Monday, May 29, 2006

The legacy of Greenspan's Put

Maybe you remember the "Greenspan Put"? This was the financial gerrymandering done by Chairman Greenspan to step in to avert disaster by pumping up the economy with more fresly printed notes every time there was some blip on the radar. He has famously said that he knows better how to deal with a bursting bubble than an incipient one, so bring on the bubbles and let Alan take care of the busts.

In Kubrik's A Space Odyssey: 2001, HAL, the mutinous IBM computer, convinced the human pilot of the space ship that they should re-install a faulty part because, whilst they knew it was faulty, they couldn't figure out why or therefore how to fix it, so they would just let it run until it completely broke and then they would pehaps know enough of what was wrong with it to fix it. Sort of the same idea. It expresses an amazing bit of confidence that we can pull disaster out of a fire that we don't know how to control because we have the know-how to rebuild with the ashes. For instance, this bit of financial insouciance from 2003:

HSBC analysts take some comfort in the knowledge that the Greenspan Put is still very much alive, and rate cuts are still on the table if there is any sign of faltering economic recovery:
The market continued to edge higher earlier last week on better than expected economic data.

While the earnings were not particularly strong on a currency-adjusted basis, they met and in some cases exceeded market expectations. This led to a growing market perception that the economy may accelerate in the second half year, which was also alluded to in Mr. Greenspan's semi-annual testimony.

The bullish market sentiment carried on until the release of July employment report last Friday. Unfortunately, the monthly report turned out not as strong as expected, reversing earlier market optimism and casting doubts on the economic prospect. The sentiment was further set back after the ISM index rose less than expected.

The unexpectedly soft employment report may cause a deeper market correction in the near term, followed by a period of market consolidation. However, ample liquidity is likely to fuel interest in bottom fishing given the anemic return on money market funds. The recent sharp sell-off in bond market also tended to enhance interest in equity investment.

Most important of all, the 'Greenspan Put' is still very much alive with various Fed officials making it clear that interest rates will be cut if the U.S. economic recovery falters. The U.S. authorities are determined to reflate economic activities. This policy, in the near term at least, will boost market hopes and bode well for equity trading.

Anyway, after a while, discussion of the Greenspan Put just sort of drifted off into space, like the human who was sent out to re-install the faulty bid on HAL's space ship. Before it disappeared over the space horizon, a few people had some parting words for it. Brad DeLong offered a benediction for it back in July 2005:
Four years ago Barry Eichengreen and I wondered whether the "Greenspan Put" had been a powerful force pushing up lending to high-risk countries in the mid-1990s and pushing up stock prices during the dot-com bubble. But we found a problem: we couldn't find significant evidence that this was the case--indeed, we couldn't find that many mentions of the "Greenspan Put" in the financial press or the financial newsletters in the first place. If it was part of the Zeitgeist, it wasn't in any place very visible to us.

The idea of an important "Greenspan Put" lost plausibility as the Federal Reserve did not take steps to lower interest rates as the NASDAQ fell, but instead waited until it saw signs of slackening investment growth. How could anyone in the aftermath of the NASDAQ crash could speak--as John Makin does--of the Fed as providing "free insurance for aggressive risk-taking"?

Nevertheless, the Washington Post's Nell Henderson thinks it is back. But she rapidly gets badly confused between the effects of (i) good, stabilizing monetary policy which should make one optimistic about the future and cause appropriate rises in asset prices (which seems to be what James Grant is talking about), and (ii) the "Greenspan Put" proper--the belief that government rescues are in the offing--which would cause inappropriate rises in asset prices (which seems to be what John Makin is talking about).

And so the article dissolves into incoherence.
But the Greenspan Put has been studied by other economist folks who talk econo-speak way over Guambat's head, though he does pretend to understand a bit of their English (See, "MORAL HAZARD AND THE U.S. STOCK MARKET:
ANALYZING THE “GREENSPAN PUT”?" by Miller, Weller and Zhang
Since there is no explicit role for monetary policy in our model, in which the real interest rate is constant, we simply assume that the observation of asymmetric monetary policy interventions leads investors to believe that there exists a floor under the market price, i.e., it is as if they have a put option insuring them against downside risks. As this put is available without cost, it must be priced into the stock market to characterize the asset prices under such asymmetric monetary policy.
But now there is more focus on the longterm effects that this "asymmetric monetary policy" may have on the world's market players, and some not inconsiderable concern that Greenspan's Put has lulled the players into a false, and dangerous, sense of security. For instance, Glenn Stevens, the Deputy Governor (and heir apparent) of the Austrlian Reserve Bank, asks, presumeably not rhetorically, "Might not the behaviour of borrowers, lenders, investors and price setters, in response to perceived lower risk, itself work to increase the probability of instability in future?"

This was reported in a Reuters wire report but I have not seen an online version of this quote. Bloomberg reported on the speech and extracted this from it:
Interest rates around the world can't stay low and steady ``permanently'' and central banks will continue to control inflation, Reserve Bank of Australia Deputy Governor Glenn Stevens said.

``While I believe central banks will continue to control inflation over the years ahead, this does require short-term rates to move,'' Stevens said in speech notes prepared for the Securities & Derivatives Industry Association Conference in Melbourne. The speech started at 9:20 a.m. local time. ``They cannot stay low and steady permanently.''

Australia's central bank joined others around the world in raising rates to curb inflation. The Fed has increased borrowing costs 16 times since June 2004 to 5 percent. China on April 27 raised its lending rate for the first time since October 2004. Canada raised its key rate for a sixth consecutive meeting to 4 percent.

The European Central Bank increased its benchmark rate by a quarter point in March to 2.5 percent. Central banks in Thailand and Malaysia have also raised rates this year.

``It certainly seems that long-term interest rates globally have in recent years been unusually low,'' Stevens said.
And John Garnaut, Economics Correspondent for the Sydney Morning Herald ,tried to make it sound as if Stevens thinks the Yanks are just swell for taking the bullet aimed at the rest of us by building up their trade deficit:
Mr Stevens is a widely respected economist, credited with strongly influencing Mr Macfarlane in recent years.

He said an examination of the US current account deficit from the perspective of capital flows, not trade flows, showed the US to be responding rationally to a global savings glut which had pushed down the price of capital.

"I perhaps have a slightly different view to much of the conventional wisdom here.

"I think that in the past decade the behaviour of the US has actually been stabilising for the global economy.

"I think to no small extent the rise in the US deficit was a lot to do with a rational response on the part of Americans to changes in prices.

"If it was really the case that the US was dragging this capital out of a world economy that was reluctant to give it, the price would have gone up. But the price didn't go up, it went down.

"The quantity rose and the price fell - the supply curve moved.

"I think one might say it was a good thing that the Americans and others were prepared to use that capital because that kept the global economy going a lot better than it would have if things had been different.

"That isn't to say that all of that can go on indefinitely. It can't."
David Uren, Economics correspondent for The Australian, focused on Stevens' concerns over the complacency of the credit markets:
EXCESSIVE home borrowing could bring the long run of prosperity to a messy end.

Reserve Bank deputy governor Glenn Stevens said the Australian and world economies had enjoyed 15 years of unusually smooth economic growth and low inflation.

But he told a Melbourne conference at the weekend there was a danger people would use that success as a reason to act and borrow recklessly.

Mr Stevens said households felt justified in taking on much higher levels of debt than in the past because of consistent growth and low interest rates.

But the level of household borrowing was now so much greater than ever before that policymakers such as the Reserve Bank did not know how households would react to an economic downturn.

"Nor, for lenders, could historical rates of default on mortgages be assumed to be a good guide to the future."

Mr Stevens said the world had been through long periods of sustained growth with low inflation and interest rates before, such as during the 1950s and 60s, and it was possible this experience would be repeated. But he warned that now was not the time for standards of risk and credit management to become lax.

"Experienced hands almost invariably have an uneasy feeling about developments," he said.

"In part, that unease reflects a conviction that the business cycle and the cycle of greed and fear in the markets have not gone away."

He said the worry reflected changes in behaviour such as excessive home borrowing that could increase risks or create new ones.

