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Money matters: Why you should consider Hedges & Bonds
Graham Macdonald
MBMG International Ltd.
In the aftermath of any man-made disaster, the events and
circumstances tend to be analysed ad nauseum and invariably there are facts and
events and situations which, in hindsight, appear so glaringly obvious that we
wonder how they weren’t spotted at the time and why they weren’t acted upon. As
we proceed merrily into economic slowdown or worse, the flashing red lights with
‘Recession’ written all over them include the behaviour of the bond market over
the last few years.
The bond market has consistently failed to believe the Fed’s line that growth is
a given and inflation is the problem. In fact, each time that the Fed has
continued to raise interest rates in its 17 successive 0.25% increases, more
often than not the response of the bond markets has been the bond trader’s
equivalent of yelling “liar, liar pants on fire!” In other words, they’ve made
it clear that the real, long term level of interest rates is going to have to be
lower than the Fed’s rhetoric and policy actions both indicate. They think that
growth (or lack thereof) is a far bigger problem than inflation. This is what
has brought us to the point where bond yields are on the verge of inverting
(i.e. where short term rates, determined by what the Fed has done, are higher
than long term yields - more influenced by what the market believes), whereas
the normal order of things is that long term deposits should receive higher
interest than short term ones.
The bond market tends to have a far better track record of understanding these
kinds of issues than the equity market. Last month the world’s largest bond fund
re-stated its position of expecting a global slump next year by increasing its
holdings in US Treasury bonds and government agency debt for the second month
running. Pimco’s $93bn (£50bn) Total Return fund came in response to a raft of
data from the US government and OPEC which highlighted a rapid slowdown in the
American economy.
The scenario was summed up neatly by Scott Mather, head of portfolio management
at Pimco’s European arm, who recently told reporters, “The US is leading the
world economy to a lower level and possibly into recession.” Fixed-interest
investments such as government bonds increase in value as yields fall.
Therefore, Pimco are clearly expecting interest rates to fall back from the
5.25pc level that they have now reached after the 17 consecutive increases.
Mather stated, “Normally, it takes six months for the Fed to reverse policy
after it stops. Nothing is different this time.”
We concur with this - for a long time now it’s been apparent that any inflation
in the system has been tangible asset inflation - such as property prices.
Admittedly this hurts the consumer when the tangible assets are things like oil
and gas. However, real consumer price inflation is actually becoming benign
because of the slowing of the US economy - consumer prices in the US rose at the
slowest pace in five months in July, government figures confirmed yesterday.
Excluding food and fuel, costs prices rose only 0.2pc (as opposed to 0.3pc in
June). The slower rate of price rises followed the release of data this week
showing a drop in the prices paid to US producers. Inflation no longer appears
to be the big danger.
We can see this in other data too - new housing starts fell to their lowest
level since 2003 and output from America’s factories grew at only 0.4pc, only
half the June rate, while OPEC reduced its forecast for growth in average daily
oil demand for 2006 by 80,000 barrels a day to 84.5m barrels, with reduced US
demand alone making up more than half of this shortfall.
Even the equity markets are starting to wake up to this - a survey of fund
managers by Merrill Lynch showed that almost half of institutional investors
believe stock markets will be lower in six months’ time than today, while
technical analysts this week predicted a fall of up to 20pc in the main American
indices, the S&P 500 and the Dow Jones Industrial Average. This means that the
Dow Jones could plummet to under 9,000!
Bill Gross, who heads up Pimco (which manages more than $600bn) said recently
that the Fed’s interest rate pause was likely to trigger a bull market in bonds
after three years in which equities have out performed. HSBC agreed, with a
strategist saying, “We think that that is it for this cycle of rate hikes. While
bonds do well when the Fed is cutting, they do even better from the end of the
hiking cycle.” If you look at the old Pattaya Mail articles from last year, you
will see that we told investors that such a buying opportunity would arise in
twelve to eighteen months time. It looks as though that time has arrived.
A new report by Richard Spencer, partner at M.A. Partners, an independent
management consultancy, has shown that hedge funds and alternative assets are
moving increasingly away from the equity markets to seek out sources of
potential returns. By the year end, he expects that multi-strategy and fixed
interest based strategies will account for half of the global hedge fund
industry’s $1,500bn assets. Previously the industry was dominated by
equity-related strategies - to the extent of 2/3 as little as five years ago.
