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2012-08-19T11:58:00.001-07:00

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Equal weighted portfolios perform better

2010-12-17T01:25:00.000-08:00

By Robert Ferguson and David Schofield

It is a fact that a simple, equal-weighted portfolio will beat a capitalisation-weighted benchmark over time, if the distribution of capital across the stocks in the benchmark is reasonable. This can be proved mathematically using stochastic portfolio theory.

Let’s take the S&P 500 Index and suppose its largest stock weighting is 5 per cent and its smallest stock weighting is 0.0001 per cent. If you arrange these 500 stocks from largest to smallest along the horizontal axis of a chart and plot the stocks’ S&P 500 weights on the vertical axis, the resulting descending curve is called the capital distribution curve.

For more than 80 years, the capital distribution curve of actual broad capitalisation-weighted equity benchmarks has conformed to a typical shape that has a reasonable balance of large, medium and small stocks. It should not be surprising, therefore, that from January 1 1966 to June 30 2010, a simulated equal-weighted portfolio of the S&P 500 stocks beat the capitalisation-weighted S&P 500 by an average of about 3 per cent annually.

Why is that? It has long been thought that the outperformance of equal-weighted portfolios versus cap-weighted portfolios is due to the “small-stock effect” – small-cap stocks have greater returns than large-cap stocks.

However, our alternative interpretation is that equal-weighted portfolios outperform the market over time by capturing relative volatility.

This is a consequence of the trading rule required to maintain equal weights, which is to buy after a negative relative return and to sell after a positive. To the extent that stocks move up and down relative to the cap-weighted benchmark, the trading rule has a “buy low/sell high” character, which generates outperformance.

Remarkably, it can be shown that the underlying alpha source is always positive, which is another indication that the excess return has something to do with volatility. Things such as stock returns move up and down; however, stock volatilities are always positive. Why then do equal-weighted portfolios have great tracking error over time relative to the cap-weighted index? The answer involves diversity.

Diversity is a measure of the concentration of capital among large and small stocks and depends on the capital distribution curve. Diversity is at a maximum if all stock capitalisations are equal; it is at a minimum when one stock’s capitalisation accounts for virtually the entire market. If large stocks outperform small, the capital distribution curve gets steeper and diversity declines.

Changes in diversity influence relative return of the equal-weighted portfolio. Since the capital distribution curve has a typical shape, diversity must have a typical value, and no long-term trend. In this case, the influence due to changes in diversity will be close to zero over time, and the outperformance of the equal-weighted portfolio will be close to its volatility-based source, which is necessarily positive.

To summarise, stochastic portfolio theory shows mathematically that the relative return of an equal-weighted portfolio with respect to its capitalisation-weighted benchmark is the sum of two components.

The first is the relative-volatility capture rate, which is the true, underlying source of alpha for the equal-weighted portfolio, and is always positive. The second is the influence of a true size factor, called diversity. Changes in diversity are the source of tracking error. The power of this approach is that it provides a precise and useful decomposition of relative return, which is not explained by the “small-stock effect”.

The establishment of an always positive alpha due to volatility capture is meaningful. Any time one observes a true positive alpha source, it raises the following question: can it be harnessed to generate long-term returns? An example is an equal-weighted portfolio, but this is volatile. There are more efficient ways to capture relative volatility.

Such approaches require only a forecast of the volatilities and correlations among stocks. The result is that more efficient relative volatility capture strategies have higher information ratios, higher expected alphas and experience fewer and less severe underperformance periods, attempting to gain benefit of the alpha source while “smoothing out the ride”.

This China sceptic is a bull for the US

2010-12-17T00:16:00.000-08:00

China will face serious problems in medium and long term, says Deutsche Bank ex-chief economist

(SINGAPORE) While just about everyone hails the rise of China as the new economic powerhouse, economist Norbert Walter maintains that America, for all its woes, will remain the global superpower in the decades ahead.

China may well be the 'locomotive' for now and even the next five years, 'but I don't buy into a longer-term future of China', says the former chief economist of Deutsche Bank Group. As far as the longer term is concerned, 'I'm a bull for the United States and for the US dollar', he declares, adding though that he's not too upbeat about the greenback's prospects over the next three years.

Since retiring at the end of 2009 from the German bank, where he had been chief economist since 1990, Professor Walter has continued to air his views on the global economy, consensual or controversial - only he's now doing it in the name of Walter & Daughters Consult, which got underway in Germany early this year after Christine and Jeanette, both economists themselves, left their jobs to join their father as his support crew.

In town on a barely 30-hour visit this week, Prof Walter spoke to BT after addressing a breakfast meeting of the Singaporean- German Chamber of Industry and Commerce on the euro and other key economic issues of the day.

He doesn't share the worries of those who point to risks in China's banking or property sectors, and has 'no doubt' that the Chinese economy will still clock about 10 per cent growth next year, he says, but remains unconvinced about its long-term might.

'So I'm not sceptical for the short term; I'm more sceptical than almost everybody on the medium and the long term on China,' he says. In his view, theirs is a demographic problem.

The social consequences of producing 'too many boys and too few girls' are 'unbelievable', says Prof Walter, who was last in China in April, in Shanghai. 'If you have a policy that moves a five-child family into a one-child, one-boy family within two generations, you end up with fat boys, not competitive and not willing to take up challenges.'

In any case, he reckons that China's economic growth 'will voluntarily be moved from 10 per cent to over-7 in the next few years to something like 5 per cent after 2020 in order to preserve the local environment'. China will become increasingly dependent on imports for agricultural and energy supplies, he says.

Meanwhile, the US will, despite its intractable fiscal problems, 'remain the No 1 power, even in the middle of the 21st century', he declares.

'They are the youngest among the Old World. And the Americans have a better constitution to deal with change; the Americans will prove that they are better at dealing with change than anybody else.'

As for talk about the eventual demise of the euro, Prof Walter says: 'The euro will stay, with pain.' But Europe's leaders, and particularly the European Commission, must eventually work towards some 'new form of political arrangements' for the EU, he says.

'I think that's the direction to go but it will be a very bumpy road, and it will not be a fast track,' he adds. Indeed, Europe's growth will 'not be impressive' in the near term, with a few countries mired in 'imbalances, like the US'.

But his own country Germany - which he describes as 'the little locomotive of Europe' - is seeing good growth and 'will be perfectly capable of pulling the small guys around us', he says, citing Austria, Belgium, the Netherlands and Switzerland.

Prof Walter also points to who he reckons could be 'potentially the stars of the next decade'.

In relative terms, he says, 'I'd suggest that those countries that are very strong in supplying energy and agricultural products will be promising countries as well'.

So 'Latin America will be something to watch, if they improve their governance and their infrastructure', he says, citing Brazil particularly, with a new leader in charge, as 'a very interesting case' that could exceed expectations.

Source: The Business Times Singapore

Mutual Funds Are a Scam

2010-12-08T10:20:00.000-08:00

Mutual Funds Are a Scam, But Don't Bet Against America!!!

With the vast majority of fund managers underperforming the market and fees eating into your returns, "mutual funds are a scam," says Phil Town, author of Payback Time.

Citing Forbes research, Town says 96% of active fund managers underperform the market over periods of 15 years or longer. Meanwhile, he says even relatively small 1.5% management fees can cut your returns in half over a 40-year period, citing research by Vanguard founder John Bogle.