At some point, the ability of the financial system to withstand shocks would be tested. "But exactly when the bell might ring to signify a new phase of the game, and what might be the catalyst, we cannot say."

He said that as well as home borrowing, leveraged buyouts by companies and the credit derivatives market could also bring the sustained period of economic growth to a halt.

John Mauldin covers a new working paper by the Bank for International Settlements in his recent weekly Thoughts from the Frontline which he calls, "The Problem with Stable Prices." The abstract of the BIS paper reads:
No one in the industrial countries should now question the substantial economic benefits associated with reducing inflation from earlier, high levels. At the same time, history also teaches that the stability of consumer prices might not be sufficient to ensure macroeconomic stability. Past experience is replete with examples of major economic and financial crises that were not preceded by inflationary pressures. Conversely, history shows that many periods of deflation, based on rising productivity, were simultaneously characterised by rapid growth. Recent structural changes in the global economy imply that this history might
have more contemporaneous relevance than is commonly thought. If so, the implication is that policies directed to the pursuit of price stability might have to be applied more flexibly and with a longer-run focus than has recently been the case.
As Mauldin summarises it, "Cutting to the chase, White suggests that central banks need to reconsider thecurrent policy of solely targeting inflation and look at the other factors, like asset bubbles, etc." And as Guambat puts it, "Let's not wait until the bad guys make off with all the money and lose half of it on a drunken orgy before we round 'em up -- Let's head 'em off at the pass!" The BIS paper, and the Mauldin explanation, point out that the asymmetrical monetary policy (ease with disaster then coast until the next disaster), raises questions as to the sustainablity of the economy in the following ways:
Moreover, with prices subdued, monetary policy could be used to good effect to resist successive threats to growth arising from financial disturbances.
This success admitted, whether growth will prove sustainable remains an open question. One possibility is that the cumulative monetary stimulation seen to date will eventually culminate in overt inflation. Recent sharp increases in energy and commodity prices could provide a foretaste of such an outcome. With the short-run Phillips curve now seemingly flatter than before, reversing any shift upwards in inflationary expectations might be costly and necessitate a more significant tightening of monetary policy than is currently expected.

Another effect of this cumulative stimulation has been an upward trend in household debt ratios in the United States and in many other countries, accompanied by a trend downward in national savings rates, both to new historical records most recently. [A factor Glenn Stevens touched on.] In China, in contrast, domestic investment has been drifting up and now stands at a record high proportion of GDP. Moreover, in global asset markets, many risk premia have also descended to record lows even as house prices have risen to record highs. Global current account imbalances are also at unprecedented levels, with those countries having the largest external deficits generally exhibiting the largest internal imbalances as well. Should any or all of these series revert to their historical means, the sustainability of future global growth would also be open to question, perhaps leading to a deflationary rather than an inflationary outturn. To combine the two possibilities, the worst case scenario would be inflationary pressures, leading to a sharp tightening of policy, which in turn could precipitate a process of mean reversion in a number of markets simultaneously.

A further problem arising from the conventional approach is that, as imbalances accumulate over time, the capacity of monetary policy to deal with them could also become progressively reduced. A combination of raising rates less in the booms than they are lowered in successive busts could eventually drive policy rates close to zero. Once at the zero lower bound, the Japanese experience indicates that the power of monetary policy to stimulate the economy is much reduced. Should the economy then turn down, with inflation initially at a very low level, the possibility then arises that a more disruptive form of deflation might emerge. Were that to happen, it has been suggested that an even more “unconventional” monetary policy stance than that applied in Japan would be called for, with all its associated uncertainties. That this was the end point to which the conventional way of conducting policy almost led us would, in itself, seem a powerful argument for further refining the basic framework.
One of the major policy changes recommended by the BIS paper is that the Central Banks take a longer view of the economy and the things they do to help it on its way. It looks to me that this longer view would give scant regard to the stock market cycles in such a way that the Greenspan Put would expire out of the money. As they put it in their concusion:
Perhaps the greatest change required in a new framework would be to ensure that it rested firmly on minimising rather than maximising principles. Recognising the costs of cumulating financial imbalances, constraints would have to be put on policies designed solely to deal with today’s problems, given that they risked creating significantly larger problems in the future. Clearly it would not be easy to convince those affected by higher interest rates that tightening was required, not to resist inflation over the traditional horizon, but to avoid an undesirable disinflation over a still longer period.

Given this likelihood, it would be all the more important to have an institutional framework to encourage an appropriate policy response to the growth of perceived imbalances. Ensuring such a response would require both the robust identification of serious imbalances and the provision of institutional incentives to encourage monetary policymakers to respond. Neither of these would be easily provided.

Concerning the first, research work currently underway on financial stability
indicators needs to be extended. Moreover, it needs to be more widely appreciated that potential damage to the proper functioning of the financial system need not be the only source of concern. Overextended corporate and household balance sheets can also be the source of significant “headwinds”, reducing economic growth to levels well below potential.

Concerning the second, providing incentives to policymakers, they should express publicly their intention to respond to emerging financial imbalances even if, occasionally, this leads to an undershooting of near-term inflation targets. Indeed, there could be merit in understandings which shifted the “burden of proof” so that policymakers had to explain publicly why they chose not to respond to what others might see as a dangerous build-up of such imbalances. To gain government and broad public support for such an altered approach, an educational effort would clearly be required to convince people of the merits of the arguments for change set out above.

Following on these arguments, an altered framework for conducting monetary policy would demonstrate more symmetry over the credit cycle. There would be greater resistance to upswings. This, in turn, would obviate the need for asymmetric easing in the subsequent downturn and the problems arising from holding policy rates at very low levels for sustained periods. One important effect of more symmetric policies is that they would also act to prevent financial imbalances from cumulating over time. This, in turn, would free the authorities’ hands to respond appropriately to the upward phase of any given credit cycle, since there would be less fear of precipitating a crisis. In this way, a virtuous rather than a vicious circle might be more firmly established.


Mt Everest without Fear

The first woman Everest climber was Junko Tabei [1975], a Japanese student & mother, who wrote two books called “Everest Mama-san” & “Yama-o-tanoshimu – Enjoying Mountains” both in Japanese.
She prefers to be known as: "I'm a free spirit. Call me the free spirit of the mountains.” Her comments on climbing are understated:

"I can't understand why men make all this fuss about Everest — it's only a mountain."

"Technique and ability alone do not get you to the top — it is the will power that is the most important. This will power you cannot buy with money or be given by others — it rises from your heart."

“The mountain teaches me a lot of things. It makes me realize how trivial my personal problems are,"

In the last fifty years, more than 75 women have climbed the world’s highest peak, Mount Everest. Of these, only five have ever climbed the summit of K2 since 1954 and have since died. Three women - Wanda Rutkiewicz of Poland, Julie Tullis of Britain, and Liliane Barrard of France – were the first three women to stand on the summit. Unfortunately, Julie and Liliane died on the descent. All three were climbing without extra oxygen. Julie Tullis, from Britain, was a black belt in Karate, a teacher, a mother, and an award winning filmmaker. She died of exposure descending K2 in 1986. Only twelve women have ascended Nanga Parbat in the last 50 years. Of them, two were climbers of K2: Wanda Rutkeiwicz from Poland and Liliane Barrard from France. Liliane was the first woman to summit Nanga Parbat in 1984.
Sue Fear, 43, of Sydney, was the second Australian woman to climb Mount Everest and is a friend of Australian mountaineer Lincoln Hall, who was rescued from the mountain at the weekend after being presumed dead.
A rescue team is being organised to search for her on the 8156-metre Mount Manaslu in Nepal, which she was climbing with Nepali Bishnu Gurung.

But DFAT said Ms Fear, who had been awarded an Order of Australia in 2005 for her achievements in mountaineering and her work for the Fred Hollows Foundation, had been confirmed dead.

Ms Fear's family had been informed of her death, a spokeswoman said.

"Apparently the woman died after falling into a crevasse while descending the summit of Mt Manaslu," she said. "The Australian embassy in Kathmandu is seeking further information and consular assistance has been offered to the woman's family in Australia.''

