Thought Economics

The Future of Humanity

noreply@blogger.com (Vikas Shah) — Wed, 16 Dec 2009 15:10:00 +0000

In this article, we talk to Professor Nick Bostrom, Director of the Future of Humanity Institute at the University of Oxford, discussing the profound changes humanity could experience over coming years including artificial intelligence, machine consciousness, the direction of human evolution, and risks to humanity itself.

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Vikas Shah, Thought Economics, December 2009

Whether you believe that evolution gave rise to our species from a primordial soup, or that we were manifest on this earth by some divine creator, the fact remains that humanity has progressed an immense distance to where we are today, which many regard as a pivotal moment in our journey. The pace of change in all aspects of our lives is accelerating, bringing with it a greater frequency of ‘paradigm shifting’ events (i.e. those events which shape the future direction of our entire species). Renowned futurist Ray Kurzweil illustrated the speed of these changes by looking at the time between paradigm-shifting events in our history (source):

From the time humans emerged, to basic art and proto-writing, 69900 years
From the emergence of this basic art (cave painting) to agriculture 16600 years
From agriculture to fire 8200 years
From the wheel to democracy 2470 years
From the industrial revolution to the advent of modern physics, 125 years

It is clear to see that the pace increases dramatically, even over these long time periods. To take more recent examples:

In January 1915, Alexander Graham Bell made the first transcontinental phone call. Now, only a century later, practically the whole of our world, and everyone in it, is interconnected through an amorphous network (the internet), with researchers currently working on esoteric technologies which speed up data transmission by modifying time itself. Similarly, in December 1903 at Kitty Hawk, the Wright brothers flew the first modern airplane a distance of one hundred and twenty feet. Just sixty six years later, in July 1969, two men were stood on the moon, looking back at earth, the first two human beings to ever view our planet from another celestial body. In both cases, had you stood alongside the Wright brothers or Alexander Graham Bell at those moments, and told them the changes which were to come in such as short time, they would have likely dismissed your views as madness, but here we are today, witness to those very advances.

For our current iteration of humanity, the most profound changes will emerge from science and technology, fields which are consistently delivering advances of such leaps that we are frequently confronted with research which, while real, appears to exist within the realms of science fiction. At the core of these fields exists the relationship between humanity and technology, and the very nature of humanity itself. Many commentators see inevitability in the fact that human evolution will be at our own hand through genetic and technological enhancement, but in this field also exists the possibility of us, as a civilisation, creating machines which are intelligent, conscious, and smarter than we are. This combined with developments in biological and other fields also introduces the threat of ‘existential’ risks (risks which pose a threat to the very existence of humanity).
In this exclusive interview, we talk to Professor Nick Bostrom, Director of the Future of Humanity Institute at the University of Oxford, discussing the profound changes humanity could experience over coming years including artificial intelligence, machine consciousness, the direction of human evolution, and risks to humanity itself.

Nick Bostrom (ranked as one of the FP Top 100 Global Thinkers, and winner of the 2009 Eugene R. Gannon Jr. Award based on his "criteria of integrity, ingenuity, professional recognition, and significance to the future of humanity") is Director of the Future of Humanity Institute at Oxford University. He previously taught at Yale University in the Department of Philosophy and in the Yale Institute for Social and Policy Studies. He has more than 170 publications to his name, including three books: Anthropic Bias (Routledge, 2002), Global Catastrophic Risks (OUP, 2008), and Human Enhancement (OUP, 2009). His writings have been translated into 16 different languages, and reprinted numerous times in anthologies and textbooks. Bostrom has a background in physics, computational neuroscience, and mathematical logic as well as analytic philosophy. Professor Bostrom is a leading thinker on big picture questions for humanity. His research also covers the foundations of probability theory, scientific methodology, human enhancement, global catastrophic risks, moral philosophy, and consequences of future technology. Bostrom developed the first mathematically explicit theory of observation selection effects. He is also the originator of the Simulation Argument, the Reversal Test, the concept of Existential Risk, and a number of other influential contributions. He serves occasionally as an expert consultant for various governmental agencies in the UK, Europe, and the USA, and he is a frequent commentator in the media.

On Risks:

Q: What are the big risks (including existential risks) facing humanity in the 21st Century?

[Nick Bostrom] In my view, all the big existential risks are anthropogenic, arising out of human activity. More specifically, the biggest existential risks in this century arise out of anticipated future technological advances. Humanity has survived all kinds of natural hazards over a period of over one hundred thousand years; it seems unlikely, then, that any natural hazard would do us in within the next hundred.

Among future technologies that may pose significant existential risks I would rank machine super intelligence at or near the top. Advanced molecular nanotechnology could enable the construction of very powerful weapons systems, and could also pose a big risk. Synthetic biology will have some potentially very dangerous applications.

There are also some existential risks that would entail the permanent and drastic destruction of humanity’s future potential without necessarily causing human extinction. Unwise human modification that changes human nature in some undesirable way could be one example. Vastly improved surveillance and mind control technologies could perhaps facilitate the establishment of some pernicious global totalitarian regime.

Furthermore, there is a big black box of as-yet unimagined risk. Most of what now seem like the biggest risks to society were unknown one hundred years ago. It is plausible that there are some big risks that still await discovery.

On an individual level, the most likely cause of death for most of us is ageing.

On Transhumanism:

Q: What do you think will be the direction of human evolution?

[Nick Bostrom] Right now, biological evolution is not the main engine of change in the human condition. Instead, social and technological development, which occur on shorter timescales, are the predominant change-makers.

In particular, it seems that we are gaining capabilities to directly modify human nature—through genetic selection, gene therapy, cognitive enhancement drugs, life extension treatments etc. —and that we are gaining these new technological capabilities much faster than evolution changes the human genome. Future breakthroughs such as artificial general intelligence, uploading, and advanced forms synthetic biology and molecular nanotechnology, will also make it possible to alter human biology in much more profound ways.

At some point, if this kind of technological progress continues, it would seem that our descendants will become entirely digital: uploads or artificial intellects implemented on computers. At that point, it is possible that evolutionary selection will again become an important driver of change—but not necessarily of change for the better.

Q: Can you explain the concept of transhumanism and do you think it will play a part in humanities story?

[Nick Bostrom] Transhumanism might become regarded as the name of a school of thinking that first began to take seriously of the idea of direct technological intervention to profoundly change human biological nature. In the long run, that development could be one of the milestones in the history of life. However, it will probably also be said that most trans-humanists were naïve and misguided in many of their particular beliefs, and it is questionable whether the movement will really have made much of a difference or whether history would turn out pretty much the same way without people self-identifying under this rubric.

On Machine Intelligence:

Q: How far are we from creating machine intelligence? Do you think it is feasible that we will see machine consciousness and/or super-intelligence?

[Nick Bostrom] It is not known how far away we are from creating human-level machine intelligence. This means that we must distribute our credence over a rather wide range of possible dates of arrival. Mid-century seems about as good a guess as any, but it could happen considerably sooner or much later.

However long it takes to get from here to roughly human‐level machine intelligence, the step from there to super intelligence is likely to be much quicker. In one type of scenario, “the singularity hypothesis”, some sufficiently advanced and easily modifiable machine intelligence (a “seed AI”) applies its wits to create a smarter version of itself. This smarter version uses its greater intelligence to improve itself even further. The process is iterative, and each cycle is faster than its predecessor. The result is an intelligence explosion. Within some very short period of time — weeks, hours — radical super intelligence is attained. But even if the process took a few years, it would still be incredibly rapid on an historical timescale.

I think that an intelligent machine could be conscious, but there might be some ways to build intelligent machines that would not be conscious. These are philosophical questions. Whether conscious or not, the development of inexpensive human-level artificial minds could have enormous economic consequences.

Q: What are the implications to our (human) society of machine intelligence, machine consciousness and/or super-intelligence?

[Nick Bostrom] Intelligence is a big deal. Humanity owes its dominant position on Earth not to any special strength of our muscles, nor any unusual sharpness of our teeth, but to the unique ingenuity of our brains. It is our brains that are responsible for the complex social organization and the accumulation of technical, economic, and scientific advances that, for better and worse, underpin modern civilization. All our technological inventions, philosophical ideas, and scientific theories have gone through the birth canal of the human intellect. Arguably, human brain power is the chief rate‐limiting factor in the development of human civilization.

Whether abrupt and singular, or more gradual and multi‐polar, the transition from human‐level to super intelligence would of pivotal significance. Super intelligence would be the last invention biological man would ever need to make, since, by definition, it would be much better at inventing than we are. All sorts of theoretically possible technologies could be developed quickly by super intelligence — advanced molecular manufacturing, medical nanotechnology, human enhancement technologies, uploading, weapons of all kinds, lifelike virtual realities, self‐replicating space‐colonizing robotic probes, and more. It would also be super‐effective at creating plans and strategies, working out philosophical problems, persuading and manipulating, and much else beside.

It is an open question whether the consequences would be for the better or the worse. The potential upside is clearly enormous; but the downside includes existential risk. Humanity’s future might one day depend on the initial conditions we create, in particular on whether we successfully design the system (e.g., the seed AI’s goal architecture) in such a way as to make it “human‐friendly”— in the best possible interpretation of that term.

Q: Do you think we will see whole-brain emulation? What are the implications?

[Nick Bostrom] The spectrum of approaches to creating artificial (general) intelligence ranges from completely unnatural techniques, such as those used in good old‐fashioned AI, to architectures modelled more closely on the human brain. The extreme of biological imitation is whole brain emulation, or “uploading”.

This approach would involve creating a very detailed 3d map of an actual brain — showing neurons, synaptic interconnections, and other relevant detail — by scanning slices of it and generating an image using computer software. Using computational models of how the basic elements operate, the whole brain could then be emulated on a sufficiently capacious computer.

The ultimate success of biology‐inspired approaches seems highly likely, since they can progress by piecemeal reverse‐engineering of the one physical system already known to be capable of general intelligence, the brain. However, some unnatural or hybrid approach might well get there sooner.

As with other avenues to machine super intelligence, whole-brain emulation would be associated with both existential risks and enormous opportunities.

It might be that the first-best alternative would be artificial super intelligence implemented with a good “friendliness theory”. However, developing a rigorous and correct friendly AI theory is very difficult, so it is not clear whether such a theory will be available when it first becomes possible to create super intelligence. The second-best alternative might instead be whole-brain emulation with some appropriate safeguards. The least preferred alternative—the one that seems to maximize existential risk—would be artificial super intelligence created without an adequate theory of AI friendliness

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We can see from Professor Bostrom that we are really at a rather unique point in our story where it is conceivable that we, as a species, could choose and engineer the direction of our evolution. This is a profoundly powerful concept, with three core outcomes. We could either become more powerful, subordinate to a higher intelligence, or extinct, in either case, clearly a fundamental shift in what it means to be human.

Looking at the morality of this, in October 2009, we spoke with Professor John Harris, Lord Alliance Professor of Bioethics at The University of Manchester who stated, “…I believe that it is right to use technology and science and the innovation that it generates, whether the technology is mechanical, chemical or biological to improve ourselves, to make life better. We talk of “human enhancement”. For me an enhancement is necessarily good because if it wasn’t, it would not be called an ‘enhancement’ it would be a ‘disadvantage’ or ‘injury’ which would be unethical. As long as it’s good for you, its not only a reasonable thing to do, but may be morally required. One of the most fundamental moral principles is ‘do good’ or if you cant do good ‘don’t do any harm’ or if you cant avoid harm, ‘do the least harm possible’. If you believe that, and I think we all do, then you should use enhancement technologies, if they’re safe to improve human individuals and human kind. One of the ways of doing that is to use computers and if we can interface with computers in a way that enables our brain function to be better that would obviously be useful. For example, I am getting older now, and my memory isn’t what it was, and I do use my computer and my Blackberry to aid my memory. I don’t remember telephone numbers but they are in my Blackberry, I don’t remember addresses, they are in my computer, I don’t remember lots of facts, and the computer supplies those for me. This seems, to me, to be harmless and the more efficiently we can do this, perhaps by having implants that did it automatically for us, seems to be to pose no problem.”

Professor Harris reflects, in the above, that it is the nature of ‘how’ we use the technology, rather than the technology itself which creates the core moral issue of whether this evolutionary route is right or wrong.

For us, as a species and a community, if we have a hand in our evolution, the results could bring great benefits. We could become incredibly empowered, intelligent and connected. We may cease to require economies as we see them now, we may be able to indefinitely extend our lives, we may be able to eradicate disease, and exist in a society where, with genetic and technological engineering, our civilisation starts to enter a new plane of existence which would be difficult for us to even conceptualise now. The difficulties, though, arise where the pace of this change is faster than our ability as a society to adapt to it. We could see a vast plane of inequality between those who are “enhanced” versus “not enhanced”, we could see polarisation between the wealthy (who have access) and the poor (who don’t), and we could theoretically create a new underclass of humans by elevating a few into a new state of evolution.

Looking at the possibility of our civilisation creating machine consciousness and super-intelligence, this also raises issues of how we, as the subordinate species would interact with this new form of consciousness (if, indeed, it would allow us to). Would we have to acknowledge it’s rights as an entity? Would “it” acknowledge ours?

Looking at the philosophical argument, we can turn to Peter Singer who, in his book entitled, “in defence of animals” wrote “…if humans are to be regarded as equal, we need some sense of equality that does not require any actual descriptive equality of talents, capacities or other qualities. If equality is to be related to any actual characteristics of humans, they must be pitched so low, that no human lacks them – but this set of criteria – low enough which no human lacks – will not only be possessed by humans”. In context, he was referring to the rights of animals in society, but the same principles could easily be extended to machine intelligence or genetically modified variation of our race.

It is also important to look at the context of ‘how’ our current civilisation functions. Are we sufficiently at peace as a civilisation where we could be sure that elements of our society would not take this technology to use in a provocative way? At the extreme, where Professor Bostrom talks of our descendants becoming ‘entirely digital’, we are starting to also question the very nature of life, the soul, and even god.

If these concepts strike you as extreme, bear in mind that even at the current pace of growth in computing power it will be around the year 2020 when, for USD1,000 you will be able to buy a processor with the equivalent calculation power of a human brain, and around the year 2050 when, for USD1,000 you will be able to buy a processor with the equivalent calculation power of all human brains combined (based on projections by Ray Kurzweil).

The direction of our evolution, whether at our hand or otherwise, cannot effectively be predicted. All we know is, whether we like it or not, the future will happen, and it will be dramatically different to our present. George Santayana once said, “We must welcome the future, remembering that soon it will be the past; and we must respect the past, remembering that it was once all that was humanly possible.”

And as for those who fear the changes that society it was Marcus Aurelius who, almost 2000 years ago said, “Never let the future disturb you. You will meet it, if you have to, with the same weapons of reason which today arm you against the present”

The Iraq Opportunity

noreply@blogger.com (Vikas Shah) — Tue, 17 Nov 2009 16:09:00 +0000

In this article, we talk to Zaab Sethna, Head of The Baghdad Office of Northern Gulf Partners, discussing the state and stability of Iraq, the future of its economy, and sectors ranging from oil & gas, renewable energy, commodities, utilities, telecommunications, real-estate and infrastructure. We also look at the investment opportunities Iraq offers, together with many of the key issues on rebuilding the nation.

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Vikas Shah, Thought Economics, November 2009

Spanning from the north-west end of the Zagros Mountains, to the eastern Syrian and northern Arabian deserts, Iraq has been home to continuous civilisations from the 6th millennium BC, starting with the Sumerian people (the oldest known civilisation) through to the empires of the Assyrians, Babylonians, Hellenistic and Parthian peoples, and more recently, becoming a major part of Roman, Mongol, Ottoman and British empires. It is known, historically, that these civilisations, in Iraq, produced the earliest writing, literature, sciences, mathematics, laws, and philosophies of the world

In stark contrast to the desert landscapes of Western Asia and the Middle East, Iraq has two major rivers (The Tigris and the Euphrates) which flow through the country, providing land which is highly capable (agriculturally) and viable to build successful human settlement (a geography which later revealed incredible natural resources, particularly oil). In European History it was these rivers which led to Iraq being referred to by its Greek eponym ‘Mesopotamia’ (meaning land between two rivers). Iraq’s location is also strategically important from a trade perspective, sharing borders with Jordan, Syria, Turkey, Iran, Kuwait and Saudi Arabia together with 35miles of clear coastline on the Persian Gulf.

The twentieth century has, though, been a tremendously volatile time for Iraq. Following World War I, Iraq passed from the Ottoman to the British Empire who, in 1932, established the Kingdom of Iraq. In the revolution of 1958, the king was deposed, and the Republic of Iraq declared. By 1979, after two coup’s, Saddam Hussein took power of Iraq, and ruled for the remainder of the century, during the Iran-Iraq War of the 1980’s, the Invasion of Kuwait and Gulf War of 1990-91, and the period of sanctions of the 1990’s.

It was the Iran-Iraq war which first laid a rift in Iraqi finances (which are based predominantly on the Oil sector) leaving losses of at least USD 100 billion. After hostilities ended, a combination of low oil prices, repayment of war debts, and reconstruction costs resulted in a financial crisis which many cite as the reason (at least in the short term) for the invasion of Kuwait.

After this invasion, the U.N. Security Council adopted “Resolution 661” which imposed severe economic sanctions on Iraq, placing an embargo on all trade excluding medicine, food and humanitarian items. The effects of these sanctions, and government policies inevitably led to hyperinflation, poverty, and malnutrition. Iraq’s historically generous state welfare disappeared overnight, and the, “large and well-educated middle class that had grown from the years of plenty to form the bedrock of Iraqi society was impoverished”. By 2003, Iraq was, for all intents and purposes, a country suffering from a “profound macroeconomic shock”.

Saddam was eventually removed from power in the 2003 invasion of Iraq, and following one of the most controversial wars of modern times, Iraq is beginning, again, to show signs of improvement (described by the US Department of Defence as ‘significant and fragile gains’). With coalition troops withdrawing, Iraqi forces are starting to take responsibility for their own security, supported by an increasingly effective Iraqi parliament, who are slowly trying to build capacity in areas such as constitutional rights, threat deterrence, energy, economic development, education and other areas.

So what, then, is the future for Iraq?

In this exclusive interview, we speak to Zaab Sethna, Head of the Baghdad Office of Northern Gulf Partners (one of the leading asset managers in Iraq). We discuss the state and stability of Iraq, the future of its economy, and sectors ranging from oil & gas, renewable energy, commodities, utilities, telecommunications, real-estate and infrastructure. We also look at the investment opportunities Iraq offers, together with many of the key issues on rebuilding the nation.

Mr. Sethna has been working closely with Iraq’s leading political parties, business families and entrepreneurs for over ten years. He worked for the worked for the Government of Iraq on financial, trade, and energy policies and since then, has represented a number of international companies involved in Iraqi oil and gas, banking, insurance, aviation, and construction projects among others. He began his career with the United Nations in Brazil and also worked at the Sawyer/Miller Group in New York and the Rendon Group in Washington, DC and London. He is a graduate of Georgetown University and has an MIA from Columbia University.

Q: What is the current situation in Iraq?

[Zaab Sethna] The situation in Iraq is significantly improved by any measurement. Statistically violence has decreased by around 90% in the last two to three years by every metric: number of incidents, number of civilian casualties, number of security force casualties, damage to infrastructure, etc. In fact more people have been killed by violence in Mexico in the last 18 months than in Iraq. Of course there have been some terrible incidents recently and we cannot say that all the terrorists have been defeated but generally speaking the trends are very positive. More important even than the statistics is the mood of optimism you feel in Iraq now. People are certainly much more confident, and of course this kind of confidence is viral (in the sense that as people see optimism and confidence around them they themselves feel it and in turn pass it on). Quality of life indicators are also significantly improved in the last few years. GNP per capita has increased from $1800 under the US-appointed government of Ayad Allawi in 2004 to over $4000 today. Unemployment, inflation and other economic figures are also similarly improved. Corruption has been another factor in Iraq but we see this as declining as well from the high point during the US occupation and the immediate post-occupation period. The Iraqi government has instituted strong anti-corruption measures including Inspectors General in every Ministry as well as a national anti-corruption agency and there is also a parliamentary anti-corruption committee. As a firm we have a strong policy of zero tolerance for any kind of corruption but I am pleased to say we have never encountered any corruption or ever been asked for a bribe in Iraq.

Politically the situation is stabilising and what we see is that almost every group or faction in Iraq, with the exception of Al Qaeda and the Ba’athists, has now agreed to take part in the new system. The parliamentary and constitutional system is almost five years old and is ingrained. There will be free elections next year and we expect to experience a unique event in the Arab world, a peaceful transfer of power from one elected government to another.

Q: Why invest in Iraq?

[Zaab Sethna] Iraq today is an opportunity to pay rock-bottom prices for one of the world's richest countries and one of the world's best economic growth stories. The IMF forecasts Iraq's GDP growth this year at over 4% this year and close to 6% next year which is still higher than almost all others. Although it is currently impoverished, Iraq has the potential to be a very rich country in the medium term. It has water and oil but more important it has excellent human resources. Iraqis are smart, energetic and resourceful. They have an ancient history of urban civilization and commerce. The Iraq opportunity is far more compelling than the GCC and Iraq also has the most liberal economy in the Gulf region. It is easy for companies to register branches or subsidiaries and they are free to compete in any sector (with a few exceptions such as owning real estate or natural resources). There are no restrictions on repatriating capital or revenue, a simple 5% import duty and 15% income tax, a stable and free floating currency, and easy, 'one stop shopping' access through the National Investment Commission. It is a country of about 30 million people, intelligent and capable, enthusiastic about democracy, strong allies of the US and Europe, and ready to rejoin the modern world.

The Central Bank of Iraq has been doing a creditable job of keeping the dinar stable while lowering inflation. Their primary tool is interest rates which were over 20% in 2007 but have slowly been brought down and currently stand at 8.5%. Inflation has been brought under control and is 2.8%. At the same time unemployment is down from 60% to around 18%.

One of the greatest achievements of the US in Iraq has been the successful effort to reduce Iraq's debts. In 2003 Iraq was facing an absolutely massive and crushing debt burden of over $150 billion that had been accrued by the Ba’athists starting in the 1980's. The Bush administration appointed James Baker as the special envoy on Iraqi debt and he went around the world convincing Iraq's creditors to accept a large haircut. Iraq managed to reduce its debt burden with both Paris Club and London Club creditors by 80% which is the highest ever achieved by only a few other indebted countries. In fact only the Arab states have refused to reduce Iraq's debt and Kuwait continues to receive 5% of all Iraq's gross revenues under UN resolutions enforcing reparations for Saddam's invasion almost 20 years ago. It was only by reducing the debt burden that Iraq became economically viable again and also has slowly managed to rebuild its creditworthiness and rejoin the international capital markets. In fact next year Iraq plans a $5 billion bond issue which will be a major milestone. Reducing the debt burden and restoring Iraq to the world financial system might actually turn out to be the single best achievement of the Bush administration in Iraq and it was always mystifying to me why they didn't take any credit for it.

Q: What is the energy and commodities opportunity?

[Zaab Sethna] Iraq is the last place in the world where there are huge hydrocarbon reserves that are relatively easy to develop. The scale of its energy resources is simply astounding- probably the world's greatest reserves, bigger even than Saudi Arabia, at least 80 producible fields including nine 'super-giants' with over 5 billion barrels each, with close to the lowest extraction costs in the world. Iraq is the only producer on the planet that has the capability to quadruple its oil production in the next decade and increase gas production by an even higher factor. Certainly as Iraqi oil comes on stream it will raise issues with OPEC since Iraq has been without an OPEC production quota for the last 11 years. The other countries in the cartel will start to clamour for Iraq to be given a new quota while Iraqi will argue that it has produced far less than its previous quota for many years so should be allowed to make up for this lost time. Nevertheless Iraqi oil will probably have little effect on oil prices as world demand is forecast to grow by a larger margin than Iraqi production expands.

For now there are still few opportunities for investors in the upstream oil sector. Iraq has recently signed service agreements with some of the largest oil companies in the world but we know that international oil companies want production sharing agreements not service contracts. It will be some time before Iraq is ready to sign PSA's. These are still controversial in the country and there is a strong nationalistic feeling among the people when it comes to oil. Nevertheless there are excellent opportunities connected with the energy sector. Oilfield services for example will be a growth sector in Iraq for the foreseeable future as is logistics and equipment supply and maintenance. The government has also liberalised downstream and there are interesting possibilities in everything from refining to service stations. Iraq is also suffering an electricity shortage and this is a priority area for the government. They are encouraging private sector involvement in the power generation and distribution business and in fact the first private power plant in Iraq is already operational and meeting all its financial targets.

Iraq needs to rebuild its infrastructure across the board. From housing to transport to energy, there will be massive construction opportunities as well as huge demand for construction materials. Lafarge has two cement plants in Iraq already and they estimate that demand for cement will grow by over 10% annually for the next several years. If you look at statistics like cement demand per capita you see that Iraq is still very low. Lower even than Egypt let alone the Gulf states so it gives you an idea of the growth potential.

Renewable energy is not a big factor in Iraq. The country does have several hydro power stations along its rivers but they meet only about 5% of total electricity demand. One of the main problems is that Turkey has built large dams upstream and significantly restricted the water flow on the Tigris and Euphrates. That, together with low rainfall in the last few years, has reduced Iraq's hydro capacity and in fact is threatening Iraq's farmers with water shortages. However, there are some interesting uses of micro hydro generators in remote villages of the mountains of northern Iraq that are far from the national grid.

There is also an interesting use of solar power in Iraq. In Baghdad and other cities the lack of electricity meant that street lights were out for most of the night. Not only did the blackout make it easier for terrorists and criminals to plant bombs and move about but the almost total darkness had a very deleterious effect on civilian morale. The Iraqi government decided to install solar powered street lamps, even though they are 7-8 times more expensive then conventional street lighting. Now the lights are on all night and this has served to reduce crime but much more important has given people another shot of confidence.

Of course because of Saddam's weapons programs and the continuing regional fear that another Iraqi regime could revive these programs in the future, I would not imagine that nuclear power will be a factor in Iraq in the foreseeable future.

Q: What is the reconstruction, real-estate and physical infrastructure opportunity?

[Zaab Sethna] Iraq has a huge lack of housing. At least 1.5 million housing units need to be built immediately just to meet current demand. The problem here is finance. There are still no mortgage schemes available to Iraqi citizens so until the government works out a system there will not be large scale housing construction. But real estate will be a huge investment area; my guess is especially for GCC developers. In the last month two Abu Dhabi state-owned developers have finalised multi-billion dollar projects in Iraq and more will certainly follow. Baghdad is a city of 5 million people that is almost completely low-rise, hardly any building rises higher than ten stories. This is a country of almost 30 million that has no modern commercial office space, almost no international standard hotels, only one shopping mall, rudimentary public transit, and so forth. Not to mention the very large pilgrimage traffic to the Shia shrines in Najaf and Karbala. I heard the Minister of Tourism say recently that 500 hotels need to be built in Najaf and Karbala to meet demand from religious tourists which is expected to grow six-fold in the next five years. Financing remains the problem with almost no source of finance within the country and few international lenders willing to take Iraq risk. Some developments in Iraq have actually been financed with 100% cash but this is obviously not a long term solution. The Iraqi government will need to be creative and proactive in coming up with financing options that make sense to lenders and developers. I was pleased to see that the National Investment Commission has hired one of the biggest international accounting firms to provide advice on financing options for the Iraqi housing market.

Q: What is the opportunity in telecommunications and technology?

[Zaab Sethna] Iraq is the fastest growing, most competitive and most lucrative telecom market in the MENA region. There are currently three GSM carriers in Iraq but penetration is still in the range of 60-70% so there is definitely room for growth. Also the service is extremely poor and certainly an operator that was able to offer better service would capture large market share. There is a fourth GSM licence which is held by the state-owned telecom ITPC but they do not have the capital or technical know-how to build and operate a network. They are looking for international operators as JV partners to build a fourth network. There is currently no broadband service in the country but fibre links with neighbouring countries are being established and some private companies are already operating in this sphere. This is an excellent opportunity and the first companies to move into this market will do very well. There is no question that a lack of fibre backbone infrastructure is holding back economic development and I expect a boom of sorts to be set off once the national backbone is completed in the next 12 months. Because of the sanctions of the 1990s Iraq was kept out of global IT and telecom developments but now it is in a position to leapfrog straight to state of the art technologies. It is perfectly positioned geographically to become the regional fibre hub connecting Europe to the Gulf and Asia and that is what will eventually happen.

Q: What is the Agriculture & Water opportunity?

[Zaab Sethna] It is hard to believe that until the 1960s Iraq was a large agricultural exporter. Wheat, rice, barley, tobacco, lentils, fruit and vegetables were all exported from the centre of the so-called 'Fertile Crescent'. Now after two generations of a heavily oil-dependent economy overlaid with socialist planning and then the corruption of the UN Oil For Food programme, Iraq does not export a single agricultural commodity not even the dates for which it is famous. Iraq has become a major food importer. We have seen a number of interesting agribusiness plans in Iraq for things such as dairy plants, poultry farms and even cattle herds. Bottled water is another growth area. Imagine that Iraq currently imports bottled water and other beverages from Saudi Arabia, Kuwait and the UAE- the Biblical 'Land of Two Rivers' forced to bring water from 'The Empty Quarter'.

The revival of agriculture is a priority for the government but as yet they have not taken necessary steps to help farmers. It will require coordinated government action and foreign investment to revive Iraqi agriculture but of course the potential is there. I would not be surprised to see UAE companies investing heavily in Iraqi agriculture as a measure to insure food security in their country. It is possible you could see some kind of production sharing agreements for agriculture between foreign investors and Iraq.

Q: What are the consumer and business services opportunities?

[Zaab Sethna] All services are currently at a low level of development in Iraq. The banking system is primitive, medical care is substandard; there are virtually no distribution or logistics networks. Iraqi consumers have not even begun to scratch the surface of the possibilities that are available in other countries.

We see services as an excellent way to invest in Iraq and take advantage of the future growth. For example we have financed Iraq's best and most modern construction equipment rental company. This is a good way to benefit from the coming infrastructure, construction and oilfield development boom, the same with financial services. Iraq needs modern technologically advanced commercial banks and insurance companies and asset managers. We are involved in all of these areas.

Q: What is the state of banking and investment infrastructure in Iraq? and what is your view on the currency?

[Zaab Sethna] The banking sector is dominated by state-owned banks which are reminiscent of the Soviet Union for their levels of efficiency and customer service. It can take weeks to clear a cheque, there are no ATM's, and most damaging is that the banks do not really lend. For businessmen and entrepreneurs there is essentially no source of financing in the country. A dynamic well-capitalised bank based on technology and customer service will be able to capture significant market share.

The Iraqi dinar has been remarkably stable and is one of the success stories of the last few years. The Central Bank keeps a sort of unofficial peg against the dollar although the dinar is a free floating currency. As the oil sector develops and petrodollars start to flow into Iraq we can imagine that the currency will appreciate.

Q: How do you invest?

[Zaab Sethna] We invest in both public markets and private equity. We have a fund called “Iraq Investment Partners I” that invests in the Iraq Stock Exchange The ISX has no restrictions on foreign ownership and since they moved to electronic trading in the last few months volumes have increased hugely. The ISX was one of the best performers in the world last year which is very impressive since almost every market was significantly down in 2008. Since Jan 08 Iraq is up about 16% while emerging markets equities are down about 22%. It is still a small market with total market cap of around $2.5 billion and extremely low liquidity. But it is an easy way for investors to get long Iraq.

However the more important aspect of our business is direct investments in Iraqi companies that are not listed, including some that we are building ourselves as new ventures. I mentioned the equipment rentals company that we have built and our efforts in financial services. We are also involved in oilfield services, telecoms and construction materials.

Q: How do you manage and measure risk?

[Zaab Sethna] Iraq is a country that is undergoing two transitions at the same time- from centrally planned economy to free market and from war and occupation to post-conflict. Add to that a decade of the strictest sanctions regime ever established by the international community and that certainly makes for a risky environment. Besides the obvious security risks there is still a certain amount of political uncertainty as well as the longer term question of the Kurds' future in Iraq. There are also the standard risks associated with transition and frontier economies- corruption, stifling bureaucracy, weak institutions.

We employ a combination of factors to mitigate risk. We use Iraqi security firms for physical security, we use enhanced due diligence when looking at investments, we use local and international insurance--there is a lot available--for our assets. Most important of all is our local knowledge and presence. Nothing substitutes for local knowledge in emerging markets investing and this is an area where our firm certainly has a competitive advantage. With our office in Baghdad and longstanding links with Iraqis in many different walks of life we have a feel for the place that only comes from years of involvement.

Q: What kind of returns can investors expect from Iraqi markets?

[Zaab Sethna] The biggest mistake potential investors make is to approach Iraq as some kind of Klondike where there are untold riches available with little effort. There has definitely been a gold rush mentality associated with Iraq, especially in the first few years of the US occupation and its successor government when official corruption was rife. We look at Iraq from the standpoint of a long term relationship not a get rich quick scheme. We like projects with a 12-18 month capital payback period and then an IRR in the 30% range. If you have the patience, courage and perseverance to stick it out in Iraq then yes there will be outsized returns, but it will not come easy.

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Regardless of any political rhetoric, we can see, through the commentary of those engaged on the ground in Iraq such as Northern Gulf Partners, the situation is improving.

An important measure of the state of a country is human development, and rights. The Commission for Human Rights, in 2002 condemned President Saddam Hussein's government for its “systematic, widespread and extremely grave violations of human rights and international humanitarian law” demanding that Iraq immediately put an end to its “summary and arbitrary executions... the use of rape as a political tool and all enforced and involuntary disappearances”. During Saddam’s rule, full political participation was restricted to only members of the Arab Ba’ath party (just 8% of the population), citizens were not allowed to assemble unless in support of the government, and the movements of citizens was heavily taxed and monitored. Many hundreds of thousands of people were brutally tortured or killed as ‘punishment’ for violating these arbitrary restrictions, and tactics including forced disappearances, the destruction of food sources, and the widespread use of chemical and biological weapons against non-combatants.

The situation in this regard now is vastly improved, but the facts do remain that we are dealing here with a country which is just emerging from a very serious conflict (which brings ancillary risks), and a country which is still paralysed by a macro-economic shock which has forced its citizens back to subsistence.

From other conflict situations worldwide, we have also seen that economics is not only one of the key drivers for war, but for peace. As countries become economically unviable, for whatever reason it may be (climate change, politics), you see an inevitable propensity for the population to drift into conflict as competition emerges for scarce resources such as food, water and energy, and we revert to anthropological safety behaviours such as grouping (leading to gangs, terrorist groups, extremists). For rogue leaders, economics also gives leverage to control a population, reducing their mobility to a stage where they are fundamentally captive (as you see in North Korea now). A study released by Oxfam in 2009 also supports this view, finding that, "Seventy per cent of Afghans surveyed see poverty and unemployment as the major cause of the conflict in their country"

We have seen first hand in many African nations the power of economic growth to bring peace and opportunity, simply looking at the changes in Nigeria, Zimbabwe and Botswana (for example) shows that as populations become more economically empowered, with the right political infrastructure, economies can grow rapidly, and the sense of conflict decreases as populations, regardless of their political or religious beliefs, begin to fight towards a common economic goal, in which they all participate.

Rebuilding Iraq thus becomes not only an obligation of the international community to the people of Iraq, but a uniquely exciting and humbling opportunity for investors engaged in this reconstruction.

We are fundamentally faced with blank-slate economy, with huge resources (predominantly in the form of oil and potential agriculture) and an educated population who are hungry for change and have waited long enough to get it.

For investors, whether participating in individual sectors (such as energy, telecommunications, real-estate, or infrastructure), participating through exchanges and funds on broader positions, or joint venturing with international agencies engaged in the reconstruction of schools, hospitals and the like, the fundamentals remain attractive. We have a country which will experience (mid to long term) strong, resource backed growth, generating significant national, commercial, and consumer wealth.

When we combine this potential growth with a highly mobile and interconnected global economy, we can see that perhaps the world needs Iraq, as much as Iraq needs the world; and that partnership is the fundamental basis for this opportunity.

