each size.

Skype uses a proprietary protocol to route calls through other Skype peers on the network, allowing it to traverse symmetric NATs and firewalls. Simply press the Skype key on either handset to access Skype contact list and quickly connect. It works like instant messengers using one big Skype-Hosted phone book so calling someone else is super easy. But Skype is a proprietary protocol not very adapted for business purposes. Unlike majority business phones, Skype is not based on the SIP Standard Protocol. Today, with the most advanced, state-of-the-art technology, and all VoIP phone systems can accurately recognize most spoken words. In terms of business, what is great with IP telephony is that it makes  possible to use the same network cabling as an IT infrastructure, therefore simplifying the structured cabling process, and maintenance process that underpins a business. But the real advantage of that business phone system is that it can deliver a wide range of features for business users while simultaneously reducing upfront costs. Some of the key features of a VoIP PBX include an auto attendant, fax to email, voicemail, follow me feature, call forwarding and lots more.

The evidence is mounting that every Tom, Dick and Harry is investing in commodities, not to mention a few hedge funds and other financial market speculators.

Everyone’s jumping on the back of the fundamentals and riding the wave. Oil’s around $130 a barrel; but analysts reckon the supply/demand situation suggests the price should be around $60. Talk is that’s where OPEC would like to see it. When everybody’s in the market buying, there’s usually a bubble.

The total volumes accounted for in corn future contracts now constitute around 2.5 times what is potentially deliverable: clear evidence of over hyped financial speculation.

The problem with over hyped markets is that, just like the dotcom and housing bubbles, when things go bad, they go very bad, and threaten the whole system.

We’ve got to the stage where we need a  very close examination of financial speculation, and perhaps some global regulation, not to stop it, but to make sure speculation, rather than fundamentals, is not driving the global capital system. We’ve got to keep the benefits of freedom of movement of capital and of the market smoothing effect of moderate levels of speculation while curbing the excesses of the cowboys. We’ve got to stop the tail wagging the dog, without cutting off the tail.

Australia is the latest country to join those nations setting up a sovereign wealth fund. It did so in last week’s government budget, adding an infrastructure fund to the Future Fund ( set up to pay for previously unfunded public sector pensions).

It means the Land Down Under will have about A$100 billion salted away. This is a tidy sum, and probably places it in the top ten in the world, behind Abu Dhabi’s US$875 billion, Norway’s US$380 billion and Singapore’s US$330 billion, and a few others. These funds invest in a variety of assets, many of which are outside the home country. Indeed some Middle East and Asian funds have bailed out troubled US banks since the sub prime crisis surfaced last year. There’s talk that China wants to get into the Australian resources sector in a big way by taking out substantial stakes in BHP Billiton and Rio Tinto, and perhaps other mining groups.

The issue troubling observers is who makes the investment decisions and on what basis. The fact is we just don’t know for most funds.

Even in Australia, which has a more open political and economic climate than other sovereign fund homes, questions are starting to be raised about how the infrastructure fund will be invested and then spent. The government has made soothing noises about rigorous cost-benefit analysis but, as every economist knows, assumptions can be tweaked to deliver results in line with politics.

Also the notion that current taxpayers should be paying for future infrastructure is also causing some eyebrows to be raised. Wouldn’t it be better and fairer for taxes raised now to be invested in infrastructure today. This would increase economic capacity and ensure there are more taxes tomorrow to pay for tomorrow’s infrastructure.

But, argue the government’s advisors, if we spend on infrastructure today we’ll overheat the economy. Maybe. But these days there’s little correlation between the size of the government budget surplus and interest rates.

On balance, the rise and sheer weight of Sovereign funds, and the uncertainty about what signals they will respond to, is a worrying development in the international economy, where what we need is transparency.

When I was studying economics full time, eons ago, I learned there were different types of inflation, different types of unemployment, different ways to get growth. These days we seem to have adopted a one-size-fits-all approach to managing the economy.

Take inflation. There are two very big nasties pushing up prices across the globe right now. Very high energy costs and high food costs. But what are central banks doing? Some of them - like in Australia - are pushing up interest rates to curb demand.