"Those little fees kill you," Town says. "It's got to be some kind of scam. Those guys are not doing what they say they can do."

If you believe that claim - surely the mutual fund industry would deny it - Town says you have two main choices:

The Simple Strategy: "If you don't know what to do as an investor, put a little money away every month and put it in the SPY and maybe pick one international fund to get a ride on China," Town says. "But I wouldn't bet against the U.S. You'll be glad 20-30 years from now that you kept your money here."

The problem with that strategy, Town says, is the Dow could "very easily" remain range-bound between 14,000 and 8000 for a very long time. "That will kill you" if you're planning to retire within the next 15 to 20 years, he says. "You come out down the road and all you've got...is what you put in."

Stockpiling Stocks: Town recommends boning up on a handful of stocks and trading in and out of them over a long period of time, as detailed here. "We're not just buy and hold -- we're buy when they're cheap and sell when they're expensive," he says. "If you do that a couple of times, those returns are very much higher than" the broad market's long-term average of 7%.

Personally, I would suggest lazy investors to dollar cost average 50% on SPY and 50% on one of the emerging market ETF on a monthly basis. There is a 90% chance that these investors will outperform the market.

Wikileaks and the Diplomacy of Secrecy

2010-12-08T08:17:00.000-08:00

More at The Real News

Gareth Porter, Investigative Journalist and Ray McGovern, Retired CIA Analyst discuss Wikileaks

Blaming Game - Lack of Freedom Causes Global Imbalances

2010-12-07T17:09:00.000-08:00

Tear down this Chinese wall.

In his famous 1987 speech in Berlin, U.S. President Ronald Reagan delivered the exhortation to Soviet leader Mikhail Gorbachev: “Tear down this wall.” Contrary to everybody’s expectation, the wall started to come down only two years later.

It is about time to give the same directive to communist China. The Chinese wall is metaphorical, but equally hideous: It limits freedom of expression, assembly and movement. It prevents the Chinese from pursuing their happiness and choices freely. If there weren’t enough moral and humanitarian reasons to make that exhortation, here is an economic one: The lack of freedom in China is the main cause of imbalances in the world.

It is well-known that the Chinese trade surplus, or the excess of its exports over its imports, is the counterpart of too much saving, which leads to unfair advantages and possibly deflationary pressure on a global scale.

The causes of this imbalance, and the potential remedies, are disputed. The prevailing view is that it is due to China’s undervalued currency. By keeping the yuan artificially low, the argument goes, the Chinese are dumping underpriced products on Western markets, wiping out the competition unfairly. It is incumbent upon the Chinese government, the reasoning continues, to stop manipulating its currency and let it strengthen.

Cost Advantage

This theory doesn’t explain two facts. First, the Chinese cost advantage in the products they export exceeds the 20 percent to 30 percent difference that a stronger yuan could achieve. In this situation, a currency revaluation may mean Americans will pay more for Chinese imports, without reducing the amount imported by very much. The dollar’s real effective exchange rate is now almost as low as it has ever been since the end of the Bretton Woods currency-exchange system.

Why then does China export so much more than it imports? The answer comes from simple accounting. For every country, the current account is equal to the difference between the income produced and the sum of domestic investment and consumption. When a country consumes and invests less than it produces, it is bound to have a current-account surplus.

In the case of China, a country that grows 9 percent a year and invests 43 percent of its gross domestic product, it is hard to argue that it invests too little. But it is very easy to argue that it saves too much: 54 percent of GDP versus an average of 33 percent among developing countries and 17 percent among Organization for Economic Cooperation and Development economies. So China’s surplus is due to its excessive saving, not to its undervalued currency.

Citizen Preferences

How can we deem Chinese savings excessive? In a free country, the aggregate consumption-saving decision is the result of individual choices, which reflect the preferences of its citizens. It would be very paternalistic of us to argue that savings are excessive.

The point, though, is that China isn’t a free country and the economic decisions of Chinese aren’t driven by market forces. They are influenced by political decisions made by a small self-appointed elite. This group has decided that the accumulation of claims on the rest of the world is more important than the standard of living of the current generation.

The excess savings don’t reflect the will of the Chinese people. Most of it doesn’t come from household savings, but from the corporate sector, especially government-owned enterprises.

American Steaks

At the same time, Chinese wages are kept low by preventing labor from organizing and limiting the flow of information. Not only does this provide an unfair advantage to Chinese producers, but it prevents Chinese workers from having the resources to buy American steaks and iPods.

A redistribution of income would benefit the Chinese people and the world alike. Income inequality in this workers’ paradise is among the highest in the developing world. In addition, some more generous social-security system -- now almost non-existent -- for Chinese families would lower their precautionary savings.

The U.S. government should stop bashing China for its currency policy, while the Federal Reserve engages in massive quantitative easing. It’s hypocritical and leaves the Chinese with an easy way to respond. Instead the U.S. should regain the high ground and lecture them on what’s best in America: freedom.

Accusing communist China of keeping workers’ salaries artificially low and not being pro-workers would embarrass the nation’s government. Learning from Reagan, we can stand on our beliefs. If we do, the Chinese wall will come down sooner than we expect.

(Alberto Alesina is a professor of economics at Harvard University. Luigi Zingales is a finance professor at the University of Chicago Booth School of Business. The opinions expressed are their own.)

Five Ways to Bet On Ireland

2010-12-07T04:50:00.000-08:00

If fortune favors the brave, is this the time to take a bet on Ireland? And if so, how can you do it?

The idea of investing in Ireland right now isn't as crazy as it sounds. For investors, crisis usually means opportunity. The bailout of the suddenly unlucky Irish, and the arrival of the International Monetary Fund to administer their patented brand of financial emetic, needn't be as bad news for the markets are some might assume. It's hard to remember now, but the "tiger" economies of southeast Asia went through something even more severe back in 1998. Anyone who braved the maelstrom and invested in the Thai, Malaysian or Indonesian markets at the time has made a fortune since.

But if you are a U.S. investor looking to take a gamble on the Irish, watch out. You need to know what you are buying. Here are your five main choices:

1. The iShares MSCI Capped Investable Market Index Fund. In normal circumstances, this kind of low-cost exchange-traded fund would be the way to go, offering cheap access to a country's entire stock market. And it would save you from the problems of having to pick individual stocks–a challenge even in normal times.

But take a look under the hood first. The Irish stock market is unusually small, and heavily skewed towards a few big companies. So is this fund. Some 23% of the fund is invested in CRH, a multinational building supplies and aggregates company and 14% is invested in food ingredients company Kerry Group. These stocks have little relation to the Irish economy. They just happen to have their historical roots there, and their market listing in Dublin. Most of their business is overseas. Their stocks haven't collapsed in the crisis. So you aren't getting a firesale price.

2. The New Ireland Fund. This is a closed-end fund, a mutual fund that issues a fixed number of shares that trade on the stock market like any company stock. Unlike the index fund, it's actively managed, which means the manager can pick individual stocks.

But it's still quite concentrated. And many of its biggest holdings, once again, are international companies that have little connection to the Irish economy, such as CRH, low-cost airline Ryanair (Europe's answer to Southwest), and Kerry Group. Manager Peter O'Donoghue says he's also finding some good opportunities in some niche agribusiness companies such as Glanbia and Origin Enterprises.