The Future of the US Dollar

noreply@blogger.com (Vikas Shah) — Tue, 03 Nov 2009 12:41:00 +0000

In this article, we talk to Marc Chandler, Global Head of Currency Strategy at Brown Brothers Harriman and discuss the future of the US Dollar, its role as a global reserve currency, its future, relationship to interest rates and inflation, and the state of the US economy.

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Vikas Shah, Thought Economics, November 2009

The foreign exchange market is the largest, and most liquid financial environment in the world, with governments, corporations, institutions, investors, central banks, and many other participants contributing to global turnover (as measured by the Bank for International Settlements) in excess of US$3.2 trillion per day. This daily turnover consists of around US$1 trillion in spot transactions, US$362bn in outright forwards, US$1.7 trillion in swaps, and the balance in other transactions.

In neo-classical economic theory, the concept of a 'perfect competition' was put forward to describe a market with infinite buyers and sellers, no barriers to entry or exit, costless transactions, participants maximising profits, perfect information and homogenous products. The foreign exchange market is the closest we have to an environment of 'perfect competition' where ample liquidity creates an environment of 'near infinite' buyers and sellers, combined with (in the main) extremely low transaction costs, few barriers to participation in the market, and highly homogenous products. The currency markets are, though, exposed to participants who may not all be trading with the same motive, some with the ability to manipulate prices (such as central banks), and a great deal of volatility from factors ranging from macro economics, to politics, social issues, and even meteorological conditions.

At the heart of this highly dispersed global market is US Dollar, a currency which (through the advent of capitalism, international trade and investment, globalisation, and US strength internationally in economics and military terms) has retained a ‘monopoly’ position as a reserve currency, and as the most widely adopted currency of international trade and capital flow (accounting, in 2007, for 86.3% of average daily market turnover).

Since the financial crisis of 2007-8, a great deal of discussion has occurred about the nature of US Dollar’s dominance in the market, and whether shifts in economic power could see it losing reserve status and relative monopoly.

In this exclusive interview, we speak to Marc Chandler, Global Head of Currency Strategy for Brown Brothers Harriman (the oldest and largest partnership bank in America, with over 4,000 employees worldwide). Marc is also Associate Professor of Global Affairs at NYU Stern, a prolific writer, speaker, and considered by many to be one of the world's leading experts on currency. Marc is also the author of the well-respected book Making Sense of the Dollar, Exposing Dangerous Myths About Trade and Foreign Exchange (Bloomberg Press, 2009). In this interview, we speak to Marc about the future of the US Dollar, its relationship to other currencies, valuation, reserve status, and the factors affecting its trade.

Q: What is your view on US Dollar's continued role as a reserve currency?

[Marc Chandler] I think that the dollar’s role as a reserve currency will continue. It has always been relatively stable, apart from some volatility at the time of the UMU and Maastricht treaty. In general, for the last two decades or so, dollar’s share of global reserves has remained around 65-66% with the Euro (and before that the basket of European currencies) making up around 25%. This figure [for Euro] has increased now to the extent that there has been a noticeable shift in reserve allocation, but in the main, reserves are shifting from Japanese yen to British pound.

I think part of the challenge is that there is no clear alternative. Before the Euro, for example, most pundits thought it [the Euro] would be the replacement. I have articles on my desk right now claiming “dollar abandoned” and others saying “oil to be denominated in other currencies”. These are not recent articles, but pieces from February 1995!

If you look at the history, in certain parts of the dollar cycle, particularly in the down part, investors exaggerate structural problems and minimise cyclical. I would suggest that most dollar problems are cyclical, and when the fed reserve raises interest rates, and the business cycle re-enters an upswing, there will be many reasons to buy dollar.

Q: What are your views on Dollar's valuation relative to other currencies?

[Marc Chandler] I think medium to long term, we are constructive on dollar. We see short-term downward risk stemming mainly from low US interest rates and liquidity.

The problem is people don’t agree on the future or the past. Many suspected that the dollar rally in 2008-2009 was due to it’s role as a ‘safe haven’; I don’t see it that way, and would suggest that one of the most successful Fed Reserve programmes was the currency swap lines, where they made available, around USD 580 billion to the rest of the world. This program has been wound back through lack of use to around USD 40 billion, and by the rest of the world, I mean EU banks, hedge funds, and investors from Mexico, Brazil and the like. Their borrowing of dollars to buy assets created a huge carry trade which financed the bubble. This resulted in a huge margin call as foreign investors scrambled to secure dollars, and this was at the moment when US bank balance sheets imploded. The major weight on dollar now comes from the fact that interest rates are low, and the system is awash with dollars.

It is interesting to note that several EU countries issue dollar denominated bonds. Imagine if the US issued a Japanese yen denominated bond. This would be considered a sign of weakness by the market, but when Italy and its counterparts issue dollar bonds, no comment is made. This shows, again, the role of ample dollar liquidity, and its role as a financing currency.

Economically, I believe that most of the bad news is now known. Last year there was, in fact, a shortage of dollars. Many thought there was a surplus, but there was really a shortage, and the Fed Reserve flooded the market.

I can illustrate the current situation in the form of a story. Two boys were being chased by a Tiger. One boy stops to put on running shoes, and the other boy says, “What are you doing?” The first boy responds, “I don’t have to outrun the Tiger, I just have to outrun you”.

When you look at many of the financial centres such as The City of London, Wall St, and their counterparts, they think of things in Economic terms. There is, however, a reason why the likes of Alfred Smith, and Karl Marx studied politics and not economics. The role of the dollar rests on many other things, not just economics. Look at thins like human capital, for example. Many say the US has stopped inventing, but in 2008 there was one company which applied for more patents than all the others put together, this company was IBM. Seventeen of the top twenty universities in the world are in the USA, one third of all students who leave their countries to study in another come to the USA. There are only a handful of countries who spend relatively more on R&D than the USA, and these include Norway (telecommunications based) and Japan. The GDP in USA is around USD 45,000 per capita, some have higher GDP’s but almost all have a smaller population than the greater NY area. When you look at all the factors including military power, transparency, innovation, and so forth, you can see that even with the problems we have, the institutional capacity, culture and these factors suggest to me that we are very capable.

Anther interesting point on this is fertility rate which, in the US, is above 2.1 (versus around 1.6 for most of Europe and Japan). By the end of 2010, for example, Japan will have 5 million less workers, and this complicates their problems.

I try to look at the political economy, the role of the dollar based on economic AND non-economic variables. Abraham Maslow (a famous psychologist) once commented, “if all you have is a hammer, everything is a nail”. Investors currently have a hammer, and that hammer is economics.

Q: What is the role of deficits in Dollar's valuation? And what other key indicators (economically) carry the greatest influence?

[Marc Chandler] There are many people who believe that our [US] current account deficit is a major driver and a major imbalance for dollar. I, however, think there is a fetish about balances. If we agree, for example, that a key macro-economic variable is fertility, or population rates, how can you have a balanced economy when some are producing rates of 2.1(USA), and some like Japan, around 1.6 and falling. On the eve of the First World War, the absolute value of deficits in major countries was almost twice today, and capital flows are now far greater.

A lot of the problems stem also from measuring using nineteenth century models. Almost half the US trade deficit can, for example, be accounted for by movements within the same company. If General Motors, for example, export parts between state X and Detroit, this is counted in the trade deficit. In a survey of current business released by the BEA, it puts forward that if they have an alternative ‘ownership’ based framework for measurement, this will reduce the trade deficit figure by over 30%.

You also have to look at how US countries service foreign demand. For countries like Germany, this is done using pure exports (which, in the case of Germany, accounts for around 40% of GDP). In the US, we export over 1 Trillion dollars a year, but the real way we service foreign market is by building and selling locally. These affiliates of multinationals will sell more than 4 Trillion dollars of goods and services this year. This phenomenon complicates trade a lot, by finding the role of inter-firm trade and production. If we sell a good in the USA, sell widgets to China, or make and sell a good in China, is that not tantamount to the same thing? It turns out that for every ipod sold by Apple, it makes the US trade deficit go up by USD 150. Is the US poorer because the world loves ipods? No, we accrue the high-value elements like intellectual property, profit, and so forth, and outsource the lower-value parts of the chain.

I can find you may times where the deficit has widened, and dollar strengthened, and vice versa, this is not a reliable means of forecasting currency.

For Japan, pre-crisis into 2007, it was amongst the weakest of currencies in terms of the trade weighted average. Look also at the Swiss Franc, they have a major surplus and are now intervening in the foreign exchange markets. There are a lot of factors influencing values.

When most people focus on trade, they miss a significant development, namely the huge and immense mobility of capital. The daily turnover of the foreign exchange market is around USD 3.2 Trillion, meaning that in a few weeks of trade, enough capital is circulated to pay for all of global trade in a year. Capital is the driver, NOT trade.

Q: What are your views on inflation and interest rates for the USA?

[Marc Chandler] In the near term, in 2009 and for most of 2010, inflation is not a major problem. That said, the key is not inflation. To use an analogy, when you squeeze toothpaste out of a tube, it’s quite hard to get it back in. By the same token, by the time you see inflation, it’s too late. The key is inflation expectations.

The first rate hike may come in August 2010, which will follow from around 3% growth over the next few quarters led by inventory, government and residential spending. These factors, including consumption, lift economies, and after a few quarters of growth, the fed will raise interest rates, maybe by 0.25%. Interest rates will, though, have to be raised for a while for monetary policy to become tight again. Right now, rate setting is akin to the moment when titanic hit an ice-berg. In ten months, the ship will be further away in safety, and they can adjust rates slightly, but I suspect they will still be low.

Q: To what extent is the dollar valuation politicised?

[Marc Chandler] For me, this is the key to the ‘strong dollar policy’ which Trichet keeps mentioning at the European Central Bank. Previous to the ‘strong dollar is in US interests’ speech, and before 1995, the US had several treasury secretaries who used dollar as a weapon against countries like Germany and Japan. A ‘strong dollar policy’ means the US is foreswearing against this kind of activity, and we will not purposely seek dollar devaluations to achieve policy objectives, but if the dollar falls because of monetary policy? So be it.

I think in some ways, the US has tried to depoliticise the dollar. The political economy is important, though, and the competition between nations is like playing chess on many levels. I can’t separate politics from economics, as this would be doing both disciplines a disservice.

Dollar has also taken on symbolic value, representing “Anglo-America” and capitalism, and this symbology also gives it value and imparts more than just ‘means of transaction’.

An example of the politics of dollar can be seen where recently China proposed its feelings that there should be an alternative international monetary regime. This was purely a political move as it would be impractical, any time soon, to do this. What they did was play a classic sports strategy where, “the best defence is to go on offence”. After many years of haranguing by the US to revalue their currency, they went on the offensive. This strategy worked in their favour as pundits picked up this proposal and ran with it, and the US has backed away from China-bashing, instead letting other forms like the IMF take charge.

Q: What are your views on commodities being non-dollar denominated?

[Marc Chandler] I don’t think this will happen for a long time, certainly not in my lifetime. Ronald McKinnon (Stanford) and many others have argued there is a natural monopoly for dollar. Imagine you are OPEC and you are looking at many different countries to sell oil. Having a single currency, rather than bringing instability, brings economies of scale and efficiency.

These changes do not, though, happen by agreement. Take, for example, the language of ‘Esperanto’. This was a made-up language, with no country, which intellectuals said the whole world should adopt. It is not an alternative to English, but English has become a language of speaking for the world. It is the same principle. There is inertia, but a lack of alternatives.

Even if you priced oil, for example, in Euros, SDR’s or even a basket which includes Gold. OPEC would still accumulate surpluses, as would China. This is not a pricing problem, it is about principles such as savings, investment, and consumption.

Another good example is the QWERTY keyboard. To replace this, you have to bring out something which is more a little better. Whatever replaces the dollar has to be a whole lot better which is currently beyond our imaginations.

Q: With emerging markets playing an increasingly important role, do you think there are any currencies traders should watch more carefully, and why?

[Marc Chandler] With the advent of Euro, we lost many currencies and currently the GCC are even talking about adopting a common currency. BRIC is a great marketing term, but for me, it lacks substance. China and India are at odds on many things, for example. What we find is that China is in the early stage of becoming the centre of the emerging markets, buying commodities, investing cash, and so forth. This seems like a new form of imperialism, akin to what the British and the French did historically.

In some African states, for example, they have Gold and Zinc, on the way, we will build a road, or deepen a port, but the aim is to buy the resources and leave. In many ways we will see China competing with emerging markets, rather than existing with them, due in part to a cheap currency pegged to the dollar. The Economist says, for example, that by the end of 2010, there will be over one million Chinese farmers in Africa. If the US takes a project, they may bring US citizens over for management roles, but China has a lot of unemployment problems, so they bring the workers too. What’s been happening is that the market thinks that emerging economies are dead, but some funds I speak to think that Poland and Brazil are safer than US treasuries!.

We have had a love affair and have mistaken cyclical and liquidity factors for nirvana. Some countries have made progress, like Brazil, but it could be that BRIC should be renamed CRIB as most, leaving aside China, are small and in the early stages of development.

Looking at other countries, though, markets like Indonesia are very interesting, and I think the gulf is too. It is a cycle; as currencies become more traded, spreads narrow and eventually investors feel safe to pile in. We look at frontier economies such as Vietnam, Kenya and even some of the Baltics (if they survive) in this way. Just as interesting are the currencies which may not exist in ten years such as those in Eastern and Central Europe.

There are also moves to create a single unified currency in Latin America and East Asia.

Q: Currencies are often used by ‘black box’ traders (e.g. quant funds), and by those developing trading models using technical analysis. How effective do you think statistical modelling is of currency movements? And do you think the number of market participants using quantitative trading systems influences prices? (eg. Everyone trades at same points, large volumes, etc)

[Marc Chandler] It has certainly been an interesting development to see the increased accessibility to the foreign exchange market. It does, though, raise a general question in the back of our minds about how markets work. In practice, many see it as a bunch of profit making people who work to create a clearing price, but that’s not how it works in practice. Think of a list of players including corporations, unit trusts (mutual funds), central banks and the like. These major players do not see currencies as an asset class, but as a risk that needs to be managed. Many equity funds do not hedge currency risk, they see it only as a transaction vehicle and central banks do not have any profit motive. Only some participants in the market are true profit seekers. These include inter-bank dealers, proprietary desks, and hedge funds. Some people say it is a zero-sum market, but in practice its more complicated as some participants look to lock in certainty and reduce risk, and some are there to make profit. I think black-box high frequency traders and other technical traders are a factor in the market, but they may not differentiate from other speculators. The real battle in the market is between the profit seekers, and the not-profit-seekers.

On the Wider Economy

Q: What do you think the true picture is of the state of the US and Global Economy? And what are the key factors you think will influence our ‘post crisis’ economy?

[Marc Chandler] Imagine a person who got hit by a car, who was wrapped up in a full body cast. Slowly they are coming off, but the patient is still bruised, there’s a lot of pain, but as more time transpires following the accident, the patient get stronger.

What worries me is that while policy makers were (necessarily) quick to respond, many key market participants have not sufficiently changed their behaviours. We, as major industrialised nations, have survived this crisis, but I am not sure whether, for example, Germany would be prepared to give up on its “40% exports” strategy (a behaviour). The US household net-worth fell by 14 Trillion dollars, it has recovered 2 trillion dollars and Q2/09 and a further again in Q3, but with rising unemployment there is still a lot of stress.

Many people in the US and Western Europe have cited that our children may have lower living standards as a result of this crisis. My view is that it many not be as bad. Instead of retiring at 60, we now work till 65, and our children may work till 70. In the US, we have a car for every licensed driver. Is this really necessary? If my son doesn’t have a car, but uses shared vehicles like “zipcar” is this really a change in living standards? We, in the US, go through 150 gallons of water a day per person. The WHO says you need less than 20, so if my son has to buy appliances that are water saving, is the standard of living less? But the net effect is that he is consuming less automobiles and water.

People talk of an age of austerity, but in the USA and in other countries, we look at the fact that people are not starving but the opposite. Maybe it’s my own milieu from being in New York, but I see the fact that people are not embracing progress and change, they see old is good and new is bad. Over time, people have to embrace progress, and not see it as a threat. Progress may be daunting, with job losses, and loss of standing, but we have to help each other through it. It is only through progress that we will overcome these problems.

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We can see, therefore, that the foreign exchange market is a more dynamic and complex system than many realise.

It may be useful for us to understand the market, more in terms of game theory, than in terms of any single discipline such as economics, mathematics, philosophy, sociology or otherwise. If we consider the global market as our game ‘theatre’, we can see a range of actors (including central banks, investors, institutions and corporations). Each actor has a different motive (profit seeking, stabilisation, risk management, transaction) and each may have different characteristics and behaviours. By looking at the market in this way, we can see the interplay of disciplines to help us understand the true dynamic, as each actor can be influenced by issues ranging from politics (for example, government policies), psychology (for example, flights to safety, market sentiment), economics (for example, macro data) and more. This kind of model not only provides a more realistic picture of the market, but helps understand the nuances and complexities which result in its behaviour and volatility, something which a ‘single discipline’ view could never provide.

This actor and theatre based model is becoming increasingly common in science, particularly biology, where similar models are used to more accurately simulate (for example) cells, viruses, and body systems.

For US Dollar, we can see that every economic crisis we have faced, historically, has created pressure on its status in the market. Marc explains, though, that the monopoly has not only created efficiencies in the market, but is borne of a deeper sentiment towards dollar as a symbolic currency representing capitalism and its many tenets. US economic and military strength, as well as its international reach will certainly help US Dollar maintain this commanding position in the future, as many international bodies (such as governments and corporations) are tied into the currency due to volume of reserves held. For many countries (such as Zimbabwe) for example, the US Dollar has been part of the mechanism which is delivering economic stability, and aiding them in entering an environment of global participation.

We must, though, always remain aware of the capability for the world to generate high-impact, hard-to-predict, and rare events beyond the realm of normal expectations (as characterised by Nassim Nicholas Taleb in his book, Black Swan). Many functions of life which held monopolies were, eventually, displaced by innovations which made the function considerably easier or better. In context, look at the impact of email on ‘the letter’ or the impact of mobile telephony on ‘fixed line’.

In the currency markets, there is nothing to say that within our lifetimes, there could be an innovation which displaces the US Dollar as a dominant force, but it would be impossible, until we see it, to understand the shape or nature of this innovation and until then, we must understand and appreciate, that the complexity and interdependence of global trade and financial environments means that the US Dollar will retain a necessary and efficient monopolistic status in the market.

As Barry Eichengreen once said, “More than Coca-Cola, the dollar is surely the United States' signature export.”

A Journey into Bioethics

noreply@blogger.com (Vikas Shah) — Mon, 12 Oct 2009 10:48:00 +0000

In this article, we have an enlightening talk to a world expert on Bioethics, Professor John Harris (Lord Alliance Professor of Bioethics at The University of Manchester). Professor Harris discusses the philosophy, practicality and laws surrounding bioethics, covering areas including genetics, human engineering, stem cell therapies, assisted suicide, the economics of healthcare, medical research, and human computer interfaces.

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Vikas Shah, Thought Economics, October 2009

“It has become appallingly obvious” said Albert Einstein, “…that our technology has exceeded our humanity.”

This quote is often used to illustrate the rather unique point we are in civilisation’s journey where real philosophical questions are raised about the advances we make. At the core of these questions exists humanity; specifically our relationship as a society, and as individuals with technology, its effects and products.

Bioethics concerns the philosophical questions raised by the fields of medical science, and biology. The debates raised bring together areas as diverse as ethics, religion, law, economics and politics. While such issues have been debated in the context of medicine since ancient times, it is only since the mid twentieth century that ‘modern bioethics’ has had a renaissance, as organ transplantation and palliative care (such as the use of respirators, dialysis, and so forth) began to raise questions about how and when care should be given, or withdrawn. These questions took bioethics from being an esoteric scholarly debate, to including thinkers from diverse fields, and the public consciousness.

During the twentieth century, the pace of change has meant that we now have access to technologies which can fundamentally alter the ‘nature’ of humanity, and allow us to control, modify and treat ourselves in increasingly novel ways. The field of bioethics now concerns itself with a vast swathe of inquiry, including (but not limited to) Abortion, Artificial Insemination, Assisted Suicide, Brain-Computer Interface, Cloning, Consent, Euthanasia, Genetic Therapy & Engineering, Healthcare, Life extension and support, Nano-medicine, Organ Donation, Population control, Stem cell research and Transplant trade.

These are all incredibly important and emotive issues which will shape the future of how our society relates to biology and medicine, shape the direction of medical and biological science, and even impact the nature of investment in these industries.

In this exclusive interview, we speak to a world expert in bioethics, Professor John Harris, Lord Alliance Professor of Bioethics at The University of Manchester. We talk to Professor Harris about the key debates, controversies and questions in bioethics.

To put his expertise in perspective, “On March 30th 2004 John Harris was appointed as the new joint Editor-in-Chief of The Journal of Medical Ethics the highest impact journal in medical and applied ethics. John Harris was elected a Fellow of the United Kingdom Academy of Medical Sciences (FMedSci) in 2001, the first philosopher to have been elected to Fellowship of this new National Academy which was established to serve “the medical sciences in the same way as the Royal Society serves the natural sciences and the British Academy serves the humanities”. He has been a member of The United Kingdom Human Genetics Commission since its foundation in 1999 and formerly served on the United Kingdom Government Advisory Committee on Genetic Testing from its foundation in 1996 until its closure. He is also a member of the Ethics Committee of the British Medical Association. He was one of the Founder Directors of the International Association of Bioethics and is a founder member of the Board of the Journal Bioethics and Associate Editor (Genetics) of the Journal of Medical Ethics , and a member of the Editorial Board of the Cambridge Quarterly of Healthcare Ethics and many other journals. John Harris is the author or editor of fifteen books and over two hundred papers. He has published in most of the leading philosophical journals in his field including, The Journal of Medical Ethics, Bioethics, The Cambridge Quarterly of Healthcare Ethics, The Hastings Centre Report and Philosophy & Public Affairs. He has also published in many of the leading science journals including Nature, Nature Reviews, Genetics, Science, Annals of the New York Academy of Science and The British Medical Journal. He currently holds research grants from the European Commission valued at around 1.5 million Euros.”

Q: What is the relationship bioethics and society?

[John Harris] Bioethics is the study of all of the ethical issues that arise in the biosphere, so everything from medicine to stem cells, genetic modification of crops and so forth. I rather like to say that if morality is the science of the good, ethics is the study of that science, and bioethics is the study of that science as it relates to biosphere.

Q: What is the relationship between bioethics and the medical research, biotech and pharmaceutical industries?

[John Harris] Well, no industry and indeed no activity at all whether commercial or not should act unethically, or immorally and so the relationship of bioethics, or ethics, to anything it studies is the relationship of authority. One way of putting it is like this…. There’s a story told of a mother who said to her daughter, go and see what your little brother is doing, and tell him to stop. Many people think the role of bioethics is to go and see what the scientists or doctors are doing and tell them to stop because they are acting, by hypothesis, unethically. However I often find when I go and see what the scientists are doing, they are doing wonderful things and I’m very inclined to say “great guys, keep going!”

Looking at some of the key debates in bioethics

Stem Cell Research:

Q: There has been a great deal of at least “journalistic” controversy surrounding this field. What are your views on the role of stem cells in medicine and your thoughts on perhaps the personhood and sentience debate which gets applied?

[John Harris] This again is a complicated question. Stem Cells, as you know, are cells that have yet to specialise. So, in principle, they can make any type of tissue. So a stem cell can turn itself into cardiovascular tissue (heart tissue), or it can turn itself into hair follicles, or skin cells or whatever, so the great advantage is believed to be, and this is proving true, that they are a wonderful therapeutic agent. They make possible what is now being called “regenerative medicine” so that you can make any cell type of whatever sort in principle (you cannot always do it in practice) but in principle you can regenerate it, and repair damage, or indeed enhance function. So, for example, if stem cells prove safe for use in the brain, you might use them to repair brain damage, but you might use them to increase or enhance brain function. So that’s the promise of stem cells, but where it gets ethically messy is where the stem cells come from, and because stem cells are cells that haven’t yet specialised, most cells in the early embryo are just such cells, so embryos are a source of stem cells, but you can also get stem cells from adults, and you can also re-programme adult cells like skin cells to become stem cells, however insofar as embryos have up to now in science been the main source of stem cells, those who think the embryo is sacred, and that you mustn’t create it in order to destroy it, or you mustn’t use it instrumentally to save the lives of existing people, exist to stem cells, and that’s where all the issues like sentience and personhood come in because then the question is, if your deriving your stem cells from the embryo and if the embryo is, as the catholic church, as the last pope but one’s chief bioethics advisor said, “l'embrione è uno di noi” (the embryo is one of us) and if the embryo is one of us, and has the same rights that you and I do, then of course you can’t just kill it to save the lives of others. Sentience is just the capacity to feel, so sentience enters morality because we generally think its not very nice to cause others pain in other words for a creature that can feel, to cause it to feel things which are unpleasant, such as pain or whatever, is not a nice thing to do. So sentience arises when a creature is sentient and we always have reason not to cause sentient creatures pain or suffering.

On Genetics and Human Engineering:

Q: What are your views on the role of genetic engineering in the future of our species as a whole?

[John Harris] There are many roles for genetic manipulation. Engineering is a sort of interesting word, but I would rather talk of manipulation. One is of course that there are many genetic diseases and if you can change the genes that cause those genetic diseases so that they either no longer cause them or you can delete them so that a disease process is arrested or reverse, that’s one thing, that’s a therapeutic use. Evolution, of the Darwinian sort occurs when random changes in the genes, mutations as they are called, prove advantageous in survival terms and they become in built into the species because the individuals with that genetic mutation, do better, survive better, than the individuals without. And it is through that process that we have managed to evolve from our ape ancestors somewhere between five and seven millions years ago in Africa, and in turn our ape ancestors managed to evolve from simpler creatures right back to single celled organisms. So, the role of genetic changes in the future evolution of our species is crucial, and if we are to evolve further, that will be based on genetic changes. They will either happen randomly and slowly as a result of Darwinian ‘biological’ evolution or more likely, as I believe and I argued in my book ‘Enhancing Evolution’ (Princeton University Press 2007) through deliberate genetic changes made by humans in order to improve our species, to make us more resilient, more resistant to disease, and hopefully longer lived and healthier generally.

Q: Looking at the role of genetics in information technology. What do you see as the ethical implications of genetic information, will we see genetic discrimination (e.g. Insurance, jobs market) and do you think we will see “engineered versus not engineered”?

[John Harris] Starting with genetic discrimination. “Discrimination” just means “choosing”, it just means that a person who is capable of discrimination is capable of seeing the difference between X and Y. We use it to mean unjust or unfair discrimination where someone is the victim of an adverse choice where somebody else is selected over them for a job or, indeed, to stay alive. Now all discrimination of the latter sort, where it is unfair, and results in people being treated adversely for no good reason as compared to their fellows or, indeed, being not allowed to survive, is always wrong, and genetic discrimination is just one type of that sort of discrimination, one of the ways in which we humans can, if not stopped by law and morality, adversely discriminate against our fellows. Racial discrimination and gender discrimination are two examples of genetic discrimination because although race is not a matter of genes, skin colour is, and of course gender is a matter of genes, and so gender discrimination and, indeed, discrimination on the basis of skin colour are examples of genetic adverse discrimination and, of course, we don’t want any of this - it is unjustified and unreasonable. The more we can find out about peoples genes, and the more people systematically differ according to genetic differences, the more opportunity we have for genetic discrimination, and the more we should be vigilant to not permit it.

Looking at, for example, the genetic predisposition to disease to permit insurance companies to raise the premiums for people with particular genetic constitutions is a form of genetic discrimination. I believe it to be unjust, I am pleased to say the Human Genetics Commission (on which I serve) has resolutely resisted allowing insurance companies to use genetic test results as a basis for setting premiums or, indeed, granting insurance or not granting insurance. However, insurance companies still use another way of getting at genetic information namely ‘family histories’. They know that if your dad and mum died of the same thing, and its genetic, it’s very likely you will die of it too. So if they are allowed to ask you what your mum died of, its another way of effectively doing a genetic test, and I would stop that as well – but that’s my personal opinion, not the view of the Human Genetics Commission.

Q: In terms of the fact that we’re now seeing research into the human computer interface, cybernetics etc, what do you think are the ethical and moral implications this raises?

[John Harris] I don’t think there are any general implications. I believe that it is right to use technology and science and the innovation that it generates, whether the technology is mechanical, chemical or biological to improve ourselves, to make life better. We talk of “human enhancement”. For me an enhancement is necessarily good because if it wasn’t, it would not be called an ‘enhancement’ it would be a ‘disadvantage’ or ‘injury’ which would be unethical. As long as its good for you, its not only a reasonable thing to do, but may be morally required. One of the most fundamental moral principles is ‘do good’ or if you cant do good ‘don’t do any harm’ or if you cant avoid harm, ‘do the least harm possible’. If you believe that, and I think we all do, then you should use enhancement technologies, if they’re safe to improve human individuals and human kind. One of the ways of doing that is to use computers and if we can interface with computers in a way that enables our brain function to be better that would obviously be useful. For example, I am getting older now, and my memory isn’t what it was, and I do use my computer and my Blackberry to aid my memory. I don’t remember telephone numbers but they are in my Blackberry, I don’t remember addresses, they are in my computer, I don’t remember lots of facts, and the computer supplies those for me. This seems, to me, to be harmless and the more efficiently we can do this, perhaps by having implants that did it automatically for us, seems to be to pose no problem.

Q: The world is under huge population strain, looking at the fact that we are potentially on the cusp of a Malthusian catastrophe, with the world under immense population strain, is it time for an ethical debate on prolonging human life?

[John Harris] I think its time for action to reduce birth rate. Why worry about prolonging life when actually the problem of population increase is the birth rate, and China’s one child policy in the cities is a strategy for coping with that and it seems to me that the right thing to do is decrease the number of people being born and aim not only for a stable world population, but a declining one. That is both the moral way to deal with this, and the most efficient. We shouldn’t be in the business of curtailing people’s lives, or stopping people living long lives if we can help them to. What we should do is reduce the replacements.

If you ask me what the best mechanism is for reducing the population, it is women’s education. Experience has shown that women’s education is the biggest factor in reducing family size and since women’s education is a good thing for other reasons, that is the way we should be going!

On Assisted Suicide and Abortion:

Q: what do you find are the key debates needed on assisted suicide and abortion from the perspective of the individual making the choice and the society supporting the choice?

[John Harris] Abortion and assisted suicide (voluntary euthanasia) are two very different things. Let’s deal with assisted suicide and voluntary euthanasia first. I have written extensively on this and to do justice to these complex ideas would require much supporting argument, but let me try to encapsulate it in this idea. I believe that there is only one thing bad about dying, and that’s doing it when you don’t want to. So if you think about it, what we all want is not to die when we want to go on living, not to die when we don’t want to die, but dying when we do want to, is not a problem. So I think our moral efforts, and political efforts, should be devoted to minimising the amount of people that die when they don’t want to and the corollary of that is that we should allow people to die when they do want to and of course if we’re worried about population, the more people that die when they do want to the better.

Abortion is quite different because in voluntary euthanasia and assisted suicide, by hypothesis, the individual whose life it is, is making a decision about their own life, as to whether they live or die. If you believe in freedom, you will help people to implement their own autonomous choices about their life. However, of course, in the case of abortion or in the case of non-voluntary euthanasia, we are talking about ending the lives of individuals who cannot want to die. Those are very different. To take a view about the ethics of abortion, you have to take a view on the moral status of the embryo. If you think, as I said earlier, that the embryo is ‘one of us’ and has the same rights as you and I do, then of course it would be unethical to kill it without asking its permission first. On the other hand, most people think that it is inconceivable that the embryo has the same moral status, or indeed any moral status comparable to an adult person because it certainly the early embryo cannot think or feel, has no central nervous system etc and so cannot have rights or interests. The ethics of abortion turn on what you think of the moral status of embryo. But let me put to you this one suggestion. I think it is impossible to treat the embryo as if it were of full moral status; I’ll give you one illustration of that. Human sexual reproduction, the way most people reproduce, has a very high failure rate, around 80%. This means that you and I are sitting having this agreeable conversation, over the dead bodies of between three and five of our siblings that were conceived by our mother, but didn’t last very long. In order for this live birth that resulted in you, and resulted in me, to occur, some of our other siblings (between three and five) had to be conceived and die early, because that’s the way reproduction works. For every live birth between three and five embryos die; so everybody is sitting here, over the dead bodies of their siblings, and if they’re pleased to be alive, by hypothesis, they are pleased that those siblings didn’t survive!

On The Economics of Medical Care:

Q: Do you think access to healthcare is a human right? And, indeed, is it a responsibility of governments to provide universal healthcare for their citizens?

[John Harris] I think access to healthcare is very important. I tend not to use the language of rights if I can avoid it, except to add rhetorical force to what I say. The better way to look at it is not as a human right because you then have the problem that if a particular society doesn’t have the resources to deliver healthcare, are they denying human rights to their people? Well, not if they can’t generate the resources. For some African countries, for example, the available money for healthcare per capita, is something like ten dollars and you can’t deliver a comprehensive healthcare system on that sort of funding. What is an entitlement, and what is very important is firstly that we should care for other people if we can (including care for their health). This is one of our basic moral duties, partly the duty of beneficence (the duty to do good and not harm), and partly the rule of rescue (that if someone is in need of healthcare, they are in need of rescue) and a good person will try to rescue someone if he or she can. So rather than think of it in terms of rights, we have very strong moral reasons to provide healthcare to the best standard we can. That standard will vary from society to society.

Q: There has been some controversial debate on the ethics of providing care for certain specific conditions in the face of scarce resources, what are your views on the debate of “Who should be treated when not all can be treated?”

[John Harris] My firm belief is in equality, that each of us is as valuable as anyone else, and that value is not diminished by our health state, and is still less diminished by some bizarre view of our responsibility for our adverse health. So somebody in my view does not lose their entitlement to equal concern, respect and protection, just because they have one sort of disease rather than another, or even if they were partly responsible for the fact that they have a particular disease, illness or injury. I think the decent person, the moral person, will help another regardless and I hope that our societies will reflect that. So, for me, it doesn’t matter what illness people have, and that’s true for most doctors too. The duty is to help the individual, not to enquire as to their moral character as they see it.

Q: Looking at pharmaceutical and medical research industries. Do you think that intellectual property has affected treatment? Do you think the role of investment into medical science and research has introduced ethical bias?

[John Harris] This is, again, a complex issue. You have to ask whether patents facilitate or inhibit science. This is a complex and factual question, not theoretical. There is a lot of good reason to believe that patents have an adverse affect on scientific freedom, and hence have an adverse affect on the ability of science to deliver the innovation and the pipeline of products, of whatever sort, that flows from innovation. What a patent does firstly is lead to secrecy in science as people don’t publish their results until patents are granted. Once they have a patent, this restricts others ability to utilise these products. Patent holders always claim that unless they can protect their intellectual investment, they have no motive to carry out the research that leads to it, and they will also not be able to make enough money to prove the principle that leads to the product whether a drug or otherwise and therefore not only will medicine suffer, but people will suffer. I am sceptical of that, but that’s a factual question. I think there is good reason to believe that it’s worth trying different systems of reward for science. The patent system is just one system of reward, but not the only one.

I think bioethics is pretty much neutral in the direction of research, but patents are not. If you are a “for profit” industry, you need to investigate things that will generate profits and that means that, of course, you are not interested in what are sometimes called ‘orphan diseases’ (diseases that affect very few people) and you are not often interested in diseases that affect only poor people, or people in poor countries. The current system of reward is not a very good way of making sure that all humans get an equal chance of benefiting from the products of science, and that is really what we want to do.

My hope is that we will move rapidly, to different systems of reward; where scientists will have more of an incentive to produce products which are not [necessarily] highly profitable, but are highly beneficial.

Q: We have seen, in some extreme cases, markets developing in human-organs (whether by the sellers volition, or otherwise). What are your views on the apparent commoditisation and internationalisation of organ transplants, and do you think there is any way to effectively regulate the markets of organ donation and transplanting?

