Where's this Wally?

Guambat has just turned on to a really neat feature of the StatCounter utility. It's that little thingo down and to the right where it shows the number of page hits. The Stew is registering about 1,000 hits a month, including times spent bundled up in his hole, since he first added the hit-ometor.

Guambat considers it a bit dodgy (how to keep his own randomly selected IP address at home from being counted, for instance), and not as pretty as the ClustrMap with all the nice little red polka dots, but otherwise an endless source of entertainment. The mapping feature had been briefly looked at before, but only in the last day or so has Guambat learned he can drill down into the map. More entertaining that enlightening, but in someways also vewy vewy scawy.

Any way, this may become a feature if it doesn't turn into a one-off. We're going to play, "Where's this Wally?"

This Wally put up a search for "what the fuction of the office fair trading and competition commission to relate of BAA". No, really.

Sadly, Guambat Stew popped up on the search results. So this can be considered pay back.

This Wally has an IP address from Suffolk College.

This Wally lives just off a road that seems to have a different name for every block, including, Falcon St, Dogs Head St, Tacket St, Orville Pl, Eagle St and Rope Way.

Not sure if this link will work for you, but a map to this Wally might be found at http://my7.statcounter.com/project/standard/visitor_map.php?project_id=886602.

So, Where's this Wally?

Catching up with Alan

Guambat can assure everyone that, while there are many joys in moving to the Micronesian Big Smoke, the morning read isn't one of them. Sitting down to morning cuppa just ain't the same when looking at the PDN rather than reading the SMH. Throwing in the MarVar is helpful but doesn't fill the bill.

Obviously, Guambat can find the SMH online, but Guambat is a tad old-fashioned, which will likely come as a great shock to my reader. Guambat likes the utility of the newspaper; the laptop battery burns the thighs whilst on the throne.

So, Guambat doesn't regularly pour through the stories and intrigue and opinion of the SMH that he once fed daily on. Only occasionally does he spend time tabbing through the online version.

And so it was that Guambat finally found time to look back over recent Alan Kohler SMH columns. Kohler was a regular favourite of Guambat, and has oft been thrown into the Stew. He's a busy boy, that Alan, appearing on ABC shows and also writing for Melbourne's The Age and who knows what else. There's something rather snide-ish about his stuff that appeals to Guambat. It was actually a couple of items out of The Age that got Guambat's attention this time.

A recent column corroborates an argument that Guambat made a short while back, namely that money creation was being booted along at a much greater rate than happened in the past due to the new-fangled finance products and leveraged structures. Guambat had this to say:

And then there's "Private Equity". Just as booming dot.com era companies created their own money supply from highly inflated corporate script to buy out other companies, today's financial swash-bucklers create their own money by highly leveraged snatch-and-run buy-outs. See the Hertz deal, for instance. The thing that makes that bit of pretty larceny work is easy credit that the Carlyle Group, KKR and others can tap into. Those deals put billions of newly "released" (created) money into the system without increasing the economic value of the company one iota.

In his column, Alan Kohler had this to say:

All looks right with the world. Except for the gathering boom in corporate leverage via LBOs.

A total of $US350 billion ($A451.8 billion) has been raised by LBO/private equity funds around the world this year, which means more than $US1 trillion is available for takeovers, assuming a two-to-one ratio of debt to equity.

Once pension fund allocations to private equity reach 15 per cent of the superannuation pool, which would not be too far off, that will enable the private equity firms to buy 50 per cent of the assets of the super funds, thanks to gearing.

Alternatively, a 15 per cent allocation to private equity increases potential market liquidity by 50 per cent. Thirty per cent of super funds into private equity would double the pool of money.

And the larger allocations from pension funds these days, as opposed to the smaller sums from high net worth individuals with which the private equity industry got under way, means the funds are bigger and with the gearing the takeovers have to grow at three times the rate of the equity available.

To a great extent, LBOs are a matter of simple maths. Roger Montgomery of Clime Capital [Guambat knew him as "Flash" back when Roger was just a lad in a brokeage shop] produced an interesting illustration of this for me yesterday. He assumed an EBIT multiple of 12 times, with depreciation reinvested in capital maintenance (which is why we shouldn't use EBITDA). Thus an acquisition of an asset for $100 has an annual EBIT of $8.35.

Gearing levels (debt to equity) is usually three times, so the deal needs $75 debt and $25 equity. At 1.5 times interest cover and a 7.5 per cent cost of secured debt then $5.62 of interest must be paid. This leaves $2.73 pretax earnings ($8.35 minus $5.62) and a 10.9 per cent return. If profit growth is 10 per cent compound for three years this raises EBIT to $11.11.

The debt holders are paid $5.62 interest (we have a fixed rate loan with no capital payment) and pretax earnings move to $5.49 in year three.

Is the asset still worth a 10.9 per cent pretax return, or 9.4 times EBIT? If it is, the value of the equity is $50.61. The return to equity holders is thus 100 per cent over three years or 26 per cent a year.

Most funds say their required internal rate of return (IRR) is 20 per cent so they are way ahead. Indeed a 20 per cent IRR requires an equity value of $43.20 or enterprise value of $118.20 or a mere 18 per cent up over three years or just 5 per cent compound growth. And the key is the use of debt; cost-cutting, synergies, better management, etc, is the icing.

One consequence of the extra debt required to make this arithmetic work is that it raises the regulatory stakes in the economy. Increased household debt has already made the economy much more sensitive to interest rate increases than it was; the growing level of corporate gearing will make it very difficult for the RBA to regulate prices with interest rates without causing a recession.

Another of his columns a couple of weeks ago seems to have presaged today's release of trade figures which showed Australia chalked up a surprising blow-out in the trade gap, due in large part to unexpectedly weak export commodity sales, this time coal and coke.

Alan's comment was:

THERE is something rather unsettling about a commodities boom that leaves exports weak but provides the money for massive tax cuts that fuel inflation to the point where the money must be taken away again through higher interest rates.

The domestic economy appears to be slowing and exports are feeble. We've now had the first drop in employment in the current cycle.

Yet the return of the Reserve Bank's overnight cash rate target to the 6.25 per cent prevailing six years ago was completed during the week, making eight successive 0.25 per cent increases.

There hasn't been an RBA governor since Nugget Coombs who has taken over in the 16th year of economic expansion.

The task, therefore, is not to rescue the place but to keep the good times rolling.

There is no reason to think the expansion won't continue into a 17th and then 20th year, but imbalances have been growing during the boom and the task of economic management has become delicate.

In particular, despite the huge flow of money into superannuation, or perhaps because of it, Australians are not saving.

What's more, exports are mysteriously not responding to the commodities boom, while Australia's businesses and super funds are investing massively offshore.

The resulting current account deficit and investment outflow is largely financed by borrowing, mostly by Australian banks, and mostly off their balance sheets

In an important paper on Australia's 16-year boom to be published next week by the Lowy Institute, HSBC's chief economist, John Edwards, recounts Ian Macfarlane's reply to the Chilean Finance Minister, Nicolas Eyzaguirre, when asked in November 2005 the secret to Australia's success.

Macfarlane explained that it was Australia's ability to borrow in its own currency, an answer that was perhaps in part tailored to his audience.

That ability inoculates Australia from the sort of currency mismatch that brought Thailand, Korea and Indonesia unstuck in 1997.

But it's actually a bit of a trick — Australian banks generally borrow in US dollars and then hedge into $A, using Australian bond sales into Japan in particular.

Nevertheless it means the currency risk is borne by foreign lenders, not Australian borrowers, which allows the currency to bear the impact of external shocks, without the banks going broke or interest rates having to rise so the customers go broke.

But it also means the system depends on the creditworthiness of Australian banks and, as Edwards points out, "… this in turn depends on the creditworthiness of Australian households".

"The stock of bank loans to Australian households is twice as big as the stock of loans to Australian business. This is one of the reasons the Reserve Bank of Australia was concerned by the housing boom from 1996 to 2004."

In addition, corporate debt is increasing as a result of the boom in leveraged buy-outs, otherwise known as private equity. So even as business investment starts to taper off, business debt is rising rapidly, to the point where there may soon be problems.

In this context, the new RBA governor has started work on a hiding to nothing: we have high inflation and virtually full employment, justifying higher interest rates, but we also have very high, and still rising, debt, making that very dangerous.

