Portfolio Construction - Part 3

Asian property should be preferred to US property. Also, in view of the fact that the UK (as well as Australian, Spanish and Irish) property markets are about to, at the very least, suffer a correction, a good structured note that shorts UK residential property is probably the first asset that should be on anyone’s portfolio radar right now.
One aspect that determines outlook is investment psychology. It’s worth taking into account local factors. In line with national characteristics US commentators invariably tend to be more positive about the US economy than some more objective external analysts. Also historic factors should be considered (the longer that a bull run endures, the more complacency slips into equity markets which is why “maybe this time it’s different” is the mantra that has cost the most money over the last 5 decades).
Some things do change and become different - other market forces remain constant. We’re constantly disappointed at how many analysts and commentators seem to have a disappointingly weak grasp of history. To us it’s clear that we’re now in the typical calm before the storm that has marked just about every previous major correction. Let’s just look at the views of two expert commentators. Firstly, Roger Gray, CIO of Hermes, who answered a couple of questions recently:
“Q: How likely are we to see a storm in markets?
A: Oh I think we are likely to see a storm. One of the things we know about markets is that they go up and they go down and they are volatile. Of course, there is some variation in the extent of that volatility. But I think it would be naïve to assume that we won’t see a severe bout of stress and volatility in markets. Exactly what the trigger is going to be, we could, of course, explore that speculatively, but certainly there will be a trigger and probably every investor has some ideas to what their favourite potential trigger might be.
Q: And your favourite trigger at the moment?
A: I would say we have got an environment where central banks have been gradually tightening their monetary stance. Inflation has been picking up in the last few years. It hasn’t reached maybe alarming levels, but it is also not comfortably under control. If central banks find themselves having to continue raising interest rates because inflation misbehaves as we move into 2008, I don’t think that the market is really poised for that and a squeeze of liquidity could certainly be a trigger for some re-rating of risk.”
So inflation remains a concern but the removal of the surplus liquidity that has supported the markets for the last few years is Mr. Gray’s biggest concern.
William Rhodes, senior vice-chairman of Citigroup, and chairman, president and chief executive of Citibank recently wrote the following: “Much of the good news has come as a result of extraordinary levels of liquidity pouring into opportunities around the globe. To a large extent this is due to the Federal Reserve’s expansionary monetary policies early in the decade and the US administration’s fiscal stimulus. The yen carry trade has also facilitated the buoyant expansion of investments and leverage evident everywhere today. The low spreads, the tremendous build-up of liquidity, the reach for yield and the lack of differentiation among borrowers have stimulated both dynamic growth and some real concerns.”
Pockets of excess are becoming harder to ignore. Problems in the housing and mortgage area such as the sub prime sector in the US are one such example of excess that should come as no surprise. As lenders and investors inevitably become more discriminating, liquidity will recede and a number of problems will surface. Too many countries and companies with vastly different risk profiles are still commanding similar pricing.
Usually, periods of economic expansion tend to last between five and seven years. We are entering the sixth year of expansion in the US. Against that background, we believe that over the next 12 months a market correction will occur and this time it will be a real correction.
Recent market developments should be seen as a warning. What has been evident for a number of months is that, in the US, we are seeing lagging inflation and slower growth. Whether this means that we are going to have to fend off recessionary tendencies is not yet clear.
During the last big adjustment that started in July 1997 in Thailand and spread to a number of Asian economies including South Korea, followed by Russia in 1998 - and led ultimately to the bail-out of Long Term Capital Management, the US hedge fund - a number of today’s large market operators were not yet in the mix; therefore, they may have chosen not to remember the words of Harry S. Truman, “The only unknown is the history that you have not yet read.”
Today, hedge funds, private equity and those involved in credit derivatives play important, and as yet largely untested, roles. The primary worry of many who make or regulate the market is not inflation or growth or interest rates, but instead the coming adjustment and the possible destabilising effect these new players could have on the functioning of international markets as liquidity recedes. It is also possible that they could provide relief for markets that face shortages of liquidity.
Either way, this clearly is the time to exercise greater prudence in lending and in investing and to resist any temptation to relax standards.
I think that everyone should heed this - prudent diversified 5 asset class diversification is more important now than ever. Don’t say that you haven’t been warned!
To be continued…