[John Harris] I see nothing, in principle, wrong with the commoditisation of the body. I’m not getting paid for this interview, but I often give interviews for money, and that is part of the commoditisation of the body, I am selling my brain power or my power to talk. Most of us sell parts of our bodies in that way. Very few people could be gainfully employed if they weren’t selling their labour (which is a bodily product) and so forth. In terms of organ transplants, I think we need to distinguish between organs from the dead (the prime source of organs to transplantation) and organs from the living. In my view, there is no point in paying for organs from the dead, because we ought to have them for free. The dead don’t exist to be paid. We don’t want to reduce the supply by having to pay for it, thus increasing the costs of organ transplantation. They should be freely available, no dead person needs their organs, I promise you that! And no dead person has ever complained of their organs being taken. It is for those two reasons we should always have organs freely available from the dead. From the living, it’s a different question. The living have to consent. Live organ donations are more successful therapeutically than organs from the dead (cadavers) and many transplantations now take place from the living. In many countries, it is forbidden to sell live organs. I think that is ridiculous and wasteful. Its sometimes defended in terms of altruism, insofar as it should be a ‘gift’ relationship but that’s nonsense.

A neighbour of mine gave one of her organs freely to a stranger without pay (she didn’t want to be paid for it). Nonetheless, she suffered some financial hardship as she was off work and it was painful and so forth, and she was not adequately compensated (in my view) for that. I see no reason why she shouldn’t have been paid because everybody else was paid in the donation she gave. The transplant surgeon was paid, the nurses were paid, the transplant team were paid, the ambulance driver was paid, and the recipient of the organ was paid handsomely in kind! The only poor person who was required to be altruistic was the donor. That’s not altruism, that’s enforced altruism on the person who risks most, and is most generous. That’s not fair. I see, therefore, nothing in principle wrong in paying for live donor organs.

Can this be regulated? Of course it can. I will give you a simple recipe for its effective ethical management. Any organ market for live donor organs has to be confined to a self-governing entity, like a nation state or possibly like the European Union. There is one purchaser, purchasing organs on behalf of the community (like the NHS might) and distributing according to need. No direct sales, no buying from the poor and selling to the rich. Anybody who would sell their organ into the market benefits three ways. They get paid for the organ, they reduce the chances of anyone they care about (including themselves) needing an organ transplant and failing to get one. They benefit financially directly, they benefit because they contribute to a system which could wipe out shortage of donor organs, and they are paid because they have done something wonderful, and it is always great to do something wonderful. A market that was developed along those lines, I have written about this for almost ten years, I believe could be ethically managed and safe. The organs could be screened and checked, and it would ensure safety of recipients and so forth.

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As we look at the complex interplay of issues surrounding bioethics, we see an underlying common thread, that of morality.

Gerard Hughes, a former Chair of the Department of Philosophy at Heythrop College (University of London) describes (in Great Thinkers on Great Questions, by Roy Varghese) “Morality has to do with what enables human beings to flourish. How humans can flourish will, as Aristotle pointed out, and as has often been repeated since then, depend on the kind of beings that humans are. What it takes for a human being to flourish will depend on our common human nature and on the particular qualities which each person possesses as an individual, and on the environment, physical and social, in which that person lives. If something like that picture is correct, it will follow that morality will require us to treat different people in different ways, both because of their individual differences, and because of the different settings in which we encounter them. There will be no one single recipe for enabling a person to achieve their optimum development. Morality should reflect the complexity of human beings and their various physical and social environments, even when it can correctly be said that these environments are far from ideal for humans to have to live in.”

He continues… “Moral principles cannot sensibly be formulated independently of our knowledge of biology, psychology, economics and the human sciences generally. To the extent that our knowledge in these areas is incomplete or grossly inadequate, so will our grasp of moral truth be uncertain…. Two kinds of difficulty exist. The difficulty in knowing whether a human life is a worthwhile human life or not; and the difficulty of knowing by what precise steps a worthwhile human life can be fostered.”

The challenge here is to create parameters around which principles can be set. This is a challenge which is frequently undertaken in the field of human rights. James Griffin, The Whites Professor of Moral Philosophy Emeritus at the University of Oxford, describes in his 2008 book (entitled ‘On Human Rights’), “…In a statement issued through the Secretary-General of the United Nations, [it was] claimed that ‘the opportunity to decide the number and spacing of their children is a basic human right’ of parents. Does China’s one-child policy then really infringe a human right? Would a five- or a ten-child policy do so too?” This clearly raises the debate about parameters for the individual, and principles for a society in the face of a population crisis. He goes on to argue on the topics of abortion and selling organs, “If the government were to prohibit us from selling our body parts, as many governments are thinking of doing, would our human rights not be infringed? This proposed right is not dissimilar to a widely accepted human right – a right to the security of person. But one’s person’s being secure is considerably different from one’s body’s being in all respects under one’s own determination. How are we to tell whether we have such a strong right? We do not know. The term ‘human right’ is nearly criterionless”.

To further illustrate this difficulty on setting criterion (parameters), let us refer to a famous paper by American Philosopher Judith Jarvis Thomson entitled, “A Defence of Abortion”. In this paper Judith describes, “Most opposition to abortion relies on the premises that the foetus is a human being, a person, from the moment of conception. The premiss is argued for, but, as I think, not well. Take, for example, the most common argument. We are asked to notice that the development of a human being from conception through birth into childhood is continuous; then it is said that to draw a line, to choose a point in this development and say ‘before this point the thing is not a person, after this point it is a person’ is to make an arbitrary choice, a choice for which in the nature of things no good reason can be given. It is concluded that the foetus is, or anyway that we had better say it is, a person from the moment of conception. But this conclusion does not follow. Similar things might be said about the development of an acorn into an oak tree, and it does not follow that acorns are oak trees, or that we had better say they are.”

Her thoughts on abortion were, by many, considered controversial, but they do highlight the convergence of science, philosophy and religion which had previously existed as separate disciplines. Our advances are making us question the very nature of humanity itself, its place in the ‘grander scheme of things’ and its obligations to itself as a society, to itself as individuals, and to itself as a metaphysical entity.

As technology increases its pace, these debates will only get more profound as it is conceivable, to take example from computing; that by the year 2020, we will have access to computers with the power of the human mind, and by 2050, to computers with the power of all human minds (Ray Kurzweil, The Singularity is Near). This raises philosophical debate about the nature of consciousness, and of life itself.

Needless to say, humanity must adapt to advancements, and be judged on the outcome of their behaviour. John F. Kennedy described this well, albeit in a different context, in a famous speech given in 1962, “…We set sail on this new sea because there is new knowledge to be gained, and new rights to be won, and they must be won and used for the progress of all people. For space science, like nuclear science and all technology, has no conscience of its own. Whether it will become a force for good or ill depends on man, and only if the United States occupies a position of pre-eminence can we help decide whether this new ocean will be a sea of peace or a new terrifying theatre of war. ...Many years ago the great British explorer George Mallory, who was to die on Mount Everest, was asked why did he want to climb it. He said, "Because it is there." Well, space is there, and we're going to climb it, and the moon and the planets are there, and new hopes for knowledge and peace are there. And, therefore, as we set sail we ask God's blessing on the most hazardous and dangerous and greatest adventure on which man has ever embarked.”

African Agriculture – Humanitarian Challenge, Economic Opportunity

noreply@blogger.com (Vikas Shah) — Wed, 30 Sep 2009 10:51:00 +0000

In this article, we talk to Susan Payne, CEO of Emergent Asset Management and discuss Agriculture, a keystone industry for Sub-Saharan Africa, a region which is home to almost a billion people and presents one of the greatest humanitarian challenges and economic opportunities of modern civilisation. In this exclusive interview, we discuss the future of Agriculture in the region, climate change, hunger, investment opportunities, macro-economics and more.

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Vikas Shah, Thought Economics, September 2009

Sub-Saharan Africa (SSA), home to over eight hundred million people (around 10% of the world’s population) represents one of the greatest development challenges facing our world. The region is a vast swathe of continent, encompassing many countries including Angola, The Democratic Republic of Congo, Kenya, Ethiopia, Somalia, Botswana, South Africa, Zimbabwe, Ghana, Nigeria, Sierra Leone and Senegal.

Global agencies agree that this region presents one of the greatest development challenges which our civilisation faces, with political, economic, social and environmental crises, exacerbated by domestic and international conflict, corruption, health and other issues. Current statistics from the UN Food and Agriculture Organisation show, for example, that 210million people are already chronically malnourished across the region (30% of its total population), resulting in at least three million hunger related deaths annually.

In the past decade, international aid and support have brought a degree of change to SSA, meaning the probability of an African country experiencing growth acceleration increased to 46% in the last decade, up from 21% in the previous decade; the probability of growth deceleration decreased to 12%, down from 36%. Looking at a specific measure, in 2000–2006 the average GDP per capita growth in SSA was 2.0%, up from –0.7% in 1990–1999 with overall GDP being US$744 billion, which was equivalent of 28% of China’s GDP, 69% of Brazil’s, 74% of Russia’s, and 80% of India’s. (Source – World Bank)

With almost 44% of the population aged between 10 and 14, and estimates putting the total population of the region at 1.5 billion by 2050, it is clear that not only are these significant challenges to meet, but significant areas of economic opportunity.Critical to the economic and social wellbeing of the region is Agriculture, with around 65% of SSA’s total population relying on subsistence farming. The keystone nature of this industry is highlighted in the United Nations Development Programme’s “Millennium Goals” where the first key target is to, by 2015, “Eradicate extreme poverty and hunger”. Most international agencies concur that agricultural development is the focus to achieve this result.

Sub Saharan Africa has, though, potential to become a global-agriculture powerhouse, but still remains a net food importer (with, in 2005, a negative balance of $4.6billion) and struggles to meet the basic needs of feeding its population. While challenging environmental conditions have certainly contributed to these reduced crop yields (less than 30% yields versus equivalent land in Asia), foreign aid into the sector has significantly declined (cut by almost 75% in the past decade) which has prevented farmers gaining access to the infrastructure and technology to exploit land, improve crop yields (taking lessons from the Asian green revolution) and build an economy.

Historically and recently, many of the world’s great social challenges have been supported by private enterprise, whether through philanthropic foundations, or commercial ventures. Africa’s issues are no exception to this, with a mix of organisations ranging from governments, to NGO’s, and private enterprise entering the market to bring about the rapid changes the country needs to survive and prosper.

Susan Payne is the Chief Executive of Emergent Asset Management who are a multi award winning UK investment management firm. She is ranked as one of the top 100 most influential women in European Finance, and has over twenty years experience on buy and sell side of emerging markets. “The Emergent African Land Fund”, in their own words, “offers investors the opportunity to participate in the growing Sub-Saharan agricultural sector. It applies modern management disciplines and introduces improved farmland techniques to increase crop yields and investment returns. Initially, the investment focus has been in South Africa and Mozambique, though the portfolio is swiftly being expanded within Africa to include (but not limited to) countries such as Botswana, Zambia, Angola, Swaziland and the DRC. Emergent has partnered with Grainvest, a firm of professional agricultural traders and one of the top five participants on the South African Securities Exchange, involved in agriculture locally, including farming, manufacturing, and transport and trading. Together with Grainvest, Emergent has formed the operating company "EmVest Agricultural Corporation", which has brought together a highly-experienced farm management team to manage the Fund's investments. The Fund qualifies as a Socially Responsible Investment (SRI) in keeping with the co-managers’ investment philosophy, endeavouring to make a positive contribution to the well-being of the local communities in which it invests.”.

In this exclusive interview, we talk to Susan about the Emergent African Land Fund, the impact of agriculture now, and in the future, why African Agriculture represents such an opportunity for investors, and the impact of climate change, politics, technology and economics on the region.

Q: Why invest in Agriculture? And what are the key drivers for your investment and return model?

[Susan Payne] Regarding why agriculture: There are various alarming statistics in food security. Globally, we have neglected this topic [agriculture] for decades. We have, worldwide, over a billion undernourished people. Food prices have risen over the past few years, with our own research showing these should accelerate up from 2010. The world’s demographics are also alarming: The world’s population has quadrupled in the twentieth century, doubling between 1960 and 2007. For the first time in history, we have seen the global urban population exceed the rural one, and, over the past forty years, agricultural-land has increased by only 10%. Two words, food security, are central to our model.

Q: Why Africa? And what is the role of Agriculture, as a sector in Africa’s social development?

[Susan Payne] Africa is an enormous continent, larger than the US, China and Europe combined. It represents 20% of the global land mass, and only 10% of the world’s population. It offers an un-crowded space of opportunities including minerals, natural resources, water and agriculture.

Africa has many drivers. It is the fastest growing continent globally, and the African population between now and 2050 will grow faster than anywhere else in the world including in India, China and Latin America, other countries with compelling demographics. When you look at the numbers, over half the sub-Saharan African population is under 18 years old, versus Latin America, where over half the population is under 25 years old and Asia, where it is under 35 years old. In short, these EM populations are young, expansive and dynamic, not like the stable, more risk-averse populations of the world’s developed economies.

Finally, over 70% of the labour force in sub-Saharan Africa (SSA) is involved in agriculture. This means the sector forms a lynch-pin of society. Our focus at this time is SSA as the region is highly productive and fertile. The SSA zone makes up 6.5% of world GDP, but has enormous upside. To give you a comparison, let’s look at Latin America versus sub-Saharan Africa. In Argentina, 50% of the GDP is derived from agriculture, while in South Africa that number is only 6%. With the introduction of better technology into SSA, as we are now doing, there will be a dramatic increase in productivity and GDP growth. In other words, there is strong upside potential.

Historically, Africa has been viewed by many countries as a ‘burden,’ whereas the BRIC’s see it as an enormous opportunity. To put this in context, Europe has twice as much trade with Africa as does even China, so Europe must wake up to the fact that Africa is an important and relevant opportunity, not a burden. China is, though, already making inroads on the continent, building roads, dams, commercial real estate and generally financing expansion from Angola to Ethiopia. This level of Chinese interest has, invariably, lowered western leverage. How Africa is now perceived is interesting, and Obama is the proponent Africa has had for a very long time.

Q: What are the key challenges EAML faces on the ground? And what are the development strategies EAML employs?

[Susan Payne] In any investment, but particularly in emerging markets, the investor must be well rewarded for the risks taken. The returns in Africa are very strong, and we are experienced on the ground with our various local relationships. The risks, though, to the strategy are, in no specific order:

Climate change is a J-curve, not linear. Rates of change globally are occurring at a faster pace than the global population expects, and will impact food production. To mitigate the fund’s risks, we have diversified across ten to twenty commodities and across several countries with different longitudes and latitudes. We have focused on the various micro-climates available on the highlands, and our farms are always located beside large water reservoirs, lakes or rivers.

The risk of commodity price fluctuations is also a threat, which we mitigate through hedging and price modelling. We employ production protection (insurances) against natural disasters. Political risk is another, and we work closely with local governments, who are very supportive of our work as we address their own concerns of providing local employment, training and socially responsible projects, and increasing food production through the introduction of cutting-edge technology.

Technology is an important part of our strategy, key to maximising production. Green tech is revolutionising farming in tilling, water, electricity and other areas.
We are also importing technologies from around the world and, unlike Europe in particular, these countries are open to employing technology which can bring about great increases in productivity.

Finally, once we have checked and been satisfied that the potential risks to our projects have been addressed, we can begin to optimise our assets, and build capacity quickly.

Q: What are the infrastructure capabilities in African banking in terms of trading of agricultural commodities and hedging? And how does Africa’s financial system engage with the sector?

[Susan Payne] Africa is turning a corner, and it is important to consider the bigger picture. From about 2000, Africa has come into an economic renaissance: Between 2000 and 2008, we saw a marked improvement in macro-economic stability, with inflation falling and interest rates hitting single digits even in areas like Nigeria. We have seen robust GDP growth, 17% in Angola and 5.5% in Ghana and Nigeria in 2008 for example, combined with increases in FDI (Foreign Direct Investment), which was up25% year on year between 2000 and 2005. In many countries, we have also seen a return to democratic rule, with the liberalisation of sectors such as telecommunications, and a range of financial reforms. These changes span from countries such as Nigeria to Egypt, Mauritius to Mozambique. There has definitely been a sea-change, first in South Africa, and now in other countries we are seeing investment in job creation, infrastructure, and concerted attempts to achieve an open and transparent environment. Ghana had its first democratic election, for example, in 1992, South Africa in 1994 (Mandela’s era), and thereafter there has been a whole series of political changes on the continent.

In Africa today, we see sounder monetary policies than a decade ago, strong GDP growth, and twenty four stock markets posting good returns, excepting 2008. They are not big (apart from South Africa and Nigeria), and many are quite illiquid, but they are growing. A study completed over the last year on regulation by the World Bank highlighted Burkina Faso, Botswana and Senegal as three of the top ten best regulated countries in the world.

Q: What impact has climate change had on African agriculture?

[Susan Payne] Climate change is a key consideration in the agri space for obvious reasons. We have a number of “Big Picture” themes for our investments, and climate change is a cornerstone to these.

I discussed climate change earlier, but, in short, natural disasters are rising globally, thereby increasing risks, and climate change is impacting weather patterns, habitats and ecosystems in every environment. We are seeing retreating glaciers, hotter temperatures, and rising sea levels globally.

Water, for example, is a major issue. The concentration of water levels around the world is very interesting, and sub Saharan Africa, for example, has a full four times higher the water concentration level than South America. It is only half of Canada’s but is still well saturated compared to most of the globe, with concentration levels similar to Eastern Europe, yet with land that is one seventh the price.

Obama’s Global Change Research Programme which, three months ago, released a paper highlighting the impact of climate change in America, noted shorter winters, increased flooding and declining forestation. The key finding of the report was that, “climate change will intensify and challenge society’s ability to adapt”. This is a fact, and we are, for example, very alert to global changes. If you look at global warming and temperature change, increased desertification is one outcome. China, for example, loses 1 million hectares every year desertification, an area the size of Greece and Nepal combined. The effects will be greater in the Northern than the Southern hemisphere, with expected temperature rises in Africa being lower than its counterparts north of the equator.

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We can see, therefore, that what is needed is a co-ordinated approach, covering all facets of human economic and social development, ranging from healthcare to education, telecommunications to infrastructure and energy to government.

For Sub Saharan Africa, the challenge is acute. This is a region which should be a global economic powerhouse, but is currently facing economic and social crises of huge proportions, with some arguing that many countries in the region are on the brink of a Malthusian catastrophe. At the heart of all these approaches is Agriculture which is not only the only solution to a hunger crisis, but provides the keystone in generating social, economic and even political stability for these regions, and the impetus to grow and develop. “Africa…” said Mafa Chipeta of the Food and Agriculture Organisation, “needs to be offended at the idea of a grown-up continent being fed by others that have no obligation to do so.”

The solutions are, though, faced with challenges, one of the largest being Climate Change. On September 30th 2009, the International Food Policy Research Institute released an important report, entitled, “Climate Change, Impact on Agriculture and Costs of Adaptation”. The report discusses how, “The unimpeded growth of greenhouse gas emissions is raising the earth’s temperature. The consequences include melting glaciers, more precipitation, more and more extreme weather events, and shifting seasons. The accelerating pace of climate change, combined with global population and income growth, threatens food security everywhere. Agriculture is extremely vulnerable to climate change. Higher temperatures eventually reduce yields of desirable crops while encouraging weed and pest proliferation. Changes in precipitation patterns increase the likelihood of short-run crop failures and long-run production declines. Although there will be gains in some crops in some regions of the world, the overall impacts of climate change on agriculture are expected to be negative, threatening global food security. Populations in the developing world, which are already vulnerable and food insecure, are likely to be the most seriously affected. In 2005, nearly half of the economically active population in developing countries—2.5 billion people—relied on agriculture for its livelihood. Today, 75 percent of the world’s poor live in rural areas.” The IFPRI conduced extensive research with a climactic model to simulate various scenarios of climate change from mild to extreme, and in the results of the analysis suggest that, "agriculture and human well-being will be negatively affected by climate change" with specific findings including:

• In developing countries, climate change will cause yield declines for the most important crops.

• Climate change will result in additional price increases for the most important agricultural crops–rice, wheat, maize, and soybeans. Higher feed prices will result in higher meat prices. As a result, climate change will reduce the growth in meat consumption slightly and cause a more substantial fall in cereals consumption.

• Calorie availability in 2050 will not only be lower than in the no–climate-change scenario—it will actually decline relative to 2000 levels throughout the developing world.

• By 2050, the decline in calorie availability will increase child malnutrition by 20 percent (almost 25million more malnourished children) relative to a world with no climate change.

• Climate change will eliminate much of the improvement in child malnourishment levels that would occur with no climate change.

• Aggressive agricultural productivity investments of US$7.1–7.3 billion are needed to raise calorie consumption enough to offset the negative impacts of climate change on the health and well-being of children.

These are startling and real statistics which arguably are the effect of mankind as a cause.

We are seeing a pivotal point in our civilisations story. We have emerged through hundreds of years of conflict, colonisation and development to a point where we, as a race, are globally connected and (arguably) enlightened.

“Business…” said Jeffrey Sachs, “often does a good job supporting communities: the arts, universities, and scientific enterprises... But that philosophy has rarely reached poor countries. Even businesses that are enlightened in their home bases see Africa, Latin America, and parts of Asia as places to exploit natural resources or use cheap labour.”

This attitude has been symptomatic of the past half-century, but is an attitude which must shift. Economic and Social injustice have been a part of our world since records began, but this is the first time in our story that we are technologically, economically and intellectually able to create change. The shift in view comes at a huge ‘cost’ to our incumbent attitudes, but as we have seen through history, it is these very shifts which bring about benefits to all of humanity economically and socially.

“You cannot hope to build a better world without improving the individuals. To that end each of us must work for his own improvement and at the same time share a general responsibility for all humanity, our particular duty being to aid those to whom we think we can be most useful.” - Marie Curie

The Future of Space Exploration

noreply@blogger.com (Vikas Shah) — Sun, 23 Aug 2009 10:03:00 +0000

In this article, we speak to Dr. Buzz Aldrin, Apollo 11 Astronaut, who secured his place in history when, on July 20th 1969, he became one of the first two humans to set foot on the Moon. We talk to Dr. Aldrin about the relationship between humanity and space, the future of space exploration, its economics, and the commercial opportunities it presents.

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Vikas Shah, Thought Economics, September 2009

Humanity has an innate spirit of adventure, which, over many thousands of years, has given our civilisation some of its greatest triumphs, conflicts, and evolutionary leaps. These leaps have (in the main) come from crossing frontiers, learning more about our place in ‘the grander scheme of things’ and thus bringing a paradoxical sense of humility and power. The former from understanding that we exist in a system larger and more complex than we could possibly comprehend of which we are a part, not the cause, and the latter from our sense of empowerment at being able to engage ourselves in adventures which cross frontiers of knowledge, reach and understanding.

Space has, throughout history, been regarded as the greatest of these frontiers, representing a right of passage for civilisation outside its safe-harbour (Earth) and regarded, by many space advocates, as an essential step in ensuring our race continues. "I don't think the human race will survive the next thousand years” said Stephen Hawking, “…unless we spread into space. There are too many accidents that can befall life on a single planet. But I'm an optimist. We will reach out to the stars."

While Prof. Hawking’s view is based on his feeling that humanity has now got the tools to, whether by accident or design, destroy itself (specifically nuclear and genetic technology and artificial intelligence) there are many other reasons why Space exploration presents a necessary and inevitable step for our species’ ‘story’.

Dr. Buzz Aldrin is a man who requires little introduction. Following a distinguished career in the US Air Force, he joined NASA. After flying in the Gemini missions, he progressed to the Apollo programme, where, as the lunar module pilot of the Apollo 11 mission, on July 20th 1969, he and Neil Armstrong took their profoundly important steps, becoming the first two beings to observe Earth from another celestial body.

Since his retirement from NASA in 1971, Dr. Aldrin has been a major Space advocate, and in this exclusive interview, we talk to him about the relationship between humanity and Space, the future of space exploration, politics, economics, opportunities, innovation, and the spirit of adventure.
Q: What is the economic role and significance of space exploration in our civilisation’s future?

[Buzz Aldrin] I think the aerospace industries of the U.S. and all nations will gain from considering the return from, for example, satellite reconnaissance, and many other areas that I’ll touch on.

Reconnaissance and defence in particular though, are important not just for offensive operations, but to maintain peace. The more one knows about potential adversaries, their resources, and their abilities to damage the economics of other nations, for example, is the real return from reconnaissance activities. A missile launched upwards as high as possible, instead of “at a target”, which then detonates a nuclear device, could cripple most all of the low earth orbit satellites. This would be detrimental to all nations, especially those who rely so heavily on space assets. Defending against these kinds of attacks is hugely dependent on the health of the aerospace industries. As far as the United States are concerned, we have a history of being defensive of liberty and freedom throughout the world, and I want to stress that we have a lot of assets up there so we, in particular, need to stress the importance of these issues, with encouragement and co-operation of international organisations rather than just those who are critical of the weaponisation of space. At the opposite end of the defence spectrum, we have the issues concerning the survival of economies and major assets on the surface of the earth. This may depend on our ability to detect and defend against impacts from outer space which could be very damaging to entire civilisations, and major portions of the earth. In space, to advance to a point where we have planetary defence is a significant and important option for us.

The resources of the earth are not limitless. We are finding, through scouting, resources and minerals that are located on spotty locations around our planet. These did not all come from the core of the earth, but from the impact of objects with the earth. Those objects also impacted the Moon, and many of them have not yet done so. These objects are, of course, asteroids. The easiest transport of these asteroid resources is not, though, from the Moon or Mars, but using the asteroids themselves, and once space transport has matured, the time to deliver resources is no longer a function. For example, the speed of oil tankers is no longer a function once the supply line is set up.

As an observation, maybe as my observation for the short term for the United States, building up the capacity to visit beyond the Moon with significant capability including human visits, assures potential economic leadership in asteroid resources. At the Moon, excavating or inspecting around the surface and craters for minerals is, indeed, a hugely difficult task, but breakthroughs may come. Also, when we consider some who view oxygen (from surface dust, water or ice) as being an abundant resource on the Moon, they often don’t consider the paradox of using oxygen fuel from earth to go to the Moon, to get oxygen fuel and use oxygen fuel to get back. This may not, therefore, bear a good economic return. People have also mentioned helium three from the Moon. I’m a little sceptical because, as yet, we do not have a reactor that can use helium three. My view is that there may be other isotopes on the Moon like Boron 11 which are not radioactive, and are more plentiful. These could be processed sooner, and in a less costly manner than helium three (which does not generate neutron free reactions).

Looking at space tourism, my view is that we are a long way off. We may have people in orbit, but much beyond swinging by the Moon (an extension of earth orbit) I am not sure where the economic return comes from tourism in space.

The inspiration of youth for education in the science, technology and maths disciplines is also a critical role for space. A nation like the U.S. which has reached the peak of manufacturing and trade in comparison with other areas of the world, ought to hold onto what it has as far as the inspiration of the education system goes. I am concerned that we, in the U.S., are not doing this well, as we should be using space to inspire and motivate people into science, engineering and maths. This is obviously an economic return from space.

Philosophically, there is also the role of space in the ‘total survival’ of humanity. Sooner or later an intelligent species must realise its obligation, not just to future generations, but to all the lives that been lived productively in the past. All the knowledge, progress and dedication of these many billions of lives served could be wiped out. Many would judge that an even greater loss, than the loss of future generations.

Q: Will space teach us anything about our home environment on earth? And what is the role of private enterprise versus governments in the future of space exploration?

[Buzz Aldrin]There have been a few emails exchanged which talk about the results of a catastrophic loss of environmental control on earth. There are many influential individuals who are quite extreme about this, I am not among them. For the satisfaction, though, of those who are concerned about the extremes of conditions that could be brought about here on earth, it seems that the immediate expenditures are not shared between those producing the adverse affects, and those spending to mitigate them. People want just those who can afford it, rather than those who produce it (e.g. Asia which produces a lot of the environmental degradation) to spend the money. I suspect, personally, a lot of this field is political.

There may certainly be opportunities to learn from other planets about the evolving nature of natural influences which can teach us a good bit about nature here on earth, and how these influences could be detrimental in the long term to our environment. I mentioned before about mining and minerals, but I’m talking more about phenomenon such as climate change, and dust storms (such as those which exist on Mars) which would have to be coped with. The extremes of temperature, the scarcity of water, we will have to learn about how to deal with all these things on the Moon and other places. As we learn how to deal with these severe environmental conditions, in vacuum environments or limited atmospheres, and in very different gravity, we can inevitably learn how to understand and cope with changing conditions here on earth.

Looking at the role of private enterprise, I think we are beginning to see the areas where commercial profit making endeavours can stem; for example commercially designed space-craft and rockets which could deliver U.S. and other astronauts to the space station, in return for compensation. This provides an economic benefit which alleviates governments from getting involved in endeavours which are not directly involved in exploration. Commercial organisations are also able to get involved in refuelling, by taking fuel into space, and selling it to someone who wants to use it in low earth orbit, for lunar missions, or other purposes. This can be done by many nations who cannot afford big rockets and the total exploration package. This is something which I know is being looked at very seriously, and something which I firmly endorse as it makes the most out of in-situ resource utilisation (ISRU) at the Moon, other objects, and the surface of Mars. This type of commercialisation will be very important for the sustainability of these missions, and opens up viable economic routes to ship resources and the means of processing them to the Moon, Mars and other bodies to sustain settlers there for whatever reason they have arrived.

Q: Historically, much of the progress in space exploration has come from the conflict and competition between nations. What is the role of competition in the current space exploration landscape?

[Buzz Aldrin] The key downside to competition is duplication at the operating end which is wasteful yet inevitable as there is always more than one way of doing something. Competition at the development end, though, in creating capabilities and then sharing internationally through co-operation allows us to get the most out of competition, without suffering the waste of duplicating. In this sense, we must compete at the supply end of developing rockets and space craft, but co-operate in the utilisation of them.

Looking at the participation of emerging nations, I’d much rather see early efforts at co-operation and collaboration which can then be carried on at the operating end of achieving specific goals, whether exploration or development. This ensures that the ‘best’ are selected, through means of competition, but we get the economic benefits as a group. I can see we’re starting to accomplish this for peaceful and commercial reasons, as the “end result” (operating end) competition is lessened when not in an aggressive or offensive capacity.

There is also an important lesson of resource destruction in low earth orbit by debris such as collision with objects which are no longer utilised. This cries out of a re-evaluation of what is allowed under international law to penetrate space. Perhaps the solution would be to register and inspect any object going up or down, to make sure it has an end of mission disposal which removes the asset from potential collision in the crowded space of derelict things. This can do nothing but enhance understanding and awareness of peaceful activities. Certainly every nation with assets has the right to defend those assets against deliberate attack by rogue nations, and the peaceful space faring nations can band together to discourage such rogue nations capabilities and aggressive actions. We need, in my opinion, to also urgently re-evaluate the Outer Space Treaty.

Q: What are your views of the American space programme?

[Buzz Aldrin] This has been my very challenge, realising the delay, wastefulness, and lack of productivity for the U.S to revisit the Moon. We’ve done it, we understand what’s there pretty well, and we can continue to investigate robotically much cheaper, exerting the leadership we developed forty years ago, and in the last five years, as evidence, to assist other nations in their efforts to put their humans on the Moon for whatever inspirational or motivational reasons they may have to demonstrate to their people, and the international community, the progressive nature of their achievements.

During this process, there will inevitably be the discovery of some now unknown economic benefit which can be responded to.

For my part, I propose a two phase, two decade plan. Where at the end of the first decade (around the 50th anniversary of the lunar landing) we re-evaluate the overall plan of, “clearing a pathway to settling on Mars, via the Moon of Mars as a stepping stone”. We re-evaluate at the end of one decade, and either ratchet up resources to complete that mission, have an off-ramp for asteroid or lunar development, or cancel the whole thing. Politically, if a wise pathway is charted to develop and settle on another planet, the historical significance of this is significant enough where it would not be apt to be negated by whoever is president at the Phase 2 time. I have, clearly, considered the politics involved.

Q: Does space exploration pose any threat from religious extremists who may not agree with it?

[Buzz Aldrin] I don’t think so at all. Twenty years ago or more, I was having a conversation with the (then) NASA administrator, Jim Fletcher. He was a Mormon, my wife was a Mormon (though not quite as orthodox) and he said to my wife, “Are you going to convert Buzz to the Mormon religion?” I answered, “No, I’m too busy planning space exploration in search of the celestial kingdom”.

Q: Do we currently have the technology to make space exploration and exploitation viable? And what are the critical areas of innovation for space?

[Buzz Aldrin] Of course I couldn’t blindly say we can tweak what we have and merely optimise flight paths, sequences and so forth. Clearly everybody is aware of the greatest impediment, which is the cost of access to space. Specifically this relates to propulsion into orbit, requiring high thrusts to offset drag of atmosphere and gravity. Once you are in orbit you can accelerate slowly, but there is also a clear need to reduce the time of travel with greater efficiencies and different propellants. Higher velocity changes need more energy, and if we can make this energy cheap, we will be able to make the high velocity changes to depart and arrive. This would be a major breakthrough, and would certainly make space more viable.

Communications systems are pretty good, and I don’t think we can improve on things too much. There are, though, improvements in encryption and also I was recently made aware of devices which can communicate using gravity waves, communicating not around the spherical earth, but through the centre. I know this sounds far fetched, but it is something which is being investigated as we speak at a number of U.S. sites (many of which are discouraged that China is ahead of the U.S. in this field of research).

Radiation protection is probably our primary concern for life support. With sufficient exercise we can deal with bone and calcium loss, and muscle degradation caused by reduced gravity and even these can be dealt with using rotating spacecraft (one around the other or internal centrifugal forces). If you have enough acceleration with thrust, you can just use that, but our current technologies will not allow that (though this presents another advantage of being able to thrust at a sizeable fraction of gravity).

Q: How can humanity share in the experience of space exploration? And what role does education play in stimulating the “spirit of adventure”?

[Buzz Aldrin] The ‘low end sharing of space’ must be addressed through marketing means. Essentially this could involve lottery-like investments for the low probability but high return of understanding and experiencing space. As long as this does not conflict with gambling and internet restrictions, and if it’s a non-transferable experience, the amount of investment can grow and grow to the user’s satisfaction to reduce the low probability of return. I personally don’t think that marketing activities like this have received their optimum consideration yet. It has always been desirable to market opportunities at the full value of one transaction (i.e. I’ve got a seat to sell, I’ll sell it when I have a passenger) rather than making a limited number of ‘seats’ available to thousands and figuring out the distribution mechanism whether by merit (competition) or zero merit (opportunity for all).

I think we need to also publicise the availability of partial experiences and their potential to increase knowledge. The simulators of shuttle launches in Florida, for example, are getting better and better. There’s also the centrifuge an Philadelphia which has a good simulation of Virgin Galactic’s sub-orbital flights, and aircraft which fly for brief times at lunar, Martian, or zero gravity. There are also neutral buoyancy underwater experiences which could be further developed. Experiences like these could certainly also be considered educational to enhance the appreciation for the taxpayer “investments” in space exploration to help them understand why some of their money is going in that direction.

There are, though, certain prohibitions on governments spending taxpayer’s money to advertise their [government’s] activities. We need to enlighten judgement on doing that, opening more debate on vested and political interests and influences.

Q: Has your spaceflight experience changed your view on humanity and our place in the universe?

[Buzz Aldrin] Without sounding trite, but during missions, we were busy with the items of the moment, and not too much into philosophising. In my personal life evolution, though, I don’t believe that these experiences have provided more direct involvement in my life than a background. I don’t believe the time of the experiences [e.g. walking on the Moon] and shortly thereafter had a major impact on my life, but what did have impact was dealing with my personal change in outlook as a result of dealing with, and recovering from, depression and alcoholism, which introduced the satisfying concept of a higher power in my life, totally eclipsing anything I had previously experienced including taking communion on the Moon. It caused me to take consideration, or reconsideration, of the forces, intellect, and powers of creation that have set this magnificent universe in motion including all aspects physical and spiritual.