The only trail out of this jungle is paved with exports. As John Edwards says in his paper: "With the long sequence of large current account deficits in the last two decades, Australian liabilities to the rest of the world now match nearly six-tenths of output, and will continue to grow faster than GDP unless and until Australia can run a persistent surplus of exports over imports."

Hot potato

You probably remember that child's game hot potato? Much like musical chairs. In essence, the kids all race around or pass around an object for an indeterminate time. When time is called the person left holding the hot potato or without a chair is eliminated from the game. Guambat has never known a Guambat-kid who didn't just love the game.

One reason it is so enticing is that everyone is a winner so long as "time" isn't called. It's only when "time" is called that the looser becomes apparent.

The grown-up equivalent of that game is leveraged debt. Debt is something we all take on and most of us pay. But we know for a certainty that at some point someone is not going to honour their debt. For whatever reason, design or misfortune or happenstance, some debt is at some time not repaid.

That's why we pay people to take our debt; if noone ever defaulted there would be no rational reason to pay interest (apart from future income discounting). We pay for our debts as insurance against the certainty that at some point someone will bail. And that greases the wheels to make sure that debt gets extended to those who will pay.

Now hold onto that thought whilst Guambat relates a story told long ago to Guambat about cows and the Chicago cow yards.

At one time Chicago was slaughter city. Almost all of the cows from the great mid-west USofA were sent to Chicago abbatoirs, and they supplied the world with all that beef. But there was more to it than just beef. There were hides, as well. And bone, and blood and gall stones and everything else between hoof and horn that the canny butchers learned to exploit.

The saying that rings in Guambat's ears is, "By the time they got through with a cow, the only thing left was the "moo"."

And this is where we return to the debt story. Modern finance has developed means of extracting all the various benefits to be had from the cashflows resulting from debts of all sorts, including credit cards, low-doc mortgages, car rental contracts, sovereigns, whatever. They extract and trade in the near-term cashflow, the medium term cashflow, the long term cashflow, and the expectancies of whether the debt will be repaid or not.

Indeed, when the modern financier get through with a debt, the only thing left is the "due".

The game of this world of modern finance is not unlike the childhood games of hot potato and musica chairs. The premise of the game is that time will not be called while you are holding the potato or between chairs. The marketing of the game of modern finance is that you can take your share of the cashflow and pass off any of the risk that the debt will not be repaid. It is, in reality, a shell game.

And what happens when everyone is racing around the chairs, passing around the hot potato, and time just goes on, is that people get sloppy. Or tired. Or even if they don't, at some unexpected time, "time" is called.

The inevitable event occurs. And no amount of racing or passing will save you if you are the one on the outs when time is called. You are simply dead meat regardless of your best efforts and high expectations.

No matter how often or fast you pass off the risk of the hot potato or the risk of no chair, you do not eliminate the risk. It is the defining character of the game. And you are only fooling yourself if you think that by playing the game you have eliminated the risk.

Bill Gross doesn't put the story in quite the same fashion, but he tells essentially the same story in his most recent essay, Alpha/Beta Anemia:

[I]f the “Beta” or return from various asset classes is correlated to the growth rate of nominal GDP, then what we have to look forward to is a rather anemic “Beta” in future years. In turn, if because of that increasing realization, investors have responded by compressing risk spreads and therefore potential Alpha, then what’s looming over the immediate horizon is an Alpha/Beta anemia that can’t come close to meeting investor expectations or for that matter come close to immunizing this nation’s collective liabilities.

As nominal GDP growth rates have declined from 11%+ to a recent 5-year average of less than 5%, future asset returns of a similar magnitude are foretold. While Chart 1 suggests that a 5% GDP growth rate can be levered up to perhaps 6% or 7%, that levering is certainly more difficult with a Fed Funds policy rate higher than the current growth rate of GDP and with disinflation near its end. In any case, we appear to be looking at maximum 6-7% average annual returns over the immediate future from stocks, bonds, and real estate in total (stamps too!).

A recent study by the Bank for International Settlements points out that the annualized volatilities for stock, bond, and currency markets are approaching historic lows, with the implicit assumption that the pricing of risk is following in lock step.

To be fair, the BIS also points out that there may be numerous fundamental reasons that justify lower risk spreads. Globalization, the “great moderation” of economic growth in recent decades, increased central bank transparency, and the innovation and promulgation of financial derivatives, which can disperse and spread risk as well as promote increased liquidity are but a few of their major arguments. I concur with much of their logic.

But I also agree with Alan Greenspan and economist Hyman Minsky that stability can in time be inherently destabilizing as overconfidence leads to lower and lower risk spreads, more and more financial leverage (Ponzi finance as Minsky called it) and an ultimate vulnerability to the economy and its financial markets on the downside. The BIS points out that financial institutions in recent years may have ultimately increased their overall risk exposure despite the reduction in asset volatility.

Playing by the new rules which in part require an assumption of levered risk spreads at historic lows could likely lead to low absolute returns and/or negative Alpha should instability return. Your asset returns – and active portfolio management itself – are now both at risk in this seemingly riskless and increasingly anemic investment return environment.

Financial innovation, central bank transparency, and even globalization’s great moderation of economic volatility are powerful arguments suggesting the old days of copious Alpha and Beta are over because 5% GDP growth and compressed risk spreads are not likely to permanently return to historic levels. Yet we have a collective sense that risk spreads will not remain so low over the next 12-24 months, and that instability – whether it be sparked by U.S. housing, global overinvestment, or geopolitical events – will one day temporarily resurface.

If both major assumptions have merit, then the strategic and structural case for now should be guided by the New Age acceptance of change and the Old Age wisdom that bad things can happen to apparently good assets in the short term.

But its all in the game

Guambat is (once again) showing his age. One of the great songs of his youth was, "Many a tear has to fall (but its all in the game"). I'm sure you can buy it on TimeWarner Music. It's a classic.

The tune crooned out between his ears when Guambat read,

Private equity boom may "end in tears"

THE head of Australia's largest bank today warned the boom in private equity transactions in the domestic market was likely to end in tears.

National Australia Bank group chief executive John Stewart told a business luncheon that it would take only one syndicate to fold to see the boom unravel.

"Everyone feels private equity is going to end up in tears," Mr Stewart said.

"The only question is do you join in while it is making good money for everyone?"

"When you know there is a problem is when the first syndicate fails," he said. "All you need is one deal to fold then it will start unravelling, I suspect."

Mr Stewart said the major banks were in a better position than they used to be and were not holding all the risk in private equity deals.

Private equity raiders have been active in the market this year, buying up the Myer department store chain, the Cleanaway division of Brambles, retailer Colorado group and 50 per cent stakes in the media assets of each of Publishing and Broadcasting and the Seven Network.

Negotiations were also underway to sell Flight Centre and Rebel Sport into private hands.

Mr Stewart also expected the moving of jobs offshore by the bank would increase from a current 20 to 30 people to around 200.

"Most banks will keep customer-facing jobs but back office jobs will be done in places like India and China," he said. In a wide ranging address, Mr Stewart also said NAB's credit card business was not for sale.

"We're okay in credit cards," he said.

"Other banks are better than us in credit cards and it is a business we will probably invest in, but not right now, thank you."

He said Australian consumers were showing signs of stress and it would be the wrong time to look for more credit card business.

He said if the economy slowed, the first business areas to suffer would be lending and credit cards.

Of course, you'd expect that from a banker.

This just in

The headlines are coming acrosst the wire on the release of the Cole enquiry report into the AWB oil for wheat deal.

The headlines suggest that Howard, Downer and Vaile saw no evil, heard no evil and spoke no evil so far as the evidentiary trail led.




UPDATE: Cole clears PM in bribes probe
Mark Davis
November 27, 2006 - 4:26PM

"There is no evidence that any of the Prime Minister, the Minister for Foreign Affairs, the Minister for Trade or the Minister for Agriculture, Fisheries and Forestry were ever informed about, or otherwise acquired knowledge of, the relevant activities of AWB,'' the report said.

The 1951-page report by Commissioner Terence Cole, tabled in federal parliament this afternoon, named 11 senior AWB executives whose conduct may have involved being accessories to criminal behaviour or breaching the Corporations Act.

Commissioner Cole sheeted the blame for AWB's series of illicit payments to the company's internal corporate culture.

"The question posed within AWB was: 'What must be done to maintain sales to Iraq'.

