World doubts the leadership of Uncle Sam: expert

The culture of guns

As the US has lost more international status and influence since the global financial crisis in 2008, the international community is raising doubts about its leadership and ability to contribute to the world, an expert said, analyzing that such a decline of influence can be attributed to some deep-seated reasons, including its self-willed overseas military operations.

Since the financial crisis, the US can neither provide effective solutions to a host of global challenges, nor sustain its control over other countries, Zhang Ruizhuang, Director of the Center of American Studies at Nankai University, wrote in an article published in the People’s Daily on Sunday.

In the commentary titled “The City upon a Hill is not there any more,” he gave an in-depth analysis on the reasons of such changes.

Zhang says that “A City upon a Hill,” often cited by American politicians as their political creed, verified the self-labelling of the arrogant Americans as “God's Chosen Ones” to lead the world. After the Cold War, the preaching about the superiority of its values brought US much popularity and pulled the country to a commanding stage.

But it over-consumed its accumulated political capital during the last quarter of the 20th century, which resulted in a decline in its global influence, Zhang said, adding that the most destructive threat to its dropping status can be attributed to overseas military operations.

After the Soviet Union collapsed with the end of the Cold War, the US dominated the world and launched a series of capricious measures. With the excuse of protecting democracy, human rights and the world order, Uncle Sam trampled on the post-war international law based on the UN Charter and norms governing global relations by bringing the flames of war to many parts of the world.

Panama, Somalia, Haiti and Kosovo are all victims of such wars waged by the superpower. With a made-up excuse, it pulled Iraq into a war and this political farce finally brought the latter millions of civilian casualties, endless terrorist attacks and ceaseless disturbance.

What the US gained, after it paid a price of trillions of dollars for the war, was a hotbed for terrorist organizations which in turn threatened the security of itself and other Western countries. The war against Iraq ultimately turned out to be a foolish one that not only crumbled its diplomatic morality, but undermined its own strategic interests, Zhang concluded.

Despite the lessons, the US never gave up every opportunity to start “color revolutions.” Its attacks on Libya and Syria, once again, dragged these nations into raging wars. What’s worse, as a result of the wars, a number of regulation vacuums provided ISIS and other religious extremist organizations a bed in which to grow stronger.

The US, its Western allies, as well as the whole world, are now swallowing the sour fruits resulted from its self-willed deed, he added.

According to the scholar, apart from its frequent diplomatic mistakes, its economy, politics and society, in which the Americans once took pride, are all in a predicament, arising more doubts over the superiority of the US system.

The global financial crisis breaking out in 2008 exposed the defects of capitalism once again. It brought to light not only the failure of Keynesian policy to narrow the wealth gap and boost effective demand, but the greed and corruption of financial executives, the ineffectiveness of financial supervision, plus the government’s shielding of tycoons.

The US public felt shock, despair and anger towards such defects, and the ensuing “Occupy Wall Street” movement is one of their ways to express dissatisfaction. The protest wave later spilled to other part of the world, triggering worldwide query over the US system and its values.

Zhang also criticized US domestic politics, citing its notorious presidential election system as an example.

Manipulated by capital, the “winner takes all” election system in many states gives no chance to other newborn parties besides the two major parties. The American elections of the past two to three decades have been more like technical games.

The candidates now focus more on technical details for the sake of more votes rather than their political ideas and governance philosophies, and the whole process has fallen into personal attacks between the two candidates, he added.

Coupled with some other faults, the US and even the whole world began to question on the effectiveness of US democracy, as well as its leader selected in such a flawed way.

The article analyzed that one key reason for its flopping election lies in a lack of innovative governing ideas.

Barely stimulated by major crisis, US society tends to be mediocre and conservative about its ideas, the commentary further explained, adding that the prevailing philosophy of so-called “political correctness” also created an unfavorable environment for the candidates to come up with new ideas acceptable to the public.

Lack of foresighted candidates with outstanding capability is another reason for its unsuccessful election, Zhang wrote.

He explained that some capable politicians are not willing to embarrass themselves on the election stage at the cost of their privacy and that of their family as the butt of jokes.

“As a result, the world was presented with an election farce performed by the two unqualified and big-mouth candidates selected by the two parties,” the author concluded.

“It is obvious that the US is seeing a decline in terms of both prestige and influence, but such a drop is not so eye-catching as it has no strong competitors yet. It would be a complicated historic path,” the scholar said, calling for more attention to the course of the world pattern.

 (People's Daily)

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The audacity of hedge funds and their lack of righteousness

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THINK ASIAN By ANDREW SHENG

IN the old days, technical books were read for one's education, but they are so boring that you would fall asleep. You read novels instead for their drama, romance and excitement. In this fast moving world where daily events are more thrilling than fiction, books like More Money than God by Sebastian Mallaby make you want to turn the next page.