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]@mbmg-international.com.com

Snap Shots: by Harry Flashman

Norman Parkinson

As this is the 14th anniversary of the Pattaya Mail as the leader in the English language publications on the Eastern Seaboard, I struggled to find some connection between 14 and photography. There is an f11 and an f16, but no f14 I am afraid. There is a 1/15th shutter speed, but no 1/4th either. Then I remembered Norman Parkinson, and the famous tale of his apprenticeship and the reference to a fortnight, which is after all, 14 days. There is a 14 connection for photography after all.

One of the greats, in any discussions on fashion photography, is the late Norman Parkinson who died a little over 14 years ago, aged seventy seven. Primarily a fashion photographer, he produced many original concepts during his lifetime, and always was one to go his own way, even from the outset.
He was indentured to Speaight of Bond Street, the ‘Court’ photographer in 1931 when he was eighteen years old. Those were the days when you paid to be allowed to work under such important people, and Parkinson’s fee was three hundred pounds to able to learn from the ‘great man’.
Speaight had once photographed Kaiser Wilhelm in the trenches and would regale his students with the tale, and how he used a bed sheet to reflect the light into the face of his famous subject. “What do you think the exposure was?” he thundered at Parkinson. “About a fortnight at f8,” was his cheeky reply. That quick-witted response epitomizes Norman Parkinson’s approach to photography as well. Quick to adapt and an underlying sense of humour.
After leaving Speaight, Parkinson set up his own studio in London. He was twenty one and willing to experiment with lighting and was soon in demand from the young debutantes of the day. However, Parkinson soon felt hemmed in by the confines of his studio, but when Harper’s Bazaar magazine commissioned him to photograph hats out of doors, Parkinson was off.

With a hiatus for the war years where he worked in aerial reconnaissance, Parkinson came back with a rush and worked for the international Conde Nast group, with the bulk of his work going into the British and American Vogue magazines. He is credited as having had an enormous influence on post war American fashion photography, setting the trend in that country also in using the outdoors as the backdrop.
His favorite way of shooting outdoors was “contre jour” (against the light) and to use a fill-in flash to light the foreground. Parkinson did this because when you take a shot with the sun behind you, there is no way you can control or modify the light source, but by using fill-in flash he would retain total control, balancing the foreground illumination against the light from behind the model, as supplied by the great celestial lighting technician.
Like all true professionals, Parkinson carried more than one camera on a shoot and would have two sets of medium format cameras (Hasselblads) and another two sets of 35 mm cameras (Nikons). Before committing the final scene to film, he would check all his exposure settings by taking some Polaroid instant films. He even said in 1981 that he had not used an exposure meter for over twenty years. Mind you, with seasoned pro’s such as Parkinson, he would have been able to guess the settings and be spot on over 90 percent of the time.
Whilst he is best remembered for his fashion work, Parkinson was also a very skilled portrait photographer. With regards to this type of work he said, “I try to make people look as good as they’d like to look, and with luck a shade better. If I photograph a woman then my job is to make her as beautiful as it is possible for her to be. If I photograph a gnarled old man, then I must make him as interesting as a gnarled old man can be.” Norman Parkinson, a true professional, and the author of “a fortnight at f8!”

Modern Medicine: by Dr. Iain Corness, Consultant

The 14 year old problem!

