The Solution That Doesn't Exist

Europe's problems are simple: every country in Europe -- there are no exceptions, not even Germany -- borrows to pay for promises that their own economy hasn't got the resources to pay for. The same is true in the US, but it hasn't become front burner yet. It will. Ultimately, you run out of people willing to loan you the money to pay for things that you otherwise can't afford.

It's not as if the US and Europe are borrowing to build bridges. That might represent a legitimate reason to borrow. Instead the indebtedness is a result of current funding needs that will only escalate over time. When does social security and medicare get less expensive? This is the heart of the European problem. They are not borrowing to fund long term investments, they are borrowing to fund the welfare state.

Put another way, they are borrowing for current consumption. The consumption being funded is part and parcel of the way of life in Europe, as it is in the US. There is no real difference. When your economy does not produce enough resources to fund it's obligations, then borrowing from somewhere, anywhere for a while will postpone the day of reckoning. But, not forever. Sooner or later bondholders realize you have no way to pay them.

So, what is the Obama solution. Float more debt. How? Who's going to buy it? Even if Germany were to relent and agree to underwrite the rest of Europe, Germany doesn't have the resources to do so. Once you have a debt that's not payable and you know that it not ever going to be payable, the jig is up. The jig is up. It's just a matter of time until the default process begins. That can either be an orderly process of "restructuring" or it can just be pure chaos.

If Greece returns to the Drachma, how does that help them? Who's buying Drachma based debt? And will Drachmas fund their social welfare agenda? Who's kidding who?

Economists are partly to blame for this fiasco because they have been negligent in pointing attention to unrealistic sovereign debt levels that exist in every western economy. In fact, they've encouraged these absurd debt levels by arguing that higher and higher government expenditures and higher and higher debt levels are good for economies. Read Paul Krugman if you want a taste of this reasoning. If your debt levels are growing so that you fund consumption by transfer payments to "entitled" people, it can't be good for the economy.

There is no serious economic research out there that suggests that this has any beneficial economic effects. Yet most academic economists have remained silent. Many are in the forefront of the clamoring for Germany to underwrite the Eurozone. But, that doesn't work either. Has anybody looked at Germany's numbers? There just isn't anyone left out there to buy bonds to fund other people's retirement at 60. It's over for that. This is not about European unity or a fiscal union or any other nonsense. The is about raw numbers.

2012/2013 List of Unit Trust Funds for EPF Members Investment Scheme

Last week, EPF announced that it has published the revised list of Fund Management Institutions (FMI) and unit trust funds for 2012/2013 for EPF Members Investment Scheme (EPF-MIS). For the period of 2012/2013, a total of 223 active unit trust funds from 24 FMIs are offered under EPF-MIS, details of which are as follows:

"The list of funds under EPF-MIS is reviewed annually based on a set of evaluation criteria that focuses on the consistency of fund performance, as approved by the Ministry of Finance. The evaluation process is carried out together with the Federation of Investment Managers Malaysia (FIMM) which represents the unit trust industry," said EPF General Manager for Public Relations.

When would it be effective?

The revised list will be effective for the period of 1 June 2012 until 31 May 2013. 

List of EPF approved funds from some of the popular Fund Management Institutions:

How about Public Mutual?
Because of too many funds, please click here for the list of funds from Public Mutual.

Source: www.kwsp.gov.my

A Journalistic Coup

John Isner, the top seeded American in the French Open which begins play today in Paris, found himself trapped when I discovered him with his entourage of trainers and coaches in his hotel in Paris yesterday. Isner had agreed to a 9 PM phone interview and made the serious mistake of providing me with the name of his hotel. I wandered over to his hotel and found him in the hotel lobby conversing with his tennis buddies and he graciously granted me the exclusive interview that I sought.

You can read the resulting article in Sunday's Daily Progress at Dailyprogress.com. I may not be a great sports writer, but I am doggedly persistent. I discovered, among other things, that tennis players at the top of the world rankings live much better than I do. Isner's hotel put my poor fleabag of a hotel to shame. His hotel was just off the Champs Elysee in a neighborood that I know I could never find a restaurant that I could afford. C'est la vie.

