WILLIAM DE VIJLDER Blog - in English

Listening to Bernanke: how transparent should the Fed be?

(Opinion piece in De Tijd - 27 January 2012 - http://www.tijd.be/opinie)

Can transparency ever be too much of a good thing? That’s what I wonder when contemplating the Federal Reserve’s new communication policy. I’m not talking about the announcement on 25 January that the US central bank will keep its policy rate unchanged until late 2014, nor about the 2% inflation target. What I’m still struggling with is the publication of individual FOMC members’ long-term forecasts for the fed funds rate. For economists this publication is a godsend, and in a few years’ time postgraduate students will be eagerly writing up PhD theses. You can do a lot with these details: for instance, answering the following questions:
1. how has the average forecast of the first policy tightening evolved in terms of timing and size in comparison with the previous forecast?;
2. is there a correlation between this evolution and data published subsequently?;
3. is there a link between FOMC members’ speeches and individual forecasts (“who endorses which forecast?”);
4. do we need to worry when the individual forecasts range more widely?;
5. when there is a significant discrepancy between the average forecast and what Ben Bernanke says, does this mean that his credibility is at stake and that his position could be undermined?;
6. when the profile of the projected fed funds rate is steep (i.e. when FOMC members predict a rapid series of rate hikes once the first step has been taken), should we be reassured that this path reflects the Fed’s confidence in the economic recovery, or should we be worried that the Fed is agonising over inflation?;
7. analogous questions can be asked if the interest rate profile is very flat: does the Fed believe that the economy will remain weak and will not respond to the accommodating policy, or is the Fed worried about deflation?

In short, more than enough questions to fill up many analysts’ report, but as an investor you will not be much wiser. Bernanke was asked the key question at this week’s press conference: how confident can one be about forecasts for several years down the line? His response spoke volumes: “Our ability to forecast three and four years out is obviously very limited”. You wonder why anyone even bothers to publish individual forecasts over such a time frame.

I have the feeling that Bernanke was worried that the market might be unsettled by the wide spread of the forecasts (from three FOMC members who are thinking about a rate hike this year to two others who would not raise rates before 2016 (!)). Hence his message that the fed funds rate would remain unchanged until late 2014. If we link this to the longer-term inflation target of 2%, the message, although implicit, is crystal-clear: for those who have debts, inflation will gradually reduce them; and for those who have money to invest, they can choose between paying an “inflation tax” (because interest rates are below inflation) or taking more risk.

No wonder that the emerging country currencies surged on the day after the FOMC meeting.

William De Vijlder
Chief Investment Officer, Strategy & Partners
BNP Paribas Investment Partners

27 January 2012

Risk aversion fatigue

Text published in Le Jeudi (Luxembourg) on 26 January 2012 and in Beleggers Belangen on 27 January 2012.

Client meetings in the past few days in Paris, Helsinki and Vienna had already made me suspect a certain degree of ‘risk aversion fatigue’ among investors, and recent market movements confirm this impression. Various factors explain this phenomenon. For one thing, the current attitude towards the Eurozone is one of ‘no news is good news’. In fact, potentially alarming news is shrugged off. Rating downgrades for numerous countries? No problem. Germany is reportedly not keen to increase the EFSF funding? No problem. And the list goes on. One explanation is undoubtedly the growing awareness that the European Central Bank made a very intelligent decision in pumping almost EUR 500 billion of liquidity into the banking system for a three-year period: banks can use the facility if they are unable to refinance their debt paper at maturity or to buy government paper. And what do we see now? Investors are perfectly prepared after all to invest in bank paper and the auctions of government paper in France, Italy and Spain went quite smoothly. In this light, the prospect of a new ECB three-year funding operation in February sounds as music to the ears.