We live in a totally ‘fogged’ atmosphere where you cannot see the enormity of the stars above us, and occasional meteorites, and other evidences. An individual without the intellect, wisdom or appreciation for these things will have a very restricted and narrow concept of the human intellect’s place in this universe, unlike those who have given considerably more thought, including astronomers, astrophysicists, nuclear and particle physicists and some philosophers. Often these individuals (such as Einstein) have been challenged because of their intellect and position, reflected only after publication of their wisdom. These individuals have had a significant impact on me as I value their intellect. I like Stephen Hawking, for example. I don’t have to understand string-theory and all the observations, but he has a reputation around the world for not being a dreamer, but a concrete philosopher of enormous capability. I can entrust his thoughts and opinions without having to say “I believe everything he says” I can simply grant a credit of comprehension, and go along with his views.

This can, though, get dangerous, when some high-brow scientist from an international organisation starts discussing how “before the end of the century, oceans will rise 10ft”. I’m not sure I see credentials in these predictions based on past evidence. I (personally) feel I am treading on very dangerous ground as in order to get my ideas and concepts and vision for space exploration heard, I have to deal with science advisors at the very highest levels who may not quite agree with my personal thoughts on these issues, and others such as climate change.

I also feel quite free to use the hoax and UFO people’s craze and desires to further publicise my points of view and to expand knowledge on these subjects. The ‘monolith on phobos’, for example, will get great attention in coming years. The Canadians, and others, who have observed shadows of this topographic structure are pretty scientific in their analysis of it. But in terms of these crazes stimulating adventure, when Canadian scientists detailed their proposed robotic study of phobos and were asked, “where are you going to land?” their response, “we’ll go for the monolith”.

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Buzz Aldrin has, here, given us a pragmatic and realistic view of our society’s relationship with space. Our scientific advances, particularly over the last century, have enabled us to move “space” from being a philosophical concept into a potential new frontier for humanity.

While some critics such as the late Richard Feynman (Nobel Prize winning physicist) have argued that human space travel (to distinguish it from robotic missions) has, “never achieved any major scientific breakthroughs” we can see from our discussion that the underlying rationale behind space exploration is different. We are not dealing with a single experiment, or a single mission, which would lead to a ‘eureka’ moment. We are participating, as a civilisation, in understanding a great unknown which presents many opportunities to inspire, enrich, and develop humanity.

A great paradigm for our relationship with space can be found looking back in history at our relationship with the oceans. These vast unknown expanses, over thousands of years have been charted and explored, by iterations of human civilisation including the Greeks, Egyptians, and Polynesians on to the Vikings, Portuguese, and individuals such as (famously) Christopher Columbus. These explorers challenged our understanding of the oceans, (remember, many thought the horizon was the edge of the world) our place on earth, and brought about a new era of inspiration for the seas. These voyages created a wealth of new scientific knowledge, together with economic exchange for trade and resources, a great cultural exchange, and a theatre for defensive and offensive operations. This relationship between humans and the ocean, even though it stretches over thousands of years, is still in its infancy, as we continually discover new species, and new ways of using the ocean to further our world (particularly with regards energy and trade).

This paradigm is appropriate and poignant for space exploration. We are at the same early stage of our relationship with space, as civilisation was in AD400-1400 with its relationship with the oceans. Our faculties now will allow us to more rapidly extend our reach of understanding, exploration, and commercialisation, but we cannot expect this to happen in an instant. It will take generations to fully appreciate the benefits space will bring to society, and through all those generations, we cannot lose sight of the importance of the spirit of adventure to drive this exploration forward.

At a time when the world is beset with problems from war, to overpopulation, climate change and economic uncertainty, many would question the validity and relevance of space exploration in our story, but throughout history, civilisation has achieved great things, in spite of all manner of catastrophe. Our current introverted, risk-averse, attitudes cannot save or progress humanity, but merely allow us to coast perilously avoiding the great leaps in evolution we require to flourish.

We are, therefore, at a unique and profound stage in our story, where the sight of stars can not only make us dream, but can represent a new and exciting environment for our civilisation to create knowledge, inspiration and economic return. What a terrible shame it would be if, rather than leaping into the unknown, we took refuge in our seemingly safe-harbour.

“Man” said Rene Dubos, “…could escape danger only by renouncing adventure, by abandoning that which has given to the human condition its unique character and genius among the rest of living things”

Global Conflict: Causes and Solutions for Peace.

noreply@blogger.com (Vikas Shah) — Thu, 16 Jul 2009 15:20:00 +0000

In this article, we speak to Kristiina Rintakoski, Executive Director of the Crisis Management Initiative (launched by Nobel Prize winner President Martti Ahtisaari) about global conflict, its relationship with economic inequality, climate change and energy. We talk about the dynamics of conflict and crisis situations, and how organisations like CMI are building peace internationally.

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Vikas Shah, Thought Economics, July 2009

Perhaps more than at any time in our history, our world is engaged in conflict. From the UK and USA engaged at war in Afghanistan and Iraq, through to insurgencies in Algeria, Burma and Columbia, civil wars in African nations, and conflict between people in China, Iran and Israel, we see that we are in a fragile landscape.

Over the past century, a number of facets of humanities development have contributed to this, including:

Economics: From early colonialism to modern capitalism, our western economic growth has often been at the detriment of other nations where, for example, we have aggressively acquired assets, created trade routes, or leveraged economic scale to source products, assets, and services artificially cheaply. These processes, while creating great wealth and development in Europe and the USA, have exacerbated poverty and economic inequality in many nations, creating a great deal of tension and potential for conflict.

Agriculture and Energy: Our world is hugely dependent on agriculture and energy. Both of these asset classes are in huge demand, with their protection and development becoming serious debate. Population and economic growth also puts huge strains on these assets, as our world comes close to consuming greater than is sustainable.

Technology: While technology has been a huge enabler for global development, it has also made our injustices and inequalities more visible to external and internal participants in any situation.

Climate Change: This is now becoming a real and significant issue with millions worldwide becoming displaced by climatic effects.

Religion, Governance, and Politics: These issues, and their allied topics of human rights, justice, and so forth have historically caused many of the world’s most significant conflicts, and continue to do so as often these issues are the most fundamental in the structure of a society.

So how, then, will humanity move forward to create solutions for conflict?

CMI (The Crisis Management Initiative) was founded in 2000 by its Chairman, President Martti Ahtisaari (Nobel Peace Prize Laureate 2008, and President of Finland 1994-2000). The organisation focuses on issues critical to creating sustainable peace and security, and making strategic contributions to the capacity of local, regional and international actors operating in war-torn and conflict-ridden societies through preventive diplomacy, peace-mediation and state building.

In a privileged interview we spoke to Mrs. Kristiina Rintakoski, executive director of the Crisis Management Initiative, about global conflict, its relationship with economic inequality, climate change and energy. We talk about the dynamics of conflict and crisis situations, and how organisations like CMI are building peace internationally

On Conflict and Peace:

Q: What are the key causes the conflicts we see globally?

[Kristiina Rintakoski] All conflicts are different with their particular history and reasons. I think that inequality within societies and between regions has become a key cause for conflict, exacerbated by rapid information dissemination, as people are (now) more aware of inequalities. Economic, social and environmental trends come together, for example, looking at resource competition and climate change (the latter intensifying the lack of resources, leading to political conflict). State fragility continues to be a key source for internal conflicts, instability and human suffering.

Q: How do you go about reconciling sides who have seemingly irreconcilable differences?

[Kristiina Rintakoski] Our strategy is to try and find elements which can create a common ground, a common agenda, which can then build confidence for sides to work together. Often, a common-agenda comes from issues outside the source of the conflict, such as economic and social well-being, but these areas are ones where all sides have an interest (though, often, it is these areas which have caused the conflict). Another strategy, which we inherited from our Chairman, President Martti Ahtisaari, is to work towards finding practical solutions to political disputes grounded in everyday realities in conflict situations. These strategies can lessen tension between parties to concentrate on solution oriented thinking.

Q: What does it take to create peace? And what is the role of conflict resolution in your overall strategy?

[Kristiina Rintakoski] The fundamental starting point is to acknowledge that outside actors can rarely create peace, local ownership in resolving the conflicts is vital. In one respect, this has become part of our practice of peace building, but fundamentally the role of the people within conflicted societies is critical. You cannot import peace, it is created within society.

There are also a number of key issues that a sustainable peace process has to address. Physical security is often the first priority, creating space for societal developments and processes to take place. Creating rule of law, good governance, and democratic political system take time and patience. Sometimes what comes too late, and does not receive adequate attention is economic recovery, guaranteeing the livelihoods of individuals in a society. Concepts like democracy and human rights will always remain fairly abstract if you cannot feed your family. It is therefore important to ensure that job creation, and protecting livelihoods occurs early on in the process.

Q: How do you work alongside governments, supra-nationals (e.g. UN), and military forces?

[Kristiina Rintakoski] Something which is particular to CMI is that we are not a lobbying organisation, we are, indeed, looking at co-operation with, and working alongside government, military and civilian actors in any situation. It is important to note that these organisations are funding our activities, but not in the sense of “sub-contracting”. Where we can add value to a situation such as peace mediation and state building, we may get funding from governments to carry out specific missions. We also work with policy development and support, for example we are working with the European institutions in creating a mediation capacity for the EU, and similarly we are working with the African union on preventative diplomacy and mediation. We encourage transparency and sharing of information, but it is important to note that there are many places where non-government actors (such as ourselves) do not face the same limitations as government actors do, and thus we can be more flexible. We aim to complement these organisations, acknowledging our relatively small size, but our excellent international network. Together, we create a collective capacity for peace-building.

On Threats:

Q: Are we now at risk of more complex threats? Such as cyberterrorism, financial terrororism, etc?

[Kristiina Rintakoski] We are now living with a great deal of uncertainty, which will increase. It is difficult to look at the relative nature of ‘traditional’ versus ‘novel’ threats, but Cyber-terrorism and Financial-terrorism are certainly part of the picture. What is important to look at is the causes of conflict, the issues of state fragility, injustice and inequality impact EU and Global security, and link strongly with issues like terrorism (giving rise to it not only in conflict areas, but in our society). As a society, though, we have to be prepared for threats we cannot conceive, we must build resilience not just in developed countries, but particularly in conflict areas. We, as nations, must also consider, for example, how climate change and financial crisis affects them [conflicted and developing nations].

On Technology:

Q: How important is technology within your overall strategy? And are there any innovations which you think are going to dramatically affect crisis and conflict management?

[Kristiina Rintakoski] I think technology is under-utilised in peace building and state building, but it is important to keep it in context as a tool. To get the best out of technology, you must have the processes to support it, and often that is the problem, you introduce technology without process, and that doesn’t get anyone very far. Technology should be an enabler to support local and national administration, who may have limited resources. In these contexts, technology builds their capacity to provide services and provide administration, and also increases transparency and accountability within these processes.

Looking at the potential for dramatic changes. From the side of responders, technology is bringing a greater level of interoperability between agencies, but it is a long way from being seamless. Looking at the regions of conflict and development, connectivity plays a big role. In Africa, for example, connectivity is being brought in predominantly from mobile technologies, and this will have a dramatic influence in finding solutions for these countries. Technology is one of the biggest gaps dividing western societies and developing countries, improving this will help provide solutions also in education and state administration.

On The Media:

Q: How do you perceive the media in context of global crisis and conflict?

[Kristiina Rintakoski] It is not black and white, the media can play a hugely positive role, but can also be very harmful. One of the main positives is increased knowledge and visibility of situations, specifically the transmission of human rights violations and other internal issues. This makes it difficult to turn a blind eye or deny knowledge and means that we (as society) have to react if governments are not protecting their citizens; it brings a sense of responsibility. We see this too where, for example, when peace workers are kidnapped, the media pressure can help make things happen. The reporting must, though, be factual and appropriate. There must be a good dialogue between practitioners and the media. For example, looking at our negotiations between the Indonesian government and the Aceh people, “nothing was agreed before everything was agreed”. We limited media comment by parties, protecting our negotiation environment, and preventing any false victories in the process. This is a good example of how sometimes you have to maintain privacy in a situation.

Q: Do you think broader coverage of conflict and crisis is harming resolution expectations?

[Kristiina Rintakoski] You never know how long these processes will take. Our negotiations in Indonesia were relatively short, but often it can take a long time. The media often diverts attention when parties need to be focussed on the actual process. It can often create expectations and momentum which forces parties to break from processes to deal with situations back home defending positions and solving situations, this can be immensely harmful to the process.

On The Wider World:

Q: How are issues like climate change, energy, and growing populations affecting crises and conflict?

[Kristiina Rintakoski] These are huge areas of interest for us, looking at how these issues affect political conflict. Climate change is, in many areas, impacting food availability and the kinds of patterns you would expect to see in society such as land ownership, pastoralism, and so forth. These issues are significant, and it is important that there is increased efforts to understand the connection of conflict and climate trends. This is not only affecting developing countries, but has the ability to intensify global conflict.

Energy issues influence thinking particularly in industrialized countries and is a fundamental issue of national interest. Nations might make compromises to have access to energy, and it can also impact the willingness of nations to intervene, and influence specific policies as part of conflict resolution

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What is clear is that there needs to be more understanding of the complexities of conflict, and its specific issues, before we can come close to achieving peace. President Ahtisaari describes, “…the international community has demonstrated its incapacity in resolving conflicts and building sustainable peace in many countries and regions of the world. Meanwhile, new conflicts requiring international intervention may flare up. There has never been such an acute need for the international community to work together to develop innovative solutions and practical responses to these crises. This calls for coordination amongst international actors and a need to find common means and common language and for multi-faceted and multi-disciplinary approaches to problems. No political crisis or conflict can be solved without also seeking to create economic opportunities and employment as means to promote sustainable security.”

These economic opportunities and practical solutions must, though, deal with the overwhelming network of issues which interact to create, exacerbate and spread conflicts. Looking at some of the more pertinent factors:

Economic Equality: These issues are of critical importance as economic growth and sustainability are often key drivers to the success of a nation in generating peace and stability. To put it in context, and to give a measure of the level of inequality, of the world’s 6.7billion population (which is growing at a tremendous pace) around 22% live below the poverty line (earning less than $1.25 per day), with 85% living in low to middle income countries (earning under $3,705 GNI per capita). NOTE: The World Bank calculated the GNI of the USA and UK in 2008 were $47,580 and $45,390 respectively.

The recent financial crisis has caused great concern about economic solutions, as funding support to conflicted regions gets cut, and protectionist trade barriers are erected. As President Ahtisaari explains, “The current global financial crisis has increased the risk of major geopolitical instability. Many of the regions and countries most affected by the withdrawal of capital from emerging markets and the collapse of international trade are already fragile, with many only just emerging from years of conflict. Growing inequality between countries and within society exacerbates existing cleavages. The loss of welfare and employment opportunities leads to a loss of hope and faith in the future amongst the vulnerable. This in turn fosters the rise of fundamentalism and violence, and creates breeding-grounds for crime, terrorism and war. We risk losing a generation to this financial crisis. And with globalization and increased interdependence amongst countries, violence in one region will have an impact in another part of the world.”

For more detail on this, please refer to our interview in December 2008 with Professor Wim Naudé, (Senior Research Fellow and Project Director of the United Nations University World Institute for Developing Economics Research) who talked about the Economics of Developing Nations in the World Financial Crisis Click To View

Agricultural Sustainability & Climate Change: We currently have almost a billion people in the world hungry, with over five million people dying every year from hunger. Lack of agricultural development is certainly a factor, but climate change is also reducing the viability of land, making it impossible to cultivate high yields of crop without significant investments in irrigation. With booming populations, and increasing demands on agriculture, this has to be addressed. Climate change is also likely to displace many millions of people, predominantly in underdeveloped areas, also leading to a great degree of conflict as already stressed regions struggle to cope with the influx (including the western world).

Example: The Economist (May, 2009) "Rich food importers are acquiring vast tracts of poor countries' farmland. Is this beneficial foreign investment or neocolonialism?" - Click to view

Energy and Resource Security: We are becoming globally more dependent on energy, and we cannot underestimate the fact that ‘western’ societies are becoming dependent on their developing and conflict-heavy neighbours to provide them with oil and natural-resources. This dependency and underlying relationship will have huge impacts over how conflicts are resolved as intervening nations place energy and resource on their agenda.

Example: The Economist (July, 2009) "Foreign oil firms in Iraq" - Click to view

Justice and Human Rights: The level of injustice (in all its forms) and continuing human rights abuses occurring worldwide serve to exacerbate the stress of conflict and bring parties and populations further away from peace.

One of the most interesting factors though, is Technology. This generation, more than any before, are able to communicate globally, instantly, relatively seamlessly. This means that not only are those in conflict regions able to communicate their plight to the world, but it means that we, as a global audience of citizens and organisations can no longer turn a blind eye to what is happening. As the Dalai Lama was quoted as saying, “A wider of more altruistic attitude is very relevant in today's world. If we look at the situation from various angles, such as the complexity and inter-connectedness of the nature of modern existence, then we will gradually notice a change in our outlook, so that when we say 'others' and when we think of others, we will no longer dismiss them as something that is irrelevant to us. We will no longer feel indifferent.” We see this play out ourselves as tens of thousands of individuals, often with no direct link to a conflict will march in cities on behalf of those who are persecuted thousands of miles away.

Along with empowering us (as an audience) to understand conflict, technology has also provided a critical link of support in peace building, Mrs. Rintakoski described, in our interview, “…outside actors can rarely create peace, local ownership of the situation must occur”. We are seeing now that populations themselves, using collaborative and communications technologies are becoming empowered enough to create the momentum required to effectively participate in the conflict resolution and peace building process. The momentum of populations is often the impetus needed, as Dwight Eisenhower observed in the 19th Century, “I like to believe that people in the long run are going to do more to promote peace than our governments. Indeed, I think that people want peace so much that one of these days governments had better get out of the way and let them have it.”

Organisations like CMI, who realise that humanity is key, are working hard around the world, taking an innovative approach to brokering peace. They are not trying to cure irreconcilable differences in opinions, they are not trying to undermine the struggles of different sides, but they are finding a common ground which all parties are (in general) interested in, i.e. the well being and conditions of their citizens. It is this process of working towards common goals, which can help broker peace, allowing parties to move forward with a new sense of purpose. We have seen this approach succeed even in our recent history. The troubles in South Africa involved issues which would have been seemingly impossible to reconcile, the cure involved collaboration between parties in hugely sheltered discussions, to work together for a common goal. Nelson Mandela himself observed, “If you want to make peace with your enemy, you have to work with your enemy. Then he becomes your partner.”

John F. Kennedy is quoted as saying, “Peace is a daily, a weekly, a monthly process, gradually changing opinions, slowly eroding old barriers, quietly building new structures.” The facts remain peace (for most cases we see) will take not just months, but in many cases, years and generations, as sustainable economies and governance is developed combined with education and a generation who follow with a new shared momentum.

“If we are to teach real peace in this world,” said Mahatma Gandhi “…and if we are to carry on a real war against war, we shall have to begin with the children.”

Investing and Trading Illiquid Assets

noreply@blogger.com (Vikas Shah) — Thu, 02 Jul 2009 14:03:00 +0000

In this article, we speak to Jeremy Smith, Chief Strategy Officer at SecondMarket, where over 3,000 participants manage over $1 trillion, participating in the world’s largest centralized, independent marketplace and auction platform for illiquid assets from auction rate securities to private company shares, CDO’s, mortgage and asset backed securities.

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Vikas Shah, Thought Economics, July 2009

Professor Eugene Fama, in his 1960’s Ph.D. thesis at the University of Chicago Booth Business School hypothesised that, “financial markets are ‘informationally efficient’, or that prices on traded assets (e.g., stocks, bonds, or property) already reflect all known information, and rapidly change to reflect new information”. This ‘efficient market hypothesis’ is now widely disregarded, as in the past quarter-century, our advances in technology allow us to observe that markets are not truly efficient as described by Fama, but are efficient to a greater or lesser degree based on many factors in the market.

Contemporary market thinking focuses a lot of attention on the fields of “behavioural finance” and “behavioural economics” which take inspiration and insight from fields including philosophy, psychology, statistics and neo-classical economics. Hersh Shefrin, in his 2002 paper, “Beyond Greed and Fear: Understanding behavioural finance and the psychology of investing” identified three main themes in understanding behavioural markets

Heuristics: People often make decisions based on approximate rules of thumb, not strictly rational analysis. (Cognitive Biases)

Framing: The way a problem or decision is presented to the decision maker will affect their action. (Information Biases)

Market inefficiencies: There are explanations for observed market outcomes that are contrary to rational expectations and market efficiency. These include mis-pricings, non-rational decision making, and return anomalies.

More recently, these theories have been extended to create the Adaptive Market Hypothesis, which. “Reconciles theories that imply that the markets are efficient with behavioural alternatives, by applying the principles of evolution - competition, adaptation, and natural selection - to financial interactions” (Andrew Lo).

Keeping these theories in the back of our mind, let us turn attention to the concept of Liquidity in a market.

“A liquid asset has some or more of the following features. It can be sold rapidly, with minimal loss of value, any time within market hours. The essential characteristic of a liquid market is that there are ready and willing buyers and sellers at all times. Another elegant definition of liquidity is the probability that the next trade is executed at a price equal to the last one. A market may be considered deeply liquid if there are ready and willing buyers and sellers in large quantities. This is related to a market depth, where sometimes orders cannot strongly influence prices.”

“An illiquid asset is an asset which is not readily saleable due to uncertainty about its value or lacking a market in which it is regularly traded. The mortgage related assets which resulted in the sub-prime mortgage crisis are examples of illiquid assets as their value is not readily determinable despite being secured by real property. Another example is an asset such as large block of stock, the sale of which affects the market value.”

The latter case, of illiquid assets, has come to the forefront of market commentary as “uncertainty” (the keyword in the definition) has turned many massively liquid markets suddenly the other way (including inter-bank lending, commercial paper, and more). In many cases, the assets considered are still investment grade, and present opportunities for buyer and seller, but the problems caused by heuristics, framing and inefficiencies in these less liquid markets prevent the structured trading necessary to create efficient operations.

SecondMarket (in their own words) are, “the largest centralized marketplace and auction platform for illiquid assets, such as auction-rate securities, bankruptcy claims, collateralized debt obligations, limited partnership interests, private company securities, residential and commercial mortgage-backed securities, restricted securities and block trades in public companies and whole loans. SecondMarket's online auction platform has 3,000 participants, including global financial institutions, hedge funds, private equity firms, mutual funds, corporations and other institutional and accredited investors that collectively manage over $1 trillion in assets available for investment.”

Using an innovative approach, they are aiming to create an efficient market for the trade of these ‘illiquid’ assets, and in a privileged interview, Jeremy Smith (the firms Chief Strategy Officer) talks to us about how they create liquidity and opportunity in these markets.

Q: In your own words, what is second-market and why does it exist?

[Jeremy Smith]: “In the simplest terms, we are an independent marketplace for illiquid assets including, but not limited to, auction rate securities to CDO’s, mortgage backed securities and private company stocks. The key word is “independent”, we are not owned by major buyers or sellers of any of the assets we market, we do not take principal positions to buy or sell assets, we simply provide a market for them to meet. This is an important feature, as in some of the ‘toxic-asset’ markets, one of the biggest problems is that you have market-makers and the market-place acting as the same entity, so for auction rate securities and CDO’s, the banks that connected you with the buyer would buy the asset from you at a discount, and sell to the other party. This provides near instant liquidity, but the problem is for the seller who gets an artificially lowered price. The second problem is more systemic. What happens when the market-makers who are the marketplace go out of business or pull back on their balance sheets? When that happens, the marketplace disappears too. This is a structural flaw where the market-makers and marketplace are the same. If you think of NYSE, CBOE and so forth, you see that you have a marketplace (e.g. NYSE) and a market-maker (e.g. Goldman Sachs), the fact they are different entities keeps the market, to a greater degree, stable.”

Q: How does SecondMarket sit alongside exchanges? And what is the significance of your ‘ecosystem’ approach?

[Jeremy Smith] “The biggest difference, other than legal and regulatory influences, is the types of assets which they, and we, are able and willing to handle. Exchanges are highly automated, with a ‘point, click, execute’ attitude. With these [illiquid assets] you cannot use an automated system; it has to be hybrid to define the necessary efficiency and power. You have to be a market specialist. Of our 125 employees, for example, over 50 are specialists in the specific asset classes they handle, dealing with the unique transaction characteristics for each, and giving “high touch” hand holding, to create liquidity.

Our ecosystem is designed to look at the systemic issues, the transparency if you will. It is a two pronged approach, and is the only way to realistically bring liquidity to these markets. We have an internal transparency team who aggregate and standardise public information and make it available, for free, to buyers and sellers. Not all information is public (e.g. CDO’s) but also, in order to find buyers, you have to provide analytical valuation firepower. Our ecosystem provides all this information, the analytics, research, and valuation systems, to participants on both sides.”

Q: Illiquid assets and instruments have been notoriously hard to price, how does SecondMarket aid in the efficient pricing of these assets and instruments?

[Jeremy Smith] “Transparency is key. The more information you give, the more then bid and ask come together. We provide pricing transparency to buyer and seller showing where similar transactions have happened (or are happening in the case of auctions), bringing pricing into focus.

Another part is education. If we can educate buyers into pricing out there in the market, and why their thinking may not be correct, it also helps us bring liquidity and a narrower bid/ask spread. Improvements in settlement times for established asset classes, for example, restricted securities, which used to take four to six weeks to settle, now take just seven to twelve days, so by definition, we have increased liquidity.

It is, though, important to note that there are controls in these markets, ensuring that sellers, in particular, can control the level of information they give to the market and who can see it. This is essential for certain asset classes”.

Q: Are you seeing any global trends in countries with higher volumes of illiquid assets? And looking at SecondMarket’s site, you have a lot of activity in China, Dubai, Korea etc, how does Asia factor in to your model?

[Jeremy Smith] “I would say, clearly, we see a lot of activity in the USA, closely followed by western Europe. Asia, though, presents an area of great potential, the sheer size of investments held over there gives a medium-term opportunity. Right now, there is not a lot of movement (for economic and cultural reasons) but our efforts there are to penetrate the markets, and ensure we are there when the opportunity develops.”

Turning to sellers of illiquid assets?

Q: Who are the key participants and what are the key advantages to them in participating on SecondMarket?

[Jeremy Smith] “There are marked differences between asset classes. When it comes to auction rate securities and bankruptcy, the bulk of sellers are corporations with bad receivables in a company that went bankrupt (e.g. if company X owed company Y $10,000,000 and went bust, then company Y could sell the debt it is owed). As far as private companies are concerned, usually what you see are employees and early angel investors looking to sell their stakes. Hedge funds and High Net Worth Individuals participate in equity and in other toxic assets where we also have financial institutions and global/regional banks and insurers in the market.

As we discussed above, they have the ability to get better pricing and faster liquidity, and it is because of having these things in a centralised marketplace to aggregate at any time, that the level of participation improves, as does pricing, settlement speed and so forth. “

Turning to the buyers of illiquid assets?

Q: Who are the key participants?

[Jeremy Smith] “As far as buyers are concerned, each asset class is, again, different. The buyers of private company stock may be a venture capitalist, auction rate securities may be a hedge fund, and bankruptcies may be distressed debt buyers. To give you a general sense, around 65% of our buyer base is hedge fund, with the balance split fairly evenly between venture capitalists, pensions and endowments, family offices, global financial institutions, and asset managers.”

Q: Why buy illiquid assets?

[Jeremy Smith] “There are two primary reasons, one being somewhat self serving. Firstly, one unique factor across the majority of investors, is that they are looking for a unique investment opportunity. This [SecondMarket] gives investors access to markets which may have either not been available before, or may have only been available in a small way. Secondly, they [investors] know that they always have a market in which to resell the asset. They may not, previously, have participated because if they invested, they couldn’t easily get out, so they stayed out. Now they can resell these ‘illiquid’ assets, they are more inclined to participate as their risk is somewhat reduced.

Our philosophy is that there should be no such thing as an illiquid asset, there should be “more liquid versus less liquid”, but never illiquid. What we are talking about here is not conducive to environments such as NASDAQ or LSE where billions in liquidity can be created in seconds, but we still aim to provide an adequate level of liquidity.

The complexity and lack of “instant” liquidity also gives these asset classes a higher yield.

It is also important to note that for the asset classes traded, it may not necessarily be the asset which is distressed. In many cases, it is the SELLER of the asset who is distressed, or needs liquidity, the underlying asset itself is fine, but the seller’s own condition creates an opportunity to buy at discount.”

Looking at a few specific markets:

CDO’s and Mortgage Backed Securities

Q: There has been a great deal of negativity directed at these asset classes, how are you seeing investor attitudes here?

[Jeremy Smith] “Seller’s attitudes have been more negative than buyers, simply because they have become upset at carrying assets they don’t want, and can’t get rid of. This is in contrast to the buyers, who see an opportunity and are very excited.

For us as a marketplace, we are seeing a great deal of interest in these assets as buyers, attracted by the high yields (from purchase discount) are also feeling more comfortable trading, as they can resell their assets when they choose, eliminating some elements of risk which had prevented them participating.”

LP Interests & Private Companies:

Q: Interestingly, you also have a market for the ‘vehicles’ used by the VC industry for their investments, along with private company interests directly. Could you tell us more about how these markets work, and what the investor and seller interest and attitude has been like?

[Jeremy Smith] “Most markets are bilateral, insofar as you have a buyer a seller, and that’s it. With LP interests, and private companies, it is a three sided market. You don’t just have a buyer or seller, you have the company (or general partner ‘fund’). So the dynamic really changes because of this characteristic. What we see in terms of attitudes is that private companies and general partners have been reluctant to see these markets form, so we have spent over two years developing our unique ‘private company model’ because of these concerns. The key, we found, was control.

For private companies, for example, we create a micromarket. Typically these companies say, “I’m a private company, private for a reason. I don’t want my shares trading hands between buyers and sellers without me knowing”. The problem is, it already happens. So the choice is, do you want to take control? Or leave the ad-hoc method in place.

In the latter case (ad-hoc) it is useful to note that if employees want to sell shares, they can. Most companies do retain first refusal but in practice (especially at the moment) they don’t want to use capital to buy their own shares back, and would rather invest in market or R&D. The employee therefore calls their accountant, broker, or lawyer who will then sell. Information invariably leaks to the market, and false signals are sent

With our market structure, the company takes control. If you are, for example, linkedin or twitter, you create your own micromarket, you decide who your buyers are (e.g. existing investors? A select group? The whole market), you decide the rules for existing shareholders (how much of their holding can they sell? Do they have a physical value limit? How often can they trade?)

We also, through this model, answer the information problem. By giving control, and privacy, private companies are paradoxically more inclined to release information, as only approved individuals can see it. This creates liquidity and informed bids and in an environment where IPO’s are increasingly difficult, we are seeing many firms opting down our route.

When you have this kind of systemic control, you also get better price stability, which helps fundraising as investors can be more confident in price, transparency, and know they have a market to resell to if required.”

Looking at the future:

Q: How do you see the future for SecondMarket? What ‘markets’ are you bringing on-stream? And what are the key technological innovations you think will have the greatest impact on your business?

[Jeremy Smith] “We currently have around eight markets for illiquid asset classes, with another fifty on our watch-list which we are assessing. In the next twelve months, the marketplaces we have identified in particular include s363 asset sales (a US Bankruptcy asset), private REIT’s, and asset backed securities (including credit card and auto loan securities).

Technology is certainly important to our business, with the regular introduction of add-ons to help analysis and efficiency, but the real crux is the combination of technological and human. Our innovation is predominantly on improving the process and structure of the markets, increasing speed, efficiency, and hence liquidity.”

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What we see here is a business model which innovates to tackle the tenets of behavioural finance to create efficiency and opportunity.

By increasing transparency, information, and analysis, SecondMarket have been able to reduce cognitive (heuristic), and framing (information) biases in the market (creating greater participation, and pricing accuracy) and by creating an ecosystem of many thousands of participants, with a great deal of control, they have been able to not only reduce overall risk for participants (almost acting as a pseudo-central counterparty clearing house like LCH.Clearnet) but compensate for the yield, pricing, and rationality anomalies which illiquid markets typically see.

Taking illiquid markets to the extreme, we see companies like “Commercial Intelligence”, who specialise in the recovery of debts from or guaranteed by governments, parastatals or companies in Africa and Asia, here utilising the lack of transparency and liquidity, together with the high perceived level of market-risk, to create high yields and opportunity from highly-illiquid assets.

The more our world becomes interconnected, and the pace of commerce increases, the more we will see that markets ‘behave’ rather than exist, meaning that innovation must take place to ensure continued liquidity and transparency. The lessons of the economic crisis of 08/09 have taught us the importance of these factors, and of the need for continued liquidity, This does signal a change of attitudes in the market, which Geoffrey Moore summarises well describing how “….we were thinking about scale instead of liquidity, ... The correct move now is to redirect the race toward liquidity.”

For more information on SecondMarket, visit them online at: www.secondmarket.com

How Participatory Culture and Mass Collaboration are Shaping our World.

noreply@blogger.com (Vikas Shah) — Sat, 20 Jun 2009 15:39:00 +0000

In this article, we are privileged to speak to Jimmy Wales, founder of Wikipedia and president of Wikia Inc. We speak to Mr. Wales about his latest project, “Wikia” and about how our world is now, and will forever be, remarkably changed by Participatory Culture, Mass-Collaboration and the pace of technological advance.

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Vikas Shah, Thought Economics, June 2009

Humanity is undergoing profound changes, “we won't experience 100 years of progress in the 21st century” Says Ray Kurzweil, “it will be more like 20,000 years of progress (at today's rate)”. In his 2001 essay, “The Law of Accelerating Returns”, Kurzweil describes an exponential growth of the progress of technology in society, explaining we are about to experience, "technological change so rapid and profound it represents a rupture in the fabric of human history."

We can see these changes all around us, and in 1983, Gerald Hawkins gave them a name; “Mindsteps” (dramatic and irreversible changes to paradigms or world views). Hawkins describes inventions such as imagery, writing, mathematics, printing, the rocket, the computer and TV as such steps, and noted (as did Kurzweil), “The waiting period between the mindsteps is getting shorter”. In the past decade, we have seen these mindsteps in action, with advances in telephony, computers, software, and science changing the way we communicate with each other, the way we work and the way we access knowledge and interact with technology. These paradigm shifts have left us more empowered than at any other time in history, with concepts like collaboration and participation leaving theoretical texts, and being a part of our social, commercial, political and economic worlds.

Jimmy Wales is one of the most prolific members of the generation of thinkers who have helped shaped these changes. He is best known for founding Wikipedia, a collaborative encyclopaedia maintained by volunteers, which now contains over 17 million articles, receives over 50,000 page requests a second, and is widely regarded as one of the greatest demonstrations of collaboration in the technological age. Mr. Wales is Chair Emeritus of the not-for-profit Wikimedia foundation (which runs Wikipedia) and co-founder of Wikia Inc, a commercial organisation which allows individuals, groups and communities to create and manage collaborative portals of detailed information on whatever topic they choose “Wikis”

In this privileged interview, we speak to Mr. Wales gaining a unique and detailed insight into Wikia, its technologies, and how participatory culture and mass collaboration are changing our world including the theory of “participatory economics”

ON WIKIA:

Q: How would you describe the Wikia concept and its purpose?

[Jimmy Wales] “The concept of Wikia is to provide a platform for communities to build "the rest of the library", everything that doesn't belong in an encyclopaedia. The purpose is to empower the next wave of massive collaboration, and to extend participatory culture beyond just the non-profit educational and reference works of the Wikimedia Foundation.”

Wikia is a successful example of ‘meta design’, which Fischer G. and Giaccardi E. in 2004 described as, “a conceptual framework defining and creating social and technical infrastructures in which new forms of collaborative design can take place”.

Q: How does wikia satisfy the needs of a system which neither falls into the trap where “everything is possible, but nothing of interest is easy” or “operations are easy, but little of interest is possible” ? and how do you design for the “unknown” (i.e. a system which, copes with the need for improvisation, evolution and innovation, often at the hands of its users)?