But most of these stocks have been doing just fine. They haven't collapsed in panic. The stocks that have are the banks, and this fund doesn't own any. Mr. O'Donoghue plays a conservative hand, and focuses on companies with strong balance sheets.

Ajai Chopra, left, Deputy Director of the European Department of the IMF and a colleague pass a beggar as they make their way to the Central Bank of Ireland for talks with the Irish government in Dublin last week.

This fund has high expenses, north of 2%. But it comes with an advantage: Right now shares are trading at a hefty 15% discount to their underlying net asset value.

3. Bank stocks. If you feel brave you have the chance to stick your head right into the mouth of the Celtic Tiger by buying stocks in Allied Irish Banks or Bank of Ireland. The banks are the ones whose disastrous loan books precipitated the crisis. Both have depositary receipts traded in New York. Both, predictably, have collapsed. Allied Irish, $63 per ADR in early 2007, slumped another 19% Tuesday to 90 cents. Bank of Ireland–the formal name, magnificently, is The Governor and Company of the Bank of Ireland–has collapsed from a peak of $98 to $1.68, down a further 25% on Tuesday.

Mr. O'Donoghue calculates that both may end up nearly worthless. Nobody knows how much extra money they will need, nor the terms they will get. Stockholders are at the bottom of the capital tree. They may get diluted or wiped out altogether. However, a hedge fund manager in London I know is taking wagers on both. Of the two, he prefers Allied Irish. His reasoning? While he accepts investors may yet get wiped out, he thinks there's also a good chance of making a fat profit. And, as we all know, banks get special favors from governments. Cynical, but true.

4. British banks. If you don't like extreme sports, these may be a better bet. Why? Their stocks have been marked down in the worries about the crisis–and yet they're benefiting from it, as alarmed Irish savers withdraw their money from banks in Dublin and send it to banks based in London instead. All banking stocks need warning labels slapped on them–you can wake up one day to find your stake has vanished in the night–but for those willing to take a limited bet both Lloyds and Barclays have American Depositary Receipts. As ever, you pays your money and you takes your chances. No tears.

5. Irish government bonds. Loomis Sayles bond guru Dan Fuss was loading up on Irish bonds at their depths last week, when they were paying about 7 percentage points more per year than German government bonds. He told me: "We have a short term problem that is extremely serious but we think the country will survive just fine. At the 'wides' the bonds were yielding nearly 700 basis points more and similar maturity in bunds. We think both are money good." However, the bonds have rallied since then–the interest rate gap is now below 6%. It can be difficult and costly for an ordinary U.S. investor to buy foreign government bonds. And, bluntly, I'm wary of bonds at any price. I think inflation is coming, sooner or later. I'd want more than the promise of a 7% profit to go to the effort of buying foreign bonds.

Write to Brett Arends at brett.arends@wsj.com

Euro Zone Members as U.S. States

2010-12-05T18:05:00.000-08:00

By Phil Izzo
Source: Wall Street Journal

Ireland is a small economy. How small? Its total output is roughly that of the state of Connecticut. But its troubles threaten to spread to other European economies, some small (like Portugal) and some sizeable (like Spain.)

To get a sense of scale, Real Time Economics compared the 2009 output of goods and services for members of the euro zone to the output of U.S. states. The economy of Spain, for instance, is about the same size as the combined economies of Texas, Oklahoma, New Mexico and Arkansas. Italy is nearly as big as Illinois, Indiana, Michigan, Ohio, Wisconsin and Kentucky combined.

Meanwhile, hopes for rescue rest on the shoulders of France, whose economy is bigger than that of the entire West Coast including Alaska, Hawaii and the U.S.’s largest state California, and on Germany, which is about the size of New York, New Jersey, Pennsylvania, Maryland, Virginia and North Carolina — plus the District of Columbia.

The smallest euro-zone economies aren’t even as big as the smallest U.S. state. The economy of Cyprus is smaller than the economy of Vermont. And tiny Malta, for example, has a smaller GDP than that of the city of Amarillo, Texas. In all, the gross domestic product of the euro zone in 2009 was 12% smaller than that of the U.S.

The financial world should learn from Epicurus

2010-12-05T09:05:00.000-08:00

"The financial world should learn from Epicurus - It does not matter what you have for meal, but it matters who you have it with. Bankers makes millions and billions at the expense of others, how much spiritual wealth could they really achieve at the end of the day?"

British philosopher Alain De Botton discusses the personal implications of the ancient Greek philosopher Epicurus (341-270BCE) who was no epicurean glutton or wanton consumerist, but an advocate of “friends, freedom and thought” as the path to happiness.

War on Energy

2010-12-05T02:43:00.000-08:00

Forget the axis of evil, its the axis of oil. The Cold War and the War on Terror were about ideology and globalization. The 21st century will be dominated by the struggle for energy: It will be every man for himself and it’s going to get dirty.

In the two-part documentary Energy War, VPRO’s Backlight investigates the major developments with regards to energy sources. Featuring NY Times columnist Thomas Friedman.

The film describes the geopolitical consequences of the dependency on fossil fuels. In the struggle for the last sources of fossil fuels, countries all over the world are forced to take new political and moral decisions and have to enter into awkward alliances: rogue regimes must be tolerated and befriended.

With a special focus on the gas conflict between Georgia and Russia and the position of Saudi Arabia. Featuring a.o. Thomas Friedman, author of international bestseller The World is Flat. Friedman sheds his light on the inverse connection between rising oil prices and the establishment of free democracies.

The film then moves on to take a look at the international markets for alternative energy. If oil and gas are scarce and expensive in the future, where will countries turn to keep their economy going and their population warm and happy?

Could solar energy or bio fuels become the main energy sources of the post-fossil fuel era? Will governments, multinationals or small producers be the motor of the green race?

Donate to Wikileaks - tax deductible in Germany

2010-12-04T19:07:00.000-08:00

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Where are the billionaires?

2010-12-04T17:19:00.000-08:00

Based on Forbes Magazine in 2009.

There is a total of more than 800 scattered globally.

1. United States

New York City is the headquarters of some of the World's Largest Corporations

You’ll find an astounding collection of 329 billionaires throughout the United States. Some names are familiar to the general public while others are not. They include Lenore & Walter Annenberg, Warren Buffett, Bill Gates, Steve Jobs, Abigail Johnson, Peter Kellog, and many more. Makes you want to book a flight, stay in a Los Angeles hotel and hope that the billionaire vibe rubs off on you!

2. China

The Famous Bank of China building

In China you’ll find 79 billionaires with net values ranging from $1 billion up to $16.2 billion. The most notable is Yang Yuiyan, considered not only the wealthiest female but the richest in Mainland China, having inherited her father’s business at the very young age of 26.

3. India

Mysore - Lalitha Mahal Palace Hotel

India is proud to call itself the home of 58 distinguished billionaires. From Anu Aga to Yusuf Hamied and Azim Premji, each has an incredible story. Anu Aga, for example, is one of the 8 wealthiest Indian women in the world, having once served as the chairperson of the Thermax Ltd. engineering firm.