We’ve all been there and done that. Squeezed the zit that came up just hours before that big date, and turned it into a weeping beacon. The cause? Acne vulgaris – a vulgar name for a common condition
There is only a handful of people who go through their teenage years without suffering from acne vulgaris, otherwise known as “Zits”. The official figures are that it affects 90 percent of boys and 80 percent of girls in the 14-17 year age bracket. Now while we always think of it as a condition of adolescence, the bad news is that it appears to be starting to spread into middle age as well. Zits for ever! Perish the thought.
There is a tendency to trivialize acne just because everyone goes through it, but when you take into consideration that acne scarring can be permanent, and that for the adolescent sufferer this can produce depression, social isolation and even suicide, then the condition takes a much higher medical profile.
The actual cause of acne is still not fully understood, though we do understand the disease process. What happens is that there is an increase in sebum production by the oil producing glands in the skin. This is most likely hormonally regulated. (Around that age, the hormones do tend to run a little amok!) This results in blockage of the oil producing gland itself (the follicle) which then becomes invaded and infected by a bug called Proprionibacterium acnes. This results in the pustular Mt. Vesuvius on the face which is the scourge of the teenage years.
Unfortunately, there is much myth surrounding the causation of the zits. The first is that it is caused by eating too much chocolate and fatty foods. Not so, say the dermatology researchers. While I believe there is a connection, the sugary and fatty foods are apparently not the cause. I believe it accelerates the condition, though.
There is also an underlying thought that acne is the result of poor hygiene. Let me assure you that this is not the case. “Blackheads” are not dirt and the dark colour is a combination of melanin and the skin cells and the plug of sebum in the oil producing glands in the skin.
Another problem comes from the fact that teenagers get told that acne is just a “normal” part of growing up and don’t worry about it. While most kids will get the condition, it is not really “normal” and should never be thought of that way.
Another of the great myths is that prescription treatments do not work. This is not correct, the earlier the treatment is instituted, the less likelihood there is of permanent scarring. I am sorry, but I have never been a fan of the proprietary preparations which are heavily advertised on TV. If they can spend that much money on advertising, the expensive tube of wonder goo must have a huge profit margin in it.
So what treatments are available? Basically there are two types – rub it on (which we call topical) or swallow it (which we call oral therapies). The problems that occur are the fact that there is no “instant” cure and treatment may have to be maintained for up to six months, or even longer. There is now an oral form of a group of drugs called retinoids as well, and while these have really produced a small “break through” in the treatment of acne, they are also a very hazardous form of treatment which has to be done under the close supervision of a skin specialist. So don’t go buying them over the counter at your local ‘shady’ pharmacy.
That’s the 14 year old acne story. Don’t just accept it as inevitable – but get treatment early!