Another contributing factor is the feeling that the US economy is not in as dire straits as thought. Unemployment is falling, more jobs are being created, small businesses are becoming more upbeat, confidence in the construction sector is improving. If it goes on like this, the current consensus forecast of 2.1% growth for this year will need to be revised upwards. The pessimism of last summer when many feared a new recession is already a distant memory. Interestingly, since last summer the US indicators have systematically surpassed the expectations: despite the overwhelming amount of data, predicting the economy remains a hazardous business.

The emerging picture looks very different from what was deemed possible between Christmas and New Year, when the mood was still doom and gloom. Now it would seem that bad news such as certain corporate results or the relentless rise in oil prices due to the weaker euro has no significance. So the problems have by no means disappeared, even though the newspaper coverage has become less intense. Undoubtedly, the traditional seasonal effect is also playing a role. The equity markets tend to do better in January than in most other months, as many investors think in calendar year terms: they avoid risk towards the close of the year if the results are good at the end of November and start building up risk positions at the beginning of the year when they can start all over again with a clean slate. There is, incidentally, an interesting asymmetry in this respect. When stock markets rise, the expected future return falls, because good news has already been priced in. So what you don’t want at the start of the year is to fall behind the pack, because that means you need to pedal twice as fast to catch up (‘twice as fast’ refers to the fact that the expected future return has meanwhile decreased). If the stock markets fall at the start of the year, you can reduce your position via a price limit and find consolation in the consideration that the expected return has increased (because markets typically fluctuate more strongly than the fundamentals). So for now, let us all enjoy the January effect and prepare ourselves for the European summit at the end of this month, which will no doubt provide a timely reminder of the challenges still awaiting us.

William De Vijlder
Chief Investment Officer, Strategy & Partners
BNP Paribas Investment Partners
19 January 2012

LTRO adds to pent-up demand for risky assets

What would have been the decline of European equities if the 3 year long term refinancing operation (LTRO) of the ECB would have seen a lukewarm response of banks?  I suppose significant considering that the enthusiastic response seen yesterday (EUR 489 billion taken up by 523 banks) only had a very short-lived positive impact on equity markets. Does this mean that the entire operation has been pointless from a market perspective? Not at all. Importantly, investors will have a more relaxed feeling about the considerable refinancing of bank paper that is due to take place next year. If investors would not reinvest all of the maturing paper, the banking sector liquidity needs would be met by the refinancing operation in December 2011 and a similar operation in February 2012. 

Admittedly, the LTRO does not address directly the financing of budget deficits of eurozone members although indirectly there is a link when banks use the liquidity provided to buy government paper which is then used as collateral for loans from the ECB. For that reason, a country like Spain had seen quite a decline in its 3 year bond yield after the announcement earlier this month that the 3 year LTRO would be organised. The key question is of course to what extent liquidity will indeed be used to buy government paper. We’ll have to wait and see. One should expect this will be function of the progress made in other areas and in particular on the new governance model agreed upon at the latest EU summit. The upcoming political summits will (again) be crucial.

Against the background of the negative comments in many analyses and articles on the absence of a bazooka (a highly leveraged EFSF, ECB as buyer of last resort), on the outcome of the most recent EU summit as well as on the LTRO (I’m referring to the negative equity market reaction), there is a risk of losing sight that gradually progress has been made:

1. The ECB has eased it policy (cut in the official interest rate; two 3 year LTROs; facilitating funding via covered bonds; reducing the reserve ratio from 2% to 1%; etc) which will give a considerable boost to liquidity (the reduction in the reserve ratio frees up EUR 100bn)
2. The firepower of the IMF is being increased
3. Governments have committed to a fiscal policy which will bring the structural deficit back to maximum 0,5% of nominal GDP. Automatic correction mechanisms are foreseen as well
4. The entry into force of the European Stability Mechanism has been accelerated and an emergency procedure for decision making has been introduced
5. The ECB has accepted to act as the agent of the EFSF which indicated the latter is getting ‘ready for action’

Clearly, there are still many uncertainties, notably on translating the new governance framework into legislation, and investors understandably adopt an attitude of ‘better be late than sorry’. Risk aversion comes with a price though, it is sufficient to compare the level of short term rates to inflation. The liquidity which has been put in the system via the first 3 year LTRO and the reserve ratio reduction and which will be complemented by the second 3 year LTRO (which probably will again be successful), in combination with an overweight of low  yielding low risk assets and safe havens create a huge pent-up demand for risky assets. The big question is when this will be unleashed. 2012 is about spotting this catalyst.