A close friend of Ms Fear's, who did not wish to be named, said Ms Fear and Bishnu Gurung reached the summit of the mountain yesterday, but on the descent she fell into a crevasse.

"It's understood Bishnu was able to climb out and descend to camp four, where he placed a call to base camp," she said.

The friend said Ms Fear was a "very sensible and calculating climber", who has already scaled four of the world's 8000 metre-plus peaks.

"She is Australia's leading female climber, holding the highest number of 8000 metre peaks - this was going to be her fifth 8000 metre peak," she said.

Mr Hall wrote a book with Ms Fear about her life and climb of Everest called Fear No Boundary which was published last year.

She was Australian Geographic's Adventurer of the Year in 2003.

Prior to her climb, Ms Fear told Australian Geographic Mt Manaslu had experienced excessive snowfalls and strong winds, which added to the "already daunting challenge".

Ms Fear had been climbing the mountain via the "standard" north-east route, the magazine's website said.

She was sharing a permit with four others: an Austrian, and a Japanese party including Junko Tabei, the first women to climb Mt Everest, in 1975, it said.

1979: The first woman, Hannelore Schmatz, dies on Everest descending from the Summit after becoming only the 4th woman to Summit Everest. And more mountain trivia here.

Saturday, May 27, 2006

Is this why it's lonely at the top?

By Richard Glover, May 27, 2006

IT IS not enough to climb Everest any more. You must have a gimmick. Mark Inglis, who climbed it last week, has no legs. Another person is deaf. A third is merely very young. One Australian bloke - faced with a lack of disability of any kind - had the idea of doing it without oxygen, and by starting his walk a really, really long way away.

He was successful. Next time, he'll have to add a blindfold and start his ascent in Hobart.

People are now paying as much as $US70,000 ($93,000) to be virtually "dragged up the mountain by guides", as one mountaineer put it this week. Once they're back home, they have to figure out how to get themselves into the record books.

With Everest, we are now in the land of the hyphenated claim - the first female-over-40; the first gay-plumber-under-25; the first retiree-with-gout-who-forgot-his-medication. ["A Nepalese Sherpa briefly removed all his clothes atop Mt Everest to set a record of sorts on the world's tallest peak, according to local media reports."]

God knows what the world's transsexuals think they are doing. I've just placed the phrase "first transsexual to climb Everest" into Google, and come up with nothing. If I were you, I'd start training now.

It all seems a long way from 1953, when Edmund Hillary and Tenzing Norgay became the first people to climb the mountain - their achievement, curiously enough, reported to the world by the later-to-be-transsexual reporter James Morris. (Yet still today's transsexuals do nothing.)

On radio this week, I asked Hillary about the reality of Everest in 2006. He described how the mountain is now equipped with ladders and ropes - offering permanent help over the difficult bits. He noted that this rather defeated the point.

He is particularly uneasy about the attitude of "get to the top at any cost" - itself a reflection of the big fees being paid to guides. Inglis's achievement - reaching the top with his artificial legs - may be remarkable, but it's been soured by his admission that he walked past a dying mountaineer on his way up.

For Hillary, that shows a value system that's all wrong: people "just want to get to the top [and] don't give a damn for anybody else in distress".

Inglis has defended his own actions - pointing out that his party at least paused to help the dying man. About 40 other mountaineers simply walked past.

Forty! Suddenly Everest seems like the Pitt Street of the Himalayas. Forget climbing it; I want the Starbucks concession. Indeed, Hillary told me there are often 60 people at the summit. You'd be more secluded in the Cross City Tunnel.

I'm not arguing that climbing Everest is easy, even with all the help, ladders and crowds. The fact so many die is a measure of the difficulties and dangers.

What's weird, though, is this desire to manufacture challenges as if humanity hadn't enough real ones - adding difficulties to the climb with one hand, while removing them with the other, all in order to get into the record books.

Death and ethics collide at top of the world
That day, May 15, 40 climbers passed Sharp, and all made the same decision to leave him. No one knows when he died, but he died alone. Three days later, climbers confirmed there were now two bodies to pass on the way to the summit. That is the new reality.

Whatever the situation, however, it is difficult not to wonder about the morality of survival on Everest, with Sir Edmund Hillary, one of the two men to first climb the world's highest mountain in 1953, expressing concern.

"I think the whole attitude to climbing Everest has become quite horrifying," he said. "Human life is far more important than just getting to the top of a mountain."

Killip was respectful, but disagreed. "I'm certain Sir Edmund would feel differently if he had been there and seen the situation," he said. "He would have understood."

There were other factors as well. Sharp paid $7500 to make a solo assault without oxygen, the most dangerous and difficult way to climb. The basic cost of a climb with sherpas and guides is about $40,000 and can go as high as $90,000 a climber.

Sharp made unsuccessful solo attempts in 2003 and 2004. He had no one to guide or help him for all three..

Perhaps his most serious miscalculation is that he had reached the summit late the previous day and had to make his descent of the precipitous north-east ridge in darkness in minus 40 degree cold, an almost certain route to death.

Sharp descended about 250 metres before he sought the only refuge available, the overhang at 8600 metres where, in 1998, the Polish climber had also sought protection and died.

At some stage, he removed his headgear and unzipped his down protective suit, symptoms of the fatal stages of hypothermia. His arms and legs turned black with frostbite.

Killip, who made an unsuccessful attempt in 2001, and one of his two guides were the two most experienced mountaineers among his team of five other climbers, who included the New Zealander Mark Inglis, 47, a double leg amputee. With eight sherpas, they set out from their assault camp at 8400 metres at 11pm, passing the overhang two hours later.

Killip reached the summit at 6.30am and although it was a clear day with a light breeze it was "incredibly cold. I stayed only 10 minutes". On his descent, he became aware of the tragedy when he listened on his radio to climbers trying to help Sharp.

Max spent an hour with the distressed climber. He tried to give him oxygen, sacrificing his own attempt on the summit. Killip said: "Max was crying, seeking advice on the radio" from the expedition leader, Russell Bryce, an experienced New Zealander, and a doctor at base camp.

"They told him there was nothing he could do," Killip said.

Sherpas from Bryce's Himalayan Expeditions and Arun Treks got Sharp to his feet but he was unable to stand, even with support. They, too, gave him oxygen, but it failed to revive him. In tears, they left him.

Sharp was unable to walk or help himself. "If you can't walk, you're finished," said Zac Zaharias, 49, who has led two assaults on Everest, climbing past the dead Pole in 2001. "No one has been carried off that ridge at that altitude - ever. It is not humanly possible."

Below the overhang, there is a 500-metre drop on a 50 degree slope over broken rock. At that altitude, even with breathing equipment, it is deemed impossible to carry an 80-kilogram person, even working in relays.

Killip said: "I feel distressed. But the truth is, I was in difficulties myself. I couldn't have carried my best friend off that mountain. I had frostbite; I had barely enough strength to get myself down. When I got to David [on the descent], the issue had been settled."

Since 1953, more than 2250 people, including 28 Australians, have climbed Everest. It is estimated that 80 per cent of climbers with professional guides reach the summit. The death toll is 187, including five Australians.

Hillary criticises abandoning climber to death
EDMUND HILLARY, who became one of two men to first conquer Mount Everest 53 years ago, said yesterday that he disagreed with the actions of the amputee mountaineer Mark Inglis, who left a fellow climber to die on the slopes of the world's highest mountain this month.

Sir Edmund said he would have abandoned his own record-setting attempt had another climber been in danger.

And there has been further drama on Everest, with breathing problems forcing a Sydney teenager to abandon his attempt. Christopher Harris, 15, of Emu Plains, turned back at 7500 metres. He is believed to be the youngest climber to reach that height.

Inglis, who this month became the first double amputee to reach the summit, was with one of many climbing parties that made the excruciating decision not to help the oxygen-deprived British climber David Sharp, who died about 300 metres below the peak. Sharp, 34, had climbed alone, after two previous unsuccessful attempts in 2003 and 2004.

"It was wrong if there was a man suffering altitude problems and was huddled under a rock, just to lift your hat, say 'Good morning' and pass on by," said Sir Edmund, 87.

