The wheels are coming off the whole of southern Europe

Europe’s debt-crisis strategy is near collapse. The long-awaited recovery has failed to take wing. Debt ratios across southern Europe are rising at an accelerating pace. Political consent for extreme austerity is breaking down in almost every EMU crisis state. And now the US Federal Reserve has inflicted a full-blown credit shock for good measure.

By Ambrose Evans-Pritchard

8:50PM BST 10 Jul 2013

Municipal workers protest outside parliament during a rally in Athens.
A leaked report from the European Commission confirms that Greece will miss its austerity targets yet again by a wide margin Photo: Reuters

None of Euroland’s key actors seems willing to admit that the current strategy is untenable. They hope to paper over the cracks until the German elections in September, as if that is going to make any difference.
A leaked report from the European Commission confirms that Greece will miss its austerity targets yet again by a wide margin. It alleges that Greece lacks the “willingness and capacity” to collect taxes. In fact, Athens is missing targets because the economy is still in freefall and that is because of austerity overkill. The Greek think-tank IOBE expects GDP to fall 5pc this year. It has told journalists privately that the final figure may be -7pc. The Greek stabilisation is a mirage.
Italy’s slow crisis is again flaring up. Its debt trajectory has punched through the danger line over the past two years. The country’s €2.1 trillion (£1.8 trillion) debt129pc of GDP – may already be beyond the point of no return for a country without its own currency.
Standard & Poor’s did not say this outright when it downgraded the country to near-junk BBB on Tuesday. But if you read between the lines, it is close to saying the game is up for Italy.
Its point is that ifnominal GDPremains near zero, Rome will have to run a primary surplus of 5pc of GDP each year to stabilise the debt ratio. Risks to achieving such an outturn appear to be increasing,” it said.

Indeed. The International Monetary Fund has just slashed its growth forecast for Italy this year to -1.8pc. The accumulated fall in Italian output since 2007 will reach 10pc. This is a depression. Yet how is the country supposed to get out of this trap with its currency overvalued by 20pc to 30pc within EMU?

Spain’s crisis has a new twist. The ruling Partido Popular is caught in a slush-fund scandal of such gravity that it cannot plausibly brazen out the allegations any longer, let alone rally the nation behind another year of scorched-earth cuts. El Mundo says a “pre-revolutionarymood is taking hold.

A magistrate has obtained the originalsmoking gun” alleging that Premier Mariano Rajoy accepted illegal payments as a minister. The Left is calling for his head but so are members of the Consejo General del Poder Judicial, the justice watchdog.

Citizens cannot tolerate a situation where the prime minister has received undeclared payments,” said José Manuel Gómez, a Consejo member. Much of the ruling party appears tainted by a network of covert funding. If proved, said Mr Gomez, it poses a “very gravethreat to Spanish democracy.

Portugal is slipping away. Professor João Ferreira do Amaral’s book - Why We Should Leave The Euro – has been a bestseller for months. He accuses Brussels of serving as an enforcer for Germany and the creditor powers.

Like Greece before it, Portugal is chasing its tail in a downward spiral. Economic contraction of 3pc a year is eroding the tax base, causing Lisbon to miss deficit targets. A new working paper by the Bank of Portugal explains why it has gone wrong. The fiscal multiplier is “twice as large as normal”, or 2.0, in small open economies during crisis times.

What is new is that Vitor Gaspar, the high priest of Portugal’s shock therapy, has thrown in the towel. He blames the fainthearted for refusing to slash with greater vigour. Needless to say, he still refuses to accept that a strategy of wage cuts and deflation in a country with total debt of 370pc of GDP was always likely to fail.

If Portugal does pull off an “internal devaluationwithin EMU it will shrink the economic base. Yet the debt burden remains. This is the dreaded denominator effect. Public debt has jumped from 93pc to 123pc since 2010 alone.

The Gaspar exit has closed a chapter. The junior coalition partners are demanding a change of course. I write before knowing whether President Anibal Cavaco Silva will call a snap election, opening the way for a Left-leaning anti-austerity government.

The Portuguese press is already reporting that the European Commission is working secretly on a second bail-out, an admission that the wheels are coming off the original €78bn EU-IMF troika rescue.

This is a political minefield. Any fresh rescue would require a vote in the German Bundestag, certain to demand ferocious conditions if this occurs before the elections.

Europe’s leaders have given a solemn pledge that they will never repeat the error made in Greece of forcing an EMU state into default, with haircuts for banks and pension funds. If Portugal needs debt relief, these leaders will face an ugly choice.

Do they violate this pledge, and shatter market confidence? Or do they admit for the first time that taxpayers will have to foot the bill for holding EMU together? All rescue packages have been loans so far. German, Dutch, Finnish and other creditor parliaments have never yet had to crystallize a single euro in losses.