"The answer given was: 'Do whatever is necessary to retain the trade'.

"No one asked, 'What is the right thing to do?'"

"Necessarily one asks, 'Why?' The answer is a closed culture of superiority and impregnability, of dominance and self-importance," the report said.

Astra-ology

(map source)

I don't remember what led me to this link, but I'm glad I went. Just another reminder about what a wide world this small planet is.

The link was to a story in the online The Hindu, and was written by someone with a Muslim perspective, I'd guess. Whatever, I must have missed this on Channel Nine's Getaway travel program, but I'd love to see them do it. Sounds interesting in an edgy kinda way.

Astrakhan, Russia's Eurasian melting pot: It is Asian enough to be familiar

Astrakhan (Russia): As the Nikitin expedition moves south and east, the urban landscape becomes more oriental than Russian even before you cross the Caucuses. Astrakhan, situated 100 km from the shores of the Caspian, is Asian enough to be familiar and provincial enough to be intimate.

Dusty ramshackle wooden bungalows, reminiscent of Indian towns of the 1950s line both sides of the narrow streets. Soviet-style high-rises are few and far between and traffic is tolerably sparse.

But make no mistake. Astrakhan is more international than Moscow. The town lives up to its reputation as a key link in the north-south silk route. The quays are dotted with boats and cranes.

Europe and Asia converge in this town, which is home to 1.2 million people from 170 nationalities. Russian Christians make up the majority, followed by Tatars and Kazakh Muslims. Cossacks from Krasnador Krai and Stavropol dressed in breeches and carrying sabres are not an uncommon sight on the streets of Astrakhan. Azeris run the thriving catering businesses.

Armenians, Caucasians, Georgians and Dagestanis all come in search of jobs in oil and caviar for which this region is famous. Multinational and Russian oil majors — Agip, BP, Rosneft, Gazprom and Lukoil — are drilling in the Caspian, hoping to hit it big in this region acclaimed as the second Middle East.

The legal status of the Caspian is yet to be determined and the littoral states are fighting over whether it is a sea or a lake. Meanwhile, Astrakhan, the bridgehead for oil and gas exploration in the Russian coast of the Caspian Sea makes hay, merrily drilling away. A state-of- the- art port — Olya — is being built here and, when completed, will become the bridge to the north-south trade corridor that could bring Russian goods to Indian shores and vice versa.

But it was neither oil nor caviar that first brought Indian traders to this part of the world more than 200 years ago. Enterprising Gujarati merchants trudged all the way from Kutch piled high with super-soft cotton razaais lovingly sewn by Kutch women. They came on boats, camels, horses and even on foot to trade in other goods. After all they were all vegetarians and did not care much for caviar nor had the means to carry oil back home. In fact, most of them decided to stay on.

There was a flourishing Indian trading yard in the affluent part of the town adjacent to the Persian and Armenian trading centres, but today nothing survives. The Astrakhan state administration has seen it fit to mark the site and declare the site of the trading yard as a national monument.

Indians continue to fascinate historians and scholars alike. We meet @@ at the @@ library. She is researching for a book on Indians in Astrakhan based on extensive secondary material — books, portraits, photographs — housed in the local library. Unfortunately, Indians in Astrakhan are no longer distinguishable since they have intermarried and merged with local peoples. @@ also tells us that many Indians were also hounded out of Astrakhan during ## for charging usurious rates of interest!

Perhaps it was this Indian connection that brought Gujarat Chief Minister Narendra Modi to Astrakhan in August this year. Ahmedabad and Astrakhan are sister cities and Modi landed with a group of businessmen from Gujarat. Many MoUs were signed. Collaboration in oil and gas exploration and production was one of them.

We visit the very modern and very impressive Astrakhan State University, whose medical faculty boasts many Indian students.

Astrakhan is truly a melting pot of many cultures and civilisations. Islam practiced in these parts seems a liberal version, one that tolerates consumption of alcohol as well as pork. Before the Russian Revolution, Astrakhan province had 260 mosques, and the town itself was home to 91. But during Soviet times, all the mosques were converted into offices and barracks. Now worship takes place only in 8 mosques.

Says Refat Asanov, a Tatar youth, "We hope to get back the mosques one day". We visit the White Mosque built in 1898 by Hazrat Wahabuddin. During the one-hour we spent in the premises, we saw several worshippers - Azeri, Kazakh, Chechen and Tatars - trooping in for prayers. Some of the madrassas are being revived although funding seems to be a problem. There are many churches and a Buddhist monastery as well.

I'm sure it was an honest oversight, but there is a long and thriving Jewish history in Astrakhan, and synagogues too.

Jewish community of Astrakhan

Astrakhan is a major city in southern European Russia, which lies on the Volga River, close to where it empties into the Caspian Sea. While Astrakhan's Kremlin dates back to the 1580s, the city was likely settled under the Tatar dynasties of the 13th century. Ivan IV conquered the city in 1556, thus opening the entire Volga River to Russian traffic, and it became an important trade center.

Situated 1534 kilometers south-east of Moscow, the city spreads over eleven islands, occupying 500 square kilometers. The country's main waterway, the Volga River, flows through Astrakhan and connects it with the Black Sea. The region borders on Kalmykia to the west, Volgograd Region to the north and Kazakhstan to the east.

As a frontier city at Russia's southern gates, Astrakhan is situated on the crossroads between Europe and Asia, making it a commercial and transport center. Both a large river and seaport, it was an essential stop on the Great Silk Way and played a key role connecting West and East.

There are over 150 minorities and ethnic groups in Astrakhan and 14 different religious confessions. The total population as of the 2002 census is 502,800 people, of whom there are an estimated 3000 Jews.

The first signs of Jewish life in this region may be connected to an epoch that left almost no evidence except for broken crockery and a coin with the Magen David star, both of which were found about 14 kilometers from the city of Astrakhan. This is all that remains from the city Itil, the capital of the Khazar Khanate, an empire that which existed until the 16th century.

In 1791, Empress Catherine the Great granted permission to Jews to reside in Astrakhan. The first Jews settled here in 1804 - two members of the Davidov family, both merchants representing the Chernorechensk Winery.

By 1835, there were 49 Jews residing in Astrakhan. None of them were registered to a community and were basically occupied with their craftsmanship. In that year, Tsar Nikolai I introduced the concept of the 'Jewish pale' and excluded Astrakhan from the cities on this list. His decree to evict all Jews from the city came in spite of appeals from the Governor of Astrakhan Region, who argued that Jews did not disturb the city's Russian population. Nevertheless, the Governor did not defy orders given by the Minister of Finance, who had taken control of the eviction process.

Among the local Jewish population were both Ashkenazi and Sephardi Jews, both natives of the Caucasus region. The Jewish community purchased a building for use as their first Synagogue. They also started to construct a new building as a second Synagogue. By the beginning of the 20th century, the city had two Synagogues: one Ashkenazi, one Sephardi. The Ashkenazi Synagogue gave rise to the so-called 'Craftsmen's" Synagogue'.

A Karaite Jewish community used to exist just north of the city, but its members eventually left the Astrakhan Region.

(map source)

In the early 19th century, there was also a large group of Gers. These were Molokan Subbotniks (sectarian Bible-centered Christian peasants who refused the Russian Orthodox Church and came to adopt Jewish practices) who eventually converted to Judaism.

Read all about it

Go see for yourself

Loose threads 25 Nov 2006

Just a few items I've bookmarked in the last few days for passing along.


Hank Greenberg: Ever want to know what he's keeping an eye on? Well, I'm not sure if it's this particular Hank Greenberg, but this news-clipping service of a Hank Greenberg showed up as a recent hit on one of Guambat's stews.

Citadel: This story started a few days back and has progressed, so far, along these lines:

Market talk of trouble at hedge fund fuels dollar selling. This is a curious one because my google seach references statements linking the "trouble" to Citadel (e.g., "... "Rumors of a major US hedge fund collapse appear to be behind the dollar's latest dip," said ... Dolan said the speculation centers on Citadel Investment Group. ... "), but the article (no longer??) has that reference.

Hedge Fund Rumors: Citadel Tell WSJ "It Ain't Us"

Troubled hedge fund rumours point to Citadel....

Citadel Investments said it is having a strong year despite talk in the financial markets that the $12 billion hedge fund may be suffering losses.