Well, it is not local demand for energy that is responsible for high pump prices. It is concerns over Peak Oil and the high and growing demand in China. Higher Australian interest rates are going to have no impact on the price of oil.

Cost-push inflation, price rises that are imported into an economy independent of domestic demand, can only be ameliorated by finding substitute goods or services. Say pedal power instead of vehicle power. But you can’t pedal goods to market, you have to send them by trucks running on diesel. Those costs are passed on through the economy.

I can’t see how higher interests improve this picture. If anything they could make things worse by forcing manufacturers to increase prices on the fewer goods they are selling to make a profit. Or, maybe higher interest rates topple the balance sheet and the firm goes out of business.

Banks around the western world are clearing out their books, taking hits on their balance sheets, raising new capital and working out where the next (lucrative) banking wave will be.

There is no concensus yet emerging in the industry about where that next wave is. That means we’ll likely see some tussles on boards of directors, between boards and CEOs, and some casualties among senior staff as opposing views lay out new strategies. Many banks will need a new group of senior management to bring fresh ideas to the table.
A quick review of the business pages tells the story. Bank A will grow into China - Asia is where the future lies! Bank B believes there will be rich pickings in the detritus of the subprime market in the US, in the same way that hedge funds cleaned up after the LTCM crisis in ‘98 .

The banking cultures in US, France, Switzerland and Germany are still strikingly different, despite almost three decades of globalised capital markets, so each will respond in their own way. The UK banking sector is now dominated by US and German banks, so London’s solution may be the hybrid that points the way for others.

For London, (and the UK) there is a great deal riding on this search for new growth streams. Its economy has become extremely dependent on and exposed to global banking, that any moves that smack of ‘renationalising’ global capital (where local markets dominate) will be a severe jolt.

Investors need to watch the noises banks make about future growth and make their own judgments about how sensible they seem. Warren Buffet makes his money through a no-nonsense strategy of investing where he sees real value based on common sense. Don’t let the snake oil salesmen con you.

We are starting to see the impact of the credit crisis - to use the current jargon - ripple through the economy. The commercial property development market has seen about 10 percentage points shaved of the credit side of the equation and added to the equity side.

Whereas last year medium size property developers could get 75%+ in loan funding on a project, talk is that they’ll now get around 65% - assuming projects go ahead. It’s a shifting of some of the risk by nervous financiers.

The big boys with solid reputations and strong portfolios can still raise whatever they need, but have had to add a couple of percentage points to their interest bills.

It’s hard to read how this will play out because property developers are still running the numbers on prospects, but we don’t know yet whether this is just out of habit and the lack of other things to pass the time with. Will they take the next step and build stuff?

The impact of these medium sized developers is very important because, like all markets, they will at least have an impact at the margin, and hence a significant impact on market momentum.

There’s a bucket full of gloom around at the moment. We are in a new age of Malthus.

He was the pastor turned fledgling economist who predicted - 300 years ago - population growth would lead to mass starvation because our ability to grow food would increase by a set amount every 25 years but the population would double. Food growth would be arithmetic; population growth would be geometric.

He was wrong, and so has every doom sayer since been. No one seems to factor in that we humans are quite smart, ingenious even.

Currently we have Global Warming, Peak Oil, and crises in Food supply, credit markets, western housing markets, China’s pollution, and the US Democratic Party. I may have missed a few.

I predict, however, that innovation will solve these problems and leave us free to worry about other things and let politicians move on to other crises.

If we are at Peak Oil, we’ll move to something else. In London in 1880 it was predicted that if something was not done about the growth in horse drawn traffic, the capital of the British Empire would be knee deep in Horse poo by 1930. The automobile saved us from that. Soon, something will save us from the car.

The phrase ‘moral hazard’ is a masterful piece of obfuscation, probably invented by a government bureaucrat or spin doctor. It  refers to the inherent danger of government’s backing or guaranteeing a private financial institution on the grounds that not to do so would endanger the economy, or a large number of citizens.