Today, the French newspapers were discussing the Spanish bank problems. They look insuperable. Combined with the fact that regional governmets are imploding financially, the latest in trouble is Catalonia, Spain looks like the next Greece. Spanish unemployment exceeds the levels the US reached in the Great Depression. Soon, the Spanish bond auctions will begin attracting more (negative) attention. This has pushed Italy to the back pages, but their problems will soon reassert themselves and gain better media coverage. The expectation now is that Greece is gone, but then what? There will be no good news out of Europe for a long while.

 I also read a review of another book on the problem of income inequality. I think I will write a book about the problem of tennis playing inequality. There is certainly a bigger gap than ever between the best players and the worst players. In fact, I suspect that is true in every sport. What to do? Why not forbid good athletes from training or competing? That might level the "playing" field some. Or just handicap all the good athletes. Make LeBron James carry an anchor around while he plays.

That seems to be the economic solution proposed by those that decry inequality. Isn't the real point to improve the economic position of the folks at the bottom? Why does it matter what the gap is between the top and the bottom? That is a ridiculous preoccupation and emphasizing inequality may preclude policies that improve outcomes for those at the bottom of the economic pile.

Of course, I am reading papers published in a country that just elected a socialist at its President. But, then, are his policies much different from those of Obama. The rhetoric seems identical. I guess I have to return to Asia to find a real interest in promoting free markets. Who would have guessed?

May in Paris

Greetings from Paris. It is another beautiful day in Paris where I find myself covering the French Open tennis tournament. This is my other job. The French Open starts tomorrow morning on the courts of Roland Garros. One of my favorite trivia questions is "who was Roland Garros?" You will be surprised. Guess before you google it and see how well you do.

 I am staying at a small hotel a block from the Tuilierries and around the corner from the Place Vendome in the heart of Paris. Wandering around this morning I discovered a parka for sale in a storefront, the price of which is equivalent to my extending my stay in Paris for another three weeks. Wonder who buys things like that? For a clue, I stood outside the entrance to the Westin Hotel to watch how the other half lives. One thing for certain, the other half smokes a lot -- at least they do in Paris. For the convenience of the wealthy tourists and locals in the area, there are conveniently placed receptacles on the sides of buildings that say: "Etienez votre cigarette." How handy! They also say, in English, "Take Your Pill." Hmmm.

I wandered by the Hotel Meurice. I stayed there once many years ago, but it now costs somewhat more than my roundtrip flight to stay there for a single day. But then, Smith Barney was kind enough to pay the bills back then. Here in socialist France, things are quite expensive. A soft drink will run about six euros in any of the establishments within a two block walk of here and it is best not to eat too often or you may not have enough money left to sightsee. A five day metro pass is a mere 31 euros, so getting around is cheap and you see lots of bicycles and motorscooters in use. But the cost of eating is so high, it is not surprising that are few overweight people on view. Not many older people either. Small wonder.

The local French papers say that Angela Merkel is close to a compromise with Francois Hollande regarding Euro-wide guarantees of sovereign debts in member countries. I would doubt that. But, if true, it simply extends the agony and postpones any real resolution of the Eurozone's problems, which is that the current debt levels are not payable. Extending them doesn't really get at the real issue. So more pain ahead for Europe.

I must appear an obvious tourist. The same pickpocket team singled me out twice yesterday in the Place Vendome. The trick is that one of the team appears to find a gold ring on the ground. They pick up the ring and ask if it is yours. Then, as you try it on at their request, another member of the team, finding you distracted, lifts your wallet neatly from your pocket. Since I had no interest in acquiring a ring or trying one on for size, the scheme did not work on me, but it is interesting that the same team tried this on me twice in one day.

Today, I have an exclusive interview with John Isner, 10th seeded (highest American seed) in the tournament. He is one of the few college grads on the tour. Wonder if he will hit a few with me after the interview?

The Jamie Dimon Saga

Jamie Dimon has made himself too visible.  He basked in the glow of a powerful Wall Street post and a left wing image.  Dimon was one of Obama's strongest supporters in 2008.  Like most of Wall Street, Dimon saw nothing wrong in loading up costs on employers, who had made the mistake of hiring workers.  After all, the workers that Dimon hires are high-end, highly skilled employees, who are largely unaffected by minimum wage laws, health care mandates, and a variety of worker protection schemes and union promotions (think "card check").  So Dimon, like Buffett, courted the media and made clear that he was a "caring" soul.  Now, Dimon is finding out, as Buffett will also, that this is not about "caring."  This is about a war on capitalism, waged from the White House.