Written by a former journalist, who today works for the US Council for Foreign Relations, the book has combined blood and guts story-telling of the hedge fund industry with careful analysis, tracing meticulously how the industry works like Sherlock Holmes. The narrative is so thrilling that when the author described the scene where the hedge funds took down Thailand in 1997, my hair stood on end. I was a ringside witness but I had not known who was doing what and how they did it.

If you want to know how hedge funds sniff out opportunities by talking to honest and nave central bankers who admit that they made policy mistakes and then make more money than God, read this book. It is both a clinical analysis of how hedge funds emerged from nowhere to become the market movers of today, as well as a morality story that raises more questions than it is able to answer. It may not be illegal (at least under existing law) to do a trade that tips a nation into abject poverty because there were tragic policy mistakes, but is it morally right to take home billions by accelerating the process of “creative destruction”?

The central insight of the hedge fund industry is brilliant it is that the academic finance theory is all wrong and we are all naive to believe otherwise. Modern finance theory begins with the assumption that the market is efficient and knows best. The efficient market hypothesis is based on the view that it is not easy to beat the market.

However, the hedge fund industry makes most money from the inefficiencies of the market. If you are not convinced, how between May 1980 and August 1998, the Tiger Fund earned an average of 31.7% per year after fees, beating the 12.7% return on the S&P500 index. The offshoots of the Tiger Fund, created by people who left the Fund to set up on their own, generated returns of 11.9% per year between 2000 and 2009, compared with the average of 5.3% per year for the S&P index.



Mallaby takes the story from the 1949 creation of the first hedged fund by Alfred Winslow Jones to the emergence of a sophisticated and complex US$2 trillion industry. He weaves a wondrous tale of how tribal and interconnected the industry became as it emerged.

Nobel Laureate Paul Samuelson, famous for arguing that randomly chosen stock selection would beat professionally managed mutual funds, was a founder investor of the Commodities Corporation, one of the first “quants” to use computer analysis to trade commodities. The Commodities Corporation was the nursery for three future hedge fund giants, Bruce Kovner (Caxton), Paul Tudor Jones (Tudor Investments) and Louis Bacon of Moore Capital.

Louis Bacon had connections with two of the Big Three in the early 1990s, being related by marriage to Julian Robertson (Tiger Funds) and worked briefly with Michael Steinhardt. The last of the Big Three is George Soros (Quantum Fund), who became famous as the man who made 1bil speculating in sterling and has become a philosopher/philanthropist. Many of these funds were involved during the speculative raids on Asian currencies during the 1997/98 Asian crisis and it is likely that many of them are having a food fest in Europe right now.

The last chapter of the book is a defense of why hedge funds should not be regulated. “The case for believing in the industry is not that it is populated with saints but that its incentives and culture are ultimately less flawed than those of other financial institutions.”

In Mallaby's view, “whereas large parts of the financial system have proved too big to fail, hedge funds are generally small enough to fail. When they blow up, they cost taxpayers nothing.” Yes, but when their prime brokers blew up with them, it cost taxpayers trillions.

Here lies the contradiction of their existence. Hedge funds are symbiotically tied to their prime brokers, the investment banks and large global banks that provide the leverage for their activities. No leverage means no ability to hedge or speculate. The latter group is too big to fail and its proprietary trading, combined with those of the hedge funds, are large enough to move markets.

The earlier argument that the prime brokers would safeguard systemic stability by indirectly regulating hedge funds (many of whom are former staff of the prime brokers) failed when Lehmans collapsed.

Hedge funds thrive because of regulatory and information arbitrage. The more the regular banking system is regulated, the more business drifts to the under-regulated shadow banking institutions.

Mallaby argues that it remains unproven whether heavier regulation will succeed. The regulators were scared to regulate, because of moral hazard, that is, the industry would take higher risks and the government would pay. Unfortunately, whenever there is a financial crisis, the government would be blamed and have to pay, irrespective of heavy or light regulation.

While hedge funds are not of public concern if they remain small, their herd like effect becomes a real problem when the momentum play can drive even mid-sized nations over the brink. Europe today is a live experiment of gigantic proportions. If someone makes tens of billions through speculation from the failure of some European countries and millions become unemployed, it is no longer a regulatory issue. Rightly or wrongly, this is a political crisis of the first order.

More Money than God should be the first book for everyone to read if they are to understand how the hedge funds dissect the European crisis as an opportunity.

Andrew Sheng is President of Fung Global Institute and author of From Asian to Global Financial Crisis.

Investing during turbulent times

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Tips on how to invest during turbulent times

STOCK markets around the world lately gave investors that sinking feeling again, weighed down by deepening woes of Europe's sovereign debts, an anemic US economy and new fears of a sharp economic slowdown in China.