William De Vijlder
Chief Investment Officer, Strategy & Partners, BNP Paribas Investment Partners
22 December 2011

Three betas and an alpha: managing under uncertainty

Last week I participated in a panel debate organised by a Dutch financial magazine. It lasted about two hours and the word ‘uncertainty’ was used countless times and quite rightly so. What we are experiencing today is rather extraordinary and puts investors in an uncomfortable position. Historical reference points are lacking. In a normal business cycle, past behaviour of economic time series can give guidance for the future. The same holds for market ‘cycles’ (I use inverted kommas because I want to avoid creating an impression that these cycles are deterministic). Today, recovery is slow and there are recurrent worries about a re-lapse into recession. Monetary policy is ineffective thus far, hence QE2 and Operation Twist in the US. As far as market cycles are concerned, we seem to be in a permanent high volatility/high correlation regime where risky assets are priced off a ‘to be re-defined’ risk free rate of return. In summary, uncertainty is high. Referring to the great economist Frank Knight, in dealing with uncertainty we do not have reference points, statistical distributions are lacking and using the word ‘probability’ in assessing uncertain outcomes (as opposed to risky outcomes) is meaningless.

How do you deal with uncertainty as an investor? How do you handle a situation where traditional approaches and metrics become less reliable because the outcome can be completely different depending on the occurrence of some uncertain event? I differentiate between different behaviours.

1. caving in. This is the equivalent of hiding in a bomb shelter. One invests with a short horizon (to avoid interest rate risk) in a high quality deposit or in high quality treasury bills in the home currency. This is fine if real interest rates are positive but it is getting expensive when they are negative because of the opportunity cost of missing more attractive albeit riskier returns. Under extreme risk aversion, nominal short term rates on treasury bills can even become negative, as we have seen in Germany recently
2. diversifying. Always a good idea but the realisation of specific uncertain events can have a big impact on portfolios which a priori are well diversified. Diversification isn’t the all encompassing answer when correlations spike
3. use rules to cut your losses. This is about downside risk management. Stop-losses protect against the behavioural bias of ‘let’s hold on to the position because it’s too late to sell anyhow’. It does mean that these rules seek to protect against ‘further’ downside implying that the initial hit has already been taken
4. do more homework. Spending more time on analysis before deciding can be a good idea but it’s not a guarantee for success in dealing with uncertainty which by definition is unpredictable
5. work on portfolio construction. I will elaborate on this in the next paragraph.

Portfolio construction is about deciding which exposures to take in an investment portfolio. These exposures can be looked at from the angle of asset classes (this is the traditional approach: equities, bonds, commodities, etc) or from the risk factor angle (equity market risk, value versus growth exposure, small cap versus large cap exposure, credit risk exposure, yield curve exposure, etc). Whatever the angle, all of this can be put under one denominator: beta exposure. In addition, one can also have idiosyncratic exposure also known as alpha exposure based on convictions on individual stocks and issuers.

How can portfolio construction, i e allocating between alpha and beta, help in addressing uncertainty? Alpha can be particularly useful when market direction is completely unclear. In such an environment the expectation is for a low return and a wide range of possible outcomes (low return with high volatility). If one needs to have equity exposure because of strategic benchmark considerations (e g in case of pension funds, foundations or private investors with a long horizon), seeking to exploit alpha opportunities using active management is a good idea provided the skill is there. Realising an excess return will be all the more appreciated if the market return (beta return) is low. Alpha can even be useful in the absence of a strategic exposure to equities: the investor will then opportunistically allocate money to carefully selected equities seizing opportunities offered by markets which faced with uncertainty tend to overshoot.