Citadel manager leaves firm

Are hedge funds dangerous? "When we discuss the effects of hedge funds on the financial markets, I believe it may be useful to compare the crisis at Amaranth, which I described in the beginning, with the crisis at LTCM. The effects on the financial markets were very different. Despite the fact that Amaranth’s losses were much greater than those of LTCM, no authority needed to intervene; Amaranth was able to close its positions of its own accord and in a smooth manner. The large positions were sold (at a substantial discount, one assumes) to JP Morgan and Citadel, another large hedge fund.
The Riksbank’s view as regards further regulation is that the focus should be on the hedge funds' counterparties - particularly the systemically-important banks - being able to manage their risks. Improving the banks’ risk management with regard to hedge funds has been the objective of a number of initiatives by the Basel Committee on Banking Supervision and other organisations ever since the LTCM crisis in 1998. From a stability point of view, the central issue is that the systemically-important banks should manage their counterparty exposures correctly – take sufficient collateral, have appropriate limits and be capable of managing potential liquidity problems. The arguments for further regulation of hedge funds are in this context weak."

Stefan Stern on John Monks in the Financial Times: Rise of ‘casino capitalism’ shakes faith of moderate Monks "When the John Monkses of this world say enough is enough, that the capitalist system itself is sick, you can be sure that elsewhere in the world there is deep-seated, lingering resentment and unhappiness."


Mark Hulbert: Not sure if this is evidence that the guy is right or wrong but Mark Hulbert seems to think he's finally got it right:

Fosback, for those of you unfamiliar with him, is a serious student of the stock market. He helped found the Institute for Econometric Research in the early 1970s, and for years was editor of a number of investment advisory publications, most notably Market Logic. After Time Warner acquired those publications in the 1990s and subsequently folded them, Fosback inaugurated his current newsletter.
For some time now, Fosback has been closer to the bearish end of the bull-vs.-bear spectrum, and sometimes a lot closer. As recently as this past summer, in fact, his econometric model was projecting that the stock market would produce a slight loss over the subsequent 12 months and a meager 13% total return over the subsequent five years - equivalent to just 2.5% annualized, far less than the stock market's long-term average and even lower than a riskless money market fund.
But in the issue I received on Monday, Fosback reports that his model is now projecting an 11% return over the next year and a 38% return over the next five years (equal to 6.7% annualized). Though this is not a wildly bullish forecast in and of itself, it represents a significant improvement in the stock market's prospects in a very short amount of time.
I was surprised, because market timing systems like Fosback's which use econometric techniques to distill a large number of fundamental and technical indicators the usual cause of such a markedly improved forecast in such a short time is a big decline. But Fosback's model has improved during a time in which the stock market has gone up, not down.
The Dow Jones Industrial Average today is more than a thousand points higher than where it stood when Fosback's was projecting little more than a flat market for the subsequent five years.
What has been the source of his model's brighter outlook? It's not been the market's valuation, since - as Fosback points out - "Valuation numbers (P/Es, yield, price/book ratios, etc.) have not changed significantly of late - i.e. they are still bearish to moderately bearish." Nor has there been much improvement in the monetary indicators that Fosback's model incorporates.
Instead, Fosback's model has improved because of a number of technical indicators. One is the market's breadth, as measured by the advance-decline line, "which had been quite weak last summer, but is now as strong as ever." A related indicator, which also has improved markedly since the summer, is relative strength of small-cap stocks over large-caps.
A lesser known technical indicator that also has recently exhibited a lot of improvement is known as the "High Low Logic Index." This indicator, which Fosback says that he invented in the 1970s and which he terms one of his favorites, is bearish whenever there is a large number of both new 52-weeks highs and new 52-week lows on the NYSE. The rationale behind the indicator is that "under normal conditions, either a substantial number of stocks establish new annual highs or a large number set new lows - but not both ... When the Index attains a high level, it indicates that the market is undergoing a period of extreme divergence ... Such divergence is not usually conducive to future rising stock prices."
Fosback reports that the High Low Logic Index has "improved dramatically" since earlier this year, and is now "actually nearing a buy signal."

So, this guy's model was showing a dead market, but the Dow went up about 10% at which point the model followed and "turned" bullish. Sounds a bit like a dog chasing his tail. What's to get so excited about? Even Hulbert noted, "To be sure, Fosback is not advising his clients to throw caution to the winds. A 6.7% annualized return over the next five years is still below the market's long-term historical return, and only modestly above the 4.6% return of the 10-year Treasury note." Perhaps we should just file this under "left-handed compliments."

Barry Ritholtz: Barry innocently created a classic blog discussion about market statistics and their assumptions and applications. You will have to read the post and all the comments, but it is just dandy stuff and a timely reminder to test your assumptions from time to time:

917 trading days since down 2% day

Ross Gittens on Milton Friedman: "Something they won't tell you is that the first reason cited for the Nobel Prize Friedman was awarded in 1976 was his development of a theory much more orthodox and long-lasting than "monetarism": the "permanent income hypothesis".

This is the contention that people adjust their consumption spending not in response to changes in their current income but to reflect what they expect will be their lifetime income.

But let's get on to monetarism, the idea most associated with Friedman's name. The first point is that it wasn't his new idea....."

No BHP bid for Freeport

Analysts are now saying what Guambat pointed out yesterday, namely that Freeport McMoRan comes with too much political baggage for BHP to get involved.

"0054 GMT [Dow Jones] Zero chance of BHP Billiton (BHP.AU) bidding for Freeport (FCX) in wake of latter's takeover of Phelps (PD), says industry analyst. View based on "horrendous" social, political, environmental issues surrounding
Freeport's flagship Grasberg mine in Indonesia, which would resonate loudly with BHP
given ongoing fallout from its Ok Tedi mine in nearby PNG. "BHP must be laughing at
all the broker reports naming it as likely Freeport suitor," says, naming Barrack
Gold as only possible suitor, although even that appears unlikely."

AWB: The Penultimate Chapter

Howard knew what WHEN, and told who WHAT??

Guambat has enjoyed, in a purely literary sense, the ongoing who-dun-it novel being played out involving the Australian Wheat Board's shenanigans with the governments of Australia and Iraq and incidental others. Fiction writers would give their eye teeth to come up with such a tale. It's just another case of truth turning out to be stranger than fiction, though.

Now we're told that not only did John Howard's government know at least a year before the invasion of Iraq that it would be an inevitable event in which Australia would inevitably become involved, but it gave the AWB a heads-up tip to allow them to get in early with the pillage.

Flugge knew invasion plans by Marian Wilkinson

ONE year before the invasion of Iraq, Australia's then ambassador to the United Nations, John Dauth, confidentially told AWB's former chairman, Trevor Flugge, that the Howard Government would participate in military action with the US to overthrow Saddam Hussein, new AWB documents reveal.

Details of the extraordinary conversation undercut previous statements by the Prime Minister that Australia had not agreed to join the war in Iraq before the UN debate in late 2002 and early 2003.

The conversation between Mr Dauth and Mr Flugge took place in early 2002 - 13 months before the war - and the details are contained in confidential AWB board minutes that were released without fanfare yesterday by the Cole inquiry.

The minutes record Mr Flugge telling the board on February 27, 2002, that Mr Dauth confided in him "he believed that US military action to depose Saddam Hussein was inevitable and that at this time the Australian Government would support and participate in such action".

With astonishing accuracy, Mr Dauth also predicted that the Iraqi regime's offer to invite UN weapons inspectors to return would be "likely to stave off US action for 12 to 18 months but that some military action was inevitable". The ambassador also told Mr Flugge the operation in Iraq would operationally be similar to that in Afghanistan, with "heavy use of air support followed by deployment of ground troops".

Mr Dauth promised Mr Flugge he would ensure AWB had "as much warning as would be possible" of the action but that it was likely even the Australian Government would not know the timing.

Until now, it was believed that the Howard Government began to consider military action against Saddam Hussein only in the middle of 2002. British and Australian intelligence assessments claiming Iraq still held weapons of mass destruction were released in September 2002, but throughout the next months Australia publicly supported the return of UN weapons inspectors to Iraq.

The minutes reveal Mr Flugge was given an unusual level of access to highly sensitive information. While Mr Flugge was voted out of his job in 2002, he was kept on on retainer by AWB until 2003.

Immediately after the US-led invasion of Iraq, he was hired to help with reconstruction efforts. He brought more than $1 million in cash into Iraq to distribute as part of the postwar operation.