Many investors sold shares to hold more cash, despite cash earning very little interest. In Singapore for example, six months USD fixed deposits of less than US$1mil earns zero interest in some banks.

In the United States, 10-year Treasury bonds are yielding 2.1% per annum; despite misery returns, many investors prefer the safety of US Treasuries during crisis times, while waiting for policymakers to act boldly and markets to stabilise.

At the same time, we see many economists and other pundits offer a whole host of predictions about today's global financial predicaments. The many predictions range from the slightly hopeful to the pessimistic, right down to the disastrous and absurd.

Does it sound familiar? Did we not hear many such predictions during the 2008/2009 global financial crisis? Who should we listen to? What should one do?

No doubt in hindsight, a few forecasts will be correct; and as the dust settles, many extreme predictions will also likely be forgotten. Yet for investors today, separating much of the “noise” from facts is one of the more tricky parts of steering through these very challenging times.



Fundamentals and valuation takes a back seat during a crisis

Volatile stock markets today are driven by latest positive or negative news flow affecting sentiment. Uncertainties during a crisis causes investment risks to spike, stock investors tend to sell first and ask questions later; fundamentals and stock valuation typically takes a back seat in the short term.

No doubt many investors worry about negative impact to a company's fundamentals in difficult times. For example, a manufacturing company's stock with a present price earning (PE) multiple of six times can change drastically to 60 times PE if earnings were to collapse 90% because of a global financial crisis.

Similarly, a property company's price to book value discount of 60% can easily drop to 30% if asset value is marked down by half in troubled times. Monitoring, reassessments and analysis of a company's financial progress is obviously important during tumultuous times.

Share prices of companies (even those with good fundamentals) may continue to fall indiscriminately, due to many reasons such as panic selling, fund redemption and repatriation. Investors should tread cautiously, even if stock prices may appear to be at very attractive levels.

I relate a challenging experience from the last global stock market plunge. In 2008, I invested in the largest luxury watch distributor and retailer in China (at that time 210 stores and sales amounting to 5.5 billion yuan a year or about 30% market share).

This Hong Kong listed Chinese company sells luxury watches (such as Omega, Longines, Bvlgari) from global brand owners Swatch group of Switzerland and LVMH of France (both by the way are also 9.1% and 6.3% shareholders of this Chinese company respectively).

As the US sub-prime mortgage crisis deepens by end-July 2008, many stocks around the world plunged. This company's shares similarly dropped from HK$2 to HK$1.50 in a matter of weeks.

We vigorously reassessed the company's fundamentals, including visits to retail outlets in China and Hong Kong. The result was an affirmation of our conviction to invest in the company for the long-term, despite short-term price weakness.

By late September 2008, we decided to purchase more shares when valuation proved so attractive at HK$1.15 per share (at a PE multiple of eight times).

Unfortunately, as the global financial crisis worsened, the company's shares continued to plunge and bottomed to a low of HK$0.51 by Nov 26, 2008.

This stock eventually recovered back to HK$2 per share (by June 1, 2009) and went on to exceed HK$5 per share by late 2010. The company's share prices recovered partly because Asian equities rebounded quickly in 2009, but also reached new highs because the company's fundamentals continue to improve with strong sales (+49%), profitability (+26%) and expansions (+140 stores to 350 stores) from 2008 to 2010.

A lesson if you will that during a crisis, one should be prepared for short-term (weeks and months) stock market volatility.

It is essential for bargain hunters to have long-term holding power, good understanding of company fundamentals and strong conviction on a company's prospect. In the long-term, we know fundamentals and valuation does matter.

How does one invest during a time of crisis?

My approaches to investing in turbulent times are:

• Search for and invest (when valuations are attractive) in well managed companies that will not only survive but emerge stronger from crisis times;

• Be prepared to stomach stock market volatility in the months ahead;

• Have a longer term investment horizon (perhaps two to three years); once this crisis dissipates, reap the rewards as stock markets recover.

In Asia, macroeconomic fundamentals likely will remain resilient as many Asian economies have strong foreign currency reserves, coupled with more fiscal and monetary policy options to support growth.

China is also likely to withstand any fallout from Europe better than most would think. China's economy is still growing at a strong 9.1% gross domestic product growth for the third quarter of 2011; speculations about China's economy crashing may be somewhat premature at this stage.

Similarly, I think many established Asian companies have sufficient resources be it cash, borrowing powers or human capital, to emerge out of these turbulent times faster and stronger than before.

I believe with increasingly attractive valuation, the investing risk-reward equation (potential downside risk versus long term return prospects) favors Asian equities in the long run. I have confidence investing in Asia's fundamentals and Asian companies for many more years ahead.

Teoh Kok Lin is the founder and chief investment officer of Singular Asset Management Sdn Bhd