What about beta in the portfolio construction? Here I distinguish between three betas:
1. traditional beta. This is the return offered by exposure to risk premia (equity risk, style risk, size risk, default risk, yield curve risk, etc). Ideally different exposures are taken simultaneously and in an intelligent way to exploit the imperfect correlation between the return streams. However, as mentioned above, diversification benefits go down when uncertainty spikes
2. smart beta. This concerns the pay-off for the exposure to a risk factor but whereby that exposure is taken in a ‘non-traditional’ way. In recent years an increasing number of approaches have been popularised which have a more attractive return/risk ratio than traditional capitalisation weighted benchmarks. In a world of increased uncertainty minimum variance and low volatility portfolios are particularly interesting because they offer low absolute volatility in combination with attractive returns and in the majority of cases they deliver superior returns to cap weighted portfolios
3. transformed beta. The return offered by exposure to risk premia is transformed either by applying rules (as explained above) or by investing in instruments with an a-symmetric pay-off (convertibles, hedge funds, capital guaranteed products, options)

In summary, dealing with uncertainty is extremely challenging because the traditional investment process reaches its limits, in other words markets become less predictable whatever the process (qualitative, quantitative) used to define the views. Combining three betas with alpha allows the investor to come a long way in addressing the challenges which the former US Secretary of Defense Donald Rumsfeld used to label as ‘the (un)known unknowns’.

William De Vijlder
Chief Investment Officer, Strategy & Partners, BNP Paribas Investment Partners
9 December 2011

2012: clouds, clouds and more clouds…with brief sunny spells

Everyone is familiar with the experience: you are on the beach and the sun that was shining so brightly has disappeared behind the clouds. You look up to see how fast the clouds are moving, hoping for a ray of sunshine. That is roughly what we can expect from the stock markets in 2012. The large dark cloud that has been hanging over the market for some time is that of the eurozone crisis. Let’s hope that the (umpteenth) crucial summit of 9 December will provide a bright spell. However, though very welcome, that will still not lead to permanent sunshine. The next cloud is already on its way: the recession in Europe. Looking at the Purchasing Manager Index (PMI), we are already in recession and next year the impact of the public spending cuts will also start to kick in (though we should note, of course, that the decline in confidence indicators like the PMI already partly reflects this development). Another factor to be taken into account is that a satisfactory answer to the eurozone crisis would remove the current reluctance among businesses and households to invest and consume. If growing uncertainty weighs down growth, as the IMF has ‘proven’ with hard figures, then a decrease in uncertainty should provide a positive impulse. Nevertheless, 2012 will be a difficult economic year and investors wonder what to make of the consensus forecast of 9% profit growth and 4% sales growth in Europe, which is above inflation. What’s more, margins are already very high. In the US more than 10% profit growth and 4% sales growth, as well as improving margins, are forecast. So this leaves no room for disappointing macro developments. The picture that emerges is one of jubilation if a solution to the eurozone crisis is found, followed by doubts about future profit growth. Assuming that the US economy manages to move up a gear thanks to Operation Twist or Quantitative Easing 3, a further short-lived bout of euphoria will soon make way for a renewed focus on the political uncertainty: if the Administration and Congress have a different political colour, the chances of getting the US back onto the straight budgetary track look slim. Yet another cloud.

So are there any places where the sunny spells may last a little longer? Certainly. US high-yield bonds are clearly cheap: the market is unduly negative about the economic developments. What’s more, the US will not slip into recession and the base interest rate remains extremely low, which will restrict the number of defaults. In addition, emerging market bonds (and particularly corporate bonds) are attractive, offering clearly higher yields than similar-quality bonds in the West. If you buy these bonds in local currency, you can also benefit from the upward potential of currencies that were recently hard hit by the global increase in risk aversion. Finally, emerging market equities are also an alternative worth considering. Though growth in these economies (e.g. China, India and Brazil) is also slowing down, this creates scope for monetary relaxation. Moreover, growth will remain substantial and the relative price/earnings ratio has decreased further versus western markets (the discount is even larger than normal). When the weather outlook is uncertain, holidaymakers tend to book flights to far-flung sunny destinations. That is certainly worth considering in the investment world.