Dimon had harsh words for Paul Volcker when the so-called "Volcker Rule" became part of the regulatory landscape.  Ouch!  Now, Dimon is getting blasted from the left.  See Simon Johnson's note in today's New York Times, where he quotes "Native-American" Elizabeth Warren and Socialist Bernie Sanders saying that Dimon should resign from the Board of Governors of the New York Fed.  Right!  And maybe put someone on the board that knows next to nothing about Fed Policy, like Elizabeth Warren or Bernie Sanders.

Ironically, J P Morgan should be praised, not villified, for owning up to a relatively minor trading loss that went awry.  J P Morgan weathered the 2008 crisis better than any other major investment bank and has been much more forthright than brethren banks.  But, no one cares about this.  All that matters is that Dimon and JPM stumbled and that is enough to bring forth the "no-nothings" demanding that something be done.  Whatever that something turns out to be, it will further damage the financial services industry and make it even tougher for a moribund economy to get off the mat and less likely that job seekers will find work.

But, who cares about the unemployed or the bad economy, when there is another rich guy to roast.

Europe’s Woes Flood Wall Street—But Not the Economy? (May 2012)

After months of buildup, Europe’s sovereign-debt crisis has finally wreaked havoc on the U.S. stock market, as a wave of anxiety has prompted a major sell-off on Wall Street. We’ve seen a dramatically “risk off” environment with the Dow Jones Industrial Average dropping 3.52% — the biggest one-week decline since November — and the S&P 500 falling 4.3%. Among the hardest hit stocks were small caps and tech, with the Russell 2000 and the Nasdaq Composite falling 5.4% and 5.3%, respectively. To further underscore the risk-off environment, the yield on the 10-year Treasury still appears to be searching for a bottom, finishing at 1.702%, but falling below 1.700% intraday this week — a modern-era low.

Spring Swoon?

History may not be repeating itself, but it certainly is rhyming. Like the spring of 2010 and the spring of 2011, investors’ fears are coming to fruition and we are once again experiencing a “spring swoon.” Stocks are selling off and junk-bond spreads are widening, as concerns about the euro-zone crisis are weighing heavily on investors. While some strategists believe Germany may be softening its stance, yields on some EU periphery nations are skyrocketing and rumors abound that the European Central Bank is preparing for a Greek departure from the European Monetary Union. The problem seems to be fundamental to the structure of the EU and therefore there are no easy solutions: while there is one shared currency, there is no true central government with one shared ability to levy taxes or issue debt that all countries are responsible for.

A federal Europe and closer fiscal integration is the ideal solution but it does not appear to be close at hand. The fiscal compact was agreed to in principal in December 2011, which is an important step toward that goal, but it is still awaiting approval by some euro-zone members.

However, the U.S. economy continues to chug along, albeit slowly. Initial jobless claims remain well below 400,000. The Consumer Price Index was flat for April. In fact, the “oil choke collar” has disengaged, with crude oil falling nearly 5% this week to finish at $91.48 per barrel. New residential construction was higher than expected in April as well. One area of disappointment was leading economic indicators, which were slightly negative for the first time in six months, down 0.1% versus expectations of a 0.1% gain. This is largely attributable to a decrease in the number of building permits and an uptick in the number of unemployment claims.

Looser Credit

Last week’s release of the minutes from the Federal Open Markets Committee’s April meeting offers further insight into the U.S. economic picture. While generally bullish in its observation of measured economic growth, the FOMC highlighted a bright spot for the economy that may have been overlooked: banks are loosening credit standards. As reported in the minutes, “Bank credit slowed in March but expanded at a solid pace in the first quarter as a whole. The Senior Loan Officer Opinion Survey on Bank Lending Practices conducted in April indicated that, in the aggregate, domestic banks eased slightly their lending standards on core loans—C&I, real estate and consumer loans—and experienced somewhat stronger demand for such loans in the first quarter of 2012.” The Fed’s poll includes 60 large domestic banks and 24 U.S. branches and agencies of foreign banks.