All this is happening just as tapering talk by the Fed sends shockwaves through credit markets, pushing up borrowing costs by 70 basis points across Europe. Spanish 10-year yields are back to 4.8pc. These are higher than they look, since Spain is already in deflation once tax distortions are stripped out. Real interest rates are soaring.

By doing nothing to offset this, the ECB is allowingpassive tightening” to occur. Mario Draghi’s attempt to talk down yields with his new policy of forward guidance is spitting in the wind. The ECB needs to turn on the monetary spigot full blastlike the Bank of Japan – to head off a slide into deflation trap and enveloping disaster by next year. This is not going to happen.

Der Spiegel reports that the German-led bloc fought vehemently against a rate cut at the last ECB meeting, even though Germany itself has slowed to a crawl as China and the BRICS come off the rails.

Markets have reacted insouciantly so far to these gestating crises across Club Med. They remain entranced by the “Draghi Put”, the ECB’s slowly fraying pledge to backstop Italian and Spanish debt, forgetting that the ECB can only act under strict conditions, triggered first by a vote in the Bundestag.

These conditions can no longer be fulfilled. The politics have curdled everywhere.

Sooner or later, this immense bluff must surely be called.


July 10, 2013, 7:25 p.m. ET

Why Individual Investors Are Fleeing Stocks

High-frequency trading, flash crashes, policy uncertainty. There are ways to fix this.


Our firm was founded 40 years ago on the belief that all Americans should have the opportunity to invest in the stock market with the same advantages available to institutions and the big guys. But looking at our capital markets today, we should all be concerned.

It's becoming increasingly difficult for individual investors to compete on a level playing field. The system seems rigged against them. And they are responding by walking away.

A Gallup survey conducted in April found that just 52% of Americans were invested in "an individual stock, a stock mutual fund, or in a self-directed 401(k) or IRA." This is the broadest ownership of capital in the world, but it is down from a Gallup-survey high of 67% in June 2002. That's not good for individuals, and it's not good for the country. 

Investors are the lifeblood of the economy. They provide the capital that spurs job creation, innovation and entrepreneurship.

No one will benefit if individual investors stop participating in the markets. But that is what's happening at a troubling rate. Here are some reasons for that trend—and our recommendations for restoring balance:
High-frequency traders are gaming the system. Using sophisticated algorithms, high-frequency traders can trade stocks in an instant. Some flood the market with orders, then cancel 90% or more once they've glimpsed the state of the market and gleaned an advantage. Almost all "co-locate" their computer servers as physically close as possible to those of the exchanges to cut down the travel time of information by microseconds and then trade on that tiny speed advantage.
Acknowledging this new, high-speed environment, last September the Securities and Exchange Commission levied a $5 million fine on the New York Stock Exchange—the first ever against a U.S. exchange by the regulator—for providing stock-price quotes and other data to certain firms just moments ahead of the public. As Robert Khuzami, then director of the SEC's Division of Enforcement, said at the time: "Improper early access to market data, even measured in milliseconds, can in today's markets be a real and substantial advantage that disproportionately disadvantages retail and long-term investors." 

It was a watershed moment, but regulators need to do more to ensure that all professional traders are playing by the same rules as the rest of us. A penalty on excessive cancellations, rigorous enforcement of rules regarding information access, and a top-to-bottom study of the NYSE's 40-year-old Market Data System would be good places to start.
Glitches and errors plague the markets. From the "flash crash" of 2010 to the glitch-riddled Facebook FB +1.24% IPO in 2012 to the market-wide shutdown when Hurricane Sandy hit New York, individuals are losing confidence in the integrity of the system. In April, a Twitter hoax claiming President Obama had been injured in an explosion at the White House sent the market spiraling downward in seconds, with computer-driven trades flooding the market the instant the false news hit the wires.
Markets have always been affected by misinformation, but the speed with which high-frequency traders react to false stories is alarming. In this age of technological innovation and rapid-fire information dissemination, investors need to be confident that markets can keep up.
Regulators have been slow to respond to the epidemic of market glitches large and small. Stronger steps—such as imposing "kill switches" to stop trading in a stock when a problem occursneed to be taken to ensure that systems can detect and isolate a problem before it spreads across the market.
Tax policies here and abroad discourage investors. In the U.S., tax rates on capital gains and dividends went up for some investors in 2013, compounding a new surtax on investment income for wealthier taxpayers that went into effect this year as part of the new health-care law. While we support the goal of increasing health-care coverage for all Americans, doing so on the backs of investors seems shortsighted.
Overseas, a financial transaction tax is under consideration in several European countries. It's another tax on investors. Thus far, the Obama administration, to its credit, has been steadfast in its opposition to such a tax in the United States. But some in Congress see a tax on investors as a potential boon to the Treasury. As lawmakers debate tax reform, they should encourage investing, which boosts savings, rewards the good ideas of entrepreneurs and stimulates the economy.
The retirement savings system is under attack.Private savings for retirement has played a critical role in supplementing safety-net programs by helping millions of Americans prepare for their futures. But instead of being celebrated, the laws that better enable people to take care of themselves are facing criticism and calls for drastic change.
President Obama's recent budget would set an arbitrary cap on the total amount of retirement savings an individual can accumulate in tax-advantaged retirement accounts. Reducing contribution limits to employer-sponsored 401(k) plans and individual retirement accounts is openly discussed on Capitol Hill. Some are even calling for the entire system to be replaced with one run by the government.
The system we have is not perfect. But instead of hindering it or scrapping it altogether we should be enacting policies that make it easier for employers of all sizes to offer employees a savings plan, encouraging market-based innovation, and making a concerted national effort to educate America's workers on how to maximize retirement plans, particularly with low-cost investment choices.
If policy makers in Washington embrace these goals, individual investors will regain the confidence that someone is fighting for them. Confidence and participation in the markets will rise, and the economy and average individual investors will benefit.