William De Vijlder
Chief Investment Officer, Strategy & Partners, BNP Paribas Investment Partners

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A tipping point?

The disappointing auction of German government bonds this week is open to diverse interpretations.

1. The ‘animal spirits’ theory, which basically entails that investors – for all sorts of inexplicable psychological reasons – had no appetite for buying. That is obviously not much use for an economist.
2. The ‘wake up’ theory. Large investors from outside the eurozone are fed up with the continuing failure to resolve the crisis and want to send a signal by no longer buying German bonds.
3. The panic theory. Investors, both inside and outside the eurozone, fear that the contagion will continue unabated, and that the eurozone recession will be deeper than the mild recession ECB president Mario Draghi recently referred to a. In this case, Germany would get its share of the economic blows, which would push its public deficit higher.
4. The inflation hawk theory. This assumes a ‘deus ex machina’: Germany gives up its resistance to eurobonds or the ECB agrees after all to the unlimited purchasing of bonds. The first scenario could trigger a strong turnaround in economic confidence and suggest that the ECB is fairly quick to decide that its policy is too relaxed. The second scenario could raise fears that unlimited purchasing would ultimately cause inflation. In both cases inflation-averse investors would refuse to buy German bonds at the current yields. I hasten to add, however, that this ‘inflation hawk theory’ has no basis, given recent statements of both Angela Merkel (‘no’ to eurobonds) and Mario Draghi (‘no’ to the ECB as ‘buyer of last resort’).
5. The tipping point theory. Markets have a fine nose for anticipating dramatic events. When the British central bank decided on Wednesday, 16 September 1992, to prop up the pound sterling in the European Exchange Rate Mechanism (ERM) by further raising the base rate by several hundreds of basis points on an annual basis, stock markets rose because investors realised that this desperate measure was doomed to fail. They were right: the pound withdrew from the ERM later that day. Perhaps the reluctance of investors to buy German bonds signals an expectation that a major event is about to happen, that the ‘definitive solution’ is at hand. Judging by recent comments, this seems, at the very least, optimistic; but you could also argue that necessity is not only the mother of invention, but also of compromise and, hence, of a solution.
6. The ‘enough is enough’ theory. This entails that investors are of the opinion that buying long-term German bonds at the current levels is no longer a good idea as the  real coupon rate is negative (inflation is higher than the nominal interest rate).

This last explanation deserves a closer look. After all, until recently, investors were queuing up to buy German paper even though the real interest rate was already negative. Why this change? I see three explanations.

1. Investors no longer believe in a Japan scenario for the eurozone or Germany: there is no danger of deflation and, hence, no prospect of a continuing fall in interest rates.
2. Investors feel they have already invested enough in the ‘safe haven’ offered by German bonds.
3. Investors do not rule out positive developments in the Eurozone crisis in the fairly short term. As an investor, you can respond to this expectation in various ways: aggressively, by buying instruments that have suffered heavily from the crisis (Italian bonds; Eurozone shares); or more cautiously, by buying fewer German bonds and putting the money in short-term deposits. The duration of ten-year German bonds is about 9 years. And as soon as a solution looks imminent, interest rates could easily shoot up by 100 basis points, thus leading to a price loss of 9 per cent. Against this backdrop, the wait-and-see attitude among investors is understandable.

The six different theories are not equally realistic, to put it mildly. If I were forced to choose the least unrealistic one, I would go for the sixth (‘enough is enough’). But even so, it is premature to say that the ‘silver bullet’ solution is near. However, this week’s events suggest that investors believe we are getting closer to a tipping point. Let’s hope that even this modest expectation is not too optimistic.