See no evil

The AWB scandal unfolded under the watch of Alexander Downer and Mark Vaile. The two ministers are now bracing for the Cole report - and the inevitable political fallout.

ALEXANDER DOWNER was in full flight. "I've never heard more hogwash than that in the whole of my life!" The Minister for Foreign Affairs was berating Canberra's foreign press corps recently on climate change, Iraq, North Korea and corrupt Solomon Islanders.

He knows in the Pacific they call him "colonialist, arrogant and overbearing". But, he quipped: "Actually, I'm lovely."

It was a rare light moment in a shrill Downer performance. These days, his old jocular persona is a distant memory. Thrown by the implosion of the Bush White House and rocked at home by Terence Cole's probing into the oil-for-food scandal, Downer finds the political ground rapidly shifting beneath him for first time in a decade. And he sounds decidedly uncomfortable.

In public Downer vents his anger on reporters who won't "bring on the truth for at least five minutes in the third quarter and give it a run around". He vents it on Kim Beazley, who wants to "cut and run" from Iraq.

But in private, Downer also vents a little anger about the Prime Minister's most senior official, Dr Peter Shergold.

Shergold, a career public servant with a fondness for bush gardening, persuaded John Howard last November to set up the Cole inquiry into the oil-for-food scandal. And for that, Downer may never forgive him.

The tension between Downer and Shergold over Cole is extremely sensitive within the Howard Government. Insiders say Downer saw Shergold's advice as naive, arguing he failed to recognise the damage it would wreak on the Department of Foreign Affairs and Trade. But Shergold's backers reply that there was no alternative once the UN's Volcker report found that AWB had paid almost $300 million in kickbacks to Saddam Hussein's regime.

Shergold ran through all the options - a police inquiry, public service inquiry and closed door inquiry - but he firmly believed that without full judicial powers to subpoena documents and call witnesses, no inquiry would get to the bottom of one of Australia's worst postwar scandals.

Downer declined to discuss Shergold this week, saying he would make no comment on the Cole inquiry except to attack the media and Beazley for "a series of outrageous allegations" against him. "These will be tested by [the] independent commission of inquiry," he said. The indefatigable Downer had just left Indonesia after signing the Lombok Treaty with his Indonesian counterpart, Hassan Wirajuda, and was meeting the US Secretary of State, Condoleezza Rice, in the poignant setting of Hanoi to discuss the quagmire in Iraq.

But on his return home Downer will confront Terence Cole's weighty report. The still-secret final tome will be handed to the Government on Friday. It will make no findings against Downer or any Government minister. Indeed, Cole will make it clear he had no brief in his terms of reference to investigate their performance. But Downer is expected to announce a major shake-up of his department to respond to criticism in the report. Everything from record management to crisis management is being scrutinised.

The Cole report is expected to lay out in excruciating detail how AWB managed to funnel almost $300 million in kickbacks to Saddam Hussein's regime under the nose of Downer and his department. It will expose evidence of criminal behaviour by AWB executives and managers. But it will also find AWB grossly deceived the Government, and both Downer and Howard will rely on this to clear them of any wrongdoing in the scandal.

Even so, Downer cannot escape the reality that AWB was furiously busting UN sanctions against Saddam at the same time as he and his department were responsible for upholding them.

For this reason, despite Cole's restrictive terms of reference, his inquiry has already bruised Downer. In effect, the inquiry tore down the walls of secrecy that normally shield a government department and its minister. It exposed both to unprecedented and, at times, brutal scrutiny and left them looking incompetent.

Hundreds of documents - ministerial submissions, diplomatic cables, records of embarrassing discussions between Downer and AWB executives - were slapped onto the public record. According to one insider, Downer found his own appearance in the witness box one of the most stressful experiences in his career.

Downer has already been briefed on the voluminous draft submission prepared by Cole's counsel assisting, John Agius, which will be the basis of the final report. The Agius draft prompted the department's lawyers to make lengthy submissions to Cole in the hopes of softening its criticisms. Among them are that DFAT was "cursory" in its approach to enforcing the sanctions against Saddam; that it lost a vital file about AWB's trucking fees which adversely reflected on DFAT; and that individual officers should have read the warning signs. The actions of officers in the Middle East branch, in the Jordanian embassy, in the UN's New York headquarters and on the Iraq taskforce are dealt with in detail.

Many in the department, especially the middle-ranking officers, are still shell-shocked. One long-time officer described the mood as "unsettling and very uncomfortable".

There is also anger in the ranks that the most senior DFAT officers were spared from appearing in the witness box. "They don't point the finger but there is a lot of talk that there is a void in responsibility at the level of secretary and deputy secretary," one officer said. "A lot of the burden of accountability has fallen at the middle level. These are the desk officers, the junior officers who carry the water. The decision-making and the advice does not start and stop at that level in the department."

The middle-ranking officers realise if Cole's final report confirms that criminal charges could be brought against senior AWB figures such as Trevor Flugge and Andrew Lindberg, they will be called as witnesses in criminal trials and subjected to rigorous cross-examination by the defence.

A key chapter in the draft, called "The Knowledge of the Commonwealth", makes it clear that AWB's only real defence to many of the charges is to attempt to establish that departmental officers knew about the kickbacks.

Cole's limited brief was to look for evidence of lawbreaking by AWB, not examine the Government's competence. But there is little doubt that in the months of hearings, he inflicted serious collateral damage not only on the department but on Downer. "There is no doubt it undermined him," said one Liberal backbencher. "The negative question times, the bad publicity, the editorials day in and day out. It can't not have had an impact."

THOSE who have worked closely with Downer credit him with enormous energy and rigour. Even among his opponents in the Liberal party room he has earned respect, if not love. But friends and enemies alike say Downer has one serious weakness as a foreign minister. Behind the sometimes blustering appearance, he is a deeply partisan animal. He passionately embraces a stand and once he does, he and his circle defend it to the death.

As one former close colleague put it: "They take a position, mark out their ground and then defend it very, very vigorously. And often when you're defending it so vigorously, you don't notice the guys behind you have disappeared."

Downer's style was starkly exposed during the Cole inquiry. The paper trail from his office reveals that when AWB was under attack over allegations of kickbacks, Downer chose to accept the company's denials largely at face value and go into bat. "I'm more relaxed about this than they are," he memorably scrawled on a note to his departmental head, Michael L'Estrange, who pointed out AWB had admitted its trucking firm in Iraq was half-owned by Saddam's regime.

Even when the head of the UN inquiry, Paul Volcker, warned in October last year that there was overwhelming evidence against the company, Downer was still accepting AWB's denials and personally advising its executives on how to defend themselves. No one in his department, according to the evidence, offered the frank and fearless advice that AWB executives could be lying.

One month later, Howard had backflipped and set up the Cole inquiry.

Downer's passionate partisanship is in overdrive when he is defending George Bush's strategy in Iraq. In August this year, as a tsunami-like tide of American public opinion was building against the Iraq war, Downer helped fund the fringe neo-conservative commentator Mark Steyn on a speaking tour of Australia. For several colourful days and nights, Steyn delivered humorous polemic diatribes in support of Bush, the war and Downer, calling his patron "my favourite foreign minister".

At a dinner for Steyn co-sponsored by Downer and the new journal The Conservative, the minister was surrounded by his staunch factional allies on the right of the Liberal Party, the Finance Minister, Nick Minchin, and the Minister for Ageing, Santo Santoro. The NSW Liberal apparatchik David Clarke even put in an appearance. Downer basked in Steyn's praise of his "magnificent performance" during question time that afternoon, when Downer damned Opposition calls to pull out of Iraq with the jibe that Beazley's "constant companion is a white flag".

In stark contrast, a few months earlier Downer's estwhile American colleague, the former secretary of state Colin Powell, was telling Bush he was in deep trouble in Iraq. Powell, dumped by Bush in 2004, was invited back to the White House by his old boss to discuss the deepening crisis as Iraq teetered on the brink of civil war.

While Downer and Howard were publicly holding the line in Canberra, Bush was seeking out bipartisan ideas on his clearly failing Iraq strategy. He set up the Iraq Study Group under his father's old adviser, James Baker, and invited Powell and nine other former secretaries of state and defence to brainstorm.