Mr. Schwab is the founder and chairman of the Charles Schwab Corporation. Mr. Bettinger is the company's president and chief executive officer. SCHW -1.19%

Copyright 2012 Dow Jones & Company, Inc. All Rights Reserved


A new hope

Institutions are betting on fresh sources of return

Jul 13th 2013

THE termalternative assetsconjures up an image of the counterculture—tie-dye shirts and magic mushrooms. But in financial jargon it means those assets that are not equities, bonds or cash. It covers everything from hedge funds to property, infrastructure projects to art.

When the stockmarket was rising by 20% a year in the late 1990s, interest in alternatives was limited. Equities provided all the excitement that investors needed. But in recent years a combination of poor stockmarkets and low bond yields have made alternatives fashionable.

Since 1995 global pension funds have increased their portfolio allocation to alternatives from 5% to 19%. In just the past two years there has been a 15% increase in the assets managed by alternatives managers on behalf of insurance companies, according to a new survey by Towers Watson, a consultancy. The 100 biggest alternatives managers look after more tan $3 trillion of assets.

This diversification makes some sense. If the various alternative-asset categories share one characteristic, it is illiquidity. Over the long run you would expect illiquid assets to deliver a premium return (over the risk-free rate) to compensate investors for not being able to get immediate access to their money. Institutional investors, such as pension funds and endowments, can afford to take the long view and wait for these illiquid assets to come good.

But the drive into alternative assets also runs counter to a long-running decline in fees. Institutional investors have used their buying power to persuade traditional fund managers to lower their fees.

Many institutions have also switched parts of their portfolios into index-tracking funds, where the expenses may be only a few hundredths of a percentage point. Alternative-asset managers’ fees tend to be a lot higher. Big institutions can negotiate better terms—they may not have to pay the famous two-and-twenty combination of annual and performance fees charged by hedge funds and private-equity firms. But they are still giving back some of the hard-won cost gains of previous years.

An even bigger question is what drives the returns on alternative assets. In the case of property, which accounts for around a third of the total that institutions allocate to these assets, the labelalternative” is a misnomer. Property has been around for centuries. But it does afford genuine diversification. Property offers an income stream, in the form of rents, and a long-term hedge against inflation.

For the other alternative-asset classes the issue is whether they represent a different income stream from mainstream assets, and whether they are liquid enough to absorb lots of capital. Infrastructure projects offer the potential for inflation-linked income (from road tolls, for example), although they are subject to regulatory risk. But institutions are keener to invest in projects that are up and running than to finance greenfield schemes.

Whether private equity offers a superior return to the conventional stockmarket, once you allow for the risks involved in using high levels of debt, is a controversial subject. Clearly, however, if economic conditions are poor, private-equity portfolios are just as likely to suffer as publicly quoted companies.

The hedge-fund industry is diverse. It ranges from the giant macro funds that make bets on the back of their economic analysis to “long-shortequity funds that pick stocks and “managed futuresfunds that try to ride the market’s short- and long-term trends.

Some managers offer institutions exposure to the same risks they face elsewhere (to quoted equities, say). In contrast, a hedge fund that bets on volatility might do well when the stockmarket falls. But the expected return from this approach may be close to zero. There is no reason why the manager should consistently anticipate changes in volatility, and there is no underlying return from the strategy, in the sense that equities pay dividends or bonds pay interest.