William De Vijlder
25 November 2011

R-words

Last week was dominated by two R-words: “referendum” and “recession”. The announcement that a referendum would be held in Greece on a yet to be decided question came as a bolt from the blue. Several weeks ago the Bloomberg website had posted a similar report from Greece, but this was denied by Athens the following day. This time it was serious. At least for a few days. The strength of the market response was linked to the introduction of a new kind of uncertainty: would the referendum be about membership of the eurozone, a question which was thought to be taboo until recently? One can imagine the endless media debates between supporters and opponents. It would have been reminiscent of the debates preceding the referendums on the Maastricht Treaty in the 1990s. But these debates were small beer compared to the issue at hand. A second kind of uncertainty was of course what would happen if the Greeks voted “no” on whether to stay in the eurozone. And then there was a third kind of uncertainty, namely whether the Greek precedent would spark calls for referendums in other countries.

So relief all round when the referendum idea was scrapped on Thursday. The key word in this whole saga is “uncertainty”. In this context I recently read an interesting IMF paper entitled “The uncertainty channel of contagion”. The authors show that uncertainty can lead to contagion, regardless of the traditional channels of contagion. These traditional channels include commercial relations (the trade partners of an ailing country become “infected”), or comparable characteristics (countries which are also ailing come under speculative pressure). “Uncertainty” is a completely new channel: surprises on how the situation develops in a particular country raise doubts about the correctness of the analysis for other countries, and these doubts are sufficient to cause contagion in those countries. Or to put it differently: investors do not want to get their fingers burned again and prefer to be safe than sorry, with the upshot lower share and bond prices. The underlying cause: increased uncertainty.

The second R-word is “recession”. There is no uncertainty on this count, at least not according to the ECB president, Mario Draghi, who in a press conference last Thursday spoke of a “mild” recession in the eurozone. Investors should welcome such clarity, if only because it leaves little doubt about the direction of the policy rate: further downwards.

William De Vijlder

8 November 2011

‘Buying a bazooka’: market consequences

Investors have been waiting impatiently for the ‘definitive answers’ to address the eurozone crisis. Interestingly, the recent delays have not had a very negative impact on the markets, which would seem to indicate that investors think that there might be a positive surprise after all.

Without assessing the likelihood and possible shape of such a positive surprise, let’s think of how strong the market reaction could be and how long the party would last. Let’s suppose that a ‘bazooka’, as it is now commonly called, is put in place, i.e. the firepower of the EFSF is increased considerably directly or indirectly (via insurance wrappers). This would mean that countries which hitherto have had difficulty in accessing capital markets would now be able to meet their gross funding requirements (budget deficit + rolling over maturing debt) at less onerous interest rates. It would halt the negative feedback loop we have seen in past months. In this loop, the prospect of a gradual rise in the average interest rate charged on the entire debt (whereby the speed of the increase is a function of the size of the net funding requirement and the maturity structure of the debt, which dictates at which speed debt is “rolled over”) led to increased worries about solvency and hence pushed up interest rates. This in turn hurt private credit demand and the growth outlook. Bank share prices and equity markets in general also suffered.

To be more precise, one can argue that this negative feedback loop will not just be halted, but it will go into reverse. The prospect of financing the gross funding requirements at a lower interest rate than today’s market levels means that the solvency worries will decline. Even with unchanged fiscal policy, the exponential increase in the debt/GDP ratio will be slower. Moreover, countries benefiting from EFSF support will need to conduct an appropriate fiscal policy so this will help in getting the debt/GDP dynamics under control. Tying this all together, this would justify a reduction in spreads. The questions are by how much and how fast? Let’s start from an extreme assumption: all investors take the stance that “the proof is in the pudding”. This would imply that although the gross funding need would be met at lower rates via the EFSF, secondary market bond prices would not rise and spreads would not narrow because investors want to see confirmation that the negative feedback loop described above has been stopped and that fiscal frugality will be applied. By the way, it’s for this very reason that Spain’s decision to commit itself to sound fiscal policy by putting this as an objective in the country’s constitution was a good idea because it enhanced credibility. Undoubtedly, the assumption that investors would adopt a wait-and-see attitude is extreme.