Downer was fully briefed on the shifts in Washington at the time but it has taken months for him to qualify his public rhetoric. This week, in the aftermath of the savage US election swing, Downer acknowledged the White House might consider "adjustments to the tactics" in Iraq.

Bush is expected to announce a significant shift in the structure of US forces in Iraq and their tactics soon. There will be a greater emphasis on securing Baghdad, but the President insists he will not bow to Democratic demands for a timetable on withdrawals.

After their meetings in Hanoi this week with Bush and Rice, Howard and Downer were adamant America's fundamental strategy would not change. That strategy is to train Iraq's military and police forces in order to progressively hand over security to the Iraqis themselves. Downer concedes this works only if the shaky, faction-ridden Iraqi Government can stand up. But as Powell told Bush earlier this year, if Nouri al-Maliki's Government is already falling apart, the coalition will not be building up security forces in Iraq, it will be building up sectarian militias that are slaughtering each other.

SO FAR, Downer's unflinching support for the Iraq war has cost him little politically, but with Bush looking like a lame duck that may change. The decision to go into Iraq deeply split Canberra's elite foreign affairs and defence community. Labor's Kevin Rudd labelled it "one of the most reckless decision in the history of postwar Australian foreign policy". Friendships have been ructured over Iraq, including several of Downer's. Now his critics are again asking Downer to explain why he supported it.

The former Foreign Affairs head Richard Woolcott was once a friend and sounding board for Downer. Two weeks ago he delivered a stinging public attack on the Government's Iraq policy during a speech at Newcastle University. Calling the invasion "a catastrophic foreign and security policy blunder", Woolcott argued that Australia's role had "raised Australia's profile as a terrorist target and … massively accelerated terrorist activities in Iraq itself".

Woolcott was put on Downer's enemies list in 2004 after he signed a letter with 42 other retired government advisers saying Australia's support for the invasion was a mistake. Downer was furious because at the time Woolcott's son, Peter, was working as his chief of staff.

Woolcott questions whether his old department gave frank and fearless advice advice to Downer on the decision to support the US-led invasion. Along with two former Howard Government advisers who spoke to the Herald, Woolcott questioned whether DFAT had produced a comprehensive cabinet submission on the implications of the invasion before the war.

They point to the revelation in the 2004 Flood report on Australian intelligence that the Government's peak intelligence agency, the Office of National Assessments, never produced a comprehensive report on the implications of supporting invasion.

Questioned about this by the Herald, Downer did not refer to any formal cabinet submission or ONA assessment but said: "There was an enormous amount of discussion and analysis of the implications of Australia's participation in the overthrow of Saddam Hussein's regime."

One former adviser closely involved in the Iraq strategy believes whatever the lack of formal reports, Downer and Howard were acutely aware that US plans for postwar Iraq were problematic. This is why Howard insisted on an extremely small Australian postwar military presence in Iraq. "We were conscious it would be a difficult period," the adviser said. "But no one envisaged it would be so bad. And no one expected after four years it would be as bad as it is now."

Downer and Howard are now both "trapped in a dilemma of their own making", Woolcott says. But Howard made it clear this week he could not envisage a US withdrawal from Iraq soon, saying it would do "enormous damage to the reputation, prestige and influence" of the US.

Until this year, Downer's close alignment with Howard and the Bush Administration elevated his stature internationally. Unlike Powell or Blair's former foreign secretary, Robin Cook, Downer prosecuted his Government's policies unflinchingly, seldom taking a backward step. At home, his closeness to Howard enhanced his power in the Government.

BUT some of his factional opponents in the Liberal Party note that Downer is looking weaker. In March, when he was distracted by the AWB hearings, Downer's opponents had a rare opportunity to land a blow. His former senior adviser and close friend, Joshua Frydenberg, made a bold run to challenge the party's leading moderate, Petro Georgiou, in the safe Victorian seat of Kooyong. Downer's perceived intervention in support of Frydenberg created a furious backlash against him. In an extraordinary move, the rival Victorian factions, headed by the Treasurer, Peter Costello, and the former Victorian premier Jeff Kennett, combined to crush Frydenberg.

Downer insists he played no role in Frydenberg's push. "I neither encouraged or discouraged him to stand for the Kooyong preselection and spoke to no delegates at all on his behalf," he told the Herald.

Downer's party opponents dismiss his denials and are still crowing. "He used his prestige on something that was a dismal failure," was how one summed it up.

But those who saw Downer come back from his failed stint as Liberal Party leader don't question his political resilience. He's like a wind-up toy, says one colleague. With L'Estrange, he has already set in train the reforms to answer the Cole report.

Among them is expected to be the hiring of a new phalanx of public relations officers. Which suggests Downer is planning to dig in to defend his territory rather than concede any ground.
The foreign affairs cables

January 13, 2000 Australia's UN mission in New York says the UN is warning that AWB could be paying kickbacks to Saddam Hussein in breach of UN sanctions.

January 18, 2000 Canberra responds, declaring "we think it unlikely … AWB would be involved knowingly" in kickbacks.

March 10, 2000 New York advises that despite AWB assurances, there is still a "question mark" over its dealings with Baghdad.

March 11, 2000 Austrade in Washington expresses its concern over AWB's reluctance to provide more material to New York and says the Trade Minister should be advised.

March 17, 2000 Canberra advises that the UN concerns will be addressed with AWB executives the following week.

March 22, 2000 Canberra tells New York and Washington that AWB stands by its view there is nothing untoward in its Iraqi wheat contracts.

June 23, 2003 Baghdad embassy reveals that an energetic US captain has sifted through the oil-for-food contracts and found that "every contract since Phase 9 included a kickback to the regime from between 10 and 19 per cent".

August 19, 2004 Washington embassy warns that US Senate committee is on the hunt for incriminating documents, declaring "it is in the interests of both the AWB and the Government to remain in close contact on the issue"

Meanwhile, AWB to be sued by shareholders

A US lawsuit claiming up to $US1 billion ($1.29 billion) in damages from AWB is on hold, but a shareholder class action against the disgraced wheat exporter is set to be filed in Australia within a month.

The US case, which will rely on American laws designed to crack down on organised crime, has been withdrawn from the US District Court in Washington DC for fine tuning, one of the lead solicitors in the action said.

It could be refiled in another jurisdiction - possibly the same American court where AWB is facing another lawsuit relating to sales of soybeans to Indonesia three years ago.

"We just did a voluntary dismissal and the reason we did it was to finalise a few more details," Washington lawyer Palmer Foret said.

"It will be refiled in the not too distant future."

The move gives AWB some breathing space as it braces for the likely damning findings of the Cole inquiry into the $290 million in kickbacks the company paid to the former Iraqi regime of Saddam Hussein under the corruption-ridden UN oil-for-food program.

But the legal mire enveloping the company deepened today when Australian law firm Maurice Blackburn Cashman confirmed it was close to launching a shareholder class action against AWB.

Interest in Australian rates rising

Economic report tips higher interest rates

The South Australian Centre for Economic Studies said higher interest rates would also lead to slower economic growth next year.

Releasing its latest economic briefing, the centre said strong domestic demand, wages growth in sectors competing for skilled workers and slowing productivity growth had produced a "heady mixture for generating inflationary pressures".

Those pressures were not expected to wane in the near future, said the centre's Associate Professor Owen Covick.

"In these circumstances it is appropriate for the Reserve Bank to be increasing interest rates in order to contain these inflationary pressures," he said.

Be with you shortly

There's an opinion piece in the FT by Arne Alsin that says, in a nutshell, that long term investors shouldn't short-sell the market, and he takes a swipe at the shorting funds. A few years back Guambat did a paper, mainly for himself, which he got into in answer to a friend's question, in which Guambat reckoned that buy and hold was a capital idea for the long haul, and that a leveraged buy and hold scheme using derivatives would amplify the returns. So Guambat has some affinity with the idea.

But Guambat finds that too boring and that it is really entertaining to be more active, which leads into trading. There is a cost to this kind of entertainment, not unlike gambling.

So, without intending criticism of the Alsin piece, I want to point out at least one error in his assessment. He says, "The reason they [short-sell funds] lose investors’ capital over the long term is owing to the insurmountable structural impediments in their path.... Another impediment is the relentless upward bias of the market. The combined companies in the Dow Jones Industrial Average have been unprofitable only once in the past 80 years. That was a small loss in the midst of the Great Depression in 1932."