4. Germany

A clock tower in Munich, Germany

In Germany you’ll find 54 incredible billionaires with net values ranging from $1 billion up to $21 billion. They include well-known names like Otto Beisheim, Klaus-Michael Kuhne, Friedrich Karl Flick, Johanna Quandt, Theo Albrecht, and Karl Albrecht. Karl Albrecht, with a fortune totaling $21.5 billion, made his fortune while working with his brother Theo. They’re responsible for opening the popular discount store known worldwide as Aldi.

5. Russia

Entrance to The Kremlin, Moscow

Russia is home to a group of 32 distinct billionaires with fortunes valued anywhere from $1.2 to 9.5 billion. Mikhail Prokhorov is one of the most notable, with a net worth of $9.5 billion. At the young age of 44, he’s considered one of the top industrialists in Russia. Today, this 6’9” tall entrepreneur sits on the board of Polyus Gold (the largest producer of gold in the world) and is the president of the famed Onexim Group.

6. United Kingdom

Busy Bath Street

In the United Kingdom you’ll find 25 British billionaires, each with an incredible history and back story. Take Bernard Lewis, for example. Born in 1926, he started his career as an entrepreneur selling fruits and vegetables in North London. He then went on to develop the famous River Island brand of clothing.

7. Canada

North York Business and Residences

If you head towards Canada you’ll find 23 prominent billionaires, with fortunes valued anywhere from $1.5 billion up to $24.41 billion. The Thomson family, of The Thomson Corporation, has accumulated a fortune of more than $24 billion. They did so by manufacturing educational textbooks, resources, and reference materials with worldwide distribution.

8. Hong Kong

A Busy Zebra Crossing on King's Road, North Point, Hong Kong, 11th February 2009

Hong Kong is home to 19 of the world’s most prominent billionaires. The most impressive is Sir Li Ka-shing, an individual with a net worth ranking in at $16.2 billion dollars. At the age of 80, Sir Li Ka-shing is actually the 12th richest individual in the world, having made his fortune both operating container terminals and retailing health and beauty products.

9. Japan

In front of the palace - view over business city in Marunouchi district

Japan is next on the list with a total of 17 billionaires, all of which are individuals. They include Akira Mori, Hiroshi Yamauchi, Hiroko Takei, Takemitsu takizaki, and many others. Their net worth ranges from $1 billion up to $5.5 billion!

10. Indonesia

An Indonesian man paddles a makeshift raft along a flooded road in the central business district

Indonesia is home to 15 distinct billionaires. According to Forbes, 10 of these are billionaire families sharing the wealth and 5 get to keep their earnings to themselves. Individual billionaires include Eddie William Katauri, Martua Sitorus, and Peter Sondakh – the latter just making it onto the list at the age of 56 with a net worth of $1 billion.

Where are all the millionaires?

2010-12-04T07:25:00.000-08:00

Yes, that puts Singapore at the top of Boston Consulting Group list of the top 10 countries with the greatest proportion of millionaire households. You may be surprised by the full run-down:

1) Singapore
Population: 4.7 million
Percentage of Millionaire Households: 11.4%

Who would think the tiny Republic of Singapore would be crammed with so many millionaires? The country, all of just 247 square miles, has emerged from the recession and has rebounded in a big way. Its GDP, exports and manufacturing are all rising, and so, too, are home prices. That has led Singapore to boast the highest concentration of millionaires anywhere on the planet. Among its very rich: Ng Teng Fong, a real estate tycoon, and Wee Cho Yaw, who runs United Overseas Bank, one of Singapore's big lenders.

2) Hong Kong
Population: 7.1 million
Percentage of Millionaire Households: 8.8%

Hong Kong, the home of Li Ka-shing, who runs conglomerates Cheung Kong and Hutchison Whampoa, had 205,000 millionaire households in 2009 and takes the number two spot for percentage of millionaire households. Hong Kong's close relationship with mainland China brings benefits and risks, but it's been good for many of the wealthiest, who made their money by investing in a real estate market that has no shortage of swanky hotels and malls.

3) Switzerland
Population: 7.6 million
Percentage of Millionaire Households: 8.4%

The Swiss economy is recovering from slow growth during the recession, but a good many of its citizens thrived during the upswing, bringing it to third place in percentage of millionaire households. The country boasts 285,000 of them, up 19.5% from 2008. Driving the recovery: manufacturing, rising exports and consumer spending. Among the country's rich: Swiss biotech tycoon Ernesto Bertarelli, who is, perhaps, better known for winning the America's Cup in 2003.

4) Kuwait
Population: 2.8 million
Percentage of Millionaire Households: 8.2%

The rising price of oil has led to more millionaires in this tiny country. With some 100 billion barrels of crude, Kuwait has been growing rapidly. But the oil-dependent nation now plans to spend up to $140 billion over the next five years to diversify away from oil and to attract more investment -- a move that could help it ascend this list's ranks. Such a strategy may help billionaire Nasser Al Kharafi, chairman of one of the most diversified and largest conglomerates in the Arab world. His food division, Americana, has the Middle East franchise rights to KFC, Wimpy, TGI Fridays and Pizza Hut, among others.

5) Qatar
Population: 841,000
Percentage of Millionaire Households: 7.4%

Qatar's economy expanded by about 8.7% last year, thanks to growth in the natural gas business. That helped the country, already the world's largest gas exporter, to emerge from the global economic crisis pretty much unscathed, leaving many of its millionaire households in good stead. Among its megarich: Bader Al Darwish, with a fortune of about $1.7 billion. Al Darwish runs Darwish Holdings, which operates businesses including real estate, investments and retail services.

6) United Arab Emirates
Population: 4.9 million
Percentage of Millionaire Households: 6.2%

As the world's third-largest oil exporter, the UAE's economic growth is expected to rise to 3.2% this year, after posting a 1.3% increase in 2009,. Like others, its oil business has generated wealth among its citizens. It also helps that UAE isn't expected to suffer from the eurozone debt crisis. The country is home to Abdul Aziz Al Ghurair and his family, who run Mashreqbank and the second-largest flour milling company in the Mideast, as well as megamalls.

7) United States
Population: 310.2 million
Percentage of Millionaire Households: 4.1%

The 4.7 million U.S. millionaires in 2009 was up by 15.1% over 2008. But as a market percentage, the U.S. falls relatively low on the top 10 list. The country, which is home to two of the world's wealthiest people, Bill Gates and Warren Buffett, saw its economy bounce back in 2009 from the year before as the Dow Jones Industrial Average rose 40%. By the end of 2009, the economy grew at its fastest pace in more than six years, even though many businesses put the brakes on hiring.

8) Belgium
Population: 10.4 million
Percentage of Millionaire Households: 3.5%

Suffering from spiraling debt and political problems, Belgium still managed to hold on to a number of millionaires. The country has set a goal of getting its budget deficit to 4.8% of GDP in 2010, which is far below Europe's average. But Belgium's total debt will rise above 100% of GDP, placing it behind only Greece and Italy. The debt crisis in Europe will also likely take a toll on the country's economy in 2010. The good news is that Belgium has a trade surplus, and household savings are high. Among its richest: Albert Frere, who founded the media, utilities and oil conglomerate, Compagnie Nationale a Portefeuille.

9) Israel
Population: 7.4 million
Percentage of Millionaire Households: 3.3%

Unlike other markets, the story in Israel wasn't about rising real estate values or credit, but about gains in technology, which some say will help lead the country to continued economic growth. While 2009 was a good year for the economy, the current eurozone crisis could hurt Israeli exports because about 33% of them go to Europe. Rich man in Israel: shipping tycoon Sammy Ofer, worth north of $6 billion.