James Vinci, managing director in Morgan Stanley’s hedge-related prime brokerage
business, believes that this is, at least in part, due to the development of a
growing number of derivatives products - “Credit default swaps and other
products have made capital structure arbitrage [exploiting differences between
asset types] a lot easier - you can now expand your fundamental view of a
company into all securities markets ... So, if you’ve been doing an equity
analysis of a company, you can leverage that expertise and your existing
infrastructure to find opportunities in other areas,” i.e. find out something
good (or bad) about a company and use that information not just in the equity
markets but also in debt, futures, options, swaps and other markets, where the
information can yield extra and often better returns than the overcrowded equity
markets. “It’s a question of hedging your business model. If your particular
strategy is out of favour, you have the ability to use your infrastructure to
achieve alpha in other types of securities rather than having an asset allocator
think that they need to pull their money out of your fund, you become the asset
allocator, and move the money around between strategies within your own fund.”
Hedge funds are increasingly taking on additional expertise in other areas, e.g.
complementing existing equity strategies with credit strategies - but the funds
expanding into multiple strategies mainly tend to be those with large,
established infrastructures. According to the report, the 400 largest funds by
assets under management control 80 percent of the funds within the multi-asset
class and fixed income strategies - both of which are sectors favoured by MBMG
and exploited mainly via the expertise of our hedge fund partners, Man
Investments and through our niche hedge strategy advisors, Castlestone. The
message seems pretty clear - the economy is in trouble and therefore bonds and
alternative strategies are better than stocks.
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The above data and research was compiled from sources believed to be
reliable. However, neither MBMG International Ltd nor its officers can accept
any liability for any errors or omissions in the above article nor bear any
responsibility for any losses achieved as a result of any actions taken or not
taken as a consequence of reading the above article. For more information please
contact Graham Macdonald on [email protected]
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Snap Shots: Why your brain is better than an electronic brain
by Harry Flashman
The current modern world will be known in the future as the
“lazy” generation. Forget about the “Generation X” and all that
fanciful nonsense. The world is becoming lazy. We are now so
‘smart’ we can do everything electronically, and technology
delivers us the best of everything. Anyone who has sat at a
computer while it crashes might disagree. Technology is still
flawed.
 Picasso
by Penn
However, let us turn to photography. With modern cameras able to
produce perfect photographs, according to the publicity sheets
if nothing else, why would I use a battered old Nikon FM2n,
which is manual in operation? Am I too old to understand the new
technology? Surely not, as again, according to the blurb, all I
have to do is set any new camera on A for Automatic and its
little electronic chip brain does all the rest. I do not need to
know “how” it does it.
Unfortunately, this is not the case, in fact quite the reverse,
as there are many situations where your brains beat electronic
brains. Do not listen to the technocrats, the sales personnel,
or the guy with the new digital camera next door, but listen to
me!
The first area is that of focussing. I have written about this
many times, but modern auto-focus cameras deliver more “out of
focus” shots than manually focussed cameras. Why? Simply because
the camera’s electronic brain has no idea what the subject of
your photograph really is. The electronic gizmos sharply focus
on a small spot right in the centre of the viewfinder, and if
that spot isn’t directly over your subject, you have just got
yourself a fuzzy photo. A classic example is the shot of a
couple. There are two heads, one each side of the magic central
spot, which is then making the camera focus on the background,
several kilometers away!
The next good reason to go manual is when you wish to take an
action shot. You want to “stop” the motion, so you know you will
need a fast shutter speed. Takes one twist of the dial and I’ve
got 1/2000th of a second. With the fancy digital camera, you
generally have to push a button to get the “menu”, scroll down
to find the “action man” logo and select “on”. I was many times
quicker than you - and, what’s more, I got to select the shutter
speed I wanted. You get what the camera decides you want! There
is a big difference in stopping a speeding railway train
compared to stopping Miss Lotus Blossom as she jogs past your
front gate. Manually you can select that faster shutter speed
from the complete range - even to the point of allowing a little
blur to show dynamic movement. The electronic brain cannot do
that, sorry!
Likewise when you want to make the romantic portrait by the
window. The suffused light from the white curtain makes for a
soft quality to the photograph. But does the electronic brain
know this? No! It hasn’t a clue. You have gone through the menu
and scrolling bit, and now you (or rather “it”) have a camera
ready to go in the “portrait” mode, with a wide open aperture to
give a short depth of field. Unfortunately, as you compose the
shot, all it “sees” is a strong area of light and reduces the
amount of light going to fall on the film by upping the shutter
speed (because the aperture is fixed in the portrait mode).