Learn to Live to Learn: with Andrew Watson

Some educational conversations…

I took the opportunity recently to transcribe some conversations with international school Heads which go into some detail concerning quite a few topics of current currency. I won’t mention their names, because it’s not really important who they are, except to say that they gave their blessing to the column. I don’t think their opinions can be regarded as contentious, but I do think they are interesting. This conversation relates to “Faith Schools” (schools whose identity is grounded in religious belief; i.e., Christian schools, Jewish schools, Muslim schools, etc.) Nom de plumes courtesy of Tarantino.
Mr. Orange: “If we accept that globally, faith schools are inevitable, shouldn’t they be seen as essential partners in developing educational models? Would not the celebration of cultural diversity be a logical result of such a partnership? (This was not intended to promote a debate on the pros and cons of faith schools, so much as one on the acknowledgement of different aspects of human sociological experience.)
Mr. Blue: “If we reject outright the notion of faith schools, it seems to me we are putting religion outside the sociologically valid arena for learning. Such a position would also presume that religious education ceases to be a genuine form of education when it becomes “Religious Knowledge or Instruction”. In my view, such a position betrays some ignorance of the common messages of the three monotheistic religions in particular, which actually preach the celebration of diversity (The Dignity of Difference, Jonathan Sacks, 1994) and are at their heart, extremely close to the central tenets of a body such as the International Baccalaureate Organization (IBO). For example, the part of IBO mission statement which reads: “The IBO aims to develop inquiring, knowledgeable and caring young people who help to create a better and more peaceful world through intercultural understanding and respect.”
Mrs. Green: “From an ideological stance, yes, I think it would be great to see faith schools as partners in developing educational models, but the point critics of faith schools make is that the very purpose of these schools is to promote their religion, not encourage debate about it. They are imposing beliefs as absolute “truths” and therefore undermining democracy. If so, how do they encourage students “to understand that other people, with their differences, can also be right?” (another part of the IBO mission statement).
Mr. Blue: “I wonder if rejection of faith schools relates to a concern that “faith” may not always be something individuals experience for themselves. Rather in the schooling process it is a cultural belief system that is taught as an absolute truth and therefore could be considered indoctrination?”
Mrs. Violet: “I don’t think it is possible to deny that religion is a part of the sociological fabric of mankind. I think that religious education can only be seen as genuine education when it takes the form of introducing young people to the important part that religion has played in human development. Objections lie in the imposition of the religious values on young people when the imposition is sought as a means of control. Such a “return to rationalism” allows the dominant social group (read “dictator”) to impose their definition of an absolute value.”
Mrs. Green (taking control slightly): “I still take issue on the following grounds; firstly, that students do not need to experience faith in order to attend faith schools. Secondly, if the faith school is delivering education consistent with the message of its religion, then it should not be taught as an absolute truth. There may be aspects of ethical absolutism, which I propose are prevalent in cultural belief systems, whether religious or not. Thirdly (from personal experience), delivering a cultural belief system as an absolute truth is (in my view) inconsistent with the criteria for authorization and the mission statement of the IBO. However, there are many faith schools delivering the IBO’s culturally embracing curricula, which leads me to logically conclude that either some (but not all) faith schools share common ideology with the IBO or that the IBO are being hoodwinked by self-serving religious groups who want to use the ‘branding’ of the IBO as a method for student recruitment. I prefer the former idea. Fourthly, I think it is a mistake to consider faith schools in isolation. In my view, in being identifiably different by espousing a cultural belief system, they are in essence no different from a school which proclaims above all else (for instance) its “Britishness”. After all, “Britishness” I submit, could be viewed as just as incompatible with the concept of “International Education” as faith schools. Fifthly, it is in the IBO’s interests to be as inclusive as possible. The last thing they want is to be seen as elitist. This may seem an unsustainable ambition (and is in many regards being borne out as such by their patterns of growth) but is a laudable ideology nonetheless. So they encourage faith school representation as well as representation from “culturally dominant groups” like American schools, British schools and “international” schools. Sixthly, show me an education system which cannot be considered “indoctrination”. Consider the Western Humanist Imperialist Orientated IGCSE or GCE History syllabus. Where, for instance, is “Britain in Ireland?” Could not the IBO’s mission statement be described as politically left of centre or ideologically “politically correct”?
Mr. Blue (finally cutting in): “I think it’s a valid point about faith being an aspect of human sociological experience. I wonder what happens when schools use faith as its main vehicle of cultural transmission through its curriculum and whether it includes moral, political, literary, cultural contributions also made to society. Does the curriculum of faith schools value and represent particular cultural phenomena over others because those align more with its ideological motives? Does it only choose to transmit the virtues of that particular cultural belief? Do faith schools always give students the option to construct their own knowledge? For example, are they allowed to choose between the Biblical or the Darwinian account of the universe for themselves or does one account become the absolute truth? Or is knowledge construction allowed only in certain subjects where the message of the religion does not conflict with the educational content?”
Food for thought, I hope.
Andrew Watson is a Management Consultant for Garden International Schools in Thailand. andreww @gardenrayong.com
All proceeds from this column are donated to the Esther Benjamins Trust. www.ebtrust.org.uk email: [email protected]
Next week: Education or indoctrination?