10) Taiwan
Population: 23 million
Percentage of Millionaire Households: 3%

Taiwan may be last on the top 10 list -- but that's still quite a feat. The country was hit hard by the recession mostly because its economy depends on trade. But as the world economy skittishly improves, Taiwanese families have seen their fortunes rise. The country now has some 230,000 millionaire households. That's an increase of 22.1% over 2008. One of its richest is Terry Gou of Foxconn, a maker of electronics for Apple (AAPL), Nokia (NOK), Nintendo and others. That company has been in the news recently because 13 of its workers have committed suicide or tried to.

All-star team of traders and academics lost billions. Why?

2010-12-03T04:24:00.000-08:00

"Key lesson to be learnt from the collapse of LTCM"

In 1994, John Meriwether, the famed Salomon Brothers bond trader, founded a hedge fund called Long-Term Capital Management. Meriwether assembled an all-star team of traders and academics in an attempt to create a fund that would profit from the combination of the academics' quantitative models and the traders' market judgement and execution capabilities. Sophisticated investors, including many large investment banks, flocked to the fund, investing $1.3 billion at inception. But four years later, at the end of September 1998, the fund had lost substantial amounts of the investors' equity capital and was teetering on the brink of default. To avoid the threat of a systemic crisis in the world financial system, the Federal Reserve orchestrated a $3.5 billion rescue package from leading U.S. investment and commercial banks. In exchange the participants received 90% of LTCM's equity.

The lessons to be learned from this crisis are:

(1) Market values matter for leveraged portfolios

(2) Liquidity itself is a risk factor

(3) Models must be stress-tested and combined with judgement

(4) Financial institutions should aggregate exposures to common risk factors

To read further: full report

Wikileaks' server moved to Switzerland

2010-12-03T03:35:00.000-08:00

WikiLeaks Friday moved to a new Switzerland address after the American domain name system provider, EveryDNS, withdrawed service to the wikileaks.org.

"Free speech has a number: http://88.80.13.160," said a tweet from Wikileaks announcing the decision to move to Switzerland. (http://wikileaks.ch/)

EveryDNS had claimed in a statement that it dropped the website late Thursday because the attacks threatened the rest of its network.

EveryDNS provides access to some 500,000 websites.

WikiLeaks has angered the US and other governments by publishing secret diplomatic documents recently. Almost half a million secret documents about the wars in Afghanistan and Iraq were also published by the whistle blower website founded by Assange.

Amazon.com Inc. which provided WikiLeaks with servers to distribute embarrassing state department communications and other documents had evicted it Wednesday. The site remains on servers of a Swedish host, Bahnhof.

The ouster from Amazon came after congressional staff questioned the company about its relationship with WikiLeaks.

Huge gold buying from China.

2010-12-02T21:05:00.000-08:00

"As at 31 October 2010, the US has approximately 8,134 metric ton of gold reserve while China has only 1,054 metric ton of gold reserve."

Gold's record rally has been attributed to everything from worries about inflation, the dollar and the emergence of exchange-traded funds. One big factor many may have missed: huge buying from China.

Data cited Thursday by China's state-run Xinhua news agency showed that China imported 209.7 metric tons of gold in the first 10 months of the year, a fivefold increase compared with the same period last year.

That surpassed purchases made by ETFs and surprised analysts, who until now had no clear insight into the size of China's buying.

Gold demand in general has soared globally this year, as a result of the sovereign-debt crisis in Europe and the Federal Reserve's new round of bond buying. Gold prices were pushed up to an all-time high of $1,409.80 a troy ounce on Nov. 9. Thursday, gold settled $1.20 higher, or 0.1%, to $1,388.50, up 27% for the year.

"Everybody in the gold market knew there was a surge in investment demand, but they didn't know it was China," said Jeff Christian, managing director at CPM Group.

China's import growth is a reminder of the country's huge but nascent purchasing power.

It comes as the government loosens its restrictions on gold purchases by financial institutions and individual investors. In August, the country began allowing more banks to import and export gold, opening up the gold market to the institutions and their clients.

Then this week, the Chinese securities regulator approved the country's first gold fund designed to invest in overseas-listed gold ETFs, a move analysts interpreted as another bullish sign for gold.

"The big picture is that China is continuing to relax the rules governing the domestic gold market," said Martin Murenbeeld, chief economist of DundeeWealth Inc., which oversees $69.9 billion in assets. "What we are seeing is the latent demand that has been there all the time and now can be exercised in the market because now the market is freed."

The World Gold Council estimates that China's gold demand could double in 10 years as more investors there embrace precious metals.

Until several years ago, China's gold market was strictly controlled by the central bank, which bought all the gold mined domestically. It then sold the metal to jewelry makers. The country, which is now the largest gold producer, remained largely self-sufficient in gold, with imports at a meager 31 metric tons in 2009, according to GFMS Ltd.

This year, fears of inflation have driven many Chinese investors to include gold in their portfolios as a store of value. At the Shanghai Gold Exchange, trading volume increased 43%, to 5,014.5 tons, in the first 10 months of 2010, exchange Chairman Shen Xiangrong said, according to Xinhua.

At a speech at the China Gold and Precious Metals Summit in Shanghai Thursday, Mr. Shen detailed the size of China's imports this year, Xinhua said. Those purchases were big enough to absorb all the gold that the International Monetary Fund had shed during that time period, which stood at 148.6 tons. It also dwarfed the SPDR Gold Shares, the world's largest gold-backed ETF, which added 159.48 tons of gold into its holdings in the same period.

China also is home to a booming gold-mining industry that keeps it as the world's largest gold producer. Wednesday, China's Ministry of Industry and Information Technology said the nation's gold production reached 277.017 metric tons in the January-to-October period, up 8.8% from the same period last year.

China's 2010 gold production is expected at about 350 metric tons, according to Standard Bank head of commodity strategy Walter de Wet.

"We note that there is likely to be illegal gold exports and imports from and to China," Mr. de Wet said in a note to clients. "This would distort the actual gold numbers for China. However, the trend is undeniable, gold demand in China is rising rapidly."

In other commodities markets:

CRUDE OIL: Prices settled at a two-year high Thursday, with oil for January delivery rising $1.25, or 1.4%, to $88 a barrel on the New York Mercantile Exchange, as economic data in the U.S. and actions in the euro zone to support debt markets lifted hopes for oil demand. Improving economic conditions in the U.S., the world's largest oil consumer, are vital to continuing the drawdown in global supplies that piled up during the recession. Tightening supplies could help clear the way for oil prices to hit $100 a barrel next year.

Source

WikiLeaks: Reveal US Banks Document Next

2010-12-01T03:47:00.000-08:00

Julian Assange says he’ll levy a “tremendous reputational tax” on unethical companies.

After revealing hundreds of thousands of Pentagon and State Department documents, the founder of WikiLeaks, Julian Assange, intends to expose bank documents next. Assange talked to Forbes on Monday, saying the site plans to release tens of thousands of internal documents from a major U.S. bank early next year.

Assange declined to name the bank, except to say it's a major U.S. bank still in operation. He said that he expects the disclosures will lead to investigations.