Guess what this does? It gives you a pale background and dark,
dark, features on the subject, and if your subject has a dusky
skin to begin with you have just turned it black.
Another area where the electronic brain is clueless is when you
want to take tricky shots using the flash. By setting the
aperture and the flash power together, I can then, by fiddling
around with the shutter speed, lighten or darken the background,
even in daylight! Yes, by having total manual control I can use
the flash at full power in the bright sun, something the
electronic brain would consider a no-no!
For creativity and the sheer “joy” of photography, use your
brain instead of the camera’s. Yours is much better!
Modern Medicine: Is your mobile phone killing your kids?
by Dr. Iain Corness, Consultant
I read a banner headline the other day which claimed, “Hours
of chatting on a mobile phone are suspected to be slashing male fertility
around the world, new research shows.” It went on to say that, “Men who use
mobile phones for more than four hours a day produce fewer and poorer
quality sperm, according to results of a study released at an American
Society for Reproductive Medicine conference in New Orleans.”
This is just the latest assault on mobile phones which have in the past been
blamed for pilots losing their way taxiing to the terminal (after all, you
are expressly warned not to turn them on until the plane has stopped), brain
tumours, and now an attack on one’s manhood. I mean this is so serious, we
should never keep mobile phones on our laps, or heaven help us, slipped
between your legs as you drive the car. Next time you are standing at the
urinal, don’t shake it, Willy the wonder wand might fall off, if we are to
believe all this “research”.
After all, London’s Daily Mail reported that doctors think sperm counts and
quality might be damaged by electromagnetic radiation emitted by handsets or
the heat they generate. And the Daily Mail is an authority, of course!
But the Mail wasn’t the only newspaper to carry the dire warnings. The
Independent said the study suggested that microwaves from mobiles appear to
reduce the number, mobility and quality of sperm by almost half, to the
point at which some men might become infertile. Almost 1 billion people
around the world use mobiles and in some countries the number is growing at
20 to 30 percent a year, The Independent also said as a warning to society.
However, I too have done my research and can prove that I have identified
the world’s greatest killer. In fact, my research shows that in Thailand
last year, this factor was significant for 92 percent of the people who
died. Yes, a staggering 92 percent of people who died last year wore shoes.
What further proof is required? The statistics prove it! How do you argue
against 92 percent? Shoes are the nation’s biggest killer!
Of course, this is fallacious use of the numbers. Always remember that there
are lies, damned lies and statistics. Just because something happens does
not mean that the cause is what you suggest it is. You are maybe measuring
factors that have no relationship to the outcome. And I believe that this
latest barrage against mobile phones comes in that basket.
Do you honestly believe that by sticking a mobile phone to your ear, the
electromagnetic radiation (or heat) generated, slides down your male body
and blows your gonads to bits? I think that common sense would perhaps
indicate that this is nonsense, pure and simple nonsense.
I think it was even more interesting that the person who gave the scientific
paper was an Ashok Agarwal, who admitted they did not prove mobile phones
were damaging male fertility, but he called for more research. “People use
mobile phones without thinking twice what the consequences might be,” he
said. “It is just like using a toothbrush, but mobiles could be having a
devastating effect on fertility.” Can you see where he’s leading next? Your
toothbrush is probably making you go blind.
What is not said in all these shock, horror headlines, is that these
research chappies in the hallowed halls of academia need finance to keep
going, and they are all in competition with each other to grab a slice of
the research dollar. The more shock, horror headers they can get, the more
likely they are to get further funding. It is the money train again.
Now there are groups doing genuine research into the malaises of mankind,
and the influence of cholesterol on cardiac deaths is a classic example. The
Framingham study kicked it all off, and it has been progressively studied
since then. High cholesterol is an adverse factor as far as your cardiac
condition is concerned. Believe it. And is unaltered by mobile phone use.
Believe that one too.
Beware of ‘scientific breakthroughs’ reported in the popular press. It may
just be fishing for funding.
 Heart to Heart with Hillary
Dear Hillary,
Is Devis from Dixie real (Pattaya Mail Vol XIV, No. 45)? He managed to get
his girl to the US, manages to get her away from the family and the greedy
relatives, gets her back to the US after running away to Thailand, and he is
as happy as a pig in a dunghill. This has to be the most amazing story ever
told. Honestly I kinda wonder if you didn’t make this up Miss Hillary? Was
he for real?
