Five themes for Davos
Top (L-R): Steve Clarke, Natsuko Waki, Gerard Wynn, Martin Howell Bottom (L-R): Peter Thal Larsen, Felix Salmon, Ben Hirschler, Krista Hughes
Reuters will have a multimedia team of 20 journalists plus editors and three columnists on site covering the Jan. 27-31 World Economic Forum annual meeting.
This year we are focusing our news coverage around five global themes that are shaping economics, politics and investment opportunities in 2010. Our in-depth reports will draw on the expertise of our specialist correspondents from around the world to help inform the Davos conversation. These reports will be complemented by on-the-ground coverage, exclusive text and TV interviews, as well as a live blog aggregating the best Davos coverage on the web and on Twitter. We’ll be exploring the probing questions behind efforts to rebuild the world economy and financial system two years after the credit crisis.
Look for these special reports:
China has emerged from the financial crisis emboldened with huge economic clout, vast FX reserves and growing diplomatic influence. To build its global presence, however, it needs brands, managerial expertise and technology. China Economics Editor Alan Wheatley asks – How will it muscle up? Will it be through internal growth or foreign acquisitions? And what are the political and industrial risks, rewards and pitfalls of each approach – for China and the world http://www.reuters.com/subjects/davos/china
Risk Takers Anonymous
An eminent scientist who studies the brain and economics thinks that the financial industry in essence became addicted and insensitive to both risk and reward.
“The finance industry was adapting to the level or risk,” said Gregory Berns a professor at Emory University in Atlanta and a leader in the relatively new field of neuroeconomics.
“It is an insidious process, and you are not aware of it. You are addicted to returns, you are addicted to risk, you are addicted to cocaine – its all the same as far the brain goes.”
The part of the brain which is rich in dopamine is active in giving people a buzz when they do something they value. Getting money can give this buzz, as can taking risks. But sadly shortly after we reach a level of wealth we need more to get the same kick, just as we become used to the risk taking which formerly would have been exciting and might have caused us to trim our sails.
Berns describes the process of becoming habituated as like adjusting to a new level of light, at first it seems bright but then you adjust.
“You get used to it. The brain is constantly gauging relative amounts. The brain does not have a mechanism ever to be satisfied.”
The implication he said, is that the trader, banker or even small investor needs some structure from outside to impose limits.
Banks to be disintermediated? or is that just replaced?
Is it actually distintermediation if the thing being disintermediated has ceased to function?
Henry Kravis of Kohlberg Kravis Roberts said in Davos that, as in essence banks aren’t playing their role of intermediating debt capital for buyouts, he would be going straight to the source, doing deals directly with investors who want to fund debt for deals.
Of course many of the institutions that used to fund buyouts, CLOs and CDOs for example, no longer exist and many like hedge funds have lower appetite. He acknowledged that leverage has “come down tremendously,” which might get the prize for biggest understatement of the week.
But, like Steve Schwarzman of Blackstone earlier in the week, he maintained that lower asset prices for deals originated now would help returns.
“You might be able to buy it with less leverage and you can still get the same returns because of the purchase price you are paying.”
I hope he means the same returns as old-fashioned vintage deals rather than the returns of 2006/07 originated ones.
Schwarzman earlier in the week on same subject:
Global Barter Stimulus for Global Economy
The world is experiencing an unprecedented global financial and economical crisis, which is threatening to lead many countries into a deep depression. All the major economical powers are seriously affected hence each country has earnestly rushed to devise an immediate stimulus program to pump her economy to avoid a depression. No doubt, any stimulus is better than no stimulus but the effectiveness of each stimulus program seems to be unpredictable due to the global scale of this current economical crisis and the complex interdependency of all the major economical powers, namely the major international trading partners. In this paper, the author thinking outside-of-a-box is proposing a global cooperative stimulus program to bring the global economy back to vitality. The central thesis of this program is to achieve the following two main objectives immediately and cost-effectively. The first one is to eliminate the credit problem now infested in global and domestic financial institutes, which is stifling all economical activities, most critical of all, the international and domestic trade and property financing. The second objective is to restore confidence quickly and globally to revitalize the international trades among major trading countries, which is the essential means to stimulate the economy of all trading partners, hence the global economy. The author calls this proposed program, The Global Barter Stimulus Program. (GBSP for short)
The GBSP proposes that the major international trading countries immediately convene to develop a stimulus program by simply pledging to barter goods and services from each other in a magnitude (dollar value) equal or more than 110% of the 2007 trading figures. This government-backed pledge has three goals:
1. Stimulate a growth economy for each participating country by mutual support,
2. Stabilize jobs in manufacturing and services by providing credit and liquidity to finance manufacturing and trades, and
3. Restore confidence in businesses, home buyers and consumers worldwide by engaging in a cooperative global economical stimulus program.
Like many international cooperative programs, there will be differences in opinions rooted in self-interest. However, this global economical crisis is so severe; hopefuly many countries would be more willing to participate to share the benefit of a rapid global recovery than to risk a long self-destructing economic scenario. In fact, this crisis may be an opportunity to bring countries together to soften the resistance of dealing with some of the global issues such as conservation of energy, global warming, product safety, work environment, epidemic disease control, etc. etc. United States being the biggest international trading partner is in a right position to initiate and lead this Global Barter Stimulus Program, which can be a more effective High Level Governmental Solution to the world’s economy than engagement in micro-managing various domestic stimulus packages.
The GBS program can be kicked off via a summit meeting of the top fifteen trading partners in the world.