And lower yields mean lower borrowing costs, which are stimulative. This lower cost of borrowing combined with long-awaited and much-needed easing of credit standards could be the one-two punch that the U.S. economy needs to continue to expand.

It is imperative that the situation be monitored closely but with the recognition that, for longer time horizons, higher-quality risk assets with substantial yields such as dividend-paying stocks continue to be attractive investment options. Dividends, which offer the benefit of getting paid to wait for better market conditions, may help steer portfolios until we see calmer seas.

Source: Allianz Global Investors

The Fixed Pie Theory

Modern public policy in Western countries seems to be based upon the assumption that the economy is a fixed pie, waiting to be divided up "fairly." How else to explain the economic utterances of President Obama and the leaders of Western Europe? It's all about who gets what. Now "economic growth" is on their mind. Where has that been? Who thought about economic growth when politicians were busy saddling their economies with regulations and mandates?

The political leaders of the Western world seem to think that the government spending is the cure for what ails us. If that were true, would we be ailing? When did government spending not exceed revenues in any country in the Western world in the last three decades? Now we need more of the same? This is like the drunk, awakening with a hangover, asking for another drink to cure a hangover. Except, there is no more booze available.

Back when, western economies grew and provided rising living standards for their citizens. But that was before noble minded politicians decided that workers needed protection from management. Now workers have that protection, but no new jobs to go along with it What good is worker protection, if there are no jobs?

All of this is based upon the idea that economies do not and cannot grow. If economies cannot grow then sitting down to divide up a fixed pie makes perfectly good sense. But, sitting down to divide up a fixed pie may mean that the pie can no longer grow. That's where we are.

 Labor and management are natural enemies, so say the modern polticians. Therefore, all political activity should be devoted to providing benefits for labor -- minimum wages, health care, litigation weapons, disability rights, and on and on. The modern politicians got their way and now the reality of a fixed pie is upon us. The western countries really cannot grow any more at any significan rate.

Double digit unemployment is the new reality, both in Europe and in the US. It isn't fiscal stimulus that is needed, as Obama thinks, it is reform of our labor laws, repeal of employer mandates and an unshackling of an oppressive regulatory climate. Absent these things, the pie will stay fixed and we can continue to argue about who gets what, as opposed to having the pie grow larger.

Was Genneva Gold Investment Scheme a Scam?

Lately, I have a long-lost friend calling me out for a drink. Without hesitation, I am more than happy to meet up with him, a successful businessman. Well, we started off with very casual conversation from politic to investment. Yes, investment is my all-time favorite topic and he knew it. Once my hot button was pressed, he share with me the Genneva Gold Investment Scheme.

With its headquarter situated at Kuchai Entrepreneurs Park, Genneva has evolved to become one of the leading and most innovative gold traders in Malaysia and neighboring countries. What I want to stress here is INNOVATIVE. Why? Please read on...

About the Scheme

Through Genneva's unique wealth sharing platform, you are not only the owner of the gold bullion in hand, you also will get 1.8-2.5% cash return (hibah) every month for 3 months under Genneva's Syariah principle-based product plan. (see picture below)

It is similar to placing your savings in Fixed Deposit. Whether the price of gold goes up or down, your capital is 100% protected with an annualized return of 21.6-30.0%. Whilst if you placed your money into fixed deposit, which only gives you around 3% per year, which one is better? In addition, at the end of each tenure (4 months), you can return the Gold Bullion at the SAME price that you bought the gold. This means a 100% capital protection and guaranteed above 20% return.

WOW. Amazing, fantastic, unbelievable, right? Wait.................................

As an investor, we always reminded that be careful on whatever schemes that promise to gives us high return. Some more, there is NO risk at all in this case. Without rushing for a deal, I search through their website and read some forums on the scheme. It was stated that the company has complied with BAFIA 1989 act and AMLA 2001 act in its website. However, forums are hot in this topic with many people commenting that it was a scam and many Genneva-friendly people refuted their claims. Which side was correct?

Here, Finance Malaysia would like to gather public opinions and comments. Whether you like it or not, it's up to you to judge and decide. For many people, they would rather refrained from entering into this scheme. Why?