Thomas from Texas
Dear Thomas from Texas,
Or should that be Doubting Thomas from Texas? I can assure you, my
unbelieving Petal, that Devis from Dixie wrote in with a very genuine
letter, and he sounded a very nice man when he finished his email with “I
know that not many of your submissions turn out as happy as mine, but my
story can provide hope for those that still looking.” Are you still looking
too, Thomas? Take heart, there are women out there who are looking for
genuine men, just as you are looking for a genuine woman.
Dear Hillary,
There has been plenty of writers to your great column for many weeks
recently all with the same problem. Where to find a good woman? I would like
to tell them all that they are more likely to find a good woman here in
Thailand than they will in their own western countries. The women here are
brought up to respect their husbands, not like the ones back home who are
out to get every red cent you ever earned. Sure there are ones here that
want to get into your wallet as well as your pants, but you can soon pick
‘em. That’s what I reckon is amazing here is that these guys don’t recognize
them straight off. There are easy rules of engagement, and I don’t mean the
engagement ring kind. If they want the lobster thermidor first time you take
‘em to a restaurant, then don’t even bother going to the desserts. She is
out to get ya right in the hip pocket. Any girl that’s dragging you down to
the realtors to get a house for Mama/Papa, then you deserve what you get.
And why do they need a motorcycle, when the baht busses are just so cheap?
Just keep your head on straight and look out for the bad ones, and you’ll
eventually get a good one. I should know, I’ve been lucky too, but then my
girl was just a simple shop girl, and not the flashy kind that attracts the
money.
Simple Sam
Dear Simple Sam,
Thank you for your somewhat mixed up letter, Petal, but it was obviously
written straight from the heart. I am glad that you found your good lady,
but you shouldn’t say “just a simple shop girl”. Shop girls work hard and
have long hours and have to be honest. This is where the true partners can
be found, not in the beer bars. If you want a kilogram of cheese, you don’t
go to the hardware shop to look for it, now do you? Some of the newer lads
should pay heed to your ‘rules of engagement’ too.
Dear Hillary,
Having given a young lady, who works in the local hostelry, some shelter for
one night, I now find that when I drop in for a beer and a chat, all the
other girls rush off and get Miss Wunnite Satand for me. This would be fun
if I actually wanted to chat to this young lady, but there is another that
interests me more. How do I get over this problem and get to speak to the
one I want, not the one the others want me to see? I also understand that
there might be a loss of face here.
Jack
Dear Jack,
I wish all the questions were as easy to answer as this one. The way around
this is to be honest and tell your Ms. Wunnite Satand (lovely name, isn’t it
– I’m sure you didn’t make it up) that you would like to speak with her
sister Ms. Neksnite Satand and could she bring her over and here’s 100 baht
for your trouble. She will understand and co-operate fully. If you have
tipped a little heavily before, then be prepared to double the finders fee.
Face can be returned with a few examples of folding currency.
Dear Hillary,
When we go to the beach every Sunday, our day is spoiled by the never ending
stream of beach vendors all trying to sell bolts of material, food,
sunglasses, inflatable toys, model airplanes, massages, ice creams, fairy
floss or nail polish. What can be done about them? Surely the person in
charge of the area could tell them to go, but it doesn’t seem to stop them.
Have you the answer to this problem?
Browned off on the beach
Dear Browned off,
Hillary agrees with you. These vendors are a pest. However, if you have
transport, then select a beach further down towards Bang Saray, or even down
to the Rayong beaches. The vendors can’t trudge that far down. Mind you,
there’s no-one to bring you a nice cold beer either! The choice is yours.
Learn to Live to Learn: A Principal of principle II
by Andrew Watson
Round Square in action
If you’re talking about measuring education of the ‘whole child’ then Kurt
Hahn’s IDEALS; Internationalism, Democracy, Environment, Adventure,
Leadership and Service, should be evident everywhere you go in the school.
They are symbols of a value rich society. Are they consciously encouraged at
Regents? “The round square philosophy is very, very real in this school.
Indeed they are. IDEALS permeate everything that happens and they are one of
the reasons why I applied to this school. I didn’t know if they were going
to be as real as the website said, but I found (to his evident delight) that
they were actually more real. You’ve only got to walk around the school and
meet the kids to see what it does.”