( http://www.census.gov/foreign-trade/stat istics/highlights/top/top0811yr.html )
The organizing country prepares and sends an agenda and a proposed preliminary document of understanding on how to participate and administer the GBS program (GBSP Document) to all invited participants. Each participating partner may bring a delegate including other not invited country/partner as an observer.
Prior to the meeting each invited GBS partner/country is requested to prepare a Barter List (category, dollar amount, specific requirements and possible trading partners) which are essentially the goods and services each country pledges to barter with the goods and services from another country if certain specific conditions are met. The lists will be shared among all trading partners and made publicly accessible. During this meeting, first, invited partners review, discuss, revise and approve the GBSP Document, then, begin discussions and negotiations to barter until each country has bartered most of her listed barter categories with other countries. The end result of bartering and pledges guarantees a positive economical projection.
The GBS process should be made as transparent as possible as an effective stimulus program; press and observers are invited so the process may be televised globally for the benefit of the world. The GBS trade lists with government pledges are the essence of the Global Economical Stimulus. Each participating country will fulfill her pledge, hence will stimulate each partner’s domestic economy; collectively the GBS partners will stimulate the world economy. GBS can be sustained yearly to achieve long-term benefit.
Foot Note:
A physical venue may be selected for this program. For example, the $450M Bird’s Nest in Beijing may be an appropriate structure to house such a program so that a meaningful Global Bartering Stimulus will lead to a sustainable global economical growth and world development.
IFC
Overheard in Davos
One of the best things about Davos is the conversations you overhear. It’s like no place else.
Sitting minding my own business, typing away I became aware of a central banker from a medium sized emerging market sitting nearby. He was joined by a gentleman from a bank in his home country. After a few muffled preliminaries the central banks said:
“So, how much trouble are you in?”
The banker responded in what sounded like soothing tones but I couldn’t make out exactly what he was saying. The only other line that came through clearly was that after a long speech the banker said to the central banker, with an air of exasperation.:
“The prices are very low, but there are no buyers!”
That’s it, in a nutshell.
Hank Paulson is not Gavrilo Princip, Lehman is not the Archduke Franz Ferdinand
Was letting Lehman go down the biggest mistake of the crisis? Many, including George Soros in the Financial Times, have argued that letting Lehman go down sowed panic to markets, consumers and businesses.
Not so fast, says Harvard historian Niall Ferguson, in an interview in Davos:
“My position is this is a typical error of historical understanding in which a single event is blamed for much more than it can possibly have caused. You can say ‘Hank Paulson is to blame for my troubles’ and if you can change one thing in the story it would have a happy ending.
It’s like saying if only Princip had not shot the Archduke Franz Ferdinand in 1914 there wouldn’t have been a First World War.
If you go through the events of September of last year you will find it incredibly hard to produce a counterfactual scenario in which it could have been possible to save both Merrill Lynch and Lehman. There is one bank which could be bought by Bank of America but there couldn’t have been two.
This is a crisis of too much bank leverage which began in August of 2007 and indeed had it roots far before. A bank leveraged 25-1 only needs a 4 percent decline in their assets to have their equity wiped out. And the notion that saving one investment bank could somehow have prevented or mitigated the crisis is a fantasy. The problem would have happened at some point somewhere else. There is a fundamental problem of bank solvency.”
Ferguson argues that without another buyer for one of the two, one would have needed to have been taken into a kind of Treasury conservatorship, as Fannie Mae and Freddie Mac were. But those were already quasi-government and such a move would have required Congressional approval, which given that Congress turned down the first version of the TARP, was not likely.
Davos 2009 Conference Shows The World At An Economic Crossroads……
http://wcgfairfield.blogspot.com/2009/01 /davos-2009-conference-shows-world-at.h tml
from James Saft:
Stephen Roach – protectionism a threat
Stephen Roach of Morgan Stanley, who pretty much called it at last year's Davos, when consensus was for no recession in the "real" economy and decoupling of emerging markets, is gloomy again. Speaking with him this morning after he did an interview with Reuters on Davos Today, Roach said that there was a real threat of protectionism as politicians come under pressure from rising unemployment. The U.S. and China relationship will be key, he said.
On U.S. real estate - a continuing issue for banks and the economy:
"The interplay between the property and financial sectors has been ground zero of this crisis.
The problem was the banks played the property bubble just like consumers did and so we are all in this together."
Not a big fan of equities, it seems:-
"Equities have pretty much discounted a dire outlook for 2009. The problem with equities as an asset class is that they are pretty much based on optimistic earning expectations for 2010 and 2011. We will challenge those expectations this year. I'd be pretty cautious before committing new funds to the equity market in this climate.
So what is Blackstone Group chairman Stephen Schwarzman's prescription for solving the banking crisis?
from James Saft:
Balance of power upended at Davos
So, back we go next week to Davos for the World Economic Forum 2009, titled this year "Shaping the post-crisis world."
Except the crisis ain't over yet and shaping the world while it is happening is proving to be about as easy as tying your shoes while riding a bicycle.
Let's dial back briefly to those more innocent days in 2008 and remember what was being discussed at Davos then.
Q - Will Sovereign Wealth Funds save the world financial system through equity investments? Are they a menace?
A - No, and even if they are it doesn't much matter.
Q - Isn't this just about a bunch of red-neck American sub-prime borrowers and the banks that were dumb enough to lend to them?
A - No and no. It is all of us, every one, and if the heart isn't pumping sooner or later the limbs stop moving.
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Resident Davos Expert
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My invitation must have gotten lost in the mail again this year…