Would the opposite assumption hold? Would investors be tempted to come back en masse to lock in attractive spreads? This assumption seems equally extreme because a lot of them will take the view of “once bitten, twice shy”. It’s hard to imagine that investors who have suffered greatly from their PIIGS exposure would now return as if nothing had happened. The target country allocation in their bond portfolio may have changed structurally because of worries about tail risk. Would this imply that spread contraction would be limited and slow? On the extent of the contraction, this will very much depend on the yields at which “EFSF-protected bonds” would be issued, because these yields would set a floor for the market. On the speed, I think it could be surprisingly quick. Mutual fund investors who manage against a benchmark and who would be underweight at this stage will be tempted to move to a benchmark weight if only to avoid underperformance during a rally. Some might even go overweight, at least for a while, thinking that underweight investors will increase their position and push up prices. From a spread perspective, we might also see a scissors effect with people selling Bunds because the “risk off” trade would switch to “risk on”, thereby pushing up Bund yields.

What about equities? Here again the reaction should be swift and short. Markets will basically re-price future cash flow by revising it upwards moderately and discounting it at a slightly less demanding rate because the eurozone had become a less risky place, warranting a lower required risk premium. At the extreme, such a re-pricing could happen in one shot (a bit like the reaction to positive surprises in US payrolls), although one would expect a rally to attract follow-through buyers to the market and hence last a bit longer. Once this adjustment has taken place, it will be back to business as usual with a focus on a slowing European economy, the prospect of a hostile growth environment in 2012  in view of a synchronised tightening of fiscal policy in the eurozone and question marks about where the US is heading. Get ready for a “flash rally”, but it’s not the beginning of a new trend.

William De Vijlder
21 October 2011

A world of contrasts

Yesterday and today I was in Moscow for meetings at our joint venture. In the evening I had dinner with clients at one of the city’s upmarket hotels. Lined up outside the entrance was a fleet of expensive German luxury cars, all identical in type and colour (brown), waiting to drive hotel guests around the city. But everyone entering the hotel must go through a metal detector. The dinner was fascinating. The Russian economy is booming, there is huge potential for infrastructure development (Moscow is a great place to start with its round-the-clock traffic congestion), the land is overflowing with resources, and earnings multiples are low. What are foreign investors waiting for? (Answer: for the global risk appetite to rebound). The West came in for severe criticism: the insatiable quest for more has led to a ‘debt boom’ followed by a ‘bust’ in the US and the eurozone.

This afternoon I caught a plane to London Heathrow, a train to Paddington and the underground to St Paul’s. The cathedral was surrounded by small tents. One banner read “capitalism is crisis”; another “give me lolly because I can’t fill my trolley”. Things seem calm, but the despair is palpable. The United Kingdom is in a deep crisis and is now acting as a guinea pig to test the right economic policy mix: an extremely tight budgetary policy combined with an extremely loose monetary policy and the umpteenth wave of money creation by the old lady of Threadneedle Street (the central bank). In the lobby of my hotel three hundred metres down the road, two private receptions are in full swing. Groups of champagne-swilling twenty-somethings are waiting for the elevator to the top floor, presumably en route to the bar.

I have dinner with a colleague from Hong Kong who happens to be in London. The economy in Hong Kong is slowing and banks have hiked their lending rates. Fewer Chinese carrying suitcases bulging with banknotes are descending upon Hong Kong. “How are the casinos in Macao faring,” I asked, because I had once read that their share prices closely tracked Hong Kong property prices (both are driven by China). Evidently, the big spenders (who can spend HKD 1 million per visit) are still good customers, but the ordinary man is staying away. Casino operators have resorted to offering cut-price chips in hotels in a bid to lure gamblers back to their tables. The discount is already 5%. I wonder what the discount in Las Vegas is.

William De Vijlder
20 October 2011