"My expedition would never for a moment have left one of the members or a group of members just lie there and die while they plugged on towards the summit."

Inglis and his party could have stopped and given Sharp oxygen, he said. Inglis's aim was to reach the summit, "and I can understand that", but there was no question in Sir Edmund's mind what he would have done.

Inglis said "there was nothing we could do" to prevent Sharp's death. "For goodness' sake, let David and his parents rest."

Some other climbers have agreed with the decision to leave Sharp. Said the alpine programs manager of the New Zealand Mountain Safety Council, Paul Chaplow: "On New Zealand mountains we would teach people to administer first aid and help, but it is a completely different world there [on Everest]. Unfortunately you hear plenty of stories of people dying and people, especially guides, who stay with clients in trouble and then do not make it out themselves."

Sir Edmund said the episode showed climbing Everest was becoming too commercial and some restrictions were needed.

Inglis lost both his legs, mid-shin, to frostbite in a climbing accident in New Zealand in 1982, and now climbs with custom-made prosthetic legs.

Back-from-the-dead Australian climber still on Everest
Left-for-dead Australian climber Lincoln Hall was fighting for his life Saturday after surviving a night in the open, 8,600 metres up Mount Everest in Nepal.

Hall, 50, collapsed 250 metres below the summit of the world's highest mountain and was left for dead by his climbing colleagues.

Russian expedition leader Alexander Abramov, who had pronounced Hall dead, sent a rescue party back up the mountain after another climber found him still alive but gravely ill.

Simon Balderstone, a fellow Australian who is monitoring progress from Sydney, said that Hall had been brought down to 7,000 metres and was in a heated tent after being examined by a doctor at the North Col camp.

American climber Dan Mazur, who was leading another party up Everest, discovered Hall, found he was still alive and gave him oxygen and hot tea.

Hall reached the summit Thursday in a team including Thomas Weber from Germany and guide Harry Kikstra from Holland. Weber, a visually impaired climber, perished descending the mountain, and Hall was also reported by Abramov to have died. Weber failed to reach the summit.

Climber Hall reaches Everest base camp
Australian climber Lincoln Hall has just walked into the advanced base camp on Mount Everest in reasonably good health, a fellow climber says.

Hall, 50, was left for dead on the mountain, then found and revived.

He spent the night at North Col camp, 7,000 metres above sea level and on Saturday morning (Nepal time) he arrived at the advanced base camp, which is at 6,400m.

South Australian climber Duncan Chessell, who runs DCXP Mountain Journeys, told AAP shortly before 3pm (AEST) on Saturday that he had received a call from one of his guides on the mountain, Jamie McGuinness, telling him the news.

"He's in reasonably good condition but he doesn't have much memory of things at this stage," Mr Chessell said.

"Basically he's been able to come down under his own steam, without assistance, is what Jamie reported.

"I imagine he got up in the morning after being treated with oxygen and hydration and left (North Col)."

Mr Chessell had expressed concern about the stretch between North Col and the advanced base camp.

He described the 70 degree slopes between the two points and said much of the area needed to be abseiled.

There have also been concerns for Hall's health, with reports from the mountain that he was suffering swelling of the brain and hypoxia.

An uncommon love affair

The notion of "common law marriage" is common enough in Australia but unknown before most courts of America.

"Mr Loving, 33, and Ms Shelltrack, 31, have lived together for 13 years. They have two children and also live with Ms Shelltrack's daughter, who calls Mr Loving her father. They bought their Black Jack [Missouri, USA] home this year. "We're just like anybody else," Ms Shelltrack said. "It's not like we're purple with polka dots or something. I just really feel like this shouldn't be anybody's business."

"They could face fines of up to $US500 ($662) a day because of a local regulation banning unmarried couples with more than one child from living there.

"The character and stability of a city is not an accident, it is the result of years of hard work by the residents," said Norman McCourt, the Mayor of Black Jack, in a statement after the city council rejected a proposal to abolish the regulation. Mr Loving and Ms Shelltrack now plan to fight the ban in court, with the help of the American Civil Liberties Union. And the Department of Housing, in Washington, has begun an investigation to determine whether Black Jack's ban is illegal.

"I find it curious at best that housing laws are being used to define the relationships that count," said Frank Alexander, of Emory University law school in Georgia, who has researched the phenomenon. "It seems a dangerous way to do indirectly what we may not be willing to confront directly, which is social control over the definition of family"."

In New Hampshire, common law marriages are only recognized at death. N.H. RSA. 457:39 (1983)

What does Common law marriage mean? Nothing. It is a myth. There are currently over four million people living with their partner in England and Wales, and many think they have rights that they don’t have. Sadly people usually only find out what rights they really have when it’s too late to do much about it.

Friday, May 26, 2006

Loose threads 26 May 2006

Guambat has been trying to sort out the liquidity quandary, and it now looks like there has indeed been an excess of liquidity which the Bank of Japan has recently started to mop up.

The best insight came from the Carried away post.

Jim Jubak has now pinned the market ructions of the past fortnight on the BoJ deck swabbing:
You can't understand why some asset prices have tumbled and others have stayed rock solid if you don't know what the Bank of Japan has been doing over the last few months.

As good as its word, the Bank of Japan has been taking huge amounts of liquidity out of the global capital markets. In an effort to re-inflate the Japanese economy and end the years of deflation that had kept the country mired in a no-growth swamp, the Bank of Japan had pumped billions into the country's banking system. Now that the economy is finally growing again and now that prices aren't sinking any longer, the Bank of Japan has given two cheers to the return of inflation and has started to remove some of that cash from the financial markets.

In the last two months, the bank has taken almost 16 trillion yen, or about $140 billion, in cash deposits out of the country's banks. The country's money supply has fallen by almost 10%. The Bank of Japan isn't finished pumping out the liquidity that it had pumped in. That should take a few more months. And when it is finished, the Bank of Japan is expected to start raising short-term interest rates.
No more cheap
This sign of the return of economic and financial health to Japan is, however, bad news to the speculators who have used cheap Japanese cash to make big profits by buying everything from Icelandic bonds to Indian stocks. The momentum in many of the world's riskier markets was a result of ever increasing floods of cash -- borrowed at 1% in Japan and multiplied by leverage as speculators turned $1 of capital into $3 or more of borrowed money.

For example, India's Mumbai stock market, up 21% in 2006 and 70% over the last 12 months, has seen an inflow of $10 billion in overseas money. That wouldn't be enough to move a market like the $14 trillion (market cap) New York Stock Exchange, but it's a bigger deal on the $742 billion Mumbai market. Although $10 billion isn't enough to move a market by itself -- that took improving fundamentals in the Indian economy -- it is enough to increase upside momentum once the ball is rolling. (The Indian market's benchmark BSE index plunged 10% Monday before trading was halted for an hour. It ended the day down 4.2%.)

New inflows of cash are needed to keep the momentum going, hot money investors know, and it looks like the supply of money flowing into these markets might diminish. The moves to date by the Bank of Japan aren't enough to radically diminish global liquidity, but they are enough so that the investors who have fed some of the world's riskier markets understand that the trend has turned.

What we've witnessed since May 13 is a global flight out of more leveraged and more speculative investments. Speculators attracted by the momentum of the gold, copper, and silver markets have sold -- and are still selling -- rushing to get out before other speculators could liquidate their positions. Emerging equity markets have sold off for the same reason: India's Bombay Sensex index dropped 6.8% on the same day as the Jakarta market fell. High-yielding bond markets have collapsed as prices dropped, sending yields soaring and currencies skidding. The central bank of Iceland has raised interest rates to 12.25% in an effort to prevent the further fall of the krona as hot money flees the country.

What the Bank of Japan has done is to set off a global re-setting of investors' risk tolerance. With Japanese interest rates so low and Japanese cash so abundant, speculators, traders, and investors have been more and more willing in the last few years to take on risk at increasingly low premiums.

Risk tolerance doesn't get reset in a day. The Bank of Japan is only halfway through removing liquidity from its domestic and global markets. Interest-rate hikes are likely to follow that with the first increases coming in the second half of 2006. At the same time, the European Central Bank is raising interest rates.

