Summit Notebook

from Global Investing:

BRIC: Brilliant/Ridiculous Investment Concept

BRIC is Brazil, Russia, India, China -- the acronym coined by Goldman Sachs banker Jim O'Neill 10 years back to describe the world's biggest, fastest-growing and most important emerging markets.  But according to Albert Edwards, Societe Generale's uber-bearish strategist, it also stands for Bloody Ridiculous Investment Concept. Some investors, licking their wounds due to BRIC markets' underperformance in 2011 and 2010, might be inclined to agree -- stocks in all four countries have performed worse this year than the broader emerging markets equity index, to say nothing of developed world equities.

For years, money has chased BRIC investments, tempted by the countries' fast growth, huge populations and explosive consumer hunger for goods and services. But Edwards cites research showing little correlation between growth and investment returns. He points out that Chinese nominal GDP growth may have averaged 15.6 percent  since 1993 but the compounded  return on equity investments was minus 3.3 percent.

But economic growth -- the BRIC holy grail -- is also now slowing. Data showed this week that Brazil posted zero growth in the third quarter of 2011 compared to last year's 7.5 percent. Indian growth is  at the weakest in over two years. In Russia, rising discontent with the Kremlin -- reflected in post-election protests -- carries the risk of hitting the broader economy. And China, facing falling exports to a moribund Western world,  is also bound to slow. Edwards goes a step further and flags a hard landing in China as the biggest potential investment shock of 2012.  "Yet investors persist in the BRIC superior growth fantasy...If growth does matter to investors, they should be worried that things seem to be slowing sharply in the BRIC universe," he writes.

Thomson Reuters data earlier this year appeared to show some disenchantment with the BRIC concept. After rising 1600-fold between 2003 and 2007, assets in BRIC funds had shrunk to $28 billion by August 2011, almost a quarter below 2007 peaks, a bigger fall in percentage terms than most other fund categories.

What of O'Neill, the man behind the moniker? He talks increasingly of Growth Markets, a broader grouping that also includes other promising emerging countries such as Turkey and Mexico. But at a Reuters investment summit this week O'Neill noted that the main reason for BRIC stocks' underperformance has been a massive monetary policy tightening exercise in all four countries, prompted by rising inflation.  With that at an end and valuations cheaper than they have been for a long time, he expects the BRIC markets, especiallly China, to do better next year despite slower growth. Time will tell.

from Ask...:

Will Greece be the first euro-zone country to restructure its debt?

The latest deal for Greece, including a new policy package and possible financing, does not contemplate the restructuring of its debt, but financial markets keep speculating on the possibility it may be the first of the euro-zone countries to reschedule its public debt. Who do you think may follow?

CFTC’s Gary Gensler just one of the “Little Monsters”

Christopher Doering found there is more to the CFTC chairman than markets.

When he’s not scaring Wall Street and big banks to make sure they follow the rules, there’s a chance the head of the U.S. Commodity Futures Trading Commission is moonlighting as a “Little Monster.”

The haunting moniker, used by American pop singer-songwriter Lady Gaga to describe her fans, aptly applies to the hard-working Gary Gensler who was among the thousands of fans who attended the popular performer’s show in Washington last week.

“Do you want to know how Lady Gaga was?” he asked reporters at the Reuters Future Face of Finance Summit.

“It was terrific. It was really terrific,” said Gensler. He did not go to the show with his three daughters, but shied away from identifying his concert-going companion(s).

“She’s a great vocalist. She really is … savvy performer,” he said of the 24-year-old known for her monster hits such as “Just Dance” and “Poker Face.”

Photo credit: Reuters/Lucy Nicholson (Lady Gaga at the Grammy Awards in Los Angeles, Feb. 13)

Unlikely alliance: Congressman Barney Frank and the Tea Party

At first glance it would appear that Congressman Barney Frank and lawmakers backed by the Tea Party movement would have little in common — one is a liberal Democrat, the others are conservative Republicans.

Look again.

Frank said his quest to reduce military spending will probably attract Tea Party lawmakers who campaigned on a platform of fiscal discipline, even to cuts in an area that typically meet strong resistance from Republicans.

“I think the notion of nation building, of America enforcing stability over the world … is wasted money because it doesn’t work,” Frank told the Reuters Future Face of Finance summit. “I think there’s some potential alliance there.”

Frank also sees another area in which the Tea Party might be allies — any attempt by the Republican majority in the House to roll back reforms on derivatives in the wake of the financial crisis. “If they were to try to roll back derivatives regulation legislatively, yes, the Tea Party people would be allies of ours,” he said.

What about their ideological differences? “You learn to work with people that you don’t have anything in common with,” Frank said.

The former chairman of the House Financial Services Committee says being in the minority now has its moments.

Bank regulator Walsh has pragmatic philosophy on financial crisis repeat

John Walsh has spent many years in Washington — having worked at the Senate Banking Committee, the Treasury Department, and now as  acting Comptroller of the Currency — and has a bit of perspective on government reaction to crises over the years.

So he has a fairly pragmatic philosophical approach on whether U.S. efforts will succeed in making sure the financial crisis does not recur.

“It is hubris to imagine that we can anticipate all the things that can go wrong and prevent them. That has never happened in human history, I don’t know why it would happen here,” Walsh said at the Reuters Future Face of Finance summit.

The Dodd-Frank set of Wall Street reforms includes components that are “on point to try to avoid such a thing happening again,” he said.

The Federal Reserve and other bank regulators are “absolutely right” to add liquidity during a crisis, but that is different from having an expectation that large financial institutions must be saved from failing, Walsh said.

“It’s that challenge of trying to figure out who’s the dead guy in the crowd as the whole boat seems to be headed for the bottom — how do you keep the boat afloat but still weed out the bad actors on the boat that have gotten themselves into insolvency?” he said.