He compares what he is ready to unleash to the emails released during the Enron trial, Forbes reports. "You could call it the ecosystem of corruption," he told Forbes. "But it's also all the regular decision making that turns a blind eye to and supports unethical practices: the oversight that's not done, the priorities of executives, how they think they're fulfilling their own self-interest."

While the promised release of bank documents would be the largest assault by WikiLeaks on the corporate sector, Assange says the business community should expect plenty of sequels, according to Forbes. Assange says he has unpublished, damaging documents on pharmaceutical, finance and energy companies, as well as on other governments, including Russia.

Why the Spending Stimulus Failed

2010-12-01T01:04:00.000-08:00

"New economic research shows why lower tax rates do far more to spur growth."

President Obama and congressional leaders meeting yesterday confronted calls for four key fiscal decisions: short-run fiscal stimulus, medium-term fiscal consolidation, and long-run tax and entitlement reform. Mr. Obama wants more spending, especially on infrastructure, and higher tax rates on income, capital gains and dividends (by allowing the lower Bush rates to expire). The intellectual and political left argues that the failed $814 billion stimulus in 2009 wasn't big enough, and that spending control any time soon will derail the economy.

But economic theory, history and statistical studies reveal that more taxes and spending are more likely to harm than help the economy. Those who demand spending control and oppose tax hikes hold the intellectual high ground.

Writing during the Great Depression, John Maynard Keynes argued that "sticky" wages and prices would not fall to clear the market when demand declines, so high unemployment would persist. Government spending produced a "multiplier" to output and income; as each dollar is spent, the recipient spends most of it, and so on. Ditto tax cuts and transfers, but the multiplier is assumed smaller.

Macroeconomics since Keynes has incorporated the effects of longer time horizons, expectations about future incomes and policies, and incentives (including marginal tax rates) on economic decisions.

Temporary small tax rebates, as in 2008 and 2009, result in only a few cents per dollar in spending. The bulk (according to economists such as Franco Modigliani and Milton Friedman) or all (according to Robert Barro of Harvard) is saved, as people spread any increased consumption over many years or anticipate future taxes necessary to finance the debt. Empirical studies (such as those by my colleague Robert Hall and Rick Mishkin of Columbia) conclude that most consumption is based on longer-term considerations.

In a dynamic economy, many parts are moving simultaneously and it is difficult to disentangle cause and effect. Taxes may be cut and spending increased at the same time and those may coincide with natural business cycle dynamics and monetary policy shifts.

Using powerful statistical methods to separate these effects in U.S. data, Andrew Mountford of the University of London and Harald Uhlig of the University of Chicago conclude that the small initial spending multiplier turns negative by the start of the second year. In a new cross-national time series study, Ethan Ilzetzki of the London School of Economics and Enrique Mendoza and Carlos Vegh of the University of Maryland conclude that in open economies with flexible exchange rates, "a fiscal expansion leads to no significant output gains."

My colleagues John Cogan and John Taylor, with Volker Wieland and Tobias Cwik, demonstrate that government purchases have a GDP impact far smaller in New Keynesian than Old Keynesian models and quickly crowd out the private sector. They estimate the effect of the February 2009 stimulus at a puny 0.2% of GDP by now.

By contrast, the last two major tax cuts—President Reagan's in 1981-83 and President George W. Bush's in 2003—boosted growth. They lowered marginal tax rates and were longer lasting, both keys to success. In a survey of fiscal policy changes in the OECD over the past four decades, Harvard's Albert Alesina and Silvia Ardagna conclude that tax cuts have been far more likely to increase growth than has more spending.

Former Obama adviser Christina Romer and David Romer of the University of California, Berkeley, estimate a tax-cut multiplier of 3.0, meaning $1 of lower taxes raises short-run output by $3. Messrs. Mountford and Uhlig show that substantial tax cuts had a far larger impact on output and employment than spending increases, with a multiplier up to 5.0.

Conversely, a tax increase is very damaging. Mr. Barro and Bain Capital's Charles Redlick estimate large negative effects of increased marginal tax rates on GDP. The best stimulus now is to stop the impending tax hikes. Mr. Alesina and Ms. Ardagna also conclude that spending cuts are more likely to reduce deficits and debt-to-GDP ratios, and less likely to cause recessions, than are tax increases.

These empirical studies leave many leading economists dubious about the ability of government spending to boost the economy in the short run. Worse, the large long-term costs of debt-financed spending are ignored in most studies of short-run fiscal stimulus and even more so in the political debate.

Mr. Uhlig estimates that a dollar of deficit-financed spending costs the economy a present value of $3.40. The spending would have to be remarkably productive, both in its own right and in generating jobs and income, for it to be worth even half that future cost. The University of Maryland's Carmen Reinhart, Harvard's Ken Rogoff and the International Monetary Fund all conclude that the high government debt-to-GDP ratios we are approaching damage growth severely.

The complexity of a dynamic market economy is not easily captured even by sophisticated modeling (an idea stressed by Friedrich Hayek and Robert Solow). But based on the best economic evidence, we should reject increased spending and increased taxes.

If anything, we should lower marginal effective corporate and personal tax rates further (for example, along the lines suggested by the bipartisan deficit commission's Erskine Bowles and Alan Simpson). We should quickly enact an enforceable gradual phase-down of the spending explosion of recent years. That's what the president and congressional leaders should initiate. Then let the equally vital task of long-run tax and entitlement reform proceed.

Mr. Boskin is a professor of economics at Stanford University and a senior fellow at the Hoover Institution. He chaired the Council of Economic Advisers under President George H.W. Bush.

How Will The Quant Models Change The World of Finance?

2010-11-30T07:03:00.000-08:00

Quants are the math wizards and computer programmers in the engine room of our global financial system who designed the financial products that almost crashed Wall st. The credit crunch has shown how the global financial system has become increasingly dependent on mathematical models trying to quantify human (economic) behavior.

Now the quants are at the heart of yet another technological revolution in finance: trading at the speed of light. What are the risks of treating the economy and its markets as a complex machine? Will we be able to keep control of this model-based financial system, or have we created a monster?

Some of the hedge funds that do black box trading have been very successful in the past 10 - 20 years. One of the best hedge funds started in 1982 by James Simons, Renaissance Technologies (https://www.renfund.com) is said to be one of the most successful hedge funds in the human history. It currently has more than $15 billion in assets under management. Since 1989, the company's $5 billion Medallion Fund has averaged 35% annual returns, after fees.

Video clip below tells a story about greed, fear and randomness from the insides of Wall Street.

The Giving Pledge: Warren Buffett, Bill Gates, Ted Turner Talk Philanthropy

2010-11-30T06:32:00.000-08:00

Over the summer, billionaires Bill Gates and Warren Buffett announced The Giving Pledge, a commitment to donate the majority of their fortunes to charity -- and to encourage other Americans to do the same.

Dozens of wealthy families have joined the pledge.

Buffett and Gates recently sat down with ABC's Christiane Amanpour to discuss their visions of philanthropy. Melinda Gates joined her husband for the interview.

Amanpour also spoke with media mogul Ted Turner, who has pledged his wealth away.

Bill and Warren spent some time a while in China to promote the same idea. But, it didn't work out well. They did not push mega-wealthy families to sign up for their campaign because China had to develop its own culture of philanthropy.