[Jimmy Wales] “My primary design philosophy involves putting the tools into the hands of the community, and thinking really hard about avoiding bottlenecks which require some "top-down" intervention. I'm not sure that I agree that the trap you identify is really a trap, as long as we keep focussed on the fact that of course reality demands of us a sharp focus if we want to accomplish anything of note.”

Q: What are the technological innovations which you think will have the greatest impact on Wikia’s future?

[Jimmy Wales] “I think the biggest technological innovation that will impact Wikia - and the Internet more broadly - is the continuing progress we are seeing in reducing the costs of communication (Internet) technology, such that it will reach the entire planet in relatively short order. Just think about what happens when the next billion people come online, and the next two billion after that. It's a remarkable thing to consider.”

ON TECHNOLOGY:

Q: Access to the internet has changed from becoming computer based to nearing the goal of ubiquitous access “anywhere, any time, and any device”. How do you think this will change our relationship as humans with the internet as a concept?

[Jimmy Wales] “In a certain sense, when things become ubiquitous, they also become
"invisible". It used to be that the process of "getting online" for me was a separate step, with a noisy and slow process of a modem on a phone line. Now, with WiFi, my laptop often seems to just simply _be_ on the Internet. The process of connection has become much less visible, so that the feeling of "my computer" "connecting" to "the Internet" has changed to a feeling that my computer is the Internet, or is "on" the Internet. Similarly, as the Internet becomes ubiquitous on various kinds of devices, it just starts to be part of the assumed fabric of technology.

This changes how we relate to it, and how we use it. We use it a lot more for one thing. I don't think "Gee, I should turn on my computer and use my modem to connect to my ISP to find out what movies are out right now." I just look in my phone and find out.”

ON PARTICIPATORY CULTURE AND MASS COLLABORATION:

Q: We are rapidly moving towards an environment where the public is acting not just as consumers, but as producers and contributors. What would you see as the key benefits of participatory over consumer culture?

[Jimmy Wales] “Probably one of the most important things is the way participatory culture empowers work in "the long tail". In the past, with consumer culture, economics dictates that most resources go into empowering the "hit makers". So we got a lot of investment in building great popular culture, and some of it really has been great. But some of it has also been really quite awful and bland.

With participatory culture, economics dictates that we pour more resources into building an infrastructure platform that anyone can use, so most resources go into empowering "the long tail". Small groups of people can come together and make use of a powerful infrastructure to enable them to pursue their own passions and interests, without regard for popularity. The result is projects of a much larger scope than ever seen before.”

Q: Are there any weaknesses to the participatory model? and how can the world tackle the impact of a ‘gap’ which is created with billions of people (without access to technology) who are ‘outside the conversation’?

[Jimmy Wales] “There are weaknesses. While participatory culture can create a
Wikipedia, it is not likely to produce something like the Star Wars franchise. I don't think that's a problem, because I don't think we have to choose between participatory and top-down culture - both will thrive.

In terms of the question of the "digital divide," I am optimistic. The price of technology comes down every year, year after year, and I see no immediate end in sight to that process. What this means is that the poorest people in the world will soon have the possibility to access the Internet in some form, and eventually will have “ordinary” access to it.

Here is a joke that I tell, a joke designed to make people think about the cultural implications. If you look at the price of telecommunications alone, it has been in a steady and steep decline for many years. The price is lower every year and there is no obvious end in sight to this trend. If you look at the price of food, it has also been generally in a long-term steady decline - but not that steep of a decline. Those two lines are crossing.

What this means: you know those people starving in Africa? Pretty soon, they are going to be able to call us... to complain. There are people who are likely to have cheap access to reliable International phone calls before they have cheap access to a reliable food supply. That's a remarkable thing to contemplate.”

Q: Looking at participatory media, do you think we are seeing ‘news and media’ becoming a meritocracy? And how do you think the ‘way’ in which individuals interact with their information sources is changing?

[Jimmy Wales] “I do think we have a greater meritocracy in news and media than we did 30 years ago, for sure. There are many problems, though, in the current media landscape. I think that at this moment, due in part to the shock of the financial crisis and recession, we have seen a sudden acceleration in the changes to the news industry, and unfortunately a drop in quality as a result. There simply does not exist right now, the money to fund journalism in the way it was funded in the past, and yet “new” models haven't yet taken up the slack.

This has forced a certain amount of change in the ways that people interact with information sources, some of it good and permanent, and some of it bad and hopefully temporary. When we turn to twitter for news about the situation in Iran after the elections, was that a bad temporary phenomenon caused by cuts in newsroom staff so that we didn't have good reporting of any other kind? Or was it a part of a good long-term trend towards an increased variety of news sources? It is too early to tell (I think) and probably some of both.”

Q: How do you think participatory culture will shape our future?

[Jimmy Wales] “Some of the obvious changes are going to have to do with a much higher degree of self-confidence and self-reliance on our ability to think and understand the world for ourselves. Rather than thinking of history and culture as something which is installed in our brains pre-digested for us, we can think of history and culture as something that we can learn about and know and engage with ourselves.”

Q: Do you think participation will change our democratic environment, and do you think we will see a future with a “theoretical form of government wherein sovereignty is lodged in the assembly of all citizens who choose to participate” (citing Kevin St. Onge, mass-collaboration.net)?

[Jimmy Wales] “Well, in western democracies, we already have very much the idea that the people are sovereign, and I think that idea is becoming stronger and stronger even in places that have traditionally not known it. The reasons for this are pretty obvious - if the only outlet for expression is a top-down media controlled by a despotic government, then as an ordinary citizen I feel helpless to change things for good reason - I actually am helpless to change things.

But when I have tools to communicate with my peers in a serious way, if we can get together on Blogs, mailing lists, IM, twitter, Wikis, and start to talk about the state of the world, then we not only "wake up" to the possibilities, we also have for the first time some new possibilities... to organize.”

ON PARTICIPATORY ECONOMICS & GAME THEORY

Turning towards the economics of the participatory environment.

Adam smith argued, in The Wealth of Nations in 1776 that, “when acting in rational self interest, individual actors unwittingly contribute to the general good of humanity” (ergo. Free market economies, even in the absence of government, achieve solidarity and equity in an efficient manner) while Albert & Hahnel (c.1980) criticised the same capitalism as being an “aggravator of prejudice, the most inequitable economy ever devised, inefficient and incompatible with economic and political democracy”.

Q: How do you think a participatory economy would answer these criticisms, and do you think that participatory economies would be able to provide an environment to support incentive, innovation and the creation of wealth?

[Jimmy Wales] “Well, Albert and Hahnel were quite simply and obviously wrong. I don't really have much else to say about that. After a century in which anti-capitalist tyrannies murdered hundreds of millions of people and suppressed the freedoms of billions more, I think the question of whether people have a fundamental human right to engage in free exchange with each other as per their own choices is answered beyond anything other than the most extreme folly.

We can quibble endlessly about the details, but that's the core. I think "participatory economies" are free economies. A culture of participation cannot properly exist in a situation where it is assumed that initiating force against others is a moral way to achieve social goals.”

Q: When modelling economies, we often use game theory to understand the dynamics of social situations. How can we relate game theory to participatory economies?

[Jimmy Wales] “For me, game theoretic thinking - broadly considered - is a great tool for thinking carefully about the dynamics of social interactions. One of the great lessons of economics is that we can't simply legislate for whatever we want to have happen - we have to consider the incentives and costs that people face, and work with those to make sure that whatever rules and social norms we have in place actually do work towards constructive ends.

Let's take a specific example: comment spam in Blogs. We can't deal with this by simple making a rule against it, or even a law against it (though the law can impose real penalties for real damage, and can be a part of the solution) and expect magical results to follow.

Instead we have to carefully analyze the incentives placed before people (even bad people) and think about how those incentives will change things for them in various environments - and also realize that this analysis can't be too simplistic, we have to take into account how various players will change their strategies in a new environment.”

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It is truly remarkable how, in fairly recent history, society has remarkably changed its posture towards technology.

Albert Einstein (1879-1955), lived at a time where western society was at the tail of the ‘industrial revolution’ and moving towards a new era of discovery, scientific advance and, of course, great conflict. Thus, a rather cynical Einstein summed up the mood of society at the time (towards technological and scientific change) by famously saying, “It has become appallingly obvious that our technology has exceeded our humanity.”

The great advances we have seen since the late 1960’s in our communications and computation ability has, though, brought about a new paradigm in how we exist. Technology no longer sits at the periphery of our human-experience, but has become an intrinsic part of it. John Naisbit commented that “…The most exciting breakthroughs of the 21st century will not occur because of technology but because of an expanding concept of what it means to be human”.

We are seeing this break-through before our own eyes, as humanity moves from being a theoretical construct to becoming something visible and tangible, empowered by our ability to connect to each other, share knowledge and information, and to behave as a cohesive group. This change has even been noted by some of our greatest living philosophers. “If we look at the situation…” said the Dalai Llama, on technology, “…from various angles, such as the complexity and inter-connectedness of the nature of modern existence, then we will gradually notice a change in our outlook, so that when we say 'others' and when we think of others, we will no longer dismiss them as something that is irrelevant to us. We will no longer feel indifferent.”

This is an exciting and game-changing time for society, and as Mr. Wales said above, we are now learning ‘how’ we exist with our new sense of connectedness and empowerment. The generation that follows ours will have a drastically modified view of what it is to be human, and this will invariably impact our political, economic, social and individual landscapes.

I believe Cesar Chavez could sum this up well, taking words relevant to his time as a civil rights activist in the early 20th century, and applying them today.

“Once social change begins, it cannot be reversed. You cannot un-educate the person who has learned to read. You cannot humiliate the person who feels pride. You cannot oppress the people who are not afraid anymore. We have seen the future, and the future is ours.”

The Psychology and Anthropology of Social Networking.

noreply@blogger.com (Vikas Shah) — Wed, 22 Apr 2009 11:44:00 +0000

In this article, we speak to Professor Robin Dunbar, Head of the Institute of Cognitive and Evolutionary Anthropology at the University of Oxford about the psychology and anthropology of social networks, together with their impact on human behaviour and the structure of our society.

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Vikas Shah, Thought Economics, April 23rd 2009

For over a century, the phrase “social network” has been used to describe social structures made of nodes (individuals or organisations) which are tied by one or more specific types of interdependency such as values, visions, ideas, financial exchange, friendship, interests, conflict or trade.

Social Networking services have been around since the inception of the web. Usenet, Arpanet and LISTSERV were early examples of the technology, which then went onto create communities such as “The Well”, “Geocities” and “Tripod” (where rather than just bulletin boards, people could communicate through chat-rooms, and through their own personal pages (a precursor to the ‘Blog’). Over the past twenty years, this concept has evolved, taking advantage of the huge changes in global communications and technology to the point where web based social networking services such as Linkedin, Facebook, Myspace and the like are a method by which hundreds of millions of people communicate and interact every day, globally.

According to Facebook’s own statistics (as at April 2009), they have more than 200 million active users, more than 100 million of which use the site daily, and together upload more than 850 million photos a month, over a billion pieces of content a month, and interact through over 25 million active groups, and 2.5 million events. These figures are growing rapidly, as many more join “The Conversation” (which consists of over 200 ‘significant’ online social networks). With emerging markets gaining more wealth and connectivity, there is a good chance that within a fairly short timeframe, billions of people worldwide will use social networking sites to communicate instantly, effortlessly, across the world.

Academics and commentators have understandably become interested in social networks, and their impacts to society. In 1916, L.J. Hanifan (in context of rural schools) discussed the concept of Social Capital, defining it as, “..that in life which tends to make these tangible substances count for most in the daily lives of people: namely good will, fellowship, sympathy, and social intercourse among the individuals and families who make up a social unit… The individual is helpless socially, if left to himself… If he comes into contact with his neighbor, and they with other neighbors, there will be accumulation of social capital, which may immediately satisfy his social needs and which may bear a social potentiality sufficient to the substantial improvement of living conditions in the whole community. The community as a whole will benefit by the cooperation of all its parts, while the individual will find in his associations the advantages of the help, the sympathy, and the fellowship of his neighbors" more recently, a 2006 Forrester Report about social computing used the term "groundswell" to refer to "a spontaneous movement of people using online tools to connect, take charge of their own experience, and get what they need-information, support, ideas, products, and bargaining power--from each other."

In a privileged interview, I spoke to Professor Robin Dunbar Head of the “Institute of Cognitive and Evolutionary Anthropology” at the University of Oxford to learn more about the psychology, anthropology and behavioural aspects of social networking sites.Professor Dunbar graduated with a BSc in Psychology and Philosophy from the University of Oxford and a PhD in Psychology from the University of Bristol. He has held research fellowships at Cambridge and Liverpool Universities, and teaching posts at the University of Stockholm, University College London, and the University of Liverpool. He is currently Professor of Evolutionary Anthropology and Director of the Institute of Cognitive and Evolutionary Anthropology in the School of Anthropology, and a Fellow of Magdalen College. He was elected a Fellow of the British Academy in 1998. He is co-Director of the British Academy’s Centenary Research Project ‘Lucy to Language: The Archaeology of the Social Brain’ , a multi-disciplinary project involving, in addition to the University of Oxford, research groups at Liverpool University, Royal Holloway (University of London), Southampton University, and the University of Kent.

[Vikas Shah] Why are people drawn to social-networking sites?

[Professor Dunbar] “We can see an early example when the mobile phone took off. Networks presumably saw SMS (texting) as a way of communicating information, but had no idea that people would use it to keep in contact so much, almost trivially. The bottom line is that this goes back to the fact that, like all primates, we are an intensely social species, and having our friends, cohorts, and acquaintances close is important to our general success. In these senses “keeping the wheels oiled” is critical, hence why we like gossip, and hence why biographies and fiction so wildly outsell anything else in the books market.

Modern society, specifically the modern economy, is very mobile. Our friendships and social networks become very quickly dispersed. At any one time, we build friendships and relationships with people and, for example, due to work, move on. If we look at the archetypal user (late teens and early twenties), they go to university for three years, have a great time building relationships, and at the end of this period they disperse all over the world and so are left, as individuals “stranded”. The ability to maintain these relationships online has driven heavy usage.

The sociality side exists with intense social networks, with a lot of time typically invested in these relationships. If you imagine the archetypal social environment we have, probably until the beginning of the twentieth century, we saw our network, our community, every day. If a relative emigrated, we lost track of them very quickly and the family link disappeared as it was a very “up front” person to person relationship. Online, we can maintain these relationships and keep them going, but you have to “say something” (i.e. participate in the conversation rather than just sitting and reflecting).”

[Vikas Shah] Sites such as “facebook” and “twitter” allow people to communicate their current ‘status’ to their network and beyond (i.e. what are they doing right now?) what is the significance of this? And why do people find it important to communicate this information?

[Professor Dunbar] “I’m conscious of a project we are involved in, with mobile phones, in which our data (albeit without final analysis) appears to show there are huge difference between the sexes and how they maintain relationships. If you go away from home (to university, for example) your relationships with friends do decay in time. Phones have helped to slow that decay considerably, but there is a big difference in how males and females service these relationships. With males, its about “doing stuff” and making arrangements rather than chatting on the phone (e.g. I’ll be back in Newcastle, shall we go for a beer, etc). With females, it’s the conversation which slows the rate of decay.

If you are to assemble a group and observe, it is clear that while females just start talking, the males will stand around looking at each other and eventually a conversation may strike up. There is something about the female psyche which is intensely social, and the most trivial conversations become part of the process of bonding. This perhaps is what causes the difference in message in sms, facebook, etc. They may appear trivial (e.g. I’m here, doing this) but there will be a lot more un-stated below the surface (i.e. I’m here talking to YOU and I’m happy to be talking to you rather than someone else) A form of commitment.

It is true, also, that people don’t realise that what they put onto these sites is going to all and sundry. When they hit the keyboard, they are mainly talking to one or two individuals, and often don’t realise how public their conversation is (paradigm: people on trains on phones talking loudly if the other party is a long way away). We have a face to face conception which is clear from texting studies we have done, which show that some ‘kids’ send, on average, 120sms messages a day, with 90%+ going to only two people.”

[Vikas Shah] When considering the capabilities of humans to maintain stable social relationships (referring to Dunbar’s number) we see that in social-networking environments, people maintain many hundreds of links, often spread across multiple networks? How do you think this will impact the quality and nature of relationships we build now and in the future?

[Professor Dunbar] “The great questions hovering at the back of the techie’s minds (who produce mobile phones and software for social networks) involve the fact that our relationships are constrained, in life, by a number of things. Generally you can only do one thing at a time (a cognitive constraint). Software cuts through these issues, and allows people to create a larger network. It turns out, though, very clearly, that our social networks are no larger in virtual worlds than in reality. The people you have on your network are the people you would typically keep into contact with in reality, face to face. The difference is, though, that you get lots of “hangers on” appearing on your network (e.g.: your friends mum). This has clearly created problems which facebook, for example, have answered by creating restrictions you can apply to your profile.

[…On Dunbar’s Number] You have to see this in the context of layers. You are surrounded by an endless series of expanded layers of social networks. Your inner core is 5, which extends to 50-150, 500 and eventually out to around 1500. As you go out through the networks, the number of people included increases, the average quality of these relationships declines. 150 (Dunbar’s Number) corresponds, seemingly, to those who you know as persons (i.e. if you bumped into them in a bar in Hong Kong at 3am, you wouldn’t feel embarrassed saying hello because you have a personal history and knowledge). This “outer layer” is heavily populated by extended kin (i.e. individuals who are only their because of a kinship relationship such as grannies, cousins, etc). Once you get beyond this layer, you drop off from personal knowledge, to categories. It is no surprise that some people can have enormous facebook type networks which tap into these outer layers. You see, though, that even with these huge networks, their interactions are typically with their inner layers rather than the “clouds” of periphery, many of whom are not active participants and may drift in and out of networks.”

[Vikas Shah] Many have argued that maintaining relationships electronically has a negative impact on society, what are your views on this?

[Professor Dunbar] “There are “Pros” and “Cons”. The “Pros” are that you can maintain relationships with otherwise would simply have died off (a timescale which can potentially take years). The analogy is where you go and meet people you haven’t seen for twenty years, you know who they are, and can put a name to a face, but at this stage, you don’t have much in common. You are happy to meet them at, say, a school reunion, and spend an evening or part of an evening, but even though you may say “we must keep in touch” chances are, that with the exception of a few strong re-ignited relationships, you wont.

It seems, to me, that relationships are face to face things. There is no point in having a virtual relationship if you are never going to see those individuals again as it crowds your “mental boxes”. To think of this in context, they are real cognitive limits. You may have the ability to maintain “x” relationships (the boxes) and the more you maintain, the more you preclude your ability to form new relationships. We see this with people who become obsessed (e.g. stalkers). Their obsession may be with an existing or past relationship, and it consumes them so much, they cannot step back, let it drop, and form new relationships. The risk, here, is that there is no such thing as a free lunch. Social networking sites are a great way to keep in contact with people, but some people are going to make the mistake of getting too wrapped up. If, for example, your best friend moves to the other side of the world, there may be desperation, on both sides, to stay in touch, even though both are developing new relationships, and networks.

The other side is very clear, with email in particular, that it is very easy to hit the keyboard and send without thinking (“Flaming”). This has seen many people becoming badly unstuck. It is not just realising that you are broadcasting to the public domain, but the fact that you react in a way that you would never react face to face, this is very destructive. One of our projects set-up a discussion group to look at this phenomenon (note that all participants understood they were part of an experiment). The dynamics of the group quickly showed that one person in particular emerged who upset the dynamics. We also see this with road rage where, in the safety of your metal shell, you fly off the handle, and by the time you step out of the car, it’s too late.

In context, if you were walking down the street, you would not, in general, have reacted in quite the same way. A lot of our response in conversation picks up facial expressions, tone of voice and so forth. Emoticons simply do not substitute for this and cannot pick up these nuances. The other end of this dimension is where you see people declaring “undying love” after only a few email exchanges. In real life, it can be a figment of their imagination; you would never do that as you pick up on many more non-verbal signals. The removal of these signals, which make us cautious, is part of the problem.”

[Vikas Shah] What is the significance of “memes” and their physical counterparts such as flash-mobs?

[Professor Dunbar] “It is an interesting question, and a bizarre phenomenon. Why would people all turn up for something they know nothing about? We do that as part of our natural social world with “in-group” and “out-group”.

In a curious way, it looks like that we are seeing the outcome of our capacity for “rabble rousing”. It is very easy to create a herd effect in people. We have seen religious and cult leaders as the archetypal proponents of this. If you catch the mood just right, it is easy to stir people up and create a powerful joint action force.

Of course, this is all done inside a community. We have the capacity to form big groups, often quite anonymously. This is an oddity of humans unlike any other species. In other species, groups are created by personal allegiances between members. We, though, have evolved the capacity to generalise that allegiance to a group as a “concept” rather than to individual members. Looking at this nebulous concept of a group, we also take the example of big team sport events where you may go along with two or three of your inner core, and hang around the periphery, engaging as much or little as you wish, in a crowd of many thousands.”

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Social networking services have, for now, become an integral part of how humans communicate with each other, and as groups. The importance of this phenomenon can be seen clearly when considering its economic and political impacts. Barack Obama, for example, engaged millions through social networks to build support for his election campaign.

The broadcast news media has also seen power of online social networks with news stories being reported on twitter and throughout the blogosphere many hours before the ‘main networks’ catch up. The recent Hudson River Plan crash, for example, showed more clearly than ever before, how connected we all are, as individuals posted, near instantly, images and commentary of what happened, before any reporters were able to attend.

The fact is, we are dealing with humans having been empowered with the ability to engage and understand social networks in a profoundly different way to ever before, and as we evolve in our relationship with this new technology, we will establish rules and balance, and behaviours that govern our engagement with it.

To understand how social networking services and our online behaviours will develop? Only we can answer that…

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For more information on Professor Dunbar you can visit his personal page and his entry on Wikipedia. Professor Dunbar is head of The Institute of Cognitive and Evolutionary Anthropology at Oxford University, and a fellow of Magdalen College.

Investing In Entrepreneurs.

noreply@blogger.com (Vikas Shah) — Fri, 20 Feb 2009 12:09:00 +0000

In this article, we talk to Charles Firmin-Didot, founder of the AXA Talents fund, with over USD400 million invested in entrepreneurs worldwide. We talk to Charles about entrepreneurship around the world, and why his fund invests in entrepreneurs.

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Vikas Shah, Thought Economics, February 19th 2009

Investors are now confronted with many ways to assess and analyse opportunities, from “quants” presenting their esoteric mathematical trading systems, to those using historic data to create business models, and many others using years of experience to create a “gut feel” for markets.

Looking at the last quarter century of our world’s business history, though, we have seen many individuals who would perhaps have slipped through the analyst’s nets and have gone on to create globally significant businesses. To name just a few of these from the public consciousness would reveal Apple, Google, Microsoft, Oracle, EasyJet, Virgin and more, with a vast number of ‘off radar’ businesses having been no less successful in their own rights.

These businesses have much in common, an innovative product or concept (which either created a market, or disrupted one), and a visionary leader who fought, “against the odds” to create value from an idea. In all these cases, too, we see businessmen who fought to take to market an idea which met with great resistance. Many investors failed to believe the numbers and buy into the concept which Larry & Sergei presented as their ‘Google’ concept, and similarly, many simply didn’t believe the business model could be possible which led to extremely low cost flights (EasyJet), a computer on every desk (Microsoft) and a step-change in how the world listens to music (Apple). The lucky few investors who got involved with these businesses, when interviewed later cite that rather than the “numbers and research” they were sold on the individuals behind the business, the “Entrepreneurs”

In recent years, the concept of entrepreneurship has become much discussed, and pushed to the forefront of general consciousness as, through programmes like “Dragons Den”, and the explosion of online media, we are more aware that ‘entrepreneurship’ is within the general reach of man, rather than being the esoteric preserve of the gifted and rich (in fact, most of the most successful entrepreneurs in the UK, started from very humble beginnings, and rarely received ‘top flight’ education).

Charles Firmin-Didot is the founder and fund manager of the Axa-Talents fund, which follows a simple investment strategy: “we only invest in companies managed by visionary entrepreneurs.” In their own words, “Warren Buffett feels that many listed companies' CEOs are not motivated to take courageous decisions. Most CEOs are under pressure to manage their businesses for the short-term interests of the investors who prefer higher dividends and risk-free strategies. Research suggests when talented individuals are allowed to implement their long term visions in business, usually their performance is ahead of the market average. And that's why we believe in thinking long term is a good way to benefit future returns, and society in general. We always encourage talented CEOs to feel free to think long term and focus less on a few investors' short term interests.”

Charles joined AXA in 2003, bringing the Talents Fund with him. He has over twenty years of financial markets expertise, and has worked in asset management and M&A in Paris, London and New York for leading institutions. Charles is assisted by five other professionals specialised by region, responsible for spotting and following talented entrepreneurs. He lives between the United States and the UK, and also travels extensively in Asia to meet entrepreneurs. In this privileged interview, Charles tells us more about why he chooses to invest in entrepreneurs, what it takes to be an entrepreneur, and his views on global entrepreneurship.

>> Why Invest in Entrepreneurs?

[Charles Firmin-Didot] “The very simple answer is that they are usually better than ‘financial people’ like me at understanding businesses. What is a good product? What is a good opportunity? We have less of an idea than these people who have been in business all their lives and have their money tied up in their companies. This is exactly why we approach the situation in basics. We are less interested in business modelling , and realise that there is no reason we should be better analysts than the thousands of financial people out there, so rather than trusting ourselves, we trust entrepreneurs who are real value creators, have their own money at stake, with track record and no conflicts.

In my time, I have been lucky enough to have access to many entrepreneurs, it’s a fascinating world, and they are often very human with great contact…perhaps because they feel that we understand them, we respect their independence and would even protect it. The financial world, especially in the UK and USA has a “new definition” of corporate governance, where you have consultants saying “it’s bad when a company is controlled by one person or a family”. This is maybe the case where the person is a crook, but there are ways to check this. In practice, if a company is controlled by one person, that person (and their company) are more motivated than average, and because its their business, they tend to be more sustainable and, from our experience, think about the planet ten times more than their diffuse-ownership counterparts. We had, for example, one entrepreneur who sold his shipping business as he did not wan the risk of a potential oil spill when a tanker broke. We have another Spanish entrepreneur who took over his family construction company and has turned it around into a very successful alternative energy business focussed on the environment, a great story.”

>> What is the scale of your fund? And what challenges have you faced recently?

[Charles Firmin-Didot] “Our funds have approximately USD400 million under management, and though, like everyone, we have had an impact in the last year or so, our performance, as a composite, still shows we have outperformed the market by 6% annually since inception. Last year was terrible; we had two very strong headwinds (which I will discuss).

It is important, though, to first look at how we define an entrepreneur. Most people think of entrepreneurs as start-up companies, who create value from nothing, but these can be, and often are, more established companies. Apple and Google, for example, are both ‘recent’ and huge companies.

The fact that we only invest in people who are big shareholders of their companies means the ‘float’ is limited, so the stocks are somewhat less liquid than average in the market. This is not true for companies like Google, but for the average $2bn market cap company, the entrepreneur would have, say a 50% holding, leaving, for example, after other things, a 35% float. We aim for long term holdings, and last year, fund managers were selling stocks that were not liquid (mainly due to redemption fears) and re-investing into liquid stocks. This had a real impact on our performance too (as it has a knock on effect on stock prices).

You can measure this phenomenon of float quite simply, by looking at holding companies which are listed (which often have listed subsidiaries). In the UK, we do not have many examples; Richard Branson had one [holding company] which was de-listed. By looking at these structures, though, you can calculate the discount to net asset value (NAV). The average discount:NAV in holding companies was 10% 18Months ago, and is now 45%. Why? Because holding companies are less liquid as usually that is where the entrepreneur has their stake.

To give you an example from France, we have a big retail chain called “Casino” which is one of the leading Global food retail groups (with 9800 stores, in 10 countries, and sales of EUR36 billion as at 2007). Casino is controlled 51% by “Rallye” (whose main asset is Casino). The owner of Rallye himself owns 60-70% of the firm, leaving a float of c30% (approximately 7x less liquid than Casino, even though it is the same business). If you look at the performance of Rallye versus Casino this is simpler to understand, the discount for the holding company went from 0% to 50% at the heights of the liquidity crisis last November.. It recently came back to a more reasonable discount. The second headwind is that entrepreneurs don’t care about short term profits. If you own and control a company, you think about the long-term and maximising value in 10years. You don’t mind that investing in research may reduce your earnings short term, and often don’t care about share prices daily (if it’s cheap, you can buy more). These firms often have low earnings visibility too rather than stable earnings, and at a time when people are nervous, they (investors) dumped companies with low visibility.

On the positive, in a recession, these companies tend to do well. Innovation, as Larry Page (Google) said is not cyclical, a new product will often sell because it’s new, regardless of a recession (e.g.: Iphone). Entrepreneurs have an inherent talent, whether its deal making, developing, innovating and more, all these talents can create value, regardless of the economic context.”

>> How do you quantify investing in the “entrepreneur”?

[Charles Firmin-Didot] “Until a couple of years ago, when we started to engage more precise portfolio construction, there was no strict rule. The big question is, how do you combine the person and the valuation in a decision? We created a scoring system, putting a score on the person, a score on the valuation and a score on the catalyst(s) (e.g.: do they buy shares, have belief in their companies or are they running away!). We add all this up to 8 points on a person, 8 on valuation (including momentum, as P/E is meaningless if EPS is falling apart) and 4 on the catalyst (e.g.: insider transactions). We take these scores to rank our stocks.

How do we score people? A lot is based on track record, and a lot is based on their link with the company, their generosity to minority shareholders and any conflict of interest. ”

>> What, in your opinion, are the characteristics of an entrepreneur? And do you find any overwhelming similarities between them ?

[Charles Firmin-Didot] “Some of them were thrown out of school or didn’t necessarily have the best education. I will quote one of our entrepreneurs, Vincent Bollore (who is a big shareholder in Aegis in the UK), who said, “…if you are intelligent, there is no reason to be an entrepreneur, as intelligent people don’t want to receive punches from everywhere around them”. When you are entrepreneurial, you work a lot, you may feel independent but most important, you are passionate about building the future, and that is what often drives you, but you receive many punches all around. Also, entrepreneurs are people who are not afraid of taking risks, and not afraid of trying. They know exactly what they are doing, and something which, for us, could seem like a risk, for them, is not. In life, you have so many people with ideas, so few of whom try, and when you realise that trying is not necessarily a big cost or risk, and when you are ready to go for one of your ideas, that is when you get into the mind of an entrepreneur.”

>> Are there any specific sectors which you are more invested in?

[Charles Firmin-Didot] “We try not to make direct sector-bets, and diversify as much as possible. In each sector we have invested in, though, we try to pick good entrepreneurs. For example, in energy, where oil prices collapsed, we picked entrepreneurs whose stock price fell, but their businesses are doing fine. They foresaw the fall, sold assets, and are now cash rich. They will, I am sure, buy their competitors. AKER (Norway) are a great example of this. We have also invested in alternative energy companies, because they got hammered in the market even though many are doing very well, and it is, of course, the main competitor to oil in the future. It is a very interesting sector.”

>> What are your views on entrepreneurship in the BRIC economies, alongside African nations?

[Charles Firmin-Didot] “These countries have a lot of entrepreneurs.. The big difference in BRIC and other emerging economies versus established markets, is they are not about exploiting employees with low salaries, they are about innovation, and they sell globally. This is a very powerful force right now, especially with protectionism coming through (which will make any businesses that rely on cheap labour very exposed). We have an entrepreneur in China, who sells vegetables to Japan which is a great achievement, and we can’t forget emerging markets firms are buying up developed market assets such as United Breweries in India buying Scottish distillery Whyte & Mackay”

>> Are any countries more conducive to generating entrepreneurs?

[Charles Firmin-Didot] “Entrepreneurship varies in different countries. Overall the credit crunch will not favour the creation of new entrepreneurs who need financing. I saw in the last few months many projects lacking the seed money to start. For the established ones, where they got there first, and have cash reserves, things are a lot easier.

If we look towards countries like Japan and Korea, where a company is held by a private person or family (more than 50%) the company has to pay more tax. This invariably leads to less competition in terms of numbers of entrepreneurs, and could therefore mean it’s easier to be a “better entrepreneur” relative to your competition.

In terms of “making it happen” for sure it is easier in the USA and EU. In China, you can only really progress if you have the right government links, and from our experience, in India, it is only easy if you are “born well”. This is changing, though, and we have now got a few successful first generation entrepreneurs, such as Bharti Airtel, for example.

Structuring is important too. In the UK, most entrepreneurs use the market to exit, and if they have a new idea, they will rarely put it in a listed company, instead doing it privately. Why? Because until recently, the tax structuring in the UK meant that there was no capital gains on selling stakes of existing businesses, meaning you could finance your new ideas, from selling existing, with no tax friction. The rules are changing, with more changes coming. In continental Europe, we have more capital gains tax, so for the entrepreneur, before putting innovation “outside” the business (where he will pay tax if he sells to finance the new idea) he will tend to put it inside the company, which changes investment strategy a lot. In Germany too, we see different habits, with many large companies staying private (of course, with exceptions like Porsche etc) this means that the firms not only stay private, but the innovations do too, and they often use the market to sell. In the USA, with their regulations, you get a good mix of both, but be wary of the limited protection of minority shareholders.”

>> Looking at the future, what sectors and industries do you think will be the 'ones to watch'?

[Charles Firmin-Didot] “At the moment, a lot of entrepreneurs are looking at finance, thinking “I don’t want to get involved with that”. This is the message I’ve been putting to my investors since a year. People were looking at banks saying they looked cheap with high dividends, but it’s not finished. Many wise and older entrepreneurs think inflation is coming back big-time, and those with plenty of cash are getting worried about their physical-cash and are buying tangible assets, or companies which own tangible assets. Alternative energy is a big one to look at, sustainable and environmentally friendly businesses also. There are also many who are taking an optimistic view on commodities in the long term (ten year+). We also have an interesting entrepreneur in the US who runs “Overstock”, they are the market leaders in selling excess inventory, and the more companies that have problems selling, and the more they can get products at deep discount for their customers’ satisfaction. , it is very interesting times potentially good for business when you have cash, tangible assets and when you can be reactive”.

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It is clear, therefore, that entrepreneurs are quite unique in their character, combining unrelenting passion about their concepts, with drive, tenacity and the constant ability to innovate.

The latter quality, innovation, is perhaps the most powerful of these forces. Peter Drucker (regarded as one of the fathers of modern management) having been quoted as saying, “Innovation is the specific tool of entrepreneurs, the means by which they exploit change as an opportunity for a different business or a different service.” A sentiment mirrored, in context of modern business by Sabeer Bhatia, the founder of Hotmail, who said, “I think the soul of an entrepreneur is to keep trying until you find the successful idea.”

Through my own work and businesses, I have been lucky enough to spend time with Entrepreneurs in many industries around the world. I have seen many bet their houses on ideas which have failed, and many which have gone on to create immense wealth from practically nothing. From conversations with these individuals, it became clear that while money was important, the underlying drive and passion came from wanting to try new things, to create value, to, for want of a better phrase, “be an entrepreneur”. Simon Woodruffe, a UK entrepreneur, and founder of “Yo! Sushi” sums this up perfectly saying, “Most entrepreneurs I know do it because they want to, not just to get rich.”

For the world to succeed and for economies to grow, we need entrepreneurs, and we need people who are willing to take on the challenge to generate ideas and create wealth, not only for themselves, but for the wider community through the creation of jobs, and dependent or connected businesses (many, for example, have become millionaires, by becoming resellers of Microsoft’s and Google’s products and services).

Throughout history, entrepreneurs have also provided the philanthropic support to arts, music, medicine, science, and global issues of the time. Whilst Nietzsche opposed philanthropy on philosophical grounds (connecting it with the idea of the weak sponging off the strong), it is clear that the legacies left historically by the likes of Carnegie and Rockerfeller, and the multi-billion-dollar living legacies of Gates, Buffet et. Al, provide the financial muscle the world needs to create the next chapter of our history, and surely that, in itself, is a good enough reason to invest in entrepreneurs.