All excess liquidity has by no means been removed from the global financial markets. But the speculators know that money is gradually getting more expensive. Rallies can count on less hot money to fuel their last stages. Getting out earlier in rallies starts to seem wiser. Some risks are just not worth taking.

The correction that began on May 13 is part of the process of resetting risk tolerance and recalibrating risk premiums.

Jubak seems pretty sanguine that the markets will not react any worse than they already have, though the ride will be bumpy.

Other folks who actually manage and make bunches of money don't sound quite so sanguine.
BRITAIN’S most successful stockpicker yesterday told investors to brace themselves for months of falling share prices.

Anthony Bolton, who runs £6.5 billion of funds for Fidelity International, suggested that the jitters of the past two weeks could turn into a more prolonged bear phase as shares plunged again.

In a rare public appearance, Mr Bolton said: “I think it could be the end of the bull market. The correction could be months, not days.”

And technical analysts like Carl Swenlin and John Murhpy are expecting a bit of a bounce off oversold conditions, but don't seem to hold out any hopes for a sustained bull run.

Meanwhile, retail cash is bleeding out of the US stock funds, but that may just be the kind of counter-intuitive event that assures a bounce for the pros to sell into.

And how do these market ructions play out in the real world, in the lives of the ordinary folks on the street? Not only does it bankrupt many of them, but it affects the very social fabric of the community:
The stock market crash, which affected more than 3.5 million middle income investors, has delayed the marriages of many people this summer, Asharq Al-Awsat newspaper reported.

Every summer, tens of thousand of Saudis get married but this year, the number is expected to drop by more than 50 percent.

Fahd Al-Harbi, a wedding hall owner, said that many people who had made reservations cancelled them after the crash.

Al-Harbi said that many wedding hall owners would reduce prices to attract customers and that he had reduced his prices by more than 50 percent.

Saleh Al-Muntasheri has postponed his wedding which was scheduled for the summer because of the crash. He said that he had lost SR120,000.

Ahmad Ali is another Saudi who lost money in the crash. He said he had lost SR67,000 which had taken him more than five years to save.

He said he had been forced to cancel his wedding because he could not afford it and that he would not borrow the money.

Many kind thanks to the Kirk Report for the inspiration and material for this post.

Thursday, May 25, 2006

Separated at birth

The powers of the American Executive and the American Legislature are intended to be separate and equal. Unlike the Australian system whereby the Executive by definition almost controls at least the House. And also unlike the Australian system, the Legislative branch upholds its independence from the Executive in spite of party lines.

This principle has never been more powerfully expressed than in the current context regarding the case involving Rep. William Jefferson, D-La. The FBI, an office of the Executive, has accused Rep. Jefferson of fraud and bribery, and would appear to have some pretty good prima facie evidence to support the accusations. But in gathering a full book of evidence, the FBI forcibly entered and searched the Congressman's House of Representative chambers.

The Legislature consider their premises to be their soverign territory. An analogy might be made of the diplomatic immunity that an embassy has, even when on foreign soil. And notwithstanding the criminal act of the individuals cloaked with the immunity.

Without in any way condoning whatever it is that Congressman Jefferson may have done, the leaders of Congress, from both sides of the isle, are demanding the Executive to BACK OFF:

Hastert, Pelosi both condemn FBI seizure of congressman's files

The Republican speaker of the House of Representatives and the House Democratic leader, in an exceptional display of unity, escalated a constitutional confrontation with the Bush administration on Wednesday over the FBI's weekend seizure of files from a congressional office.

In a rare joint statement, House Speaker Dennis Hastert, R-Ill., and Minority Leader Nancy Pelosi, D-Calif., demanded that the Justice Department return documents that the FBI seized from the offices of Rep. William Jefferson, D-La., as part of a bribery investigation.

Hastert and Pelosi challenged the raid as violating the Constitution's separation of powers between the legislative and executive branches of government.

The FBI raid occurred Saturday night when 15 agents armed with a warrant entered Jefferson's congressional offices and pored over his files until Sunday afternoon.

One law enforcement official familiar with the investigation expressed surprise at the stance taken by the House leaders.

"The implications of what they're asking for are huge," the official said, speaking on condition of anonymity to permit candor about a case involving powerful lawmakers. "They're asking that the FBI return documents to a target in the middle of a law enforcement investigation."

Congressional leaders welcomed Hastert's aggressive stance against the administration on behalf of Congress' independent authority.

"You don't want to have executive branch people coming to a congressional office on their whim," said Rep. Tom Davis, R-Va.

The reaction from lawmakers partly reflects frustration over Bush's attempts throughout his presidency to expand the reach of executive power, often at the expense of Congress and the courts. "The founders envisioned a separation of powers, and sometimes we've been too timid about exerting that," Davis said.

Hastert and Pelosi said the Justice Department violated both the Constitution's separation of powers doctrine and its more obscure "speech or debate" clause, which essentially protects members of Congress from interference when the members are conducting official duties.

The clause states that members "shall in all cases, except treason, felony and breach of the peace, be privileged from arrest during their attendance at the session of their respective houses, and in going to and returning from the same."

Congressional lawyers haven't found any precedent in the history of the House and Senate similar to the Jefferson document seizure. The chairman of the House Judiciary Committee, Rep. James Sensenbrenner, R-Wis., said the FBI's actions "could have a chilling impact on the legislative branch's ability to function."

Sensenbrenner scheduled a committee hearing for next Tuesday titled "Reckless Justice: Did the Saturday Night Raid of Congress Trample the Constitution?"

In a statement Wednesday, the Justice Department said it had tried since August to obtain the documents "through other means and were unable to do so."

"There is tremendous respect for Congress's important, independent role, but the department has an obligation to the American people to fully pursue corruption cases wherever the trail of evidence goes," the statement by Justice Department spokeswoman Tasia Scolinos said.

One constitutional scholar suggested that the Department of Justice could appoint a special master who would review the files and determine which ones were relevant to the investigation and which ones weren't.

"The question is, what is the protection to make sure that the files that have nothing to do with criminal activity aren't taken away," said Erwin Chemerinsky, a professor of law and political science at Duke University. "When lawyers' offices are searched, often it is done with a special master to see what is related to criminal activity and what is confidential and unrelated."

The clash with the White House over the documents comes as the Justice Department is conducting a number of investigations into public corruption that could snare Democrats and Republicans alike. Some Republicans worried that voters would gloss over the constitutional issues involved and conclude that Congress was acting out of self-interest.

"Given the attitudes that voters have toward Congress..., directing their fire at the administration on this issue seems wrong-headed and unbelievably misguided," said one Republican campaign consultant who works closely with Republican congressional candidates. The consultant was granted anonymity to speak candidly about his views.

Separately, Pelosi sent Jefferson a terse letter Wednesday urging him to relinquish his seat on the powerful tax-writing Ways and Means Committee.

Wednesday, May 24, 2006

Oh, and 5 miners were killed

I am a "connection", which in the horse world means I hover around someone who actually owns a horse. As the "connectee" I have been just outside the spotlights in some pretty bright limelight bathing my "connector", and I well and truly admire and understand the attaction of fine racing horses.

Last Saturday the Kentucky Derby winner broke a leg running the Preakness.

Oh, and 5 miners were killed in a Kentucky mine blast, making it now 11 mining deaths just in Kentucky and just this year.

"A horse is not just a horse, of course":

On Monday morning's Today Show, the lead story was not the five Kentucky miners who died in Harlan County, but a live interview with the surgeon who had operated on Barbaro the day before.

Pot pouri 24 May 2006

With time getting difficult, I'll just note these items:

Black boxes: With so many hedge funds operating from black box models, and air disaster forensic people only using black boxes to try to understand after the fact how a crash occurred, I was a bit relieved to hear that the hedge fund industry poses no serious risk to financial stability. ANALYSIS-Could a hedge fund collapse shake financial stability?