1. The return is too good to be true. Minimum of 21.6% annualized return, some more it is Guaranteed!!! How Genneva going to guaranteed such attractive return?
2. Can Genneva generate better return from other investment using the capital? (Better than Warren Buffett?) If not, the business model for sure will fail and it's a scam...
3. Some said Genneva sell gold at a rate more than 20% above market price? Some claims that this is Genneva's admin and processing costs. If that's true, Genneva is making huge profit from us then giving us back the said hibah. Why invest then?
4. Yes. You can get the physical gold bullion after 4 months. But, how are you going to store it? Investors should look at the cost of holding gold bullion too. That is investment expenses which will eat into the return.
5. Who is going to certify that the gold bullion was genuine?

The G-8 as an Ostrich

The G-8 communique this weekend is more of the same. The communique calls for "growth measures" for the Eurozone and is an implicit slap at the austerity measures that were imposed, by Merkel and Sarcozy, as the price of bailouts for Ireland and Greece. No mention of the over-regulation and labor laws that have made the Eurozone, even in the best of times, an impossible place for anyone under the age of 25 to find a job.

The G-8 politicians accepted the Obama Administration view that you can put an enormous tax on labor and still expect businesses to be enthusiastic about hiring workers. By piling mandate upon mandate upon employers who make the mistake of hiring anyone, the government has effectively put a huge tax on labor.

Is it any surprise no one wants to hire anyone, when it is effectively against the law to fire anyone in Spain? The 25 percent unemployment rate in Spain has nothing much to do with austerity measures, since so far there haven't really been any in Spain. Instead, the completely stifling labor laws are the main culprit for the plight of those in Spain looking for work.

So, what does the G-8 want? They want the US and Germany to fund the extravagant lifestyles of southern Europe and avoid making any of the tough choices about de-regulating their economies. Obama, of course, was the loudest trumpeter of the increased spending demands by the G-8. More infrastructure! Sounds great. But, where is the money going to come from for this? Obama pledges US funds. Really? From where?

The Eurozone countries look to Germany, but Germany will ultimately collapse if weighted down by the absorption of the debts of the rest of the Eurozone. So, what is the plan really? Avoid hard choices. Pretend that there is money from somewhere to continue to fund promises to the citizenry. Blame rich people. That's it. In other words, there is no plan, just rhetoric. That's the Obama way and is now the G-8 solution.

But, it doesn't really matter. The German public and the American public are out of chips. They can't fund this stuff, even if they wanted to. Which they don't. So put your head in the sand once more. Pretend like there is a way available for everyone to live high on the hog without anyone really working or saving. This is what I would call the "Ostrich policy." Pretend and pretend. It will not end well.

The Stock Market Swoons

The US equity markets have given up more than half of their 2012 gains in the last two weeks as the market has plunged more than seven percent in that short space of time. Why? Fear of a weaker economy in the second half is the answer. The economy still seems to be barely moving forward and, with major tax increases on the immediate horizon (January is not far off), a weakish economy could potentially roll into another recession. The odds are probably fifty-fifty.

 But, there is no set of circumstances favorable to a strong recovery. An anti-business White House has put so many roadblocks in the way of economic recovery, that the best hope is a muddling through and that is getting increasingly less likely. JP Morgan's travails will strengthen the hands of those bent on straightjacketing the finance industry.

Who loses? The average American seeking credit and small business seeking financing. The enemies that Obama has on his radar screen are, unfortunately, the only people who can provide the jobs necessary to get the economy really going again. So, the war on rich people surges along out of the White House, while Americans search fruitlessly for the job creators. The government has run out of bullets and the entrepreneurial classes are frightened out of their wits by the White House. That's basically what ails the stock market.

But, stocks are cheap. But, they are cheap for a reason. With the steady drumbeat of bad news that will continue to pour out of Europe, it will be difficult for American stocks to mount much of a rally. There will certainly be big up days in brief spurts, but over the next few months, don't expect much out of the stock market. The politicians have given the equity markets too much to ponder over.

"Greece's Problems are Europe's Problems"

Alexis Tsipras is a 37 year old politician in Greece who is surging to the top of Greek political polls with the message that Greece should not be forced into austerity. I agree with that, but I don't agree with Mr. Tsipras's broader argument.

Tsipras believes that it is perfectly okay for the Greek government to make absurd promises to its citizens and provide no means of paying for those promises. He must have been watching the successful American politicians and following their lead. Tsipras believes that the rest of Europe should underwrite the lifestyle that Greece thinks it deserves and he intends to "call their bluff." Right.