With disarming and fearless candour, Mike gives me an example, “People ask
me at interview, ‘Democracy; how do you do that? It’s a bit woolly.’ Well, I
can tell them that here, it really happens. On Monday at the globe theatre,
the secondary school was electing house captains, the round square committee
and student guild members. These kids were passionate about electing people
to represent them and the kids on stage were passionate about being elected;
and it wasn’t just the confident ones! This is what is so marvellous about
this school - it’s not just the natural leaders or those wanting the
prestige and the power. The students were up there because they were
operating in an environment which is a real democracy in which every child
can stand up and say, ‘This is what I think!’ It’s very, very powerful.”
Mike’s eyes were shimmering with belief, like a man who has seen the
promised land. He went on to articulate a dynamic and refreshing vision for
redefining where and how teaching and learning happens at Regents; “One of
things I want to do is bring together the formal academic curriculum with
the extra curricular ethos embodied in IDEALS. Let’s take for example, our
outdoor education centre on Koh Chang, a wonderful place. Traditionally,
it’s been just that; an outdoor education centre delivering fantastic
outdoor education, but I think it should be integrated into the curriculum.
We should be delivering Geography and Democracy out there! The curriculum
leaders within the school should be working with the outdoor education
centre.”
It sounds very much like he’s after the golden fleece of a seamless
transition between ethos and curriculum goals. It’s remarkable how far a
little imagination, enthusiasm and drive can take you. But you have to be
careful, surely, not to let go of your principles on the way?
Mike’s answer was ‘In loco parentis’ (the teacher’s raison d’etre)
incarnate, “I operate on a number of principles and one of them very
genuinely is that as a father I look at everything, whether it’s quality of
teaching, health and safety, anything; and I ask myself ‘would I be happy
for my child to be there?’ If there’s something that I wouldn’t be happy
about, then that’s not good enough for someone else’s child either.’”
You’d expect his staff to share that view, I suppose. I wonder, why are
staff in his school of such very high quality? “What I look for is somebody
who cares about every child - it is that care which is fundamental. In
Maslow’s hierarchy of needs, if you don’t have a teacher who is interested
in the lower levels of that hierarchy - the happiness, the security and the
boundaries - then self-actualisation is not going to happen. So I look for
teachers who not only care but who are prepared to give kids the boundaries
that they need because all of that has got to be in place before you start
really teaching and getting kids to reach their potential. So I’m looking
into the heart of a teacher when I appoint them. You have to care about the
kid, whether they’re a problem or a headache or whatever.” Quite so.
He’s on a roll and impossible to stop now; “I think that teachers who have
come from a background of teaching big classes with kids who don’t
necessarily want to learn, understand that you have got to get your teaching
right for every kid in the room. If you get it wrong for Johnny on the back
row, even though you’ve got it right for twenty-nine others, it’s not going
to be good enough. I’m looking for teachers who are going to look at the
needs of every child in the classroom. I want teachers who deliver a
well-planned lesson to meet the needs of all the kids sitting in front of
them.”
That’s fine in theory, but in order to carry out any task with such
attention to ethical, moral and professional detail, absolute devotion to
the job is surely required. Surely that’s the same for the Mike? “It’s the
sort of job that you’ve got to love. There are huge challenges and
considerable stresses and if you don’t love it - if you don’t get excited by
the challenges - then they become obstacles.”
Music to my ears; the maxim, “there are no problems only solutions” has
always been close to my heart. Mike seems to agree, “As long as you keep
thinking like that then everything becomes exciting.” A positive mental
attitude like this also helps you cope with the imperfections of life. By
now, I’m not in the least surprised to find Mike to be self-effacing; “I
don’t get everything right, I don’t win all my battles. I don’t make the
best judgments every day but what I constantly try and do is reflect and try
and learn how I could have done better.”
So is looking in the mirror the most important thing? “I think you have got
to be true to yourself. You have to be prepared to compromise in this
business but you have to be true to your own principles. I have to model
them. Once you lose people’s trust, then you’re in difficult territory.
Whilst there has to be pragmatism if you’re going to achieve your goals, in
the bigger picture, as long as you don’t lose your self-respect and dignity
you can keep going.”
And who has to win in the end? I ask, in rather a leading fashion.
“Ultimately the students are who we are here for. The core business of the
school is teaching and learning and any manger who ever forgets that has
lost their way. It’s about kids going into the classroom or wherever, where
they can receive a holistic education that creates greater opportunities for
them. It’s about doing the best job you can for the kids so the parents can
see the quality of education that we deliver at the Regents.”
Mike tells me he wants Regents to speak for itself; but their Headmaster has
done a pretty good job himself.
Next week: It never rains
[email protected]
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