Bird Flu: It appears to this uninformed person that the chances of finding an occurrence of human to human bird flu in these circumstances to be remote, notwithstanding that the mere possibility of it happening is being blamed for some of the caution in Asian markets today. Maybe it's just a case of emerging market enthusiasm having flown the coop. Avian influenza – situation in Indonesia – update 14

Relatively speaking of interest rates: Barry Ritholtz has a rare guest appearance who points out it is not the nominal rate of interest that affects markets but the relative change in direction of rates: "Let me say this: It is not the absolute level of the rate of interest that matters to those who allocate capital, it is the relative rate of change."

Bulls and Bears: The Kirk Report was looking for a muscle reversal, but lost his mojo. At least his rumblings gave as much credibility to the bears as the bulls.

John Hussman, who told us how to make money in stocks by getting out of the market, points out some factors that help to identify market tops and bottoms, some of which advise dovetails with the Barry Ritholtz guest post noted above:
Among the simplest truths is that market risk tends to be unusually rewarding when market valuations are low and interest rates are falling. For example, since 1950, the S&P 500 has enjoyed total returns averaging 33.18% annually during periods when the S&P 500 price/peak earnings ratio was below 15 and both 3-month T-bill yields and 10-year Treasury yields were below their levels of 6 months earlier. Needless to say, there are a variety of ways to refine this result based on the quality of other market internals, but it's a very useful fact in itself.

Similarly, market risk tends to be poorly rewarded when market valuations are rich and interest rates are rising. Since 1950, the S&P 500 has achieved total returns averaging just 3.50% annually during periods when the S&P 500 price/peak earnings ratio was above 15 and both 3-month T-bill yields and 10-year Treasury yields were above their levels of 6 months earlier.

It doesn't help the case for stocks to argue that, for example, earnings growth is still positive, because it turns out that the year-to-year correlation between stock returns and earnings growth is almost exactly zero. It doesn't help to argue that consumer confidence is still high, because consumer confidence is actually a contrary indicator, as are capacity utilization, the ISM figures, and other factors being used for bullish fodder. It doesn't help to argue that the Fed will stop tightening soon, because the end of a tightening cycle has historically been followed by below-average returns for about 18 months. It doesn't help that 10-year bond yields are still lower than the prospective operating earnings yield on the S&P 500 (the “Fed Model”), not only because the model is built on an omitted variables bias (see the August 22 2005 comment), but also because the model statistically underperforms a simpler rule that says “get in when stock yields are high and interest rates are falling, and get out when the reverse is true.”

Once stocks are richly valued, then, the burden of proof is on the case for staying in, not getting out (or in our case, hedging). Once interest rates are rising, that burden of proof ticks up. Once internals show “heavy” price/volume behavior, more burden. And once you get a huge leadership reversal, as we've seen over the past week, it's time to watch for falling rocks.
The Citigroup/ASIC inquiry: The story so far. The Citigroup rebuttal.

Tuesday, May 23, 2006

Unrepresentative swill (Part 3)

Having had a go at the undemocratic way the Australian democracy works (see Parts 1 and 2 under the Opus d'Guambat sidebar >>> that way), Guambat has been moved to have a word or two about corporate democracy after reading an article in the business sheets of the Sydney Morning Herald, today.

There have been many scholarly studies and reports about corporate governance, and this post is not one of them. This is just another rant. And the article that sparked this wasn't about corporate democracy, per se, but was more precisely about executive pay.

Now executive pay abuse is not a subject to dismiss out of hand. Even the Captain America Larry Kudlow has pronounced some of the recent examples of executive pay as outrageous and, in the case of the re-dated options scams, fraud. USA Today offers some assistance in how to locate the details of "obscene" executive pay in this column.

The San Jose Mercury News is running a similar line with its story, Shining a light on executive pay (free reg required) and has a related report that tells us, "The average direct compensation received by the 749 top Silicon Valley executives in this year's survey was 51 times larger than the average pay made by Silicon Valley workers in 2005, up from 44 times larger in 2004."

That's pretty modest. Guambat previously mentioned a CNN/Money report that said the average CEO pay was 451 times the amount of the average production worker in 2004.

The instigating article for this post continues with that meme:
New studies in Australia and the United States show the aristocrats and capitalists of the industrial age have been supplanted by the working rich, particularly the superstar chief executive officer.

"At the start of the 21st century, the income share of the richest 1 per cent of Australians was higher than it had been at any point since 1951," say economists Sir Anthony Atkinson, of Oxford University, and Professor Andrew Leigh, of the Australian National University, in the first detailed study of incomes of Australia's super rich.

"Much of this recent increase may have been caused by higher executive pay."

The ANU paper, The Distribution of Top Incomes in Australia, shows not all elite professionals have shared in these fabulous returns.

High Court judges have plunged from a multiple of 17 times average earnings in 1921 to just six times in 1988, before rising to almost eight times.

In that time, according to tax return data, top federal public servants had their relative wages cut from 10 times average earnings to less than five.

And politicians, whatever you might think of them, have seen their wages fall from 5.6 times average earnings in 1921 to 2.3 in 1988, before they rose slightly to 2.7 times average earnings in 2002.

Reliable historical data is not available for chief executives. But in the decade to 2002, Sir Anthony and Professor Leigh say CEO salaries of the top 50 companies rocketed from 27 times average earnings to 98 times. And they have escalated since.

Similarly, a study this year by John Shields, of the University of Sydney's School of Business, showed the 51 listed companies whose CEOs are members of the Business Council of Australia had given their chiefs a 564 per cent pay rise since 1989-90.
But it was not so much the scale of the executive pay that struck me, especially since Guambat has been noting that issue since he first started his Stew. It is rather the conclusions drawn by the authors of the study mentioned in the Herald story that irritated.

"[T]op Australian executive salaries have closely tracked US salaries, albeit from a lower level." This is an irritation that Guambat spoke of before. Australian managers have long whinged that their salaries were unfairly inferior to US executive packages. Ross Gittins, the Herald Economics writer, referred to the use of this old chestnut by Michael Chaney, president of the chief executives' union (otherwise known as the Business Council of Australia). In his review of that article, Guambat noted:
It's too bad Ross missed that little slight of hand that Michael Chaney tried to pull, comparing Australian executive remuneration to the "much higher paid" US executives as more evidence they are underpaid here. That's exactly the opposite of what they do when they talk about regular employees. In that case they bleat and piss on about how that same job could be had for one-tenth the cost in some foreign country like China or India.

How do they have the gall to compare their wages to higher paying countries while comparing the wages of the lower rung employees to the lower paying countries? (Don't bother; that's rhetorical.)
The Herald report of the current study we're discussing goes on:
In the United States, income inequality has widened at the bottom of the income scale as well as the top.

A study this year by Ian Dew-Becker and Robert Gordon for the National Bureau of Economic Research showed that fully one half of all America's productivity gains since 1966 had found their way into the salary packets of the top 10 per cent of earners.

The other 50 per cent of productivity gains filtered down to the bottom 90 per cent, where real wages fell.

Australian inequality is widening only at the top. Low earners have been protected by generous family welfare payments and wage-setting structures. [Which taxpayers, not companies, underwrite.]
The way executive have managed to skim all the productivity gains squeezed from the production workers has also been noted previously by Guambat:
"Normally, as employees are able to produce more in each hour of work, the result is greater cash flow that can be divvied up between workers and owners or investors. In the long run, rising productivity means rising wages and living standards.

The latest numbers from the Labor Department, in fact, show average weekly earnings for US workers have fallen by 0.5 percent in the past year, after adjusting for inflation."
And while workers lost out on productivity gains, the executives have been mopping up on so-called performance gains, as Dr Sheilds' study reported in the Herald explains:
Executives also point to the performance-based nature of their salaries, arguing that their salaries ensure executive and shareholder interests are aligned.

Moss, for example, earned a base salary of $670,604 - and then claimed the residual $20,506,183.80 as various performance payments.

Macquarie Bank's performance fees are more transparent that most. But academics are increasingly questioning the sort of performance that many companies are rewarding.

A University of Chicago study tracked CEO salaries at 50 American oil companies, where extraneous "luck" relating to changing higher oil prices could easily be distinguished from management performance.