 I suspect that German citizens do not share Tsipras's sanguine view of having other folks pick up the tab, since German citizens are the "other folks." So, what will happen? That's pretty easy to see by simply following the fortunes of Angela Merkel's party in the elections that are going on in various parts of Germany. German citizens are shouting a loud "no" to the bailout program that is basically funded by German citizens. "No more bailouts" is the message coming from the German electorate.

So Tsipras is simply setting the stage for a Greek default, which has been a long time in coming. The Eurozone member countries have wasted hundreds of billions of Euros in the delusion that Greece, given austerity and time, would be able to deal with its enormous indebtedness. We have Sarcocy and Merkel (and Obama and Geitner) to thank for this waste of resources.

 Now comes reality. Greece is not going to live with austerity and they are not going to pay their debts. So there. That's basically Tsipras's message. It has always been the case that Greece would ultimately have to default. There has never been a viable alternative to a Greek default. Never. The only question is whether the default will be an orderly one or a chaotic one, accompanied by civil and political unrest.

The Sarcozy-Merkel illusion has increased the odds that the outcome will be chaotic and Mr. Tsipras's rise to prominence virtually guarantees chaos. A "controlled bankruptcy" was always the right solution. Such a solution would have kept Greece in the Eurozone and likely kept Greece's far left and far right political parties in the closet. But, no. Politicians always think they have a fix for the unfixable.

So now, the worst of all outcomes is likely. Egged on by Obama and Geithner, the European leaders were convinced that there was a "European solution" to Greece's problems. There is no European solution. There is only a Greek solution.

The underlying problem is the unwillingness of political leaders to face reality and to tell their citizens the truth about the seriousness of the problems and the costs of the polticial programs that they are advancing. It is easy to promise things that can never be paid for. That's how you win elections in Europe and in the US. But, eventually the piper must be paid. California, Illinois, and New York are next. You will soon be hearing that "California's problems are America's problems." Don't buy into that one.

Why Gold Behave Differently this Round? (May 2012)

When market sentiment was bearish, equities market would slump, just like what we seen for past few days. Global markets suffered yet another blow due to the uncertainties surrounding EU, where Greece may potentially exit European Union. Would Greece finally exit EU? This is an interesting yet important questions for investors.

The headlines have been on the EU crisis recently, overshadowing the highly speculated Malaysia general election's date. Well, now would be a tough time for our Prime Minister to call on an election amid the gloomy global outlook. Maybe, the best time to hold an election already gone!!!

Anyway, another interesting issue was the slump in Gold prices. Curiously, many investors questioning the different trend for gold prices. Normally, it will spike up along with the risk level of global equities market, together with USD. Theoretically, gold and USD would over-perform other asset classes during bad times. Yes, USD had already appreciated against a basket of currencies for a record 12 straight days. However, bullion erased its 2012 gains this week while investors are reducing gold holdings for a 3rd month, the longest stretch since 2004.

So, which is the Safe Heaven now?

Based on that fact, it seems like USD is the only safe heaven asset class that investors trusted now. Frankly speaking, Finance Malaysia don't know why gold behave differently this round. Anyway, we came out with the following potential explanations:

1. Actually, we really don't know how to value gold. Is it expensive or cheap? There is no benchmark on gold prices. Because of that, gold price tends to be speculative in nature. Currently, hedge funds are the least bullish on metal since December 2008, and they are the one who drove up gold prices. Is this the time for them to take-profit?
   
   
2. While there is no benchmark for gold, the strength of USD was based on US economy. We can't deny that US is recovering now, amid at a slow pace. Also, without QE3, why USD should stay low? With that reason, investors might chose USD than gold, as the potential is greater.
   
   
3. Please don't forget that many European governments had the greatest gold holdings in the world. For sure, ECB needs to pump in more liquidity into market. Where does the money comes from? When you're holding many gold and you need money, what would you do? Of course, cash in by selling your golds.

Even said so, many analysts are predicting a rebound for bullion. While RBS, ABN Amro and Barclays cut their gold forecast in May, Goldman expects prices to rise by 25% to $1,940 an ounce in 12 months. Billionaire investors, George Soros is favoring gold and he may gave gold investors the confidence. Good Luck.