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For more information, please visit: AXA Talents Website

“The Secrets of Gold” – An Insight Into Gold markets.

noreply@blogger.com (Vikas Shah) — Sat, 31 Jan 2009 16:26:00 +0000

In this article, we explore the gold market, and talk to Michael Pento, Chief Economist at Delta Global Advisors (with over $1.5 billion under management). We talk to Michael about the role of gold as the world’s reserve currency, the factors and economic theories affecting gold pricing, the ‘ financial crisis’, and the future of gold prices.

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Vikas Shah, Thought Economics, January 30th 2009

First, a little history, to set the scene. Gold, since the earliest days of humanity, has been an object of lustre, and a medium of storage and exchange of monetary value. From the advent of the "Shekel" in 1500 BC which gave the middle east a standardised medium of exchange for international trade, gold gained value, as Caesar used it to repay Rome's debts (58 BC) and eventually the Venetian Ducat and the British Florin, Crown and Guinea set the trend for the efficient monetisation of the "yellow metal". In c.18th, following Isaac Newton's setting of "the gold price" (which lasted 200 years) Gold's progress accelerated, with the USA Coinage act setting a currency equivalent for gold and silver, and the eventual adoption of the Gold standard for currencies in 1900 and Bretton Woods taking this concept global in 1944 as international gold exchange standards were set (and the IMF created). During this period, the world was changing rapidly, and as financial markets evolved and grew, with increasingly complex products emerging, gold lost its position as a leading asset class, becoming a mechanism of reserve, and with its lack of volatility, and function as a commodity and monetary unit, gold provided an excellent hedge against inflation and store of economic value.

According to the world gold council, annual demand for gold falls into three main categories, jewellery, industrial (mainly electronics), and investment. These sectors, across 5 years to 2006, averaged 69%, 12% and 19% of demand flows for gold. In recent years, as the world’s financial markets and economies have come under pressure, “retail” and industrial uses of gold have certainly reduced, but gold’s inherent quality of not being a liability of any government or corporation with, therefore, no default risk, has brought it back to the forefront of portfolio managers and investors screens to not only diversify their funds, but to provide a hedge against currency and inflation, and provide a stable ‘haven’ for money in uncertain times.

To learn more about gold’s resurgence and economic role, where gold prices will go in 2009-2010, and the realities of the recession, we spoke to Michael Pento, Chief Economist at Delta Global Advisors, with over 17years of experience in the market, and responsibility for overseeing over $1.5billion of investments.

Q: Why Invest in Gold?

[Michael Pento] “Gold is “real and genuine money” and is the best place holder for wealth and is a store of value for investors. The Gold supply cannot be increased in the same way that currencies can (by decree), it is the least economically cyclical of all metals, and is a hedge for investors when they see the supply of their currency superfluously increased which causes the purchasing power of their currency to diminish.

Gold demand is strictly monetary so even if economies collapse and provide severely negative GDP prints, gold would increase in demand as a currency as investors begin to take more physical delivery (whether in jewellery, bullion, or coins) this services the need for an alternate currency whose purchasing power cannot be attenuated by the decree of a secondary body (e.g. Bank of England, European Central Bank, etc)”

Q: What are the factors leading to a depreciating currency?

[Michael Pento] “Negative real interest rates! In a guaranteed investment such as a short term treasury bill, if that yield falls below inflation, then investors should buy gold which will always maintain its value against depreciating currencies and inflation. When analysing this phenomenon, the crux is to assess “the inflation rate of the US Dollar versus Gold supply” as the relative weakness in the dollar may not be as apparent when comparing currency to currency (it is more apparent when comparing to hard assets).”

Q: How is Gold Priced? And what is the role of Central Banks in the gold market?

[Michael Pento] “The gold fixing price is set twice daily by the five members of the London gold pool by their interpretation of the market, and used as a benchmark for the London Bullion market(s) and hence sets the pricing of all gold derivatives and pricing of gold on global exchanges. London has become the global hub of gold trading by volume and seniority relative to other exchanges. It is, though, free market determination which sets the spot price, which is influenced by investors.

Most central banks (with the exception of a few like China) have traditionally been sellers of Gold. When you sell gold, you temporarily depress the bullion price, and increase the value of the currency, which is a countervailing force. This is a short term negative with a long term positive as gold moves from one hand to many hands, from weak hands to strong hands, and ownership of gold becomes diffused across many investors rather than being controlled by a few central authorities.

The Federal Reserve banks role, much like others around the world, is ostensibly to maintain maximum employment and price stability. It’s interesting to note that we already had something which maintained price stability, the gold standard. The central bank(s) were created to increase bankers profits, they are the “bankers banks”, and are entities where banks go to increase the money by decree which should be derived from savings (deferred consumption, which is then loaned out). In 1913, U.S. bankers got together (partly as a result of the 1907 crisis) stating that they needed more funds, to loan out more money. This was an effort to usurp power over the money supply from free market forces, it then freed them from the strictures of a gold standard.”

Q: What is the impact of the current economic crisis and inflation on gold?

[Michael Pento] “Economic growth or the lack thereof, has NOTHING to do with inflation. Take the example of Zimbabwe, with negative GDP growth, 85% unemployment, but inflation in the millions of percent per annum. Also take the example of Weimar in Germany where they also saw collapsing growth and huge inflation.

Higher prices occur when the supply of money is greater than the amount of goods and services available for purchase in the economy, thus causing prices to rise. It’s the relative amount of money in circulation, not goods and services, which cause recessions. Central banks raise and decrease the supply of money, in the latter case, causing supply to contract and causing a reduction in goods and services.

I believe inflation will be an insidious problem.

MZM (money of Zero Maturity) is up 14% YoY and is growing 32% annually. M2 (money & close substitutes) has grown 10% YoY and 24% annually with M3 (M2+Large Time Deposits) growing 11% YoY. The Monetary base (a measure of the most liquid forms of money) is up 105% YoY and is growing 183% annually, it is now close to $2trn, which can be loaned into existence more than ten times its nominal level, potentially doubling the entire M2 money stock. US national debt is over $10.6 trillion, with a $2.0 + projected 2009 trillion deficit, and a fed funds target rate of 0-0.25bps. Add that to an attack on free market capitalism and you get a perfect formula for intractable inflation!

What we have seen in recent years is a “credit crisis” as the private sector choked on onerous debt levels, and impaired bank balance sheets caused the economy to slow. Can the fed take back their rate cuts? Of course they can, but they will not be able to take it back with impunity, as they will take the entire economy down with them as debt levels have reached the point where without artificially low interest rates, the economy will implode. So can you have slow growth and massive inflation? Absolutely! History says yes. They can both exist together, and this is my prediction for what will happen in the US.

Artificially low interest rates (that must exist in perpetuity to service the unreal debt levels) will create a downward spiral of stagflation. There is no way I can see to exit this spiral without extreme levels of economic duress, i.e.: a depression.”

Q: What are your views on the gold price through 09/10?

[Michael Pento] “I have been on record for the past month or so on Bloomberg and CNBC as saying gold will get to USD1250-1500 per ounce over the period. We have seen that gold has risen remarkably, and recently has again got over USD 900/oz, a very positive move. Gold is rising in all currencies, just slower currently against the USD.”

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Gold is the most liquid commodity market other than crude oil and is as sophisticated as any other financial instrument, with Over the Counter (OTC) transactions in spot, forwards, options, exotic derivatives, futures and options providing investors with a range of methods of trading and investing, and giving industrial and retail customers the ability to not only satisfy their core demands, but to efficiently hedge against the volatility of gold as a proxy for currencies and economic climate.

As economies recover, and the world moves into its next phase of financial evolution, these investment roles will not diminish and as technology advances rapidly (requiring gold for its components) and emerging markets grow, the demand on physical gold will grow too, bolstered by a more risk averse world, requiring ever larger physical reserves. All these factors combine with the relatively static supply of gold to the market (which is unlikely to keep pace with growth); further bolstering sentiment that underlying prices will rise.

Many analysts and economists argue and debate the true value of gold, but the facts remain, as summed up by Gerald Loeb that, “The desire for gold is the most universal and deeply rooted commercial instinct of the human race.”

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For more information: Delta Global Advisors - World Gold Council - Gold News (Bloomberg)

The Economics of Developing Nations and the Global Financial Crisis

noreply@blogger.com (Vikas Shah) — Mon, 15 Dec 2008 16:09:00 +0000

More than ever before in human history, our countries are linked in a complex economic framework which creates dependencies between all nations. In a privileged interview, Thought Economics speaks to Professor Wim Naudé, (Senior Research Fellow and Project Director of the United Nations University World Institute for Developing Economics Research) and discuss the interdependence of nations, economics of world development, the effects of the global economic crisis on developing nations, free market economics, commodities, corruption, and what the developing world can teach our markets.

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December 15th 2008, Thought Economics, Vikas Shah

“Over Thousands of Years”, observed Amartya Sen (Nobel Prize Winning Economist), “globalisation has progressed through travel, trade, migration, spread of cultural influences and dissemination of knowledge and understanding”. Our immediate history has seen huge acceleration of this globalisation process, fundamentally altering the way in which people, nations and companies interact. An explosion in communications technology now means that at an instant we can tap into the total sum of human knowledge and experience, communicate instantly without borders, and instantly broadcast news events, from anywhere in the world, globally. These same advancements, combined with radical changes in political and social attitudes have also created incredible growth in international trade (seen with China becoming the world’s ‘producer’ and India serving many of the world’s service industry requirements) together with an environment where capital can now flow more freely between nations allowing greater opportunities for investment, and financial trades.

Globalisation has, though, not been without problems, and alongside the wealth and benefits our world has seen, we are now left with a global economy which is on the brink of recession, where we still observe staggering and inexcusable levels of poverty and conflict and the paradox of ‘developed’ economies in huge debt, with the ‘developing world’ holding massive reserves of currency, and the world’s natural resources.

In 1973, the United Nations established a decentralised university (the United Nations University - UNU) to “…contribute, through research and capacity building, to efforts to resolve the pressing global problems that are a concern of the United Nations, its Peoples and Member States.”. This body has grown and matured into a decentralized, global network comprising UNU Centre in Tokyo, a worldwide network of UNU Research and Training Centres/Programmes, and liaison offices at United Nations headquarters (New York) and UNESCO headquarters (Paris). The UNU now employs over 336 research staff across its thirty global locations. As part of the United Nations University, the World Institute for Development Economics Research (UNI-WIDER) was established in Helsinki, Finland in 1984, to undertake applied research and policy analysis on global development and poverty issues.

In a privileged interview, I spoke to Professor Wim Naudé (Senior Research Fellow and Project Director at the UNU-WIDER). Professor Naudé’s recent research focuses on spatial economic inequalities, entrepreneurship and African economic development. Previously, he has been Director of the Work Well Research Unit at North-West University, South Africa, and a Council Member of Statistics South Africa. He has also been lecturer and research officer at the Centre for the Study of African Economies, University of Oxford, has taught economics at Addis Ababa University, and has worked as policy researcher in a number of African countries.

Q: How dependent are emerging and developing economies from capital inflows from 'western' and other developed regions? And what has been the impact to developing economies on the massive reductions of liquidity, growth, and sentiment in the 'developed' world?

[Prof. Wim Naudé] The essence of the evolving global economic system is that all countries are dependent on one another in some way, and this includes finance. Emerging and developing countries are dependent on capital inflows from developed regions. But developed regions are also dependent on funds from the developing world! Consider for instance that the bulk of the world’s foreign exchange reserves – trillions of dollars – are held by developing economies, and that the US runs a current account and budget deficit of astronomical proportions.

As far as emerging and developing economies are concerned, they have traditionally been very dependent on capital inflows from the rest of the world, especially from high-income countries. These capital inflows consists of aid, portfolio investments, direct investments (FDI) and remittances. Each of these is important to different countries in different contexts. For instance, many small countries such as Lesotho, Cape Verde, Haiti and others depend crucially on remittances from their workers earning incomes in developed economies. Larger emerging markets such as China have benefited hugely from FDI – which has brought with it technology, know-how and best practices. Others again, like South Africa, have used the inflow of portfolio investments to continue financing a current account deficit. And then there are countries, like the group of least developed countries, who depend on aid disbursements from donor governments, mainly in the ‘west’.

Following the financial crisis that originated in the rich countries in 2007 and 2008, there have understandably been fears that capital flows to developing countries will decline. Although it is too early to give adequate numbers, current estimates range that capital flows to developing countries could decline by between US $ 300 and 400 billion. The eventual extent will depend on a number of factors and will differ between countries depending on their macroeconomic stability and macroeconomic management in place. Thus, many countries will be maintaining good fiscal discipline and positive real interest rates, as a result of which they may be benefiting by re-attracting investment flows from the developing world where interest rates are at historic lows.

Depending on what happens to commodity prices, FDI in developing countries may also resume, albeit more cautiously (much FDI in developing countries is related to their booming commodity sectors). Also, if expansionary policies in the US and EU work out to be effective in stemming the depth of the recession, the impact on remittances may be lessened. Finally, with regard to aid, it has been argued that countries should now increase aid to vulnerable countries, particularly those facing the scourge of the twin deficits (fiscal and currency account) and with a heavy dependence on the US economy. Statements from the recent Doha Conference on Finance for Development have been encouraging, and may hold the promise that aid will not be reduced.

Q: Many argue that to provide monetary development support artificially accelerates regions to grow faster than would be pragmatic, what is your view? And is the 'free market economy' principle indeed appropriate for all countries?

[Prof. Wim Naudé] Monetary support for development in itself will not accelerate growth in the real economy to artificial or unsustainable levels. It is how the finance is used – or misused. What we have seen in the present crisis is a combination of cheap and easy credit, weak regulatory control, financial ‘innovation’ that resulted in financial instruments that could not (or would not!) be assessed accurately. This resulted in over-investment in the housing market with a housing asset price boom – which further encouraged credit expansion. Once the bubble burst and borrowers started to default, the house of cards collapsed. Banks were overleveraged and are now trying to rectify the situation, and as a result we are feeling a credit crunch. The artificiality and unsustainability comes in when loans are made to customers who cannot repay those loans, and without sufficient collateral.

Otherwise, credit and loans are vital to sustain economies, and banks remain vital intermediaries between those with surplus funds and those who require funds. Therefore, as financial markets grow and becomes more interconnected, it is important to regulate and supervise these financial markets. Although one does not want to see government ownership of banks (that comes with an entire other set of problems as the Asian Crisis of 1998 has shown) governments should ensure that these banks do not engage in overtly risky practices, that they do keep sufficient capital as a bulwark against risk (and preferably in cash) and that the incentives for managers and traders do not encourage them to take excessive risks. They should also extent this oversight and regulation not just to banks, but to all institutions that are heavily leveraged. Finally developing countries should learn from the US experience and ensure through regulation, competition policy and under measures that no single firms becomes so important that it is judged ‘too big to fail’.

Q: How do the prices of commodities (e.g.: metals, oil, soft-commodities) impact developing economies?

[Prof. Wim Naudé] The excellent growth in developing countries as a group since 2001 (peaking at around 8 per cent in 2007) is in many due to the rapid increase in commodity prices, which in turn has been growing due to the demand from large emerging markets such as China, India and Brazil. In these countries, growth has been export led. With their foreign currency reserves improving, and government revenue increasing, countries are obtaining better ratings (and better conditions for sovereign debt). Poverty has been falling in Africa, Asia and Latin America.

Having said that, there are a number of developing countries, many of them amongst the least developed countries, who are not commodity exporters, and who have suffered due to the high prices of oil, cement, and more recently of food. Many of these countries have over the past year been experiencing balance of payment stresses.

Q: In terms of economic growth, which are the countries 'to watch' in your opinion and why?

[Prof. Wim Naudé] Countries with commodities that are still in demand, and for which demand over the long-term is unlikely to decline much, such as oil, will continue to grow. But the countries that will grow fastest over the next few years will be those countries that have done the most during this past commodity and growth cycle to invest their gains in infrastructure and education and where the gains have been distributed is such a manner so that the middle class have been growing most substantially. This will allow such countries the ability to better utilize domestic resources (including taxation) as well as to diversify their economies in light of changes in the world economy. More than ever perhaps, countries with an evolving entrepreneurial economy will be able to achieve faster growth. These are economies with a conducive environment for the private sector to flourish – with political stability, strong property rights, the rule of law and an independent judiciary for instance as important requirements.

Q: Transparency International's Corruption Perception Index shows many developing economies as having high levels of corruption and low transparency. Why are corruption levels so high in these regions, and do you think this plays a big role in preventing these regions from growing?

[Prof. Wim Naudé] Yes, corruption is an obstacle to growth. Essentially, corruption entails a misallocation of entrepreneurial talent into activities that carries individual benefit, but has destructive or unproductive consequences for society at large. Because of its essentially predatory nature, it reduces productive investment, leads to an outflow of talent, lowering growth rates and increasing income inequalities.

Ideally, such talent should be re-allocated into productive activities. How does this come about? Well, it depends on the incentive structure in society, which is the outcome of the broad institutional features (the ‘rules of the game’) in such societies. For example without an independent and strong judiciary, there might not be sufficient incentives to remain within the law and corrupt activities may never get prosecuted. Without sufficient transparency in awarding government contracts, incentives for fair and objective treatment might be low.

In many countries with poorly developed institutions, the existence of precious natural resources turn out to be a curse rather than a blessing, since these resources are ‘lootable’, and individuals and groups face little checks and balances in wanting to capture these for themselves.

Q: In many Asian and African countries, we have seen that rapid economic growth has led to the widening of the wealth gap, and a reduction in social mobility, what are your views on this?

[Prof. Wim Naudé] It would seem that there will always be people who are unsatisfied with economic growth, both when we have to little and when we have too much. Thus there will always be a debate on the trade-off between high growth and equity, whether growth is sufficiently ‘pro-poor’ or not, whether the benefits of growth will ‘trickle down’ or not, or whether growth is sustainable or not, whether it is harmful to the environment, etc. This reflects the fact that there is much of the nature of the economic growth process that we do not understand fully.

What we do know is that growth results from both endowments of resources and appropriate skills – and because not all individuals or countries have similar endowments and/or appropriate skills at any particular time, they will not be able to contribute equally towards growth and thus sharing equally in such growth. This is why most countries, depending on the degree to which they are tolerant of inequality, give the government a role to play in transferring resources from the rich to the poor – through for instance progressive taxation and other measures.

What we also know however is that over the longer-term, sustained economic growth can make a significant dent in absolute poverty. We have seen it in the history of the US, we have seen it in Japan and the East Asian ‘Tigers’, and we are seeing it now again in emerging markets such as China, India and parts of Africa. So growth should remain an important objective, and countries should in their own ways deal appropriately with the implications if growth is accompanied by rising inequalities.

Q: Does economic inequality lead to crime in developing economies? And do you think that following the economic crisis and impending recession/depression in western economies, can we learn lessons from these regions?

[Prof. Wim Naudé] Yes, I think that inequalities do breed opportunities for crime, although the causes of crime are more complex. But inequality also breeds resentment, especially if such inequalities are also along racial and/or ethnic lines. In such a way it diminishes a country’s ‘social capital’, which is an important mechanism for preventing crime. In many countries with high inequality and poor social capital we see that the formal criminal justice system being overburdened.

As far as the second question about lessons from the crisis is concerned, yes, I am sure there are useful lessons to learn. There have been many financial crises in developing countries. A recent IMF study has identified more than 100 such financial crises since 1970. Many lessons have been learned from these crises that could be useful even now. For instance, after the 1998 Asian crisis many countries in the region moved towards reducing government ownership of their banks, and improved bank regulation and capital adequacy requirements. They have consequently survived much of the current fallout. In contrast, governments in the US and EU have been nationalizing banks. It is not clear yet how they will get out of this, or avoid the hazards (including the moral hazards) of owning banks.

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The world (particularly Europe and the USA) has undergone a historic change in recent months, with most analysts agreeing that the global economic environment “from here” will be radically different to the past. We have also seen, with great clarity, that the effects of a financial crisis in one country will now quickly spread around the world, exposing the interdependencies and links between our nations. We re also likely to see phase-shifts in economic power, as Asian and middle-eastern nations start to increasingly flex their financial muscle on a global scale, and perhaps this will also help further free capital and trade flow across borders increasing transparency, and helping to further society as a whole.

The argument over whether recent globalisation has contributed to poverty remains, as do the many political and social problems preventing our intervention to cure it, but the phenomenon of globalisation itself, is a force which we cannot ignore, and as the dust settles on our current economic crises, and eyes turn again to growth, we will see the continuity of the observation made by Nicholas Stern (World Bank Chief Economist) who said, “An increase in international trade and investment through multilateral trade reform is not an end [to poverty] in itself, but a potentially powerful means of reducing poverty worldwide.” but as Kofi Annan himself stated, “We must ensure that the global market is embedded in broadly shared values and practices that reflect global social needs, and that all the world's people share the benefits of globalization.”

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Resources:

United Nations University: http://www.unu.edu/

World Institute for Development Economics Research: http://www.wider.unu.edu/

Profiting from “Vice” Industries

noreply@blogger.com (Vikas Shah) — Wed, 10 Dec 2008 18:53:00 +0000

In this article, we talk strategy with Charles Norton, of the “USA Mutuals Vice Fund”, an investment fund with c.USD100m under management, and a focus on Tobacco, Alcohol, Gaming and Aerospace/Defence.

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Vikas Shah, Thought Economics, December 10th 2008

In recent history, the financial community has put a great deal of emphasis on the ethics and morality of its activities and investments. Many argue that funding certain industries may be undesirable for social or environmental reasons, and many shy away from other markets fearful of the “taboo” associated with investing in them.

The fact, though, remains that where humanity exists, so does vice, and whether we consider smoking, drinking, gambling, the sex industry or even war, humanity will continue with these activities, almost regardless of economic conditions. In many cases, these industries flourish at the extremes of economic activity as humans seek to indulge in vices to celebrate or forget, and as economic growth creates war to expand civilisations, or as depressions create wars of economy.

History also shows us that vices (in all their forms) have become the gambit for many successes, whether we consider bond markets funding (and often determining the outcome of) war, or the immense wealth of families and firms involved in tobacco, defence, and more.

Investing, in its most basic form, can be defined as “…laying out money or capital in an enterprise with the expectation of profit”. This is a simple but effective definition, and is the tenet which has driven the investment markets for centuries. The shrewdest managers, though, seek not only to generate a “profit” but to generate a profit which is in excess of what one would normally expect in the market if investing their money in an “index” like fashion. This process of seeking returns in excess of market has spawned a whole generation of individuals who apply intellectual and mathematical principles to find that, “additional return above the expected return of the beta adjusted return of the market”…. Or Alpha.

Charles Norton is an experienced fund manager, and currently advises the “USA Mutuals Vice Fund” (NYSE:VICEX) which, “…invests primarily in equity securities of small, medium and large capitalization companies” and, “…normally invests at least 80% of its net assets in equity securities of companies that derive a significant portion of their revenues from alcohol, tobacco, gaming and defence/aerospace.”. Mr. Norton is also a Principal of GNI Capital, responsible for portfolio management and investment research for all of the company’s managed assets. He is a regular contributor to CNBC, Bloomberg and many other respected media outlets, and in this privileged interview, talks to us about investments in vice.As at November 2008, the fund’s portfolio has holdings in:

Philip Morris International Inc (Tobacco), Lorillard, Inc. (Tobacco), Diageo PLC (Alcoholic Beverages), Raytheon Company (Aerospace/Defence), Lockheed Martin Corporation (Aerospace/Defence), British American Tobacco (Tobacco), Boeing Company (Aerospace/Defence), Pernod Ricard (Alcoholic Beverages) and WMS Industries Inc (Gaming)

Q: "Vice" (derived from the Latin "Vitium") is defined as, "immoral or wicked behaviour" how do you define "Vice"?

[Charles Norton] "We simply focus on four sectors, Tobacco, gaming, aerospace and defence. We are ‘laser focussed’ on those four sectors, and do not have judgement about whether they are good, bad or in the middle, and instead look at companies from an investment perspective. We have believed, and seen, for a long time, that these sectors deliver long term gains regardless of economic conditions."

Q: Why are 'vice' sectors so lucrative?

[Charles Norton] "Regardless of economic activity, consumers consistently enjoy alcohol, gaming, and tobacco. In many cases, the cost of producing these products is very low, and the companies involved have strong pricing power. This, when combined with the degree of demand resilience experienced in these markets, gives you a very strong investment proposition.

Defence is usually not economically sensitive, instead tied to budgetary cycles. Aerospace, though, does depend more on global air traffic which, in turn is dependent on economic growth [it is important to note, though, that the fund’s holdings in aerospace are focussed on firms where a significant proportion of their income comes from defence aerospace, not just civilian]

The fund was incepted in 2002, and the thought process was that these sectors have been overlooked, and not for investment reasons. They also tend to be under-followed by investors, and analysts, giving opportunities due to inefficiencies which we can then, in turn, exploit."

Q: What is your opinion of the negative publicity about the ethics of ‘vice’ sectors as investments? And what is your view on the potential social and environmental issues arising from them?

[Charles Norton] "I am, fundamentally, an investor, and so any sort of opinions which relate to outside ‘making money’ only go against the development of a sound investment decision. We do not consider the outside noise, and maintain focus on our sectors from an investment perspective with anything else coming into the fray serving only as a distraction. Our view is not to analyse the ‘ethics’ outside the investment side. We focus on the merit of our four sectors and apply our deep knowledge, globally.

We also find a lot of people connect with our message, a lot of individuals do drink, gamble, or smoke and so many investors will understand those businesses (through their own participation) more than, say, the latest semi-conductor firm."

Q: What do you think are the vice-sectors to watch in coming years?

[Charles Norton] "Our four sectors (Tobacco, Alcohol, Gaming and Aerospace/Defence) give ample opportunities short and long. Our approach is global, and this gives us untold opportunities worldwide and as consumers continue to enjoy beverages and tobacco in western and emerging markets, we will see more opportunities. For firms involved in these industries, trade is certainly up, and as international brands, they attract attention, giving exposure to mature and fast growing economies. In an environment where earnings and pricing is volatile, cash flow and earnings stability are really of increasing importance, which is where our sectors come in, and vice fund exists as the only exclusive fund for these sectors."

Eric Lansky, the president of USA Mutuals (who represent the vice fund) also added, of the Vice Fund, “What we are seeing and really what providing is the opportunity for investors to invest in something they understand and believe in. What USA Mutuals offer is the opportunity for Investors to Invest Their Knowledge--a person may feel individuals drink or smoke more in hard times and hence this would make sense from an investment perspective, or perhaps unfortunately with continued global unrest, military expenditures will continue to increase--this too becomes perhaps a reason to invest in such companies. The bottom line is that seemingly over last few years funds have become so complex and investors so removed from understanding what they are actually investing in, despite having so much info readily available. Today it seems investors are not fully understanding what they are investing in and/or don't believe in what they are investing -and this is unfortunate as investing is all about buying”

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These are tremendously difficult times for global economies, and investors are now, more than ever in our recent history, presented with fewer opportunities to generate return in the markets with considered risk.

Modern Portfolio Theory “….assumes that investors are risk averse, meaning that given two assets that offer the same expected return, investors will prefer the less risky one. Thus, an investor will take on increased risk only if compensated by higher expected returns. Conversely, an investor who wants higher returns must accept more risk.” The problem occurs that in our current market, there is an incredibly high degree of perceived risk, leading to a “flight to safety” as capital flows out of equity markets, and into treasury bonds and comparable products. On December 10th 2008 Bloomberg reported that due to this overwhelming capital outflow into ‘safety’, three month “T-Bill” rates have become negative for the first time amid the worst financial crisis since the Great Depression.

One of the bi-products of this capital outflow has been that many equities have been punished unfairly, leading to lower than necessary valuations of well-performing stocks in many sectors. Andrew Lo (Harris & Harris group professor at the MIT school of management) proposed, in 2004, the “Adaptive Market Hypothesis” (an evolution from ‘efficient market’ thinking) in which he argues that, “….much of what behaviouralists cite as counterexamples to economic rationality – loss aversion, overconfidence, overreaction and other behavioural biases – are, in fact, consistent with an evolutionary model of individuals adapting to a changing environment using simple heuristics”. His theories, while relatively ‘new’ are being seen played out in our current economic crisis where rationality and efficiency seem to be making way for behaviour, specifically the aversion towards risk, otherwise manifested as fear.

It is therefore, perhaps, a prudent time for the investment market to remove some emotion from its views, and take a lesson from Warren Buffet himself who states of Berkshire Hathaway’s investment principles, “…We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”

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For more information on the vice fund, visit their website at: http://www.usamutuals.com

Other Resources:

- Morningstar Vice Fund Report
- "The Adaptive Markets Hypothesis" Research Paper by Professor Lo
- "Treasury Bills Go Negative" - Bloomberg

An Air of Change

noreply@blogger.com (Vikas Shah) — Wed, 05 Nov 2008 17:30:00 +0000

The world is currently faced with an environment of challenges and uncertainty, the likes of which have never been seen before. On November 4th 2008, the US public raises its voice and has a say on the future of the world's economy. Thought Economics investigates the US presidential election, Barack Obama, the global economic crisis, and who’s profiting from all of this? by speaking to two eminent world experts and getting an opinion on either side of the Atlantic. Dennis Gartman (Virginia, USA), a globally respected economist and trader, author of the "Gartman Letter" and Hugh Hendry (London, England), partner and CIO of Eclectica Asset Management, a renowned and respected fund manager with over $1bn under management.

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October 28th 2008, Thought Economics, Vikas Shah
[Updated November 5th 2008]

“In recent weeks”, says the Bank of England’s Financial Stability report, “…the global banking system has arguably undergone its biggest episode of instability since the start of World War I”. This quote was shrouded by a backdrop of instability and war, where the world’s monetary and political leaders have come together, injecting over USD2 Trillion into the global financial system, hoping to stave off a depression, the likes of which the world has never been seen before.

To observers, this crisis has revealed more than just systemic failures in Banking. We have seen, perhaps, the strongest representation of how interconnected the world now is, where no country is truly shielded against another’s failures. The Financial Times, in October 2008, even commented that, “…Today’s global financial crisis is unlike any other in more than three decades. Unlike the Latin American debt crisis of the 1980s, and the later Asian financial crisis, the turmoil has been exported from the US, and then western Europe, to emerging markets. Securitisation and the proliferation and global distribution of complex and opaque financial instruments mean that economies have become more interdependent.”

Regardless of recent events, the USA is, for now, the most significant global Economy, accounting (as a single country, based on World Bank Figures) for around 21.5% of global GDP (PPP) and acting as a global financial centre, and hub for foreign relations.

On November 4th, The US public will vote to decide who will become the next, “leader of the free world”. Many have cited that this election is, due to the global economic and social outlook, one of the most significant in history with “change” being at the top of both candidates’ agendas.

The US public have the right to vote, but the rest of the world watches in anticipation, and in a privileged pair of interviews, we speak to two eminent experts to get the view from either side of the Atlantic:

For the USA, Dennis Gartman (Virginia, USA), author of “The Gartman Letter” (a daily commentary on the global capital markets, subscribed to by leaders of banks, broking firms, hedge funds, mutual funds, energy and commodities traders globally). Mr. Gartman has over thirty years market experience and is a regular contributor to media outlets such as Bloomberg.

For the UK & Europe: Hugh Hendry (London, England), partner and CIO of Eclectica Asset Management, leading the investment thinking and research which manages over $1bn in assets. Hugh is one of the UK's most well known fund managers, and also a prominent media contributor on financial and economic topics.In this interview, I talk to Dennis and Hugh about Obama, War, a global depression, and who’s profiting from this crisis.

Q: Many have cited Obama as being a necessary catalyst for change, do you think "the world needs Obama?" and what impact do you think he will have on our current economic challenges?

Dennis: First of all I find his [Obama’s] economics disturbingly left of centre, and I am therefore not a great fan of Obama. I think his policies on taxes are ill advised, and he tends towards protectionist trade legislation and, on balance, is collectivist. It appears, though, that I am in a growing minority. The only thing beneficial is that equities tend to do better under democrats than republicans. The reasons are open to debate, but it could be due to a more expansive monetary and fiscal policy, or perhaps as a result of election following a ‘clear up’ of the system by the republicans. I think those with incomes under USD 100,000 have a lot of hope on Obama, but those with incomes over USD 250,000 have none. McCain has no particular vision of economics, but has a stronger military background. This leaves us with one candidate with poor economic judgement, and one with none.

Hugh: The world of economics does not need politicians, we need a ‘one term president’ as the next four years will be economically challenging and we simply cannot do justice to the magnitude of the problems we have. For him [Obama] to succeed he needs to be really honest and tell people how severe the economic contraction could be. I fear Obama completes the move to the left of centre, and is faced with a legacy of government stake-holding in financial systems. I fear Obama’s election will see the lines of finance and emotive politics blurred and will see us move into a future where political agenda is carried out through the banking system. A bank where government is a large shareholder may come under pressure to not finance hedge funds, or have a relationship with Swiss banks (due to disclosure), or may be encouraged to make more “socially desirable” loans to environmental and/or manufacturing industries. The irony is we may have experienced a social utopia, with the past five years seeing history’s biggest transfer of wealth, as money moved from ‘rich bankers’ to the poor (ie: people who were never given access to credit have been given it, and its proven disastrous).

Q: What do you think the effect of war is on recessive economies, and do you think (as some would say) that conflict is a necessary part of economics?

Dennis: I would argue that’s not true at all. History does show that war brings you out of panicked depressions, but that’s not where we’re going at all. War offers fiscal stimulus to economies, and some of this is due to the propensity of capitalists to spore a capitalist atmosphere to it. Do I think war is a necessary evil? Of course not, it’s the old theory that if we break a window it’s strong for economic circumstance as it must be replaced when, in reality, it’s a net zero gain.

Hugh: Economics tends to be framed in wave cycles like Kondratiev’s waves, and there are many indicators in the present environment to say we are seeing the emergence of a ‘winter cycle’ with savage economic conditions. I am not an expert on why society’s come into conflict, but many would argue the reason is to secure commodities. I fear that our savage economic conditions and military conflict will, though, go hand in hand. I hope I am wrong.

Q: Do you think we are heading for a global depression? Or do you think the raft of co-ordinated measures from world leaders will provide some stability?

Dennis: I do think the measures which have been put into effect will stave off “The Big D”. We’re long overdue, and in the midst of a global downturn, and it’s probably going to be a recession as severe as the early 80’s but we are unlikely to see anything worse, and certainly not as bad as ‘73/74, and that which occurred in the ‘30s is beyond all realm of likelihood. We need to be impressed with how swiftly authorities have responded. In the past they would have elected to do nothing, or would have taken months to respond. Our response would have ended up like Japan’s [citing their recent financial issues], or like the 1930’s where they avoided injecting reserves at all costs and in many instances made the idiotic move of raising taxes. Of the things we should be grateful for is Bernanke’s experience (his university dissertation was on the evolution of a depression) and his acute awareness of the fact that delay would have been a terrible mistake. The clearest way to avert disaster is to lay out liquidity and deal with it later. They have, to a great degree, done all the right things.

Hugh: I almost believe in predestination in this context. If we look at humans, I believe there is a reason they die after about eighty years (enough to kill a generation). The reason? So that future generations can repeat the mistakes of the previous. My view of history is that it’s cyclical, and this view has taken me into conflict with many investors of the past 10/15 years who have viewed history as linear. In a linear view, every day we pass from the 1930’s depression sees that event being pushed further out of our collective consciousness, and the fact that it happened in the past has no bearing on the future. Regardless of the efforts, there has been no reflective consideration, the measures have been off the hoof, and disjointed. The greatest travesty here is the one directed at Europe more than America, which is the failure of monetary policy to guide economies. A good analogy is from aviation where, if you let an aircraft break stall speed, it becomes unresponsive. We broke stall speed in the UK economy in the last 12 months, and even if we pushed our rates down to Japanese levels, we are faced with they Keynesian metaphor of “pushing string”.

Q: While the newspapers are filled with bad news, its clear that in any market, there are people making profit. Who are the ones making money from this crisis?