The authors, Marianne Bertrand and Sendhil Mullainathan, found CEOs were paid handsomely for oil price changes in the 12 years of their study that prices rose.

"Chief executive pay in fact responds as much to a lucky dollar as to a general dollar," they said.

CEO pay also rose, however, in the five years when oil prices fell.

"This hints at an asymmetry: while CEOs are always rewarded for good luck, they may not always be punished for bad luck."
Your Guambat has also had a run at this performance argument in another prior post:
Now this is where we need to start paying attention, because this performance thing is pretty tricky in this circumstance. You will have heard the old saw that a rising tide lifts all boats? That's what we have to watch for. Think back to the chart posted earlier today, showing the whole Aussie market has been rising. If a company's value rises because the whole market, or a particular segment of it, is rising, does that represent "performance"? Do you reckon the guys on the lower rungs get that increase lauded in their performance reports?

In addition to the coincidental rising values, there is a similar boat lifting exercise that moves executive and board pay in a lock-step fashion. Think of the locks in overland canals that manage the flow of water to carry boats up hill. Think back to this quote: "compares favourably with the fee pools of Australian companies of comparable size".

Now, I'm one who does believe that a good executive is due a good wage. I don't begrudge a well paid exec her due. But I think boards should be as disciplined in setting executive pay as the executives are in setting lower rung pay, and that all employees should share, if any do, in the rising and falling tides. Because, really, it is the shareholders who should get the greatest benefit of rising tides, as they take the greatest hit on falling tides, such tidal flows being what market risk taking is all about.
And it is about here in the Herald story that the authors of the story get a bit down and dirty. They pass right over any pretence of whether such payment scheme is fair or reasonable, and simply ask, "how do these guys (they're mostly guys), get away with it?" And then they propose an answer:
The authors present an alternative explanation for spiralling executive salaries: CEOs are uniquely placed to "capture" - or rig - their own pay-setting processes.

In this view, executives unduly influence their own boards and are constrained only by what their shareholders will let them get away with. If their salaries rise fastest when profits rise, it is because shareholders are more likely to turn a blind eye when they themselves are making money.

Dr Shields believes executive salaries have made a "major' contribution to widening income inequality at the top - and much of this is due to inefficient, if not ethically dubious, executive behaviour. "I don't accept the argument that says the pool of CEO talent is so minuscule that companies have to pay almost anything to get these rare human beings," he says.

Dr Shields says chief executives have inverted the lawful management structure whereby directors are engaged to control them.

"I tend to think of CEOs as behaving in the same way as traditional craft unionists: defining their own levels of skill, setting market rates for that skill, engaging in market closure and bargaining for premium levels of pay," he says.

Dr Shields says massive golden handshakes, post-retirement consulting fees and performance options that, bizarrely, can be hedged against risk, are other examples of executive " wealth by stealth".
And often it seems the wealth comes as much by filth as stealth, as seen in the current scandal du jour surrounding the re-dating of executive stock options, this from the Akron Ohio Beacon Journal, not one of the heavyweight business journals:
Given the growing number of companies involved, it's starting to look like backdating stock option grants to boost executive pay was another one of those dirty little secrets where no one thought to trust their common sense.

Even if this practice wasn't illegal, it should have produced different accounting under the rules that governed employee options until recently. Yet there was a leap among top executives, the corporate directors who oversee pay, and the accountants, lawyers and consultants who advise them.

Otherwise, it's hard to explain why UnitedHealth Group Inc. and others embroiled in this expanding scandal would be acknowledging that past profit reports may have been inflated.

By artificially boosting profits, backdating may have fueled larger bonuses for executives. Likewise, giving instant value to grants that normally would have zero starting value cancels at least part of the presumed incentive options given to executives.

Formally speaking, this practice is not widespread, said compensation experts at Mercer Human Resources Consulting and

But once one company allows a perk, others say ``Me too.'' That attitude also may have affected the accounting for what otherwise would seem a straightforward exercise.
So here we are. The managers of these public companies are able to reward themselves pretty much as and when they please. And why is that? To repeat Dr Shields' conjecture, it is because the management has "captured" the remuneration process and has "inverted the lawful management structure" by subordinating the power and duty of the boards.

Which brings us to the notion of corporate democracy. Democracy is the idea that if you have a stake in something (e.g., if you are a citizen of a country you might believe you have a stake in it), your view of major decisions regarding or affecting your relationship with your stake ought to be given some notice and you should have some opportunity to shape that decision.

In popular public governance we have the notion of "one person, one vote"; in corporate governance terms it is "one dollar, one vote". But in each case each unit does have a vote, that is to say, an opportunity to shape the outcome of the vote. Mind you, this is more conceptual than practical.

The basic structure of corporate governance was established just a few hundred years ago and fine-tuned over the last hundred years. Corporations didn't use to exist. A business was owned by and the responsibility of individuals. As the mecantile world got a bit more wide flung across the seas and dependent on the judgment of persons not in the control of the owners, merchants sought a legal structure that would secure their profits from these outposts of trade but without the responsibility associated with bad judgments that they could not control. They sought to keep their profits but avoid their liabilities.

The landed gentry thought this idea a bit rich. They came from feudal roots of personal responsibility. But they were practical, too, and saw a precedent for just this sort of thing in the ancient relationship of trust, where the trustee, duly exercising the powers and obligations of trust, would not be personally liable for things that went bump in the night. And so they created this new legal creature called a company or corporation that extended to its investors the veil of no personal liability for company debts, but only so long as the company was directed and run in such a fashion that the business exist for the trust and benefit of its owners.

This notion of duty (to the investors) and trust (in the judgments of the management) is at the foundation of modern corporate structure, governance theory and practice, at least ideally. And it is the feedback principle that passes as corporate democracy that allows, requires, the investors to communicate their interests to the managers and directors, because without communication the scope of these requirements would be difficult to ascertain and enforce.

Just as this simple model works easiest when the numbers involved are smaller, the more people involved, the more complex the whole thing gets, from every perspective, legal, social and economical.

But this wasn't a great issue of modern life until the last few decades. At the beginning of the 20th century, only a handful of the public owned any corporate stake (shares). It wasn't until after WWII that having a piece of the corporate rock became anything that the average person would even aspire to.

I reckon that public ownership of corporations didn't really kick off until mutual funds were popularised from the 1970's, and then when the Republicans invented the "ownership" society and privatised pensions and social security, they whole character of the subject changed and the issue became common parlance in the home, the taxi, the beauty parlour. Now, most folks who have something to say or think about corporate governance have their money where their mouths are; it is no longer just an academic diversion.

And I don't have any prescriptive ideas about where to go with all of this. Mankind has always had to organise around wealth production, common defense and the pursuit of prosperity within a cohesive social whole. The methods tried have ranged from the despotic to the utopian, so we do have some experiences to draw knowledge from. And I suspect we will evolve with this corporate paradigm, too.

But as we do evolve this thing, we need to remember its roots and purposes and contexts. We need to be aware of the disenfranchisement of the stakeholders. These days, though the numbers of stockholders has increased like wild fire, the direct ownership has been more and more marginalised through involvement in funds of funds of friends of funds. There is a firewall now between the owners and the management that precludes the feedback mechanism that I consider to be essential for the construct to remain a credible means of organisation. You can only disenfranchise people for so long before they bring the house down.

And there is a greater context, also, over the last few decades. The global companies now more frequently conflict with the interests of states in which they exploit their skills and interests, and so often, it is an unfair match, with the size of the company dwarfing the size of the state.

If the sovereignty of the state is going to be usurped by the power of the corporation, we really do need to think about ways of putting good old fashioned public democracy into the corporate demeocracy model.

Little Bunny Foo Foo

I've begun this post with that title of a nursery rhyme for two reasons:

First, the moral of the nursery rhyme is "Hare today, Goon tomorrow". Way back in 1982, the first time we moved to Guam, my wife needle-pointed a pleasant picture of a contented rabbit, underwritten by the phrase, "Hare today, Guam tomorrow."