Clawbacks for Politicians

Pundits and politicians are loudly proclaiming that Wall Streeters whose firms lose money should "give back" earlier compensation.  Why not apply this reasoning to politicians?  Since Jerry Brown misguessed the California deficity by $ 16 billion, why not have him cough up all of his assets (but no more than $ 16 billion).  Similar for Obama and other politicians who proudly announce their fiscal discipline and then quietly let the truth seep its way into public view when no one is watching.

If politicians had to personally make up the shortfall for their promises versus their funding of those promises, maybe they would have second thoughts about their duplicitous behavior.

Deposit Insurance Is The Problem

Why do we have federal deposit insurance for banks?  Today's federally guaranteed checking accounts, FDIC guaranteed, have their origin in a 1934 banking law designed to prevent runs on banks.  In practice, FDIC has always paid off all bank creditors, not simply those creditors who qualified legally under FDIC protection.  This is why so many banks are now "too big to fail."

The FDIC exceeded its statutory authority and thwarted the clear design of the 1934 Act.  Now, Dodd-Frank has codified this into a blanket guarantee for all "large" banks.

This creates two problems: 1) the government now thinks it should run all aspects of commercial banking; 2) banks have an incentive to gamble since the government guarantee means they can lose money with impunity yet still get low cost financing.

Every time there is a problem, like the recently revealed $ 2 Billion hit by JP Morgan, there is a call for more government regulation and new laws and restrictions on (all) banking.  Ultimately, this means that commercial banking becomes merely a creature of the state and subject to political whim.  This is what China has and would like to be rid of.

The right answer is to roll back FDIC guarantees to what they were originally intended to be: protection for moderate size checking accounts.  It's supposed to protect the first $ 125,000 of an individual's checking account.  If the federal guarantee were rolled back to that, and if an individual could not have more than a single guaranteed account beneficially, then we wouldn't be concerned about taxpayer exposure, because exposure to this kind of guarantee would be modest.  That's what the framers of the 1934 FDIC Act assumed they were guaranteeing, not the current blanket guarantee that effectively covers all of the creditors of each and every commercial bank in the system.

Bank creditors, other than small depositors, do not need federal guarantees.  There is simply no reason for taxpayers to protect the bondholders of Citigroup or JP Morgan -- none at all.  Such guarantees entice Citigroup and JP Morgan to make bets that they would not make, absent such a blanket federal guarantee and the low financing rates that come with that guarantee.

Show Me The Money

Now German Chancellor Merkel is in deep political trouble after the election results in North Rhine-Westphalia in Western Germany.  Merkel's party, the Christian Democrats, had their worst showing in NRW since World War Two ended.  They received just under 26 percent of the vote, having received 35 percent two years ago.

That pretty much completes the cycle.  No political leaders that stood in 2010 are going to survive the Merkel-Sarcozy bailout and austerity program, including Merkel.  She is up next year and it is obvious that her political day in the sun is over.  Germans aren't interested in underwriting the Greeco-Spano-Italo-Portugo-French welfare states.  They won't do it and no government will survive that promises to do it.

The problem for all of Europe and really all of the western advanced economies is that they are out of chips.  Some can play a few more hands before it is over, but all of them are in the same boat -- no money.

Neither side of the Eurozone crisis makes any sense:  There is no reason for Germans to bail out Greeks and there is no reason for Greeks to adopt austerity.  Neither position makes any sense and both Germans and Greeks will toss out any leaders that pursue such policies.  Plain old-fashioned honesty is the right solution.  The Greek debts cannot be paid.  End of subject.  It is time to face that fact.

What needs to be done is a "workout."  Greece needs to sit down with its creditors and offer them 15 cents on the dollar or whatever and get this done.  If that means some banks fail, they would fail anyway, since Greek debt probably isn't worth 15 cents on the dollar.  Governments can nationalize their banks and deal with the resulting financial crisis by reorganizing the bank balance sheets (bank bond holders become equity holders to some extent) and then putting them back into private hands.

This solution averts the abandonment of the Euro and is simply dealing with an unpayable obligation in the only way that is possible to deal with an unpayable obligation.  The politicians have been simply making things worse by pretending that there is some other solution that works.  There is no other solution that works.