Philanthropy in China has complications beyond issues like possible waste or corruption that might worry Western donors. Some wealthy Chinese fear generous donations could expose fortunes larger than the government or rivals had calculated, inviting unwanted attention.

2011’s Top 10 Fat Tail Risks

2010-11-29T00:05:00.000-08:00

What are 2011’s top 10 fat tail risks?

1) European peripherals – apocalypse scenario is realized resulting in a depression, including the breakup of the Euro

2) Protectionism – pressure put on Asian countries to appreciate their currencies and correct imbalances fails, pushing the US and/or Europe to enter trade wars or adopt protective measures

3) A US double-dip – still cannot be ruled out following recent weakness in house prices and the build-up in inventory which may cause default rates to rise

4) US municipal debt, home foreclosures, current investigation on insider trading – any one of these issues can impair US bank profitability and liquidity

5) Capital controls – more draconian measures adopted by Asian policymakers resulting in a sharp withdrawal of capital

6) Geopolitical risks flare up in the region – starting with a divided political regime in Thailand compounded by concerns of the King's health; North Korea ups the ante with the South in its military maneuvers; violence in Pakistan escalates and spills over into neighbouring India

7) Sharp rise in inflation – driven by higher food & commodity prices results in unrest in the developing Asian economies

8) China property prices – the decline in house prices is much greater than the consensus estimate of 10-15%

9) US and UK’s AAA ratings are downgraded

10) US$’s status as a reserve currency is challenged

Source: Nomura

Gold is just another Ponzi Scheme

2010-11-27T09:30:00.000-08:00

If you think gold could buy you a good inflation hedge, you could be making a big mistake here. Just imagine living in a hyperinflationary environment, how much food you could buy with your gold bar? I think you could probably buy more food if you have something people would like to exchange for? I think it will be more sensible to invest your money in things such as a garden where you could grow your own vegetables and fruits, solar panel, rain collection/water filtration technology and other things people need to stay alive when the entire monetary system collapses.

Gold bubble will eventually burst. It is a matter of time. People are just buying gold for the sake of buying due to the inflationary concern. With the gold marketing gimmick, it further exagerates the true value of gold.

Is gold tracked by exchanged-traded funds such as SPDR Gold Shares(GLD) reaching new highs because of the fear of a double dip? Is it because of quantitative easing? Is it because of the fear of euro collapse? Is it because of the first dip? Is it because of expectations for future inflation? Is the current price movement being fueled by investor speculation or has there truly been a fundamental change in society that can explain the spike?

Let's uncover the real story behind the gold bubble.

There have been four groups who have participated in this run-up:

* Group 1 (November 2007 - April 2009): Hedge funds who were worried the global financial system would crumble as a result of the mark-to-market banking regulatory requirements.
* Group 2 (October 2009 - April 2010): Hedge funds who were worried that unprecedented stimulus would result in hyperinflation as global economies recovered.
* Group 3 (May 2010 - July 2010): Hedge funds who were worried that the eurozone would collapse, thereby causing currency chaos.
* Group 4 (August 2010 - ???): Individual investors who are now buying gold for the first time because they want in on the action.

Before the financial crisis, in January 2007, gold was priced at $650/ounce. The average price of gold had fluctuated between $300 and $500 during the 10 years before. Assuming 5% inflation in the past 10 years, the inflation adjusted gold price as at today is only around $800 plus dollar.

As the financial crisis unfolded, gold served as the ultimate investment vehicle to profit from fear because of its unique characteristics. It isn't valued on fundamentals, it generates no earnings, it pays no interest, it is essentially a perpetual zero-coupon bond that is easy to manipulate into a snowball effect.

This ambiguity made the asset a prime profit-generating allocation during times of uncertainty. Unfortunately for current gold investors, fear/panic is diminishing by the day. Without that essential element, the big money will exit the trade. September's strong stock market performance was the beginning of a new stage -- a stage that I refer to as a "sigh of relief."

Investors have endured panic for three years, and gold has rightfully gone up. Now that the cataclysmic panic is subsiding those left carrying gold in their portfolios are trying to come up with reasons to justify the holding. Quantitative easing is a tough sell. Slow growth isn't enough. The time looks ripe for the investment vehicle of fear to break down. Perhaps, we need to have a war to justify a further rally in gold.

Gold at $1,400 an ounce is eerily similar to oil at $140. Remember all the credible firms extrapolating the speculative action into $200 oil forecasts. Those same bubble-builders are now calling for $2,000-an-ounce gold.

Geroge Soros has highlighted the danger of gold bubble recently. We might not be able to tell what his real agenda is. He might be telling the market one thing and doing the reverse in his own book. This is not uncommon for the big boys to do such things in the market. However, Soros Fund Management LLC sold 547,689 SPDR Gold shares as of Sept. 30, according to a filing with the U.S. Securities and Exchange Commission. The disposal represented 10 percent of Soros’s holding in SPDR Gold, according to Bloomberg calculations, and follows sales in the first two quarters. Still, SPDR Gold remains the Soros Fund’s largest single equity holding. This could be a real early warning sign.

Soros said that gold’s rally may continue, Reuters reported in September, citing an interview. “I called gold the ultimate bubble which means it may go higher but it’s certainly not safe and it’s not going to last forever,” Soros was cited as saying.

Fasten your seat belt!

*some of the inputs are taken from "thestreet.com"

Federal Reserve Scam? Real Business Remains to be Discovered!

2010-11-26T11:31:00.000-08:00

The Federal Reserve, or the Fed as it is lovingly called, may be one of the most mysterious entities in modern American government. It was created during Wilson's presidency to protect the economy in times of financial turmoil, its real business remains to be discovered. During the Wilson presidency, the U.S. government sanctions the creation of the Federal Reserve. Thought by many to be a government organization maintained to provide financial accountability in the event of a domestic depression, the actual business of the Fed is shrouded in secrecy.

Many Americans will be shocked to discover that the principle business of the Fed is to print money from nothing, lend it to the U.S. government and charge interest on these loans. Who keeps the interest? Good question. Find out as the connective tissue between this and other top-secret international organizations is explored and exposed.

The myth of Asia's miracle or the recovery of Asia?

2010-11-25T09:49:00.000-08:00

The Past & The Future:

With the recent crisis, the East asserted with increasing confidence that their system was superior than the West: Societies that accepted strong, even authoritarian governments and were willing to limit individual liberties in the interest of achieving overall net gain, take charge of their economics, and sacrifice short run consumer interests for the sake of growth would eventually outperform the increasingly chaotic societies of the West.

Before turning to Asian growth, it may be useful to introduce the concept of growth accounting and review some important pieces of economic history. Economic expansion represents the sum of two sources of growth: (1) increase in inputs – growth in employment, in the education level of workers, and in the stock of physical capital (2) increase in productivity – may result from better management or better economic policy, but in the long run, it is primarily due to increase in knowledge. The growth accounting can tell us how much of growth is due to each input – say capital as opposed to labor and how much of it is due to improved efficiency.