We need reminding that this is a rigged criterium. The DJIA has only one stock in it, General Electric, that has been in the index from the start. Loosers get dropped out, and there have been some mighty big ones over time.

A simpler way to look at it is that the broad capital market reflects returns on money, over the long term, that approximates interest rates plus a bonus for taking on additional risk. It's a bit like backing the horse instead of the bookie. And almost nobody goes to the track to back the bookie. And that's where the trading trouble starts.

Free for all

Freeport's grab for Phelps Dodge has put the pussies amongst the pigeons. It is now being speculated that BHP, who's CEO Chip Goodyear is, I believe, from Freeport McMoRan, will make a run for Freeport. If this turns into a massive free-for-all, it will be one of the last coincidents found at the top of this dot.commodity "super-cycle".

Simply ore-some

But more intriguing yet is the political fall-out of any BHP-led buyout of the vast Papuan mining interests. (You'd get the flavour of that here and here.) This would put that nasty little political "issue" smack dab in Australia's lap, where it is not so much an issue as a Molotov Cocktail.

Arc of Instability

Slipping into Jakarta yesterday for a six-hour visit, George Bush's main aim was to strengthen a key "war on terror" alliance. But the US president's fleeting appearance inadvertently highlighted the endemically unstable condition of a region that Australians, looking north and west, label the "arc of insecurity".

Indonesia's democratic institutions are but a fragile creation of the past decade. Mr Yudhoyono is the country's first directly elected leader. Since independence from the Dutch it has seen numerous religious, tribal or secessionist conflicts ranging from Aceh on Sumatra's tip to the troubled birth of East Timor. And its 220 million people are also, for the most part, poor and prey to the maladies affecting developing countries, not least an investment-starved economy, corruption and misgovernance.

Indonesia's tainted legacy of colonialism, authoritarianism and poverty is shared in spades by its smaller Pacific neighbours whose problems have been ramifying of late. And despite yesterday's big bash in Bogor, only Australia and New Zealand among the heirs to the western empires are taking much notice.

Taking the Lombok pact to the next level

After severe hiccups caused by the granting of asylum to 43 Papuans in Australia, Indonesia-Australia relations are now back on track with the recent signing of a pact for security cooperation in the widest sense of the word. The agreement, called the Treaty of Lombok, is not strictly a military pact but entails cooperation in virtually all security-related aspects, like defense, terrorism, border protection, drugs etc.

Any pact between two or more countries is essentially based on national self-interest. And it is equally true of this treaty between Canberra and Jakarta. And what are these interests that they seek to promote?

In the case of Indonesia, the top priority would be its territorial integrity, sharpened by the loss of East Timor. Rightly or wrongly, many Indonesians blame this on Australia. Therefore, when Canberra granted asylum to Papuans, Indonesia feared that Australia might be encouraging separatism in Papua.

It might be recalled that the treaty of cooperation, now signed between the two countries, was almost ready when the Papuan asylum issue scuttled the process. Jakarta had no use for a treaty of cooperation if Canberra encouraged Papuan separatism.

Therefore, the treaty says: "The Parties shall not in any manner support or participate in activities by any person or entity which constitutes a threat to the stability, sovereignty or territorial integrity of the other party, including by those who seek to use its territory for encouraging or committing such activities, including separatism, in the territory of the other party."

Though not spelled out, the reference here apparently is to Papua or any other restless region.

But the treaty can only go as far as it does on the separatism issue. If Papuan separatism were ever to become a major human rights issue, Canberra might not able to stem the tide of popular opinion as happened with East Timor. The government of the day might itself be swept away by domestic electoral considerations to take the high moral ground.

But there are some difficulties with this approach. First: any exercise to deal with Indonesia-Australia relationship at the top level, without grassroots support, is essentially fragile. It was evident with the first treaty signed in 1995 based on a leadership equation between then Prime Minister Paul Keating and President Soeharto. And when the East Timor crisis erupted, Canberra succumbed to popular opinion in Australia and Jakarta scrapped the treaty in 1999.

It is true that the present treaty is signed with a democratic Indonesian government and is not tainted with Soeharto's dictatorship. But its driving force has been Prime Minister Howard and President Yudhoyono, and one doesn't detect much popular input into it. Because of this weakness, it could easily become derailed over some crisis in Papua or any other popularly-charged issue. It would, therefore, need to build some popular support over an extended period, through education and a wide range of cultural exchanges between the two countries.

No need for cloaking effect with Indonesian ties

What, then, will we gain in the new agreement, and what is in it for Indonesia? The new text contains no less than four references to territorial integrity and separatism, which are preoccupations uniquely of Indonesia. There is no reference to human rights.

The UN Security Council does not score a mention but then the Indonesians are understandably concerned with the possibility of insurrection and insecurity particularly in and around Ambon and West Papua.

On the other hand, if one were asked to identify where, in the arc of instability to our north, our interests might in the foreseeable future be most painfully engaged, it probably would be in Indonesian West Papua. What, then, are we signing up for? Some species of underlying non-aggression pact, a part of which now clearly involves our immutable commitment to Indonesian domination of the Papuans, no matter what?

The new agreement will likely introduce more tension and resentment into our bilateral relationship with Indonesia than provide relief at what is bound to become a pressure point.

Our overall relations with Indonesia are so much more important than the Papuan part of them, which is not the same thing as saying the fate of the Papuans is not our concern. We must not let West Papua be handled as we handled East Timor.

If we try to evade this issue, if we legislate it off the bilateral agenda as the new security agreement will do, we will end up backing ourselves into a corner. The last thing we should be doing is making West Papua a no-go zone in our relations with Indonesia and in our bilateral discussion of local sources of instability.

The essential ingredient to successful Australian-Indonesian relations is to succeed in exposing the development of Indonesian West Papua to improved international scrutiny, and we are turning away from that prospect

West Papua: Indo-Australian Agreement Raises Concern over Human Rights

While the treaty acknowledges Australia's domestic laws that respect international obligations to provide asylum to genuine refugees, critics say the agreement is a deliberate attempt to prevent Australia from responding to human rights violations in West Papua.

The president of the International Commission of Jurists (ICJ) in Australia, John Dowd, says his organisation has serious concerns about Indonesia's handling of its jurisdiction over West Papua and the treaty should be the subject of more public debate.

"I can see no basis for a treaty with a country that's not under attack and we're not under attack," he told the ABC. "I think it's a mask for assisting their military."

The ICJ claims Indonesia has not honoured an international agreement made in 1962 that West Papuans be given the right to self-determination.

The Australian ICJ has released a specific statement on West Papua, which notes that no democratic elections have ever been held in the territory. The statement refers to a litany of human rights violations perpetuated by Indonesian security forces and the military since Indonesia's occupation.

Strangling West Papuan independence

West Papua has vast mineral resources of copper and gold some of which are exploited by the US Corporation, Westernport. It has huge timber forests, a prime target as forests elsewhere are being cut down and the countryside devastated.

Rex Rumakiek, the Decolonisation Officer of the Pacific Concerns Resource Centre and a West Papuan, when commenting on the new Treaty quotes the communiqué issued by the 2006 Pacific Island Forum:

"Leaders expressed concern about reports of violence in Papua and called on all parties to protect and uphold human rights of all residents in Papua and to work to address the root causes of such conflicts by peaceful means. They also urged Indonesian authorities to bring to justice the perpetrators of serious crimes in the Province of Papua."

The root causes of the independence struggle taking place in West Papua arise from the military occupation of the province and the savage repression of the independence movement.

More strife in paradise

AS instability spreads across the Pacific, a fierce debate is raging in Canberra about the direction of Australia's Pacific policy.
Last week's riots in the kingdom of Tonga mark a significant expansion of the "arc of instability" to our north, which now extends from East Timor to Tonga.

The fact that the arc is acting up comes as no surprise to observers, who have been watching Australia's global military engagement with a sense of dread.

The Howard Government, and particularly former defence minister Robert Hill, spent years undermining a fundamental principle of Australia's post-war security policy.

That is the need to maintain peace and stability in our immediate neighbourhood.

Foreign Affairs Minister Alexander Downer argues that relations between Australia and the Pacific are strong, but the reality is that Australia is in danger of drifting away from its tiny island neighbours.

Post September 11 military adventures in places such as Afghanistan and Iraq have diverted attention and resources from the region.