Dennis: This is easy! Those who have been short of ANYTHING made a lot of money, and that fact is what confused people. Anything and everything went down, the only things rising were government securities with maturities in excess of five years. Gold was down, stocks were down, every currency other than dollar and yen were down, commodities were down, corporate debt was down. If you took a dartboard and took short positions and sold anything you did ok. Those who did badly were the ones who went long. You are starting to see things change, there is now a greater wisdom in the market. Margin calls have run their course, and we’re probably at the end of the panic, and getting back to normal circumstance.

Hugh: Me! One of our funds has just made 50% in the month of October!. The paradox is that despite the doom and gloom, there are remarkable profit opportunities out there. People are taking bets on interest rates, betting that rates will fall further than consensus and betting that the economy will prove weaker than consensus. As an example, British government bond yields are currently around 4-5%, this could easily fall to 2.5% over the next two years which, if true, gives you a return north of 40%. Betting against emerging currencies, especially in Eastern Europe is also something of a no brainer. When you have crises in emerging currencies, they can move 3-400%. I would not, though, want to do injustice to the problems of countries which have taken massively short-sighted decisions (such as Hungary, where most mortgages are financed in JPY or CHF) which have resulted in profound failures, but there are market forces such as ourselves, and other funds, which simply will not allow you to beat the system.

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There have been few other elections in US history where the sense of economic and social urgency in the general population has been so great. Both McCain and Obama have identified the need for competent and strong leadership, McCain citing “Country First”, and Obama aiming to be, “The Change We Need”.

2008 has also provided the first election environment where the social dynamic of a technologically mature internet has shown the powerful ways in which society spreads and disseminates information and opinion, ensuring that now, more than ever, the individual has a say, with ‘home generated’ virals (such as ‘McCain wins by one vote’) attracting the kind of audiences which paid election broadcasts could only dream of. We also, in the same vain, see the power of social-participation, where countries and publications around the world take polls of who internationally is viewed as the ‘right choice’ (the economist having been a strong proponent of this with their ‘give the world a vote’ campaign and powerful pre-election week cover citing ‘it’s time’ with a photo of Obama).

The world’s thinkers have, as expected, torn shreds from the economic policies of both parties, and pragmatism would, perhaps, show that ‘one man’ cannot provide the solution to the problems of an economic crisis, war(s), and social unrest.

Turning our minds to the wider issues here, I take a note from Anatole France (Nobel prize winning writer in 1921) who wrote, “All changes, even the most longed for, have their melancholy; for what we leave behind us is a part of ourselves; we must die to one life before we can enter another.” It is clear that commerce, politics and society will have to make many wrenching changes over the forthcoming years to build strength and stability back into the world, and what people need is competent strong leadership and, perhaps, patriarchal guidance.

In these times therefore, policy must come a close and controversial second to the vivid realisation that the ‘emotional’ choice of leader is important, providing the collective sense ownership of the “who leads us?” decision, and of governance. This collective visionary leadership is the necessary catalyst for a change in populous sentiment needed to stabilise the US and, invariably, the rest of the world.

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Update: November 5th 2008

The people of America have spoken, and Barack Obama is now the president elect of the United States of America (at the time of publishing, the count is not complete, but as at 08:30 GMT the margin of victory was 338 electoral votes v. 155).

In a powerful speech to over 1250,000 supporters in Chicago, President Obama stated, “If there is anyone out there who still doubts that America is a place where all things are possible, who still wonders if the dream of our founders is alive in our time, who still questions the power of our democracy, tonight is your answer”

Of the financial markets response, Tullett & Prebon commented overnight “Financial markets rally in a vote of confidence to Senator Obama’s [projected] victory, with equities, commodities, USTs and the US dollar stronger yesterday”

So, “Does the world need Obama?”

While this publication aims to remain politically neutral, we must consider the viciously negative sentiment which was gripping not only the financial markets, but the population of the world in general. Regardless of the conflicts within analyst and expert views of his policies and stance, Obama’s victory was greeted with scenes of hundreds of thousands of people lining the streets of all the major cities in the USA, filling Times Square in New York, and cheering well into the early hours of the morning with people of all races and backgrounds coming together, feeling a sense of achievement and pride. President Obama himself summed up the mood saying, “…those who've been told for so long by so many to be cynical and fearful and doubtful about what we can achieve to put their hands on the arc of history and bend it once more toward the hope of a better day”

November 5th 2008 is a historic day, and I, for one, am looking forward to the impact of this change on our future.

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Resources:

Gartman Letter:

Eclectica Asset Management:

The Economist Global Electoral College 2008:

Kondratiev Economic Wave Theory:

Barack Obama:

John McCain:

Art as an Investment

noreply@blogger.com (Vikas Shah) — Fri, 24 Oct 2008 13:09:00 +0000

Art now, more than ever, is seen as an effective asset class for the management of wealth. International wealth management firms and funds are increasingly pitching ‘art banking’ and ‘art investment’ services, against a backdrop of auction houses constantly breaking records as massively liquid collectors seem to buy ‘at any price’ to secure works of prominent global artists. In this article, I investigate whether art is an effective wealth management instrument, gaining an insight into the operation of the art investment market, and interviewing Mr. Randall Willette, founder of one of the world’s leading Fine Art Wealth Management firms.

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October 24th 2008, Thought Economics, Vikas Shah

“Art”, according to Oscar Wilde, “…is the most intense mode of individualism that the world has ever known”, and throughout our history, individuals have collected art as a method of capturing societal zeitgeist, history, or even to reflect their own passions. Curiously, while civilisation has always had creativity on mass, there has been a distinction between an individual being creative and ‘art’. Carl Gustav Jung sums up the essence of this distinction, and of art perfectly when he says, “What is essential in a work of art is that it should rise far above the realm of personal life and speak to the spirit and heart of the poet as man to the spirit and heart of mankind”

This ‘essence’ is the intrinsic value of art, and is the power which has meant that through our history, the great and the good, from royalty to commerce, have sought to own art, in all its forms.

Purists have always argued that art, particularly where part of a nation or culture’s history, should be owned in the public domain. The reality is, though, that art is, to the market, like precious jewellery or fine watches. An esoteric and illiquid commodity with near limitless price.

Examining the past decade alone, art sales have created headlines as buyers often adopted the attitude of ‘at any cost’ to purchasing works.

Jackson Pollock’s “Number 5, 1948” - $140 million in 2006
Willem De Kooning “Woman III” - $137.5 million in 2006
Pablo Picasso “Garcon a la pipe” - $104.1 million in 2004
Francis Bacon “Tryptich 1976” - $86.3 million in 2008

While many would point the finger for these prices at the ‘new wealth’ of Saudi Arabia, Russia and Asia, these buyers, rather than setting the prices, are simply new liquid entrants into what was a growing art market as ‘international scale’ wealth has become more commonplace through the growth of commerce and industry in the last half century.Increasingly, art has been put forward as an asset class (though still firmly in the alternative category) for use as part of a wealth management strategy. Art is gaining value, as new generations come to appreciate its value, and as newly opened international markets seek to reclaim their artistic cultural heritage from overseas, and develop collections of their own. Many banks (UBS being a prime example) and independent funds provide ‘art investment’ services, and the number entering the market is increasing.

Traditionally, UBS and a small number of other private banks have offered clients interested in art a limited number of services (mostly around collection management). Few banks, however, have approached art as a separate asset class which can help diversify a portfolio of investments or serve as collateral for raising capital.

Artprice.com (who track international art prices at auction) described how, “In 2007, the art market posted its 7th consecutive year of price inflation. In global terms, art prices rose 18% over the previous year. The higher prices were accompanied by a higher total Fine Art market revenue at 9.2 billion dollars, up 43.8% compared with 2006 and driven by a substantially higher number of sales above the million-dollar line: 1254 compared with 810 in 2006”. The same group are also responsible for producing a global art price confidence index, using the same sophisticated tools as you would see in the production of financial markets indexes. Talking of the economic instability seen in 2008, they comment, “Indeed, analysis of the recent art market price volatility suggests that 2008 could be “correction year”. Of course, we can expect a certain lag behind financial markets in view of the relative inertia of catalogue price estimates and the time it will take to liquidate the related stocks. However a recrudescence of buyer vigilance could well start to manifest at auctions as a higher bought-in rate and we have perhaps already seen the very first signs of this: in 2007, the bought-in rate rose to 35.5%, vs. 34% in 2006. Once a price correction starts, past experience tells us that prices can unwind quite quickly. Many readers will remember that the Artprice Global Index, based on works that came to the market more than once between 1990 and July 1992, posted a 44% contraction.” The reality seems, though, that in an uncertain world, where ‘traditional’ asset classes are risky or under-perform, art has also served as an increasingly safe-haven for money.

For artists, this boom has created an incredible opportunity and purists have spoken of their displeasure that many artists now appear to create for sale, rather than creating for art’s sake. “To demand purpose from an artist”, said Goethe, (speaking on the morals of art creation) “…is to make him ruin his work”. Pablo Picasso (one of the highest auction turnover artists of history) also spoke out on the trade of art saying, “The people who make art their business are mostly impostors.”

To investigate the value of art as a wealth management instrument further, we spoke to Mr. Randall Willette, founder of “Fine Art Wealth Management”, a specialist art investment consultancy. Prior to establishing Fine Art Wealth Management, Mr. Willette was executive Director and Head of Art Banking for UBS Wealth Management in London, developing their art banking service globally. His firm’s advisory team comprises globally significant art, collectables and valuation experts, and in this interview he speaks more about the art banking and the art investment marketplace.

Q – What are the core “reasons” for an investor to get involved in the art wealth management marketplace?

We approach art and wealth management in a context which is much broader than treating art ‘simply’ as an investment. Apart from the benefits of art as an alternative as an alternative asset class , we believe there is a growing need for financial solutions around existing portfolios of art assets currently held by private clients.

We offer three streams of business activity to wealth managers focused around art including: art finance, art succession planning, and art investment. Our clients include private banks, family offices, and investment management boutiques seeking to integrate art into their overall wealth management strategy for private clients. We believe clients will significantly change the way they manage their portfolios of art in the future.

1 – An art collections requires the same strategic planning as other investments and with the help of skilled advice can become an effective working asset. There is a growing demand among private clients to unlock the liquidity in their collections much like a mortgage provides financial flexibility to owners of real estate. The profile of many HNWIs is to be asset rich but cash poor. These individuals are used to effectively leveraging their assets however until recently, few financial institutions have been prepared to lend against high value works of art.

2 – A great deal of art wealth has been accumulated in the past several years by the so-called “baby boom” generation. It has been estimated that private collectors own more that $1 trillion in art and collectible assets. Equally important, wealth transfer is estimated to reach $41 trillion during the first half of t he 21st century. Collectors are starting to think about tax and estate planning issues and needing solutions for how they will deal with leaving their art. Within the next few years, there will be a tremendous opportunity for art succession planning.

3 – There is clear evidence that art is taking on the role of an alternative asset class which should be a part of an overall investment strategy. One simply needs to look at the growth of art investment funds in recent years. Private clients are looking to increase the ratio of non-correlated instruments in their portfolios and making use of sophisticated strategies such as art investment funds to create more dynamic asset allocations is one way of doing this. Previously “hedge funds”, private equity funds and real estate have dominated the alternative space.

Q - Is art an effective wealth management asset class?

Yes, There is growing attraction to art as an investment due to its low correlation with other asset classes and its diversifying affect on an investment portfolio. We are seeing the art market going through similar transformation as the real estate market did a number of years ago.

All of this is coming at a time when alternative investments have also been gaining in acceptance with sophisticated investors. In fact, many of the gains HNWIs have reaped in recent years have been the result of strategic diversification of their holdings via moves into a broader range of asset classes.

Price movements in the art market follow long term trends in global economic performance. However during shorter intervals, there is volatility of prices in the art market that moves independently of the markets for other assets. This non correlation of can be employed as an effective risk management tool to achieve attractive diversification benefits within an investment portfolio.

Research shows that art exhibits both a highly favorable return-to-risk ratio relative to other asset classes as well as consistently low and negative correlations to the stock market and other financial markets. As a result of such strong diversification attributes, art can be a valuable addition to an investment portfolio. Also, because the market remains highly inefficient, there is a substantial opportunity for out performance through active management much like the value that private equity or venture capital funds create.

Q - In the global art market, we regularly see 'hedge fund managers' and those of international grade wealth purchasing pieces for large sums. Has the more overt visibility of these individuals aided in the increase in valuation of art in the rest of the market?

wealth creation over the past several years has been a key driver to the art market. This wealth creation is coming from a variety of places including emerging markets (where there is tremendous wealth from booming economies). To some degree, this tremendous wealth has helped to drive the market upwards and in that sense it has, in certain sectors (eg: contemporary art), created a bubble.

Much like the financial markets the art market is not immune to bubbles. In fact, the rate from which prices in the market are driven by taste and fashion is much greater than financial markets where value is more a function of market fundamentals.

The most talked about bubble in the art market occurred in the late 1980s and early 1990s in the Impressionist sector and was caused by soaring Japanese demand. Today, it is widely believed that the contemporary art market is experiencing a similar bubble. A large number of these buyers include successful hedge fund managers who have achieved enormous levels of personal wealth. In addition, a substantial level of new money has also poured into the art market from new collectors in countries of emerging wealth such as China, Russia and India.
If these sources of new wealth dry up, it is possible that the Post Modern and Contemporary sectors could experience a significant correction over the next few years.

Q - How has the arrival of UHNWI's from Russia and Saudi Arabia affected the art markets?

This ties into the previous answer, and we can see they have definitely affected the market. If you look at research from the likes of Merrill Lynch and Cap Gemini (world wealth report) clearly they have highlighted the tremendous growth of “investments of passion” (clearly art is in this category, at the top of the list). It is important to point out that particularly in emerging markets, as one begins to create wealth, many of these individuals want to invest in art from their own heritage and their own cultures, and you see a huge amount of wealth moving into art they [international wealth] can relate to and from their own artists. This has also spurred ‘western’ investors to start looking at these markets and investing in international artists, thus driving prices even higher.

The art market, like the larger economy to which it is so closely linked, has gone global. As wealth has proliferated in the developing economies, the newly wealth are reclaiming their artistic heritage by acquiring art from their own countries. Fuelled by an economic boom a new generation of collection is emerging for which art is increasingly becoming an important component of their alternative investment strategy. China's spectacular economic rise over the past quarter-century has started to create enormous wealth, and prices for Chinese art have risen steeply, especially in the last several years. The value of contemporary Indian art work has also risen substantially, reflecting an explosion of interest that closely parallels the increasing wealth of Indians at home and abroad. It is interesting to note that India has more art investment funds than any other country in the world (according to research conducted by Mr. Randall Willette).

Q - There have been many criticisms in the public domain of art collectors depriving "society" of access to significant pieces of art, what is your view of that? And do you feel it an obligation, as a collector, to loan pieces to display?

Philanthropy is quite important among collectors and is thriving as over the past several years, you have seen more high net worth collectors set up foundations and museums to make art public and to share their collections leaving wanting to leave a legacy. Philanthropy is something which is quite strong in the art world, and there are many who are very active in this area, gifting work to museums or foundations.

Q - Do you feel the 'monetisation' of art has taken away some of the 'purpose' of art? (i.e. are artists becoming production lines rather than creatives [citing many criticisms of Damien Hirst et. Al])?

. The fact that art is now being viewed as an asset class, and you have more financial players looking at art has added transparency to the market. Art is one of the last remaining unregulated markets. This [change] is one of the principle roles we see in the marketplace for our firm, where we aim to bring due-diligence and independent analysis to the investing public.

Increasingly, we are seeing two types of art buyers in the market. One type has a detached, financial point view, treating art like real estate and other financial investments and his expertise lies in following the market. The other is the collector who may have mixed motives, but whose first motive is to be a player in the art scene. For him, it is about intellect and passion and less to do about investment.

Historically, very few major collectors and art professionals endorsed art investment outright. The general view was that one should only get involved in art if you love the subject and what you are buying

Q - What has been the impact of forgery on the current marketplace?

The art market has become more litigious. As the art market has expanded and “professionalized” the need for due diligence has increased, especially considering the sheer sums of wealth being exchanged. This means that checks into fakes, forgeries, title and authenticity are critical, as well as due diligence on around cross border transactions, restitution, and purchase and sale contracts.

Q - There has been a surge of activity with art from emerging markets, are you finding prices and volumes of trading activity on pieces in these sectors is mainly from individuals from those countries (and their diasporas) or do they have wider appeal? And what impact will the "Overheating" of these economies have on valuations?

If we look at the “wealth creation effect”, it is clear these booming economies have had an effect on the prices of art. We now see Russian, Asian and Indian investors bidding in the UK for their own cultural art, and internationally known pieces. The question is whether this will continue in light of the slowing global economy.

There is a distinct and growing divergence between mature and emerging economies with the advantage going to emerging nations. With few exceptions the mature economies have weakened significantly. By contrast, up until recently emerging market proved resilient and posted robust gains uncertainty grew in the mature markets.

Up until now, the resilient emerging economies have offset slowdowns in key mature economies. The balance between emerging market strength and mature market recovery will be a delicate one.

Q - Does art make an effective 'safe haven' for funds?

I don’t think that across the board art will provide a “safe haven”. Certain sectors of the art market will undoubtedly be effected, such as the contemporary market. Where one has referred to art as a safe-haven in the past, typically this is at the very high end of the market among established artists, with established track record and history.

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It is clear to see that for any pragmatic strategy to manage wealth, art should form an essential part of the asset classes in the portfolio. Art, like many alternative classes, is an investment of passion, and while many critics say that this defeats arts purpose, the monetisation of the market has contributed much to funding new art, spaces, and encouraging a wider awareness of art in general.

Regardless of the recent contraction in economies worldwide, we are left with an environment where wealth is far more global and diffuse, and as long as mankind is fascinated, illuminated and intrigued by art, in all its forms, this surge will continue.

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Fine Art Wealth Management (in their own words)

“Fine Art Wealth Management (FAWM) is a specialist investment consultancy dedicated exclusively to art as an alternative asset class. We deliver independent solutions for wealth structuring of art assets and provide global art fund identification and assessment services to institutional and qualified investors.

In recognition of the growing importance of art as an alternative investment, FAWM combines the rigours of investment management with the specialised knowledge of art experts to integrate art into the alternative investment strategy of wealth managers and their private clients. As wealth has exploded in the developing markets of China, Korea, India, Middle East, Russia, and Latin America the newly wealthy are reclaiming their artistic heritage by investing in art from their own countries. These developments come against a backdrop of increasing investment in art globally and a new generation of collectors for whom art has become an important component of their overall wealth management strategy. Access to these services is available to professional advisors and institutional investors only.”

For more information, visit: http://www.fineartwealthmgt.com

Have Banks Bottomed Out? What is the Future of Banking Globally? And Where to Invest for Growth.

noreply@blogger.com (Vikas Shah) — Wed, 24 Sep 2008 06:00:00 +0000

The past 10 days have been “the most dramatic in Wall Street’s 216-year history” seeing Lehman Brothers collapse, AIG fall into critical distress, and the US Federal Reserve creating a c. US$1 Trillion rescue plan to “save the world”.

While many investors were caught in this crisis, the leading economists in the world saw it coming. In this article, we talk exclusively to Kenneth Murray who is Chairman & Executive Director of Blue Planet Investment Management, and a renowned banking economist about the factors which caused the crunch, whether banks have bottomed out, the future of global banking, and whether it’s the right time to invest in banks.

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September 24th 2008 – Vikas Shah

In early 2008, if a journalist had written that Lehman brothers would fall into Chapter 11, AIG would become critically distressed, and the federal reserve would be forced to create a c. US$1 Trillion rescue plan to, "save the world", they [journalist] would have openly been ridiculed for making such 'far fetched' predictions (with the same vigour as scholars who argued the earth were round were ridiculed during the Classical period).

Today, only eight months later, we are confronted with a situation where market observers are calling September 2008, "the most dramatic in Wall Street's 216-year history".

While many investors were caught in this crisis, the leading economists in the world saw it coming.

In this article, we talk to Kenneth Murray who is Chairman & Executive Director of Blue Planet Investment Management, and a renowned banking economist.

In a privileged question and answer session, we discuss the mechanisms which caused the ‘credit crunch’, look at the future of banking in the UK, US and Internationally, and understand where to invest in Banking.

Mr. Murray studied economics and computer science at Stirling University, and with an interest in financial markets he joined the city as a banking analyst. Mr. Murray quickly ascended the career ladder, becoming a Director of Fulton Prebon International Limited, one of the World's largest money brokers (which had operations in London, New York, San Francisco, Tokyo, Hong Kong, Singapore, Sydney, Bahrain, Luxembourg and many other financial markets). In 1990, he founded the Bank of Edinburgh Group plc, with the aim of rationalising the building society sector. His bank was the first to purchase a building society (The Heart of England Building Society, 1992, with assets of £1 billion). In 1994, following the sale of his bank, Kenneth Murray created Blue Planet Investment Management, with the aim of becoming, “the best manager of financial stocks in the world”.

“For me” says Mr. Murray, “Economics is a greatly rewarding intellectual challenge, like a game of chess, where along with the satisfaction of winning, you have a constant desire to play the game better”.

Q: What fundamentally went wrong in the markets, and what do you think to those who are “calling bottom” on the markets, and betting on an upside?

We predicted this back in April 2007, and the first question you have to ask yourself is “what gave rise to the increased activity in banking in the period from 2003-2007”. This is a fundamental question. The main driver of this growth was the rise in personal consumption, which has a number of elements. We can only consume at the rate of the growth of incomes, and we saw that consumption was exceeding incomes. The savings ratio reduced from a historic 5% to currently less that 1%, and finally people were “borrowing to spend” (which increases consumption). Not only were people borrowing, but they were borrowing multiples of their earnings, so the level of consumption dramatically increased. As inflation fell, interest rates followed, and people could therefore leverage (borrow) more, assuming their primacy asset (property) would hold them in retirement.

What we are seeing is a correction. As people ‘maxed out’ their borrowing curve shifted upwards. People can borrow and spend, but ultimately, they have to pay it back, and that’s when the consumption curve falls. The increase in demand is seen as money is spent, but then income is set aside to cover the borrowing, and hence the consumption curve falls. This is a particularly strong phenomenon in over leveraged economies such as UK, USA and Denmark. Elsewhere in the world such as India and Russia, personal debt as a proportion of GDP is much lower.

In terms of those who say the market is bottoming out, the first thing to look at is the track record of the people. To use an analogy I learnt at University, it doesn’t matter how nice or unpleasant they are, it’s the results that count. The overwhelming majority of analysts failed to see “what was coming”, this, in my eyes, discredits them. You are very unlikely, if you didn’t see it coming, to understand what happened.

Q: So where is the value in banks?

There will be virtually no growth for UK/US banks going forward. They may be able to exact efficiencies, and shifting bad debts to governments will de-risk the sector and re-rate stocks, but the economies will still slow down in the UK/US but by a smaller rate than a few months ago. This may create the question, “if we normalise risk, where’s the value?” In my opinion the earnings growth is in the developing market which is underleveraged, and as has budget surpluses, these are the regions where the top-lines will grow.

In terms of the US and UK, we will certainly get a rally of banking stocks due to the de-risking and unwinding of short positions, but this will also initiate mergers in both countries. Goldman Sachs and Morgan Stanley will certainly go out to buy retail banks, and we must watch out for the ‘clever’ banks such as HSBC who have steered through the markets very intelligently meaning their relative positions have shot up. Once we see this kind of activity, the rest of the market will typically head back ‘in the water’.

In our own funds, we allocate similar methodologies to our investments. Banks are a proxy for economies, and we look for well run economies, sector growth, under-penetrated economies, and solid leadership.

That strategy, though, has not worked well in the past 12 months, as the economic sentiment is non-discriminatory. URSA bank in Russia has profits up 200% last year, 60% up this year, but the share price has dropped 80% even though they have not put a foot wrong. Consider even their economy (ignoring politics) which shows the third largest foreign exchange reserves in the world, abundance of land and natural resources (mostly unexplored and unexploited), trade balance and budget surpluses, and over 7% GDP growth. This represents a perfect balance sheet, versus the UK and USA which read more like an IOU.

Q: What are your aims as a fund manager within these turbulent markets? and how do you make salient financial decisions in a market which is behaving, as Bob Diamond from Barclays said, "without a rulebook"?

We are not in a market “without a rule-book”. It is worrying when people say that.

This is economics. There are, in economies, times when madmen take over who understand nothing about anything but operate on emotion. The laws of economics always come into play.

Where we are at the moment is the tail end of a banking crisis. The reason it’s a tail end is because the practices that gave rise to bad debts stopped a year ago. We are now getting bad debts through the system, and after that, “that’s it”. We will be left with ultra conservative banks who are risk averse and trade with wider margins. Oligopolies such as HBOS/Lloyds are inevitable, and create a level of control of markets which allow them to withstand bad debts, and the power to extract returns from economies.

We are near the bottom, but people are still feeling worried, as most do not understand markets enough to make intelligent decisions on economic propositions. Emerging banks can be bought on P/E ratios of between 2-5, this is incredible, as these banks earnings are increasing 20-150% per year with sound balance sheets. In the case of India, its reserve bank imposes incredibly strict controls (high cash reserve ratios) which give very low risk. While both these countries are bothered by inflation (particularly India), in essence, they carry less risk than the west, but are considerably cheaper. Share prices in these regions have fallen more than the badly managed western banks.

Q: Do you think that increasing regulatory intervention is a positive thing for markets? And has banking failed the principle of ‘free markets’?

There are many factors at play here, but the management of monetary policy at the federal reserve (Greenspan) has played a big role. Greenspan flooded the market with cheap money (1% interest). When banks have little money to lend, they are selective who they lend to, and they want a good rate of return. When banks are awash with money, they soon exhaust “good” proposals, and engage in riskier activities, with poor credit. The more excess liquidity, the greater the bad debts. This is an inevitable consequence of bad management of money supply by central banks. Cheap money causes problems.

Banks and their actions are to blame also. Banks do not have to borrow money from central reserve but they chose to do so. In the same way, they did not have to lend this excess capital, but they chose to do so. This was a fundamental failing of bank boards, and an issue which needs to be addressed. The ultimate regulator of a market is not government (FSA/SEC) but is the bank boards. Strong management is essential, and banks need to stop hiring the “great and good” (ex PLC directors from unrelated industries who know nothing about banking, risk, and economic cycles) and instead look at bankers with track record, and an understanding of systemic risk. This has to be addressed before any rules changes are made at a policy level.

Q: Will the unwinding of risky derivatives and the absence of complex products from their activities see bank shares 'under perform' against their historic figures?

The reason for underperforming is there is no potential for earnings growth. Banking is shrouded in mystery, but a simple example is….

If you consider a country where 5% own mobile phones, and the rest are rapidly accumulating wealth and want those products, is that not a better place to be?

The same is true of banking services. In western markets, everyone has loans and too many loans, that is why everyone is defaulting. In Russia and India, there is huge growth opportunity, but much less risk. These aggregate numbers are very important. If Loans/GDP is c 7% it is like saying that a person on £100,000 has £1,000 of borrowings. In western economies if you earn £100,000 you are likely to have £200,000 in borrowings. This is, therefore, a key indicator of risk. The West will not perform too well (in general) but the ones which will are the investment banks which, as confidence returns in economies, will create more banking volume in mergers and acquisitions.

The greatest risk going forward is the unwillingness of banks to supply credit (which is much diminished as it’s simply not prudent to lend).

Q: Many analysts and traders favour 'technical analysis' as a method to deliver trading signals and trend information. Do you think in current markets, technical trading still provides a reliable strategy?

I don’t think that it [technical analysis] has ever proved reliable. If you consider the mathematical principle of VaR (In economics and finance, Value at Risk (VaR) is the maximum loss not exceeded with a given probability defined as the confidence level, over a given period of time) which, as any mathematician will tell you, is basing your risk analysis for what will happen in the future, on what has happened in the past. Ultimately, this is a flawed hypothesis. If I were to walk towards the end of a cliff, and after 98 steps I fell down a six foot hole, VaR would tell me that on average, every 98 steps I take, I will fall down a six foot hole (even though I am only two steps away from the edge of the cliff). Regulators and analysts love this kind of mathematical analysis because it looks like “good science” and gives the air of being useful. If you are a real mathematician or economist, you will know that it is fundamentally flawed, the unpredictable will always happen, that is the nature of things. VaR tells you the risk of an activity is X, and when an unpredicted event happens, that goes out of the window.

Einstein once said, “Knowledge is great, but imagination is better”. If you are backward looking number cruncher, you will never be great. The great economists are those with the vision to understand the market, demand, supply and how “this” set of things will result in “that” in twelve months time. It is the reason I enjoy being in the company of intellectual people where you can query “why do you hold that view?” without being given the response of simply “I have a feeling”.

If you look at the current downturn, it was predictable. The adjustment that is now taking place is a result of the reduced ability to borrow and spend.

So many analysts don’t think out of the box, and are simply “regurgitation machines” and they do not look at the macro position. The same is true of many economists. It is astounding that they don’t see problems, and when they occur, they are miles behind and incapable of understanding a resolution.

Q: Do you think it’s a good time to ‘buy in’ to banks?

We are much nearer the right level to buy banks in the right part of the world. If you can take a 2-5 year view, or even better, a 10 year view you will make huge returns. As Warren Buffet says, “buy good stocks and let them make the money for you”.

From this shake up will come immense opportunities, some banks and assets have been massively over-sold and when normality is returning, this will create growth. You have to have the courage to get involved at the bottom to make serious money and this courage comes from understanding what you’re doing.

A good analogy is to think of economics as an oil tanker, when in motion, its course is dealt. When banking was flooded with cheap money, this flooded the market, and created actions and consequences which were predictable. Even the development of economies is predictable, and is part of human nature, with very few new behaviours. Once the system is de-risked, people will then look rationally at individual banks asking “who is this bank?”, “what is the growth potential?”, “what is the ratio of deposits to loans?”. All of these questions along with analysis of penetration of banking services, point to emerging economies and against most western banks.

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We are seeing in the media, many articles calling the “bottom of the market”. Mark Arbeter (technical strategist at Standard & Poors) was even quoted as saying, “On three straight days a third of the stocks on the New York Stock Exchange hit 52-week lows, the first time that has happened in almost 35 years. We think evidence of a climax bottom last week were overwhelming”.

Mr. Murray’s analysis shows how the current ‘downturn’ is the expected and predictable response of underlying economic forces, and shows the failings of not just policy makers, but the bank management themselves who act as the true ‘regulators’ of the market. It is these economic forces and principles which could have predicted the failures, and can provide insights into the solution and future, historical analysis and models while interesting, simply cannot take the unknown and the ‘macro’ into account.

Our economy was at the brink of correction, as our insatiable demand peaked with absolute saturation of available space.

It was Doug Horton who summarised this perfectly in his quote, “First rule of Economics 101: our desires are insatiable. Second rule: we can stomach only three Big Macs at a time.”

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Blue Planet in their own words, "Blue Planet Investment Management Ltd is a Maltese based investment management company which specialises in managing investments in financial companies. Our corporate philosophy is that consistent out-performance is more likely to be achieved by specialisation than it is from the generalist approach, which currently prevails across most of the fund management industry."

You can find out more about their activities online at: www.blueplanet.eu

“The Price of Events”, an Inside Look Into the Minds of Energy Traders

noreply@blogger.com (Vikas Shah) — Mon, 15 Sep 2008 07:00:00 +0000

In this article, we gain a better understanding of how energy traders put a ‘price’ on geopolitical and weather events, and get a unique and privileged insight into the mindset of energy traders and the market. This article features an in depth interview with Mr. Walter Zimmerman, Senior Energy Analyst & Economist for ICAP(one of the largest brokers in the world, with an average daily transaction volume in excess of US$1.5trillion) where we talk about energy prices, events, recession, political policy and how the market “thinks”.

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September 12th 2008, Thought Economics, Vikas Shah

The global energy markets are absolutely critical to the daily lives of practically every human on the planet with trading sentiment and decisions affecting the price of our electricity, gasoline, travel, and more. In the past quarter of a century, the energy markets have grown and developed into a complex and sophisticated environment, which can affect, and are affected by, global events (such as weather, terrorism, political instability, etc). It is not, now, uncommon, to see headlines in our mainstream press such as:

“Oil prices today jumped back towards $120 a barrel today as tropical storm Gustav, which experts said was likely to be upgraded again to a hurricane, appeared set on a course for US oil and gas rigs in the Gulf of Mexico. Crude oil rose $2.98 to $119.25 a barrel after adding $1.16 yesterday. Fears about the path of Gustav and a potential impact on oil production, could see oil near a three-week high of $122 over the coming days." - The Times (UK) August 27, 2008

“Oil prices decline sharply following the September 11, 2001 terrorist attacks on the United States, largely on increased fears of a sharper worldwide economic downturn (and therefore sharply lower oil demand). Prices then increase on oil production cuts by OPEC and non-OPEC at the beginning of 2002, plus unrest in the Middle East and the possibility of renewed conflict with Iraq.” – International Energy Agency

"Continuing oil supply disruptions in Iraq and Nigeria, as well as strong energy demand, raise prices during the first and second quarters of 2005." – International Energy Agency

"Continued unrest in Venezuela and oil traders' anticipation of imminent military action in Iraq causes prices to rise in January and February, 2003." – International Energy Agency

The world of Energy Traders is one which is a fair distance away from ‘civilian’ life, but one which is of great importance to it.

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Walter Zimmerman is the senior analyst and economist for ICAP (one of the largest brokers in the world, with an average daily transaction volume in excess of US$1.5trillion), and a renowned world expert in energy pricing and economics. His career started as an eminent student of chaos mathematics, where he developed his passion for seeing how, “…turbulent systems generate patterns and those patterns give you predictive value about the system”. You are unlikely to meet people in the world who have a more in-depth understanding of Energy economics, and when asked where his passion comes from he stated, “On one level, markets are driven by free will, but it is the collective exercise of free will that creates patterns in a market, and hence predictability and determinism. It is truly fascinating to watch these cycles repeating. It’s human nature repeating itself. With the phenomenon of complexity theory, and it is a real theory, you can predict the price of oil to several decimal points months in advance, this is a deeply satisfying phenomenon for me, and one which keeps me excited to go to work”. Walter’s clients include National/International oil companies, refineries, petroleum marketers, international banks, petrochemical firms, hedge funds, airlines, utility companies and governments.

I had the privilege of speaking to Mr. Zimmerman in the format of a Q&A to get his unique view on how the energy markets work.

Q: “Why are geopolitical events (such as political instability and, for example, military events) of such interest to energy traders?”

“From the first day of trading in energy, it has always been a tug of war between “there is enough today” and “there may not be enough tomorrow”. The focus has been “there is enough today” we get a downtrend. When fear of the future comes in, that’s when we see an uptrend. So the critical factor is the sentiment, what the market is focussing on. For the last few years, the market has been spending more time being afraid of the future rather than content with the adequacy of current supply. The explosive growth of demand in China/India has eliminated excess production capacity and as of Q1 2008 there was ZERO spare OPEC production capacity globally, no supply cushion, and so any little wrinkle in the news, or hint of geopolitical tension, caused the market to take off”. He continues, “Recently we have seen more collective attention brought to the adequacy of supply. The impending recession has re-created surplus production capacity. We saw it previously in 2000/2002 where decreasing global demand caused oil to fall from $38 to $17, and natural gas from $10 to $2. This was due to recession, not policy, and as soon as the economies surged, so did prices”

Q: “One of the big questions in recent years has been, ‘when will the USA notice the price at the pump?’ clearly this has started to happen, what is your view?”

A: The US took notice when oil hit $150. As the credit bubble and house prices collapsed, they lost ‘cash’ and lost the ability to take loans against their homes and more. All of a sudden, the supply/demand curve became elastic, helped by the implosion of real-estate. The UK is more energy efficient than the USA which has the worst energy efficiency of any country globally, and no future energy policy. The US is living in a 20th Century mindset of being the ‘biggest crude producer’ unfortunately the principle of ‘you cannot predict what you don’t want to happen’ holds true here and the country needs to realise that you cannot, as 4% of the worlds population, consume 25% of the worlds energy and not have to pay up for it.

Q: “How important are 'weather' events to the energy market? And surely is there not enough 'flex' in energies to cope with supply disruption from weather events?