There’s been a lot of it about lately. Bear Stearns in the US, Northern Rock  in the UK and the hovering presence of the French Government over the recent trading scandal, are examples.

Clearly, with the government guaranteeing a bank against going belly up, it can take an optimistic view of the world which translates into a thousand small up side risks that cumulatively mean the bank has a big upside position, believing that there’ll never be another sunset.

Yet it is now clear that significant chunks of the financial system have been incompetent at best and downright sneaky at worst. These bankers and hangers on have lost any right to a privileged existence and protection from governments.

Nor does the argument that small investor or home owner is being protected wash too well. My pension fund has been badly hit, I might be 20% worse off since the credit markets starting creaking. It’s only a paper loss at this stage, perhaps, but it isn’t for someone who is retiring and cashing out now. In some parts of the world, especially the US house prices, are down 20%, and if you’re in a money market fund the effective yield might be now 2% vs 5% a year ago. So the small investors, John and Jane Citizen, are already paying for the short-sighted incompetence in the financial system.

I have found in life I can avoid shonky second hand car dealers and unscrupulous real estate agents by being careful. But there was no way I could avoid the consequences of shonky investment bankers because we as a society have let them run loose in the world’s capital markets. I’m betting 97% of the population is befuddled by Hedge Funds, Collaterised Debt Obligations and other financial services products branded as “innovative”, so the politicians haven’t had to worry about the system.

Right now I feel mad as hell and I’m not going to take it any more. I’m just trying to work out what to do about it. But I am starting to do little things - changing my relationship with some firms, cutting out some purchases out of pique  - that will have a ripple effect if more people are thinking this way.

The politics of the Zimbabwe situation remain on a knife edge, with reports suggesting President Robert Mugabe, humiliated and on the nose though he maybe, has decided to fight back against an Opposition that seems to have won more votes in the election. 

It’s like a soap opera, except of course it’s much more serious than that. A country is bleeding to death.

But maybe, just maybe, things have gone so far that more brutality won’t cut it this time for Mugabe. The Reserve Bank has just printed a Zim$50 million note, worth about US$1. Maybe getting a few $50m notes each month doesn’t excite the army rank and file and the public service anymore. Maybe they won’t do Mugabe’s bidding. Maybe (please God let is be so) they are fed up to back teeth with him too.

So maybe we’re a week or two away from a new administration. Word on the street is that Opposition Leader Morgan Tsvangirai is a decent bloke but no rocket scientist (unlike the smaller opposition group leader, who actually is one). He’ll have the world’s good will behind him and, according to the UK press, an aid package of $1 billion is being lined up. But he’ll need to bring in some good help.

How do you resurect a country who’s economy has been devastated by criminal mismanagement and that has a debased currency. Economists are not sure.

But, hey, let’s take some punts here. We’re looking for economic opportunity. I recognise of course that Zimbabwe has exchange controls in place and that doesn’t encourage investment, but Tsvangirai is going to have to lift them, even if only selectively at first.

If I were advising Tsvangirai, I’d be saying let’s get our export sector right. Our mines in our mineral rich country are low hanging fruit. Let’s make sure they have all the inputs they need and so we can take full advantage of the commodity price boom. Also, I’d be saying that we should let bygones be bygones and not be concerned that China helped out Mugabe from time to time. Let’s cosy up, sell them some chrome, get a little investment. Opportunity one: check out the mining stocks.

The second immediate opportunity is in tourism. Zimbabwe is a beautiful country; parts of it are Africa in the raw; and the people - Mugabe and the top brass apart - are friendly and hospitable. It won’t take much to get the tourist infrastructure back up to scratch. Maybe have an open skies policy so that Richard Branson will fly in sun-starved poms by the gross. 

And in a time when food prices are high and not looking to come down any time soon, there’s a solution to the problem of idle farms swirling around. Maybe long leases, maybe tax breaks to produce, maybe a use it or loose it policy for farms confiscated under Mugabe’s poorly implemented resettlement program.

I’m feeling better already and might put some money Zimbabwe’s way. There might be some opportunities and, heck, it’s a great cause.

Mugabe’s got to go first, of course.