Relations with PNG are at a near all-time low, the Solomon Islands regime hates us and Fiji's military has warned Australia not to interfere in Fiji's internal affairs.

A USTRALIAN troops and police are deployed in large numbers in East Timor and the Solomon Islands and now 55 Diggers and 35 police are on the streets of Tonga's capital, Nuku'alofa.

We have warships standing by off coup-prone Fiji, Papua New Guinea is teetering on the brink of social and economic collapse and Vanuatu is always unstable.

Other smaller island states, such as Kiribati and Tuvalu, are struggling (literally) to keep their heads above water.

Australia is the super power of the southwest Pacific and the world's only global super power, the United States, is more than happy to leave the wellbeing of the region in Australia's hands.

"We don't understand the Pacific and we don't really want to understand it. That is your back yard," a senior US official told me.

A senior Australian official, who spoke off the record, said that the problem with Australia's Pacific policy was that it was too focused on how many warships or troops were available -- and not on the underlying problems.

This new form of gunboat diplomacy carries considerable risk and does not address long-term solutions.

Simply sending in ships or Hercules transport planes to deliver peace-keepers and to rescue stranded Australian business people or tourists is not a solution.

What is required is deep and abiding engagement, closer people-to-people links, better education and access to technology.

Happy Thanksgiving

And Guambat renews his invitation to Australia to join in the Spirit of Thanksgiving.

A tangled web

Not having studied the matter, Guambat will not even hazard a statement about the current status of libel and the internet, except to say that issues remain far from settled.

The most recent case law statement comes from California, not surprising given the Free Speech Movement got boosted along in the Great and Grand '60's at UC Berkeley, which henceforthe has been called Berzerkly, the Republic of Berkeley, etc., and been the butt of many jokes by people who prefer to be told what to think than to think out loud. See, Court expands blog immunity.

That "immunity", though, is not universal and some places, such as Australia, have, in the eyes of Americans used to Bill of Rights protections for speech, fairly rough rules on libel. So the jurisdiction of the court can have significant consequences, and here, again, the US and Australia take differing stands.

The US: US court decision limits jurisdiction for internet libel

Australia: High Court makes landmark ruling on Internet jurisdiction in libel cases

And the issues don't end there. See, Times for a Change: Loutchansky v Times Newspaper by Lilian Edwards, Senior Lecturer, Edinburgh University

Shoulda bet on OJ

Global economic growth has fueled accelerated demand for raw materials, sending crude oil up 36 percent since the start of 2005. Corn jumped 74 percent over the same period, and copper doubled. Orange juice soared 132 percent.

Currency Bets Punish Commodity Traders, Henry in 2006 (Update1)By Mark Tannenbaum and Michael McDonald

Henry runs a group of commodity trading advisers, a type of fund manager that buys and sells currency, bond or commodity futures on the Chicago Board of Trade and other exchanges. His John W. Henry & Co. $1.25 billion Strategic Allocation Program lost 12.5 percent this year and plunged 19.2 percent in 2005.

The $70 billion managed by so-called CTAs returned 1.4 percent on average this year because of the steepest currency losses since 1994, said San Diego researcher Daniel B. Stark & Co. The funds, which use computer-driven trading to profit from changes in exchange rates, tumbled as the euro stayed within its narrowest range since the currency was created in 1999.

"It's been brutal," said Jeremy O'Friel, principal at Appleton Capital Management in New York, whose $150 million currency fund is down 11.7 percent this year. "In the absence of volatility, it's very difficult to make money."

Commodity trading advisers, whose investments returned just 0.5 percent in 2005 after they increased their bets on currencies, would have done better buying corn or orange juice.

Even the benchmark U.S. 10-year Treasury note outperformed commodity trading advisers, returning 3.7 percent since the start of last year on buying by foreign central banks, according to data compiled by Merrill Lynch & Co. The Standard & Poor's 500 Index of stocks has gained 15 percent.

John W. Henry's Strategic Allocation Program made its biggest bets during the past three years on currencies, which accounted for 37 percent of assets. It had 24 percent in interest rates, 14 percent in energy, 13 percent in global stock indices, 7 percent in metals and 5 percent in agricultural commodities. The Boca Raton, Florida-based company manages $1.9 billion and has eight other funds.

Henry isn't the only sophisticated investor losing on foreign exchange. Omaha, Nebraska-based Berkshire Hathaway Inc., whose chairman is Warren Buffett, lost $955 million last year in a wager against the dollar. Berkshire made $2.96 billion between 2002 and 2004 by betting on a dollar drop.

A Deutsche Bank AG index that tracks CTAs, hedge funds and mutual funds that invest in currencies has dropped 2.8 percent this year.

"We're suffering like everyone else in the currency sector because there's no volatility," Mario John Kelly, co-founder of London-based Wallwood Consultants Ltd., said in an interview from his office in Seville, Spain. Kelly said he may look more at equities after the $13 million fund fell 6.2 percent this year, compared with a 24 percent gain in 2005.

This year, currency funds have lost 4.9 percent, the most in 12 years and the worst performers in the CTA universe, according to Stark. The strongest area for CTAs is stock futures, which have produced a 9.6 percent return for the funds this year, Stark data show.

John W. Henry's $195 million Dollar Program, his biggest dedicated to currencies, has fallen 34 percent this year, the most among currency CTAs in the Stark index. The fund on average has allocated 36 percent of its assets to trades involving Asian currencies and 64 percent to European currencies the past three years, according to the company's Web site.

Fluctuations in financial markets have lessened, eroding the profit potential for commodity trading advisers, partly because of greater predictability in economic growth and inflation, John W. Henry Co. President Mark Rzepczynski wrote in the company's October market commentary. Price swings also have been curbed by more transparent and gradual moves by central banks, he said.

"We need market prices to move in a specific direction to find and exploit trends," Rzepczynski wrote. "In the long run, this is manifested through volatility."

Volatility in the euro, a measure of the currency's price fluctuation, fell this month to the lowest since the euro's January 1999 debut, according to data compiled by Bloomberg. The euro-dollar rate accounts for 28 percent of the $1.9 trillion in daily currency trading, the biggest portion, according to the Bank for International Settlements in Basel, Switzerland.

Three-month implied volatility on the rate, reflecting traders' expectations for future swings, dropped to 5.975 percent on Nov. 6, from 10.5 percent at the start of 2005. It approached 16 percent in October 2000, when the euro set a record low.

"If you're a momentum-focused, trend investor, you will not do well in this market," said Michael Huttman, who helps manage about $10.5 billion as chief investment officer at Millennium Global Investments Ltd. in London.

Many commodity trading advisers are suffering from a focus on returns linked to the dollar, Huttman said.

Even after their poor showing the past two years, futures traders are attracting new money as investors seek to diversify away from stocks and bonds, said Emanuel Balarie, a senior market strategist in Newport Beach, California, at Wisdom Financial Inc., which helps investors select CTAs.

O'Friel at Appleton said he expects business to improve next year because the Federal Reserve will start cutting interest rates to revive economic growth, boosting the volatility in currency markets.

Prog Knowsis

The tide was out in Asia today, and Guambat has always wanted to "go live" with a gut feeling. Guambat's not insubstantial gut and bottle of what passes on Guam for $2Buck Chuck tells him the DJIA will at least trade if not close at or below 12160 tonight (West Pac time; 20 Nov.) It last closed at 12342 and a bit.

So now, we'll see.

UPDATE:

Well, there you go. Nada. Dow down only a couple dozen points. With Japan down 366 points, Hong Kong down 228 and our Aussie market down 2.5% for 137 points, all without any particular headline "cause" other than being "due", it all looked like a "precursor". But the DJIA wouldn't play along. No precursors, just curses. You just can't time the markets.

Phreeport McDodgey

Freeport McMoRan is buying out Phelps Dodge for its copper assets. It's like David swallowing Goliath. When things like this happen with the markets so frothy, you always wonder which is the genius, the buyer or the seller.

Freeport has made quite a name for itself with its domineering Indonesian investments, but many in Papua would not put a very nice name to it.

It now adds The Congo to its collection of exotic places to put a hole in the ground.

Freeport believes it can bring [its Indonesian] experience to bear in the Democratic Republic of Congo, where Phelps Dodge has struggled to start its long-delayed Tenke Fungurume copper mine. "It looks to be a world-class development opportunity," Mr. Adkerson said. "Our experience in Indonesia should be useful."