A: During the early 1980’s there was a chronic oversupply of refining capacity, every year refining margins would go negative. Refiners would almost ‘root’ for a hurricane so that those refineries that weren’t shut down could make money. This was a constant situation, but now, with no excess refining capacity, we see that the slightest threat drives prices higher. In the last few months, there has been a lot of new capacity coming online, particularly in distillate (which have been the strongest commodity on the board, leading all other energy prices higher). The condition of a lack of excess refining capacity is therefore now improving, and you see the difference in the market where hurricanes Gustav and Ike hardly saw anything other than small spikes in price, nothing like previous years.

Q “Are the markets more responsive to events driven price differences during times of economic weakness?”

A: Price changes in a market are exacerbated due to the ‘mood’ of the market. THIS is the primary driver. Traders read how the market reacts to the news to gauge a pulse of the sentiment consensus of the market. There are other more direct ways (such as sentiment and consensus providers) but nevertheless the primacy is the mood of the market. If you follow this closely, it is quite fascinating.

The longer an uptrend lasts, the less traders are hedged against the lower prices, so by the time the market is peaking, very few are hedged against the downside risk. The bullish consensus is the strongest at the high - most are convinced price are still going much higher. As the market starts to sell off the hedgers become more and more bearish, and by the lows, everyone is hedged and protected against further downside and no one is protected against the upside. The market sentiment is the most bearish at the lows. This means that very few are protected from downside at the top, and virtually no one is protected against the upside from the lows.

The trend creates the news. Bullish news in a downtrend is simply ignored. The press digs out stories to explain “that’s why we’re going higher.” So the primary driver is not news events. The primary driver is the collective mood.

Q: “And how does this work in relation to spot and futures?”

A: Futures are a more leveraged version of the spot markets. So spot markets trends can be magnified in futures. Increasing leverage increasdes the emotional content of the market. And it is always the case that Fundamentals+Emotion=Price. To use an analogy from ‘Star Trek”, science officer Spock would state, “This is not logical” he would be completely out of his element in today’s markets. It is the nature of markets to over-react to the upside and to the downside. The markets are the display of human nature.

Q: “Freight derivatives have recently gained a lot of strength in the marketplace, are these particularly vulnerable to such risks?”

A: Risk is a function of leverage. Any derivative that increases leverage will increase risk. If you trade crude oil and every ‘tick’ costs you $1, you will sleep at night, but if every tick costs you $10,000, you will not sleep a wink. Due to their highly leveraged nature, certain derivatives can heighten risk and the attendant emotional intensity.

Q: “For a long time, the insurance market has been a primary example of a market which 'prices' terror/disasters/weather events, but people are now more aware of the similar process in energies. How does the trader and market go about putting a 'price' (eg: oil US$2 up on news of gustav) on these events?”

A: It depends on whether the market is in an uptrend or downtrend. To broaden out to a wider market, it is not just crude oil that has been getting ‘beat down’ so one has to start thinking whether we are in the early stages of a wider deflationary depression. If you recall in the press when Russia invaded S. Georgia, the gold price didn’t notice, there are so many people caught long, that the market simply cannot respond to threats. You can see therefore that to answer “What is an incident worth?” – Nothing in a downtrend, and everything in an uptrend, again, a bi-product of market mood.

Q: “Many countries such as the US carry a 'strategic reserve' of fossil fuels such as Oil. Do these reserves go a long way to affect pricing? (especially during times of 'events' such as political/weather events)”

A: The US government, since the initiation of the SPR (Strategic Petroleum Reserve) seems to have been much more intent on buying at the ‘top’. They have been uninterested in adding when prices are low, and nobody wants the oil. Governments are the ultimate trend follower, they do everything last. By the time the governments get around to blaming speculators, you know the peak has come and gone. The actual role of the SPR is a function of political agendas and ideologies.

Q: “We have already seen an emerging market for carbon credits, and many markets trading 'weather derivatives' etc. Alongside trading the raw commodities themselves? Where is the future for energies trading? Are we going to see more complex derivatives as we move towards renewable and other energy sources?

A: Part of the answer, and a MAJOR part of the answer, has to do with the collapse of the credit bubble, and global re-evaluation of credit risk. There is a flight away from complex derivatives to more simple instruments. Many hedge funds and banks are now more concerned with raising and preserving capital. Many are more interested in extracting themselves complex instruments which they now understand they didn’t understand! This will put a damper on more the more complex derivatives which were never necessary in the first place. The role of a bear market is to eliminate the speculative excesses of the prior bull market. A bear market has typically been a ’return to basics time.’ This trend is now visible for all to see.

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We can see; therefore, that there is a complex mix of human behaviour and fundamentals at play, giving us the pricing phenomenon we see in energy markets and, rather than the ‘news based peaks’ which most media assume, there are much larger sentiment trends in play which are controlling the overall behaviour of the energy markets.

Most would now agree that globally we are going through one of the most fiercely challenging economic climates which our civilisation has come up against for quite some time, but to state “To think that the new economy is over” (quoting Alvin Toffler, a futurist and writer) “…is like somebody in London in 1830 saying the entire industrial revolution is over because some textile manufacturers in Manchester went broke.”

The credit crisis has exposed a lot of home truths in our economy, the rebound of which has caused a greater tidal wave of sentiment in the market, shifting us from a period of buoyancy, into depression. Much of this was, perhaps, due to economic and financial short-sightedness by political and banking leaders but, “Economic depression”, as Herbert Hoover said, “…cannot be cured by legislative action or executive pronouncement. Economic wounds must be healed by the action of the cells of the economic body - the producers and consumers themselves” and as Franklin D. Roosevelt once said, and as can be applied now with great relevance, “We have always known that heedless self-interest was bad morals; we now know that it is bad economics.”

Walter Zimmerman is a senior analyst and economist for United ICAP, who were founded in 1980, and are now one of the world’s leading energy brokerage firms.

ICAP in their own words….

“ICAP is the world’s premier voice and electronic interdealer broker and the source of global market information and commentary for professionals in the international financial markets. The Group is active in the wholesale markets in interest rates, credit, commodities, foreign exchange and equity derivatives. ICAP has an average daily transaction volume in excess of $1.5 trillion, more than 60% of which is electronic. We operate in both established and emerging markets and our electronic networks deliver global connectivity to customers. We believe that we can best provide the service our customers need by combining the strengths of our people together with technology - setting the standard for our industry. ICAP provides specialist intermediary broking services to trading professionals in the wholesale financial markets. An interdealer broker draws together liquidity and matches buyers and sellers so that deals can be executed by its customers, receiving a commission when a transaction is completed. With more than 3,900 staff, ICAP has a strong presence in each of the three major financial markets; London, New York and Tokyo, together with a local presence in more than 30 countries. ICAP plc's shares are listed on the London Stock Exchange (Code:IAP) and it is a FTSE 100 company”

www.icap.com

Helping Computers Think Like Humans, to Help Humans Understand Data.

noreply@blogger.com (Vikas Shah) — Fri, 29 Aug 2008 21:29:00 +0000

Computers have become very efficient at producing vast quantities of data but for modern computing and business systems, the challenge is to create computers which can ‘see’ and ‘process’ data in a way more akin to the human brain.

Efficient Thinking:

Kwabena Boahen, a researcher at Stanford university has spent many years understanding ‘how’ the brain thinks. His research describes the efficient network of interconnected neurons in the brain, and likens in to our emerging ‘parallel’ and ‘distributed’ computing architectures (similar to how the internet itself works as a ‘system’). These systems (unlike “old computing”) are fluid, dynamic and robust, able to survive with imperfect data. His research is illustrated using an ‘electronic retina’ which is a system of transistors and connections which model the human eye. The results are startling, showing that 90% of ‘sight’ data reaching the brain is simply about contrast and movement. This fact allows the brain to quickly take in and analyse the massive amount of sight data it has to process to give us a clear understanding of our world (this same phenomenon is used in video streaming where computers are only sent the bits of an image which have ‘changed’, thus saving a lot of file space).

Parallel and distributed systems are quickly moving from the realms of ‘macro’ and corporate computing, and into business and consumer environments, meaning that at our fingertips, we now have access to systems which can efficiently manage data in a manner akin to the brain. This takes us neatly into our next important concept…

Sorting data:

At an early age, we, as humans learn the art of data organisation. We learn that social networks can be organised into “cliques” and that “words can fit into overlapping categories” (eg: dog, mammal, animal).

In a significant advance in artificial intelligence, scientists at MIT have developed a model which can recognise these patterns, and organise them into the most appropriate data structures such as trees (common in genealogy), linear orders, rings, dominance hierarchies, clusters and more.
"Instead of looking for a particular kind of structure, we came up with a broader algorithm that is able to look for all of these structures and weigh them against each other," said Josh Tenenbaum, an associate professor of brain and cognitive sciences at MIT and senior author of the paper. The model could help scientists in many fields analyze large amounts of data, and could also shed light on how the human brain discovers patterns.

Business now, more than ever, produces masses of data which our software struggles to organise in a manner which makes it easy for us to understand and process. Many providers of management information, knowledge management, and other solutions aid our ever increasing sorting and dissemination needs, but more often than not, we are left unable to take-in the volume and variety of information we are presented, leading to decisions which are conversely less accurate.

By applying the theories set out in his paper, our applications will not only be able to sort data more effectively, but present in a way which mirrors the logic our own brains use. Here are a couple of hypothetical situations:

• ABC Ltd, a market research company, could apply this logic to take quantitative results from a research study, and more efficiently understand the structure and relationship of responses.

• DEF Ltd, a large retailer, could more effectively manage a wide range of products by grouping and sorting individual lines and categories more accurately based on relationships between buying patterns and supply factors.

• GHI Ltd, a financial trading floor, could use this model to create advanced tools to understand the relationships between economic and other events, and fluctuations in their traded products (eg: currencies)

From these larger situations, we can reach the more mundane, where applications could include rapidly grouping contacts by characteristic in your address book, or combining with face recognition and other technologies to accurately sort your photos in a human manner.

These technologies are the start of a revolution in how we, as computer users, access and interact with data-sets. Behind these ‘logic’ solutions, other technologies are allowing our systems to ‘pre process’ massive amounts of data more effectively. Google’s “MapReduce” technology allows them to ‘chunk’ and ‘sort’ through incredibly large and complex data sets. Wired magazine (on July 16th 2007) detailed a staggering example of this where MapReduce was asked to, “Count every use of every word in Google Books.” (an archive spanning millions of books) before taking the output of this data, and being asked, “How often does Tolstoy mention Moscow? Paris?”. By changing the nature of how software thinks about data, and using distributed architectures to process massive amounts of information, this technology is able to answer such queries in rapid pace (within a few seconds).

Now imagine the potential for a data structuring logic architecture (as above) placed in front of such a sorting tool, to be able to understand the ‘macro’ and ‘micro’ relationships in our masses of data. In recent times, such technologies have been applied to help predict votes, air-fares, sort relevant news (in aggregators), power search tools (like Google), and more. Even the array of social networking sites apply somewhat simplistic versions of these technologies to group, sort, and display their members.

I meet many business owners who are unaware (through apathy or ignorance) about the value of the data their firms generate. Even the most ‘mundane’ pieces of information, with the right tools, can reveal valuable patterns or clues to how to improve or repair a company, and open opportunities for new business models.

The future is going to be a very exciting place, and as interfaces become increasingly intuitive, our relationship with our systems and data will fundamentally change how we think. For computing, the result is phenomenal, and summed up perfectly by phisolopher Isiah Berlin, who said, “To understand is to perceive patterns”

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Resources:

MIT Research Paper

Computational Cognitive Science Group (MIT)

Wired Magazine on “Sorting the world”:

Google’s Mapreduce framework:

Kwabena Boahen’s page at Stanford:

Danielle Aubert's Art from Microsoft Excel

noreply@blogger.com (Vikas Shah) — Mon, 28 Jul 2008 16:30:00 +0000

Leading creative journal, "Design Boom" recently covered the work of Danielle Aubert, stating, "...most digital artists use sophisticated software to create works which would otherwise not be possible. while artist danielle aubert does create one-of-a-kind artworks, the software he use is rather low-tech. aubert produces some of his drawings with none other than microsoft excel, the software more typically used for spread sheets. aubert manipulates the program in ways that clearly show the
software’s traits but from a new perspective."

Danielle's work is a wonderful example of how creative thinkers can take a concept or a technology and apply it in a way which is drastically different to intended. In this case, the end result was artwork, but the thought processes which are engaged could easily be applied to other things, whether that be business, or our lives outside that.

For many years, those in technology have seen open-source software and independent coders (often called 'hackers') take platforms and physical products (eg: ipods, satnavs, etc) and innovate to create something new. Linux, for example (a popular open source operating system) has spawned an entire culture of followers who take great delight in taking often unassuming pieces of hardware (eg: fridges, handheld computer games, car radios, etc) and turning them into fully functional computers. This generation are the followers of the 'radio shack' era, and the predecessors to a time where consumers will take a companies products and services, innovate themselves, and create often totally new objects and platforms of value.

In future articles, I will cover this consumer innovation phenomenon in more detail, but this example from Danielle Aubert, I felt, was a great illustration of it.

To see more of his works - http://www.danielleaubert.com/

Data Euphoria – The death of Science, and parallels with business.

noreply@blogger.com (Vikas Shah) — Mon, 28 Jul 2008 09:49:00 +0000

In a recent article, a postdoctoral fellow at Harvard medical school wrote of the concept of “data euphoria” where scientists are replacing conventional scientific thought & theory with large scale data experiments. The writer identified that the “….underlying problem with the whole concept of replacing the scientific establishment with a Google like data cruncher is that it misunderstand how scientific insight is achieved.”

While his Blog has a focus towards biological sciences, we see the same is true elsewhere, in science, and business. In research, it seems the world is moving from a ‘component’ approach (where we try to understand how the parts make the whole) to a ‘system’ approach (where the aim is to understand a perspective as wide as possible and then drill down).
Much of this change has been due to huge changes in how ‘science’ works, as currently, like never before, scientists have access to huge amounts of technology, capital and data, meaning that they now have the ability to a) fund massive experiments and research studies and b) have the computing power to understand the results.

To give you a flavour of this in action, you need only look at:

http://www.top500.org – a list of the fastest supercomputers in the world

http://www.lhc.ac.uk – the £3bn ‘large hadron collider’ experiment (which aims to recreate particle conditions at the time of the big bang)

A simple search on Google will reveal many other large scale ‘number crunching’ experiments and research projects which many, in the science community, question with vigour, doubting their merit as more than just ‘bragging’ exercises

If we take the basic tenets of the above, we see a great deal of similarity with the business world where, rather than creating enterprise from ‘component’ ideas and growing to large companies (as firms like GM, Unilever, and their counterparts have done over many years), the zeitgeist seems to be to deploy ever more prevalent amounts of capital (whether leverage or cash) to structure bigger and more complex deals, and fund increasingly ‘ambitious’ start-ups.

In 2007, the guardian reported news of the biggest over private equity deal (US$38bn). In the year since, even in the face of turbulent markets, we receive weekly news of mergers, acquisitions and deals with (to quote a friend in the industry), “almost comically embarrassing amounts of money involved”. (The merits of these large deals are somewhat outside the scope of this article, but will be discussed in more detail in future writing.)

If you were able to pause these scientific and financial beasts for a moment and ask, simply, “why?”, chances are that along with the pages of justification for their activities, one would be greeted with a slight undertone indicating their reasons for pursuing these budget-busting-projects are “because they can”.

That said, there are, for sure, ‘right’ conditions and upsides to large scale mergers (for example the Mittal Steel and Arcelor $33.6bn merger) but in these cases, it can usually be seen that creation of immense scale is an appropriate and savvy way of dealing with the market structure (method of product delivery, research and development costs, etc), steel and other commodity industries such as o&g, et al, are good examples for these.

In other cases, though, many mergers and acquisitions seem to take place to service a ‘perceived’ opportunity and to gauge efficiencies which may not, necessarily, exist (Airlines are a great example of where mergers may not often result in significant savings, hence code/route/aircraft share schemes). This M&A culture also creates a slight undertone of secrecy within different markets, as companies are more inclined to protect assets than share them, glowing with the thought of eventual mergers, this leads to some stagnation in markets, as IP and concepts are simply not adequately developed leading to a surge of ‘equivalents’ (driving prices down) or high cost new products (maximising revenue before IP is spread), the pharmaceuticals market perhaps exhibits this more than most.

Many may also perceive that the ‘city phenomenon’ plays a big part in this, as a potential oversupply of advisory, support and banking services can lead to these organisations hunting for deals to keep themselves in business (leading to the phenomenon of transaction-at-any-cost). To put this in perspective for the UK, from a population of only 60million, almost 2million are employed in the financial services sector.

Even in a ‘smaller’ context, I have seen many businesses within my own network where the owners have pursued a tactic of big-number-deal-making as a growth strategy not for any real ‘scope’ other than their view that one cannot grow ‘fast enough’ organically. For some industries (particularly those dealing with services or intellectual property) this kind of scaling is possible, but for MANY others (dealing in physical products), scaling like this can (while giving you a ‘big number’ business at the end of it) introduce an unreasonable amount of debt and complexity which can topple an otherwise healthy enterprise.

I would always ask entrepreneurs (often against the whim of their fee-generative-advisors) to consider the merits of big number deals before embarking on them, and would ask they take heed from the many otherwise successful firms that have collapsed because of this approach.

Doing something “because you can” doesn’t necessarily mean you should.

Credit Crunch? What Credit Crunch?

noreply@blogger.com (Vikas Shah) — Sun, 06 Jul 2008 15:43:00 +0000

In this article we look at the “crunch-defying” world wealth market, and analyse the growth in sales of luxury goods and services together with the opportunities in the luxury market globally.

In most western countries, the ‘general’ population are feeling a pinch as inflationary pressures and contracting economic conditions contribute to a difficult climate. People are feeling a drastic reduction in the value of their money (i.e. their ability to buy goods and services) while also facing a decline in the value of their physical and other assets.

Rachel Joy, from GfK NOP (Who produce the official figures on consumer confidence for the UK) stated, “This month [June 2008] the Index score continues to tumble and is almost at its lowest level since the survey began in 1974. At -34 it is only 1 point higher than the -35 recorded in March 1990 when the UK was heading into recession. With rising inflation, gloomy forecasts for interest rates and soaring fuel, utility and food prices dominating the front page headlines, it’s no surprise that confidence in the general economy is almost in freefall. It seems unlikely that this trend will reverse in the near future”

While this ‘doom and gloom’ sets in for most, the luxury markets are booming. Merrill Lynch, in June 2008, published a report which said that, "The number of people around the world with at least $1 million in assets passed 10 million for the first time last year”. This, said the report, brings, "the combined wealth of the globe's millionaires to nearly $41 trillion last year, an increase of 9 percent from a year before". Estimates say that by 2012, this figure will be near $60 trillion.
Evidence of this growth pervades to those companies supplying goods and services to the luxury marketplace (the companies supplying the needs of the richest 2% of adults in the world, who between them own more than half of all global household wealth).

Brokers and manufacturers of luxury jets, and super-yachts are, for example, reporting record sales growth and huge order backlogs, "The private aviation market is currently growing at more than 15 per cent in the Middle East," said Shane O'Hare, the President and CEO of Abu-Dhabi based Royal Jet, an executive flight services company. Wealth markets have been buoyed in the past decade for many reasons.

- The growth of financial markets and complex financial products (eg: credit derivatives) creating huge ‘city’ wealth, globally. These products and services have also helped wealth create more wealth and can often prosper in the volatile conditions we are seeing (see ICAP shares as reference of this in practice)

- The massive growth of emerging markets creating vast amounts of wealth internationally ($18.4 trillion of the $40 trillion value of global wealth is outside America & Europe).

- The huge increases in commodity prices (we have seen in particular nations such as Africa and Russia profit from these)

- Real estate, though a four letter word in many countries at the moment, has also contributed to this growth.

Other reasons are evident yet more complex including growth in demand for goods and services globally (particularly as the east develops consumer culture) and the breakdown of global business boundaries (through communications, infrastructure and policy) allowing companies to extend their trade horizons. These factors have led to the growth in both HNWI (high net worth individuals, with at least $1 million in assets) and a massive surge in the amount of UHNWI’s (ultra high net worth individuals with over $30 million in assets).

Evidence of this latter group’s growth is not just observed by wealth managers and the investment community, but by the market at large, with newspapers and magazines carrying reports of these individuals purchasing ever more expensive yachts, art, homes, aircraft, and more. According to Bloomberg, “London auction houses sold a record 558.8 million pounds ($1.1 billion) of art including fees over two weeks”. Even aircraft manufacturers Boeing and Airbus are getting in on the action, selling personalised versions of their jetliners to the ultra-rich, “from about $50m for a single-aisle plane to the $300m or so Saudi Prince Alwaleed bin Talal is paying for his Airbus A380 flying palace”. Yacht brokers I spoke to were reporting increases in interest and sales of vessels above $100million, with more esoteric markets emerging such as private submarines.

Economists and analysts argue, though, that there is more at play to the growth of the luxury markets than simply an increase in wealth. High net worth individuals have many objectives with their assets, first and foremost to protect them, and then, using diverse strategies, to grow and develop that wealth.

Globally, credit markets and other investments (such as stocks) have certainly stalled, leaving those with cash and investable assets to turn to other means to meet their strategies. The luxury goods marketplace has stepped in to this void, by providing many opportunities for the world’s wealthy to engage in ‘investments of passion’ where they are able to protect wealth by buying goods which seem to grow in value year on year including jewellery, art, collectables (eg: luxury cars) and fine wines. This phenomenon has spread with innovative companies creating many ‘securitised’ versions of luxury lifestyle accessories such as car clubs, hotel room investments, international luxury property clubs, and boat clubs. In all of these cases, the ‘primary’ investor generates a good return on the back of a luxury good or service. As for whether this will decrease when global markets resume their stability? My view would be there is clearly enough liquidity in wealth to sustain both classic and luxury investment strategies. Note that much has, recently, been discussed about the impact of the global credit market fall-out and inflation on this strata of the population, and indeed whether they are more exposed than they admit, but this will be covered in more detail in a later article.

Alongside this pragmatic attitude to the purchase of goods and services (ie: turning them into an investment), there is clearly growth in the general uptake and consumption of luxury goods and brands, seen by increases reported from established players such as Rolls Royce (up almost 60% as reported in July 2008 by the independent newspaper in Ireland).

For entrepreneurs in the luxury arena, times are good. If blinkers are applied to shield
them from the carnage of the credit markets crisis, a clear picture is created of a market which is becoming (through breakdowns of policy, communication and infrastructure barriers) more accessible and growing year on year.

High net worth consumers in Europe and America are seeking ever more extravagant and limited products, and as the social distribution of wealth increases (ie: the backgrounds and natures of individuals with wealth) we are seeing brands becoming more numerous and powerful (contesting the usual ‘controlling’ position in these markets held by the likes of polo, Chanel, Cartier and others). In non US/EU markets, the brand and product growth is even more interesting, as these high net worth consumers are truly global citizens, with ‘new’ money, and an appetite for the consumption of luxury goods. They are open to new brands, products and services, and have not ‘grown up’ with any ingrained views or attitudes towards particular companies (in the UK and USA, brands like Polo, Chanel and Cartier are almost seen as ‘uniform’, with little or no exploration outside these remits apart from the provision of bespoke). But even in these established markets, the inflow of international wealth (particularly to London) has seen a diversification of brands and products, creating more opportunities for entrepreneurs and existing brands. Many global financial institutions and funds are, for example, launching specialist investment funds to capitalise on this market, “Société Générale”, as reported in the International Herald Tribune in January 2007 “which manages $437 billion, will [through a luxury fund] invest in companies like LVMH Moët Hennessy Louis Vuitton, Porsche and Tiffany”

Ayn Rand, a Russian born American writer in the 1900’s wrote, “Money is the barometer of a society’s virtue”. There is a great deal of reluctance from companies to enter these (luxury) markets in light of global economic conditions, but in my opinion, the growth of global wealth, especially outside America and Europe provides entrepreneurs and existing companies with an incredible opportunity to develop exciting goods and services to service an ever more present and demanding strata of the population.

The world, it seems, is becoming increasingly motivated by money, and while many argue this does not buy happiness, it will (says Helen Brown, an American writer), “…help you be miserable in comfort.”

Resources:

1 GFK NOP Consumer confidence index:

2. Merrill Lynch World Wealth Report:

3. World Wealth Distribution:

“The future of computing is out of our hands” – How Cloud Computing Will Change our World

noreply@blogger.com (Vikas Shah) — Sat, 28 Jun 2008 16:20:00 +0000

There has, in recent years, been a large shift in how we access and use our software and data. Whether we consider home or business users, the ‘typical’ model of having all your programs and data on your ‘PC’, has evolved to the point where now, even for business critical uses, our software and data are stored and delivered completely online.

International economics & business journal “The Economist” summarises well, the background of how this change has been brought about. In their words, “Computing is undergoing one of its great periodic shifts. In its early days, most computing took place on mainframes. Ever-falling costs led computing to shatter- first into minicomputers, then into personal computers (PC’s) and, more recently, hand-held devices. Now communications is catching up with hardware and software and, thanks to cheap broadband and wireless access, the industry is witnessing a pull back to the middle. This is leading much computing to migrate back into huge data centres. Networks of these computing plants form ‘computing clouds’ – vast, amorphous, delocalised nebulae of processing power and storage”
For businesses, the shift towards “Software as Service”, “Communications as a Service” and “Infrastructure as Service” (all of which are types of ‘cloud computing) is well underway, with proponents such as Salesforce having led the revolution, and many businesses now operating completely via internet platforms. The concept expands to include everything from IP telephony, to the physical storage infrastructure of a company, in all cases, they pay for ‘what they use’ and have massive expansion capability, remote access, redundancy and a whole host of other benefits. Market leaders such as Microsoft have even started to offer their most popular desktop tools (eg: Microsoft Office) as completely internet based platforms. The example of Microsoft having been seen in their shift of commitment from “…a computer in every desk and every home” to, “supply services to every desk, every home, and every hand”.

For consumers, the shift towards cloud computing has been slightly slower, but is gathering incredible pace. Many of us are now accustomed to using completely web-based tools for email, and for our photographs. More recently a number of companies have even started to provide online storage and backup, allowing you to push all of your data onto a remote server giving “redundancy, security, and access from anywhere”.

In the academic world, cloud computing has been around for quite some time, with ‘grids’ of supercomputers, and ‘clouds’ of users (eg: SETI@Home) having been used for over a decade to aid in solving complex mathematical and scientific problems. Many in academic circles would argue (and I would agree) that the internet itself is, when aggregated, the largest example we have of a cloud computer.

There has, though, been a [large] degree of resistance to a more widespread and fluid shift from desktop to cloud-computing. To consider this resistance, we must understand that it is only recently that society has, for the larger part, come to terms with the concept of ‘computing’ as we went from no computers to ubiquity within a single generation (thanks to Bill Gates & his counterparts). To put such faith in computing took a huge change in thinking for society, but the change was, to a degree, made easier by the fact that we could see the physical ‘boxes’ doing the work (the desktop computers, servers, storage units etc). This allowed us, as a society, to delegate tasks to computers while still retaining ownership and control of the hardware (thus, we maintained control over its security and health, and were not dependent on individuals or companies for its existence). This could be likened to a “bricks and mortar” approach to computing (in the same way that many were happier purchasing their property and having control, rather than delegating the ownership of their home to a landlord and renting).

Cloud computing brings about a whole new range of psychological issues which society must conquer before these technologies reach the same level of ubiquity within society as other forms of computing have.

A few weeks ago, in a café, I was with an associate who asked my opinion on “online backup” questioning whether it was safe. In the same week, a client I consult for exhibited a great deal of resistance to a shift towards an online accounting system as they, “…didn’t feel comfortable with someone else controlling their data”. These attitudes are rather symptomatic of an underlying distrust society has for cloud-computing, the reasons for this can be broken down into a few areas:

• Ownership of Data:
Individuals and businesses are naturally protective over their data with the former often having ‘paranoid’ and ritualistic backup regimes to give maximum redundancy. There is also a psychological element where one places a great deal of value on data as an asset (however amorphous it really is) and thus is unwilling to delegate its physicality to another party.

• Security:
This concern is rather more obvious, and involves the security of their data whether that be against electronic attack (eg: hacking), or physical security of the data centre where their application/software is housed.

• Redundancy & Reliability:
Particularly in ‘uncertain’ economic times, individuals and businesses have a relatively risk-managed approach to things. In context of cloud computing, many are unwilling to delegate business critical operations (eg: their accounting systems/communications) or personal computing requirements (eg: all their photos/documents/music) to organisations fearing the ‘what if…’ scenario (in case the service provider goes under). In the same context, reluctance also spreads to considering the reliability of these services, and whether or not they will always be available when needed.

It is clear to see how many of these reasons are mitigated with “desktop” computing where the user has responsibility and ownership of data, software, etc.

We have, though, as a society, faced similar challenges in our history. As society developed trade (eg: agriculture and commodities in roman times), the emergence of banks appeared to facilitate this trade which, eventually, evolved to the concept of “Banking” as we see it now, where we, as individuals and as businesses, fully delegate the management of (potentially) our most valuable assets to companies in the full trust that they have the infrastructure, security, and stability to manage and maintain those assets efficiently on our behalf, giving access when and where we demand. While the ‘credit crunch’ has certainly hampered people’s trust of many financial institutions, this delegation still holds true.

Thinking laterally on this, it is clear to see that it takes a great degree of trust for us, as a civilisation, to delegate our assets to these organisations, as without them, we would hoard our money in bags or as physical commodities (eg: gold), and would have to go to great lengths to secure it and transact it. Let us apply this paradigm to computing where, currently, we are in the ‘dark ages’ of the industry and tend to hoard our computing resource physically and are, as individuals/businesses responsible for its safety and security. We also (through laptops, cd’s, vpn’s etc) have to go through great effort to mobilise and transact our data and resource.

The facts are, though, that providers of cloud computing (eg: Microsoft, Google, Amazon, etc) are, potentially, far more equipped than we, to guarantee the security and access of our computing resource and data. Their data centres have incredible levels of redundancy and security, and are specified for future growth with awesome amounts of power. A simple search on google (a cloud in its own right) will reveal the power and capacity of data centres (Microsoft, for example, are adding more than 10,000 servers PER MONTH to their cloud computing capacity). It stands to reason also, that by remotely storing all our applications and data, that access will be easier as, from any internet connected device, we will have instant access to all our business or personal computing. This phenomenon is especially important as globalisation and advances in transport have meant that we, as a global civilisation, are far more mobile than ever before, and as personal computing (ie: in hand or on desk), becomes ever more powerful, and communications become faster and cheaper, we are able to access these resources with the same level of immediacy as if they were physically on our local network or desk. These organisations even build global redundancy into their systems with data and applications being ‘spread’ across massive delocalised global networks and across a chain of data-centres (each of which often costs in the hundreds of millions of dollars).

From a financial and economic point of view, the risk of hosting ones data and applications on cloud platforms is similar to the risk of allowing a bank to manage your money. If the bank suddenly ceased to exist (not withstanding any legislative protection) your ‘virtualised’ assets (ie: your money) would disappear. We do, though, give credence to the scale and scope of banking organisations that, in the main, this is a fairly unlikely occurrence (ie: we psychologically de-risk a banks failure to the point where it is so unlikely, we are largely happy to consider it a non-event). The organisations who provide cloud-platforms often have the same level of scope and scale, many are publicly quoted companies and have similar market capitalisations to some banking organisations (Google currently standing at USD168bn, Microsoft USD257bn and, by way of perspective, Barclays Bank GBP 24bn, HSBC GBP 93.4bn, Bank of New York USD 47bn). When considering these financial figures, the obvious argument is that banks hold physical assets and liquidity (lets take derivatives and so forth out of the equation) providing a great deal of security. This argument is countered with the fact that internationally it is clearly accepted that intellectual property itself is a secure financial asset (proof being the launch of patent brokerage as a financial derivative). Many of these large tech companies also have incredibly strong balance sheets with significant amounts of cash and assets (larger, as viewing their balance sheets will show, than many private banks). My personal view is that if one considers risk, then global banks have a higher proportion of “risky” assets on their balance sheets (eg: credit derivatives and complex structured lending) than their global technology counterparts.

While our generation has grown up with a model of computing based on desktop architecture, the generation which succeeds us are, already, entering a computing environment where software, data, and communications exist as an amorphous on-demand resource provided by a range of companies worldwide. Platforms such as facebook have brought cloud computing to the masses with, at June 2008 “over 24,000 applications built on the platform [facebook] and over 400,000 developers building new social experiences.”. For that generation, then, the psychological constraints which hold ‘incumbents’ back, simply do not exist, and we can learn a lot from their attitude to computing to learn what the future will hold. A future which will impact the way we as individuals, and our businesses, see computing, and interact with data.

The future ladies and gentlemen, is not in our hands, but in the clouds.

Resources:

Answering the Big Question of "Why Design?" and the Need for Strategic Vision

noreply@blogger.com (Vikas Shah) — Thu, 26 Jun 2008 21:45:00 +0000

Philippe Starck is one of the seminal designers of our generation, known for everything from hotels, yachts, restaurants, and bars, to his bold reworking of everyday objects such as juicers, chairs, toothpicks and brushes. Anyone who, like me, shares a passion for design will, at some level, have been intrigued and influenced by the works of this man.

In 2007, Starck gave a talk at TED on the meta-question of “why design?” his response was illuminating and beautiful, delivered in a manner of humility which foregoes his reputation as a global designer.Philippe starts with a discussion on “types of designers”, including Cynics (those who feel design is a weapon for marketing), Narcissists (who design for designers to appreciate), and those (like him) who design for results. To get these results, he says, you must get into the product. Using the example of a toothbrush, who owns it? What effect does it have on their mouth? What is their life like? What society are they in? what civilisation created that society? What species created that civilisation?

In Starck’s view, it is only when considering products at this level that you can truly understand them “4.5billion years ago”, he says, “life appeared as stupid bacteria from this soup, we evolved from that into fish, monkeys and into ‘supermonkeys’ as we are now”. “… our journey”, he continues, “is only half finished, and imagine those bacteria could not comprehend what we are now, and we cannot comprehend what life will be like in the future”. That, says Philippe, is our story, our poetry and our romanticism.

He continues, by talking about genius, and about our scope of vision, the level of our eyes being an excellent metaphor for genius. “nobody is obliged to be a genius in society” says Philippe, but “everyone has a duty to participate”. “We must all work to finish the story with love and progress. There are so many scenarios to play out in our civilisation. Ours was about becoming powerful and intelligent, we are almost akin to gods now, its almost done, we must understand that. In fifty or so years, we can finish our ‘civilisation’ and give our children the opportunity to take this knowledge and these tools, and, on their blank sheet, take the combined effort of the billions in our society, to create their own visions. A new story, a new poetry”.

“This underlying duty of participation and responsibility”, he says, is why he goes to work, “even if just to design a toilet brush.” That is his motivation.

This is an important attitude to have in business, as ultimately what we create, even at the smallest level, is part of the bigger system which becomes the legacy to the generations after us. It is foolish and arrogant for us, as a civilisation, to assume that “this is it, we are the last civilisation that will ever exist” (which is often how we act, in a very selfish sense). By making this assumption, we are not drawn to create better things or act in a way which contributes to the overall system of our world.

These concepts are part of the underlying need which we (as human beings) have for a strategic vision for motivation. For Philippe, his ‘sense of participation’ gives him the strategic vision he needs to be the best at his pursuit. For others, their vision may be different, but having an overwhelming, almost metaphysical, sense of ‘purpose’ gives a very powerful tool to bring motivation and direction. I have rarely met individuals who are successful (whether in life, business, academics or otherwise) who have got there without having some kind of vision like this for their lives.

In the modern environment, we spend a lot of our time thinking in the short term. We look at our immediate needs and objectives, and gear ourselves to satisfy these. A certain sense of satisfaction is inherent, but it very quickly leads to disillusionment and dissatisfaction when things go ‘off plan’. By giving ourselves a bigger picture to work towards (in business, or life) we are able to respond better to the volatility of life, but also able to more clearly understand the endgame for the effort we are putting in now.