And with a bit of a twist on philosopher George Santayana’s famous saying, Walsh adds: “Those that have studied financial history know we’re doomed to repeat it.”

from Blogs Dashboard:

When is a threat not a threat?

By Kirstin Ridley

British bankers are not threatening to head for the Swiss hills. But that doesn’t mean they won’t pack their bags. So says Angela Knight, the head of the British Bankers Association. Knight told the Reuters Future Face of Finance Summit that if British-based banks such as HSBC, Barclays and Standard Chartered consider whether to keep headquarters in London – given the banker bashing, punitive taxation and pay restrictions imposed here -- that is merely a fact.

Speaking one day after Europe’s largest bank HSBC cut profitability targets as tougher bank regulations eat into earnings, Knight conceded that she did not expect banks to move lock, stock and barrel to Geneva – and that images of jumbo jets laden with London bankers in pinstriped suits were mere “cartoons”. But she said the simple truth was that the British economic growth lagged that of peers, while fixed costs were rising. Britain was not an obviously attractive place to be for bankers. To remain an international financial centre, the country needed to be clever and get its regulation right. Banks, she said, were just telling it as it is. “Is there an expectation that employment in banking will be reduced? Yes … Is there an expectation that sentiment will turn around? No,” she said. “We are living in a country and a region where the costs of operation are high and (there is) a lot of personal condemnation (of the banking industry)... so I think that we cannot pretend that somehow that has no effect and no impact.

“Why anyone calls it sabre rattling, I do not know, other than the fact that they must themselves be in denial,” she said. “Because these are just facts. These are not threats, they are not sabre-rattling. They’re not pretence. They are straight forward facts.”

Senator Reed sees need for speed to chase bad guys

Ann Saphir takes a look at Senator Jack Reed’s comments on cars and trading.

With traders buying and selling at dizzying speeds these days, underfunded U.S. regulators can’t hope to keep up unless they get more funding, better resources, and faster technology — think cars,  Democratic Senator Jack Reed says.

Reed, who drives a 1991 Ford Escort, says he loves his car for city driving.

But if he had to take on a race car, he’d need to upgrade – and the same goes for the Securities and Exchange Commission and the Commodity Futures Trading Commission, which are stuck using outdated technology even as their policing obligations pile up after Dodd-Frank financial reform.

House Republicans have moved to block funding increases for the regulators, saying they don’t want to add to the federal deficit.

“If I’ve got a 1991 SEC, CFTC trying to catch high frequency traders, it’s never going to happen,” Reed told the Reuters Futures Face of Finance Summit. “We’ve got to get them, maybe not up to Ferrari level, but at least up to a Fusion.”

But is that fast enough?

So how plugged in is the SEC chair? (technologically speaking)

Securities and Exchange Commission Chairman Mary Schapiro says her agency has its work cut out to compete with the massive amounts of money that private firms, policed by the SEC, pour into the latest technology.

“Can we keep up with Wall Street? I think we have a fighting chance. We’ll never have, under any circumstances, the kind of budgets that would allow us to spend a billion dollars a year on technology as some firms do, I mean that’s just not going to happen, and I totally understand that,” she said at the Reuters Future Face of Finance Summit.

“If we can build a forensics lab for our enforcement people to be able to download data off of iPhones and iPads and other instruments, then we will be a lot better able to pursue insider trading potentially and other securities law violations,” she said.

So how technologically plugged in is the SEC chair personally?

“I have an iPad,” Schapiro said.

“No I don’t do Twitter, I don’t have a Facebook page. You know, in my position it would be complicated,” she said with a laugh. “So maybe I’m kind of middling in terms of technology.”

Her agency has a Twitter feed and a Facebook page in development.

Hensarling proud of fiscal conservative creds, embraces Tea Party allies

It is clear that House Financial Services Committee Vice Chairman Jeb Hensarling is proud of his credentials as a fiscal conservative.

He may have more competition for that label after the November election swept in members of the Tea Party. But he sees that as a good thing.

Hensarling eased into the position of  House Republican Conference chair after avoiding an internal battle for the fourth highest slot in House Republican leadership when Michele Bachmann, who started the congressional Tea Party Caucus, stepped aside.

We asked him at the Reuters Future Face of Finance summit how his Tea Party colleagues are fitting in on Capitol Hill.

“I guess well. We wouldn’t have the majority were it not for the Tea Party. I think most Republicans embrace the core message of the Tea Party,” Hensarling said.

The freshman class of Tea Party lawmakers is doing “exceedingly well,” he said. “I’m happy to have them.”

“As the guy who by most estimates is one of the five most fiscally conservative members of the House, I welcome and embrace them as allies,” Hensarling said.

U.S. Treasury’s Wolin on tying debt limit to fiscal discipline debate: Don’t

Deputy Treasury Secretary Neal Wolin is urging lawmakers not to tie the U.S. debt limit to the debate on fiscal discipline.

Arguing about the future fiscal path of the United States is fine, but playing games with the debt limit can hurt U.S. creditworthiness, he warned.

The Treasury has said it will reach the statutory debt limit sometime between April 5 and May 31. Once that limit is reached, the Treasury would no longer borrow to meet day-to-day spending needs, including payment of interest on Treasury bills and bonds.

Many Republican lawmakers want to use the debt limit as leverage to push the Obama administration into deeper spending cuts.

Wolin had a message for Congress: keep the discussion over the future fiscal path of the United States separate from what to do about the debt limit.

“This is an issue on which Republicans and Democrats should come together and agree that the basic creditworthiness of the United States should not and cannot be put in question and jeopardy,” he said at the Reuters Future Face of Finance Summit.

“We should have our discussions, our debates and even our fights over what the fiscal future of the United States ought to be and those are happening,” Wolin said.