Now, let’s turn to the example of rapid Soviet economic growth four to five decades ago. It was one of the wonders of the world. Official soviet growth numbers were consistently being criticized. Nonetheless, Soviet claimed that the astonishing achievement was fully justified: their economy was achieving a rate of growth twice as high as that attained by any important capitalistic country over any considerable number of years and three times as high as the average annual GDP growth rate in the US by the early 1970s. When economists began to study the growth of the Soviet economy by using growth accounting, they actually found that Soviet growth was based on rapid growth inputs, rather than efficiency growth. By some estimates, the efficiency growth was almost nonexistent. The Soviet moved millions of workers from farms to cities, pushed millions of women into the labour force and millions of labours into longer hours, pursued massive programs of education, and plowed the ever-growing industrial output back into the construction of new factories. Soviet rapid expansion did eventually come to an end.

It is hard to see anything in common between the Asian success stories of recent years and the Soviet Union five decades ago. Indeed, it is safe to say that a typical business traveler flying into Singapore’s remarkable harbour with thousands of cargo boats in endless lines off the coast, never even thinks of any parallel to its roach-infested counterpart in Moscow. How is this Soviet example relevant to the modern world? Yet there are surprising similarities. The newly industrializing countries in Asia, like Soviet Union of the 1950, have achieved rapid growth in large part through an astonishing mobilization of resources, rather than by gains in efficiency.

Singapore grew through a mobilization of resources. Some statistics show that its productivity growth has been very much flat in the past few decades. Of course, Singapore today is far more prosperous than the Soviet when it was at its peak, because Singapore is closer to, though still below, the efficiency of Western countries. The point, however, is that Singapore’s economy has always been relatively efficient, it just used to be starved of capital and educated workers.

Singapore’s case is admittedly the most extreme. Other rapidly growing East Asian economies have not increased their labour force participation as much, made such dramatic improvements in education levels, or raised investment rates quite as far. Nonetheless, the basic conclusion is the same – there is little evidence suggesting improvements in efficiency.

What about Japan and China? Japan, unlike the East Asian tigers, seems to have grown both through high rates of input growth and through high rates of efficiency growth. Today’s fast growing economics are nowhere near converging on the US efficiency levels, but Japan is staging an unmistakable technological catch-up. However, for China, it is still a relatively poor country by GDP per capita standard. Its population is so huge that it will become the next economic power if it achieves even a fraction of Western productivity levels. And China, unlike Japan, has in recent years posted truly impressive rates of economic growth. Back to growth accounting, it is unclear what year to use as a baseline for the growth assessment in China. If one measures Chinese growth from the point at which it made a decisive turn toward the market, say 1978 Mao Zedong’s later years, there is little question that there has been dramatic improvement in efficiency as well as rapid growth in inputs. If one measures growth from before the cultural Revolution, say 1964m the picture looks more like the East Asian “tigers” – only modest growth in efficiency, with most growth driven by inputs.

If growth in East Asia is indeed running into diminishing returns, it is likely that growth in East Asia will continue to outpace growth in the West for the next decade and beyond without improving efficiency, but it will not do so at the pace of recent years. Going forward, the next priority on the list for Asian nations is to focus more on the long term sustainability of their economies, rather than the short term gains. To achieve this, investments in education, infrastructure, social benefits, technology and higher-value industries will have to be increased. The good news is, technology now increasingly flows across borders, and that newly industrializing nations are increasingly able to match the productivity of more established economies within a much shorter period of time. Diffusion of technology will place huge strains on Western world as capital flows into the emerging world and imports from these nations undermine the West’s industrial base.

If there is a secret to Asian growth, it is simply deferred gratification, the willingness to sacrifice current satisfaction for future gain.

~ Summary of Paul Krugman's "The Myth of Asia's Miracle" article from MIT

Warren Buffett: Read My Lips, Raise My Taxes

2010-11-25T09:40:00.000-08:00

With the US Congress hurtling toward a deadline on expiring tax cuts, a growing number of wealthy people are calling for higher taxes on the rich to help restore America's fiscal health.

One effort gathered over 45 millionaires who signed an open petition calling for the end of the tax cuts adopted since 2001 on those with annual incomes exceeding one million dollars.

Tax breaks for the wealthy should expire "for the fiscal health of our nation and the well-being of our fellow citizens," the letter said. It was signed by Ben & Jerry's ice cream founder Ben Cohen, hedge fund manager Michael Steinhardt and others.

Guy Saperstein, a retired California trial lawyer who organized the effort, said he was "frustrated" that President Barack Obama appeared to be wavering on his pledge to end tax cuts for the wealthy.

"I think the country's in trouble," Saperstein told AFP. "In hard times, the top strata who have done fabulously well need to sacrifice a bit, and it's not much of a sacrifice... We have among the lowest tax rates of any industrialized democracy."

Saperstein said an estimated 1,500 people have signed the letter although some of them did not want to be publicly identified on the group's website.

Philippe Villers, a French-born US businessman who founded Computervision in the 1960s and now heads Grain Pro, says he signed the letter even though it would mean higher taxes for himself.

"I don't think (extending the tax cuts for the wealthy) are fair or in the interest of building a strong economy," he said.

Villers argued that tax cuts enacted under former president George W. Bush gave a "disproportionate benefit to people with means" and contributed to the current economic woes.

Another 410 high-income Americans have signed a similar petition by Wealth for the Common Good, a network of business and civic leaders, calling for tax cuts to expire for families with incomes above 250,000 dollars.

"I've had a good run over the last few years. There's no question that others now deserve to share in that prosperity," said one of the signatories, Jeffrey Hayes, president of Stratalys Research & Consulting.

Similar comments have come from Warren Buffett, the investment guru who ranks among the world's richest individuals.

"I think that people at the high end -- people like myself -- should be paying a lot more in taxes. We have it better than we've ever had it," Buffett said in an ABC News interview.

The efforts come with Congress struggling in the face of tax cuts expiring at the end of this year.

If no action is taken by December 31, the current top rates of 33 and 35 percent would return to pre-Bush levels of 36 and 39.6 percent for the richest Americans. But taxes would also rise on all Americans if Congress fails to act.

Many Republicans are pressing to extend the tax cuts to stimulate a wobbly economy.

Obama and his Democratic allies are urging extended tax cuts for all but the wealthiest two percent of Americans -- claiming this move would help raise 700 billion dollars over 10 years to ease a crushing deficit.

"I'm glad there is a group of people who are sticking out their necks to say, 'Tax me more,'" said Mike Lapham of United For a Fair Economy's Responsible Wealth project, which has recruited 700 people in high-income brackets to work for a more progressive tax structure.

"People complain that the government should do more for New Orleans (after Hurricane Katrina) and for the (Gulf of Mexico) oil spill, but the reality is we've cut back on a lot of the things our government could do."

Jim Nunns, a senior fellow with the Tax Policy Center of the Brookings Institution and Urban Institute, said there is some momentum to raise taxes on the wealthy "because they've captured most of the growth in incomes over the last 30 to 40 years," creating a wider rich-poor gap.

But Nunns said taxing the rich alone would not solve US fiscal problems.

The better solution is to "broaden the base" so that all taxpayers contribute more, he said.

Analysts also acknowledge a climate where any tax hike is politically unpopular, especially in view of the belief that increases could choke off the economic recovery.

Bruce Josten of the US Chamber of Commerce said in an open letter to Congress that all tax cuts should be extended to boost confidence and end uncertainty about tax policy.

"The Chamber believes that no one should have their taxes raised during a time of economic weakness -- not individuals, not small businesses, not large businesses," he said, adding that this "would only hinder the already too weak recovery."