It seems highly likely that adding alternative assets to an institutional portfolio can provide investors with a smoother return. That does not necessarily mean, however, that they will deliver a higher return. It is, of course, theoretically possible to transform a low-risk portfolio into a high-return portfolio through leverage, the use of borrowed money. But many institutional investors (pension funds are a notable example) cannot really take advantage of this possibility. So the idea that alternative assets will solve the pension-funding crisis is simply misguided.

viernes, julio 12, 2013





Mike Ward
Publisher, Money Morning




A villain’s guide to football

Welcome to the beautiful game

Football clubs can easily be used as stealing machines. Here is an instruction manual. The stories are real, but most details are concealed

Jul 13th 2013

A NEW football season approaches, and with it new players, overpriced replica kits and unsavoury club owners. If you are one of them, most observers will wrongly assume that you are laundering only your reputation, and that you are willing to lose millions on a philanthropic sporting folly to do so. That is too kind. Your new asset will not just help you wash your dirty money. It will make more of it too.

It is a good time to enter the football racket. Banks are less generous and sentimental about loans. Tax officials are less lenient, too, as Rangers, a big Glasgow club, discovered: it was forced into liquidation by tax arrears, afterwards being reconstituted under new ownership.

But hard times mean clubs are desperate and going cheap. Set up a holding company (or a nest of them) in a discreet jurisdiction, as many owners do, and you have a money-laundering and embezzlement machine at your disposal. The authorities are unlikely to bother you.

Start with ticket revenues. Exaggerating the attendance at matches lets you run some of the dirty takings from your previous career through the turnstiles, turning them into legitimate income (this particular ruse works best if you buy a middling club, where games are not routinely sold out).

Conversely, if you need some petty cash you can siphon off the gate receipts—a tactic that some of Brazil’s football kingpins, the cartolas (“top hats”), are rumoured to have employed in the past.

The market in players, between clubs and across national borders, is another golden opportunity.

Time was when the scams were simple: bent coaches would takebungs” (backhanders) to buy a player with the chairman’s wallet.

Now the tricks are more complex—and some owners are in on them. One aim is money-laundering. Transfers involve huge and largely subjective sums (since a player is worth whatever someone is willing to pay for him). With agents or other intermediaries involved, payments pass through multiple hands and jurisdictions: perfect for concealing the origin and direction of the cash. Sell a player to a friendly club that publicly overstates the true price, and you can supplement the real fee with a couple of million ill-gotten euros of your own: that money is now clean and in your club’s accounts. Pull the trick in reverseinflating the value of a player you are buying—and you gain a usefully overvalued asset on your balance-sheet, which will help your club to borrow.

Transfers can also help you privatise club revenues and defraud minority shareholders. With the help of a co-operative agent, the fees, commissions and even parts of players’ salaries can find their way back to you (and away from the taxman). Agents who are personal friends may be safest. The regulations which govern transfer deals are easy to circumvent.

Another wheezeannoyingly banned by some national football associations—is third-party ownership, where the rights in a player are owned (or part-owned) not by his club but by an outside consortium. So you can secretly invest in players whom you then rent to your club, trousering the proceeds. Or sell your club’s star man to your front company for a depressed fee, then sell him on at full Price. Naturally you will award the club’s construction and catering contracts to your own firms.


Matches made in heaven

Most outsiders reckon that, when games are rigged, infiltrators are to blame: Asian criminal gangs and Balkan gangsters are the usual suspects. But the surest fixes are inside jobs. After all, you pay the players’ salaries, so you are in the best position to suborn them. You can decide who is picked or dropped, or who goes on the transfer list (or doesn’t). That gives dodgy owners plenty of scope to influence players’ behaviour. Footballers who are paid badly or erratically, as they often are in eastern Europe or the former Soviet Union (see chart), tend to be most susceptible.

But match-fixing happens in big and supposedly reputable European leagues, too—and because bookies assume the games are clean, you can lay big bets inconspicuously. If you or the players balk at losing on purpose, you can still arrange—and bet on—in-game details, such as the timing of the first corner kick. When the fix is in, consider emulating the Macedonian chairman who sold on the details of a thrown game to mafiosi. Betting syndicates will even buy intelligence on players’ injuries, nervous breakdowns and so on. Happily for you, match-fixing is hard to prove, and most police forces aren’t interested.

These are only the basics: after a season or two you can go in for more extravagant scams. Be inspired by Arkan, the deceased Serbian paramilitary who is said to have used his football club to traffic arms and drugs. It might be best, however, to stay clear of Russia, where the game has an alarming death rate, and where warlords from the North Caucasus (sinister even by football’s standards) have recently started buying into the business. Caution is also advisable in Bulgaria: 15 football club bosses have been murdered in the top football league just over a decade. An American diplomatic cable written in January 2010, and published by WikiLeaks, said “allegations of illegal gambling, match fixing, money laundering, and tax evasionplague the Bulgarian game.

Some national associations do a spot of due diligence on new owners, but this is unlikely to interfere with your plans. Having a criminal record can be a bar to acquiring a club—but if you made your money in a place where the law was flexible and the courts accommodating, such inconvenient details can be scrubbed from your record. Enjoy the beautiful game!