And now, after 17+ years in the burbs of Sydneytown, we're about to do it again. The Sydney house is sold, the Guam apartment is bought, the cat (little does he know) gets exported in a couple of weeks, and the movers will descend by the end of the first week in June. So, up goes the needlepoint, back on the kitchen wall.

So that is the story behind the lapse in posting of late, and is the explanation for the spotty, if any, posting I'll be able to get done for the next 2 months. Please hare with me, check in from time to time, just sit down and browse throught the archives like you were sitting in the dentist's office, run up my hit-o-metre, and your regular programming will resume shortly.

But the second reason for alluding to Bunny Foo Foo is that the Bunny was not really a nice guy. He was having one of those Bad Hare days, and the Blue Fairy was none too pleased, because what he was doing was rather indiscriminately running through the forest, scooping up the field mice, and bopping 'em on the head.

And the market in recent weeks has been running through the commodities and emerging countries, picking up the traders and boppin' 'em on the head. He scooped up the rational traders who thought too early things were due for a retracement, then stopped suddenly and retraced just about the time folks were really piling on the commodity band wagon. (See, e.g., Can't cop it any more.)

Along the way, all that wayward money had a field day boppin' those Arab Gulf States market traders on the head.

Yesterday, Reuters was reporting,
"Indian police are watching out for possible suicides by brokers and investors after a steep market slide wiped out billions of dollars in share values. Policemen were keeping a watch near lakes and canals, possible places where people in distress could head to kill themselves. They said rescue teams were on alert. "A financial crisis can trigger suicides. We are just trying to prevent them."

"Gold has turned into brass. We are finished," said S.S.Gupta, a middle-aged Mumbai broker who said he had lost millions of rupees in two hours of trading on Monday morning. Ahmedabad is considered particularly vulnerable to stock market volatility. With over five million retail investors, the city is one of India's main trading hubs where people have put in millions of dollars of their disposable income into the stock market.

"I borrowed money to trade in the market. I lost it all in the past two days," said 37-year-old Sanjay Joshi, a small investor. "I don't know how will I repay my loans."
Bloomberg is reporting today,
"Russian stocks, which doubled in the past year, may be among the biggest victims of the current turmoil in emerging market stocks.

The Russian Trading System Index slid 25 percent since reaching a record May 6, including a 9.1 percent plunge yesterday. Oil producer OAO Surgutneftegaz and steelmaker OAO Nizhny Tagil Iron & Steel Plant led the drop.

Investor concerns over slowing economic growth also prompted declines in the prices of oil and metals, Russia's main source of export revenue. Surgut, Siberia-based Surgutneftegaz, the country's fourth-biggest oil producer, has lost 37 percent since stocks peaked May 6. Nizhny Tagil, a unit of Moscow-based Evraz Group SA, has fallen 21 percent.

Crude oil has slipped 8.7 percent since it climbed to a record $75.35 on April 21 and April 24 in New York. Oil prices are still up 12 percent this year. Since reaching records this month, copper has lost 12 percent, nickel is down 5.2 percent and zinc has slumped 17 percent.

Moscow brokerages Alfa Bank, Aton Capital and Deutsche UFG, the Russian unit of Deutsche Bank AG, all wrote in reports last week that shares had become too expensive and might fall another 5 to 10 percent. The RTS has lost 17 percent since then.

Russian stocks trade at about 13.5 to 14 times forecast earnings for 2006, Alfa Bank estimates." reports,
The fierce sell-off in global markets continued with a vengeance on Monday, as global portfolio flows continued to target, in particular, resources stocks and global emerging markets, of which South Africa is one.

The broadest measure of performance on the JSE, the all share index, shed 2,8% on Monday, led down by huge blue chips such as Anglo American (down 5,4%), BHP Billiton (down 2,4%), AngloPlatinum (down 6,8%), Impala Platinum (down 7,1%) and Gold Fields (down 5,4%).

The selling, however, was not confined to resources by any means, as investors lightened heavily among other blue chips, such as Standard Bank (down 5%) and FirstRand (down 5,9%). There was also broad profit taking among other sectors.

According to statistics from Morgan Stanley Capital International, South Africa is one of the world’s biggest losing equity markets in the month of May, to date. Eclipsed only by Turkey, Colombia and Argentina, South African stocks have fallen by more than 13%, measured in dollar terms, so far this month.
Another Reuters report out of South Africa said,
" Gold exporter South Africa's rand fell 1.7 percent, after hitting a 6-month low against the dollar, knocked by a sharp fall in commodity prices. That is also seen denting assets in major exporter Latin America.

The Turkish lira fell 1.7 percent in after hours trade from Thursday's close, as investors thought the likelihood of early elections -- considered a risk to fiscal discipline -- had increased amid an escalation in political tensions.

After a market holiday on Friday, Istanbul's main stock index fell 7 percent, down some 24 percent from its peak this year, and weaker than its 2005 close.

Emerging market debt prices fell again on Monday, with the yield on the Turkish lira-denominated benchmark April 9, 2008 bond hitting a fresh record high for 2006 of 15.97 percent in Tuesday-dated trade.

Turkish foreign currency-denominated debt also fell faster than other emerging market paper, traders in London said.

"At the moment they're submerging, not emerging," one emerging markets trader in London said."
And down South of the Gringo border, things were also tough, as BusinessWeek reports:
Major Latin American stock markets and currencies weakened sharply on Monday as international investors fled emerging markets amid worries over rising U.S. interest rates.

Traders said investors were withdrawing funds due to speculation over accelerating inflation and rising interest rates in the United States.

The Brazilian real had the largest single day slide in three years on Monday, closing at 2.3 to the U.S. dollar, compared to 2.2 to the dollar at Friday's close, a 4.3 percent decline.

It was also the real's lowest close since Jan. 19, after rising to five-year highs only two weeks ago.

Meanwhile, the benchmark Ibovespa index of the Sao Paulo Stock Exchange closed 3.3 percent lower. The exchange closed at 36,497 points, compared with 37,733 points at Friday's close.

Mexico's stocks were also sharply lower Monday in the broad sell-off of emerging-market equities as investors shied away from higher risk holdings.

The market's IPC index of leading issues was down 3.5 percent, or 694.76 points, at 19,487.38 in midmorning trading. Mexico's peso softened, trading at 11.2970 to the dollar compared with 11.1890 at Friday's close, a weakening of about 1 percent.

Chile's benchmark IPSA stock index was off about 1.2 percent, while the Chilean peso weakened 1.5 percent against the dollar.

Argentina's Merval stock index gave back 5 percent, while the Argentine peso also weakened 0.6 percent against the greenback.
And today on the Australian markets, the ASX200 is putting on a might battle to stop a vicious 400 point sell-off that started when the index hit an all-time high just over 5400 about 8 trading sessions ago. With 2 hours left to go it's down 2 points on a day that has seen it repeatedly see-saw back and forth past the red line marking yesterday's close.

So that market Bunny Foo Foo has been really busy boppin' those field traders on dey heads. Not that it has bopped much sense into them, because they are just such an optimistic bunch these days.

According to that Reuters report above about the Indian meltdown, the emergent Indian market would re-emerge shortly: "It seems overdone and the market should stabilise during the second half of this week," said Rajat Jain, Chief Investment
Officer, Principal Asset Management Company Pvt Ltd."

And in Russia, "Some investors see further gains ahead. Optimism about global demand for oil will attract investors to the market again, said Jack Arnoff of Pictet Asset Management in London. Russia also is in its eighth year of economic growth, boosting consumption and lifting earnings of food retailers such as Pyaterochka Holding NV and phone companies such as OAO Mobile TeleSystems, eastern Europe's biggest mobile operator."

And Brazil wouldn't be too long away from the party. " Rogerio Poppe, senior equity fund manager at Mellon Global Investments Brazil, said she did not believe Brazilian markets were pressured by local factors including last week's outbreak of violence in Sao Paulo, the country's financial and business capital, where clashes between police and an organized crime group left 172 people dead. "In truth, we're suffering from external factors there's been a strong movement away from emerging markets. I think it's just a hiccup, it will pass, by it may take awhile," Poppe said."

For more optimism, tune in to CNBC.