California's Race to the Bottom

California's budget deficit is now estimated at $ 16 Billion, instead of the $ 9.2 Billion estimate that held sway as recently as January.  They kind of missed that one.  Maybe they "overestimated" the revenues they would get from the variety of new taxes that they have imposed.  So, what's the answer?  More taxes says Governor Jerry  Brown, referred to as Governor Moonbeam by most of his constituency.  According to the LA Times this morning, "...revenue in April ... fell far short of expectations, leading to a shortfall of at least $ 3 Billion in the current fiscal year.  The state has also spent $ 2.1 Billion more than expected..."

Huh?  Three months later, the deficit is $ 7 Billion higher than expected?  Was this an accident or the result of a calculated deception designed to fool the voters into believing that Governor Moonbeam and the Democratic Legislature had a balanced budget?  It increasingly doesn't matter whether Governor Brown is duplicitous or incompetent.  Either way, you reach the same destination -- the bankruptcy of the State of California.

I suspect that Governor Moonbeam's solution will be more of the same.  Why not?  Increased spending and increased tax rates.  Maybe they can get the deficit to $ 25 Billion before weary bond investors get the idea and join the Greek bond investors on the sidelines.

Expect Governor Moonbeam to begin the "fairness" discussion.  As unemployment soars past 10 percent in California and the deficit blows through the roof, the Governor can follow Obama's example and change the subject.  Maybe discussing gay marriage and demagoging tax fairness will solve the unemployment and fiscal problems of California, but not likely.  But, distractions often win elections, since voters all too often fail to do the math.

California citizens have the government they wanted and voted for.  Bankruptcy lies ahead and economic chaos for the Golden State -- not Golden any longer.

Two More Wealthy Supporters of "Tax the Rich"

Facebook co-founder Eduardo Saverin, a staunch defender of the Buffett rule raising taxes on the rich, has renounced his American citizenship to become a citizen of Singapore.  That way, any tax increases on the rich won't apply to him.  I can't wait for his next "fairness" interview on why the rich should pay their fair share.

Meanwhile, Mark Zuckerberg, another advocate of Obama's "tax the rich" scheme has arranged a tax-avoidance trust to escape massive amounts of estate and gift taxes.  Zuckerberg's and a half dozen other Facebook "luminaries," according to today's Wall Street Journal's story, are all using "a perfectly legal maneuver" to avoid taxes.

So much for the various hypocrites like Warren Buffett, Mark Zuckerberg, Eduardo Saverin and others (including Bill and Hillary Clinton, by the way).  They know they won't have to pay the taxes that the "tax the rich" Obama crowd is pushing for, so they support, not only Obama, but the hypocritical "Buffett rule."

It must be easy to advocate that other people "pay their fair share," when you know you won't have to do the same.

Who Needs J P Morgan Anyway?

Another big loss in corporate America as Jamie Dimon announces a $ 2 billion loss at J P Morgan involving a trade that was designed to reduce risk not enhance it.  Interestingly, a loss like this becomes more of a political matter than a shareholder issue.  Even after a $ 2 billion hit, J P Morgan is still expected to earn more than $ 4 billion after tax this quarter.

The way the world should work is that JP Morgan announces the loss, it's stock falls briefly, changes are made at JPMorgan and life moves on.  But, in the modern world, don't expect such a simple and rational outcome.

Instead, we wait with baited breath for the Obama Administration to opine once more on how terrible capitalism is.  Surely, a mistake like this would never have been made by the ever frugal, watchdog folks in the Obama Administration.  So, expect more rules, more demonizing of Wall Street, more attacks by the Obama Adminstration on business.  That's their thing.

Meanwhile Americans are looking for jobs, not that anyone in the White House could notice.  By implementing the Volcker Rule and the Consumer Protection Act and Dodd-Frank, the White House will effectively be putting the financial system in a complete straight-jacket, preventing the system from providing the necessary financing for a traditional economic recovery.

Who needs J P Morgan anyway?  After all, consumers can learn to do without credit cards, home mortgages and business loans.  That's the message from the White House and Pelosi-Reid Democrats.  The frequent and vocal attacks from the White House and senior Democrats on Goldman Sachs and on the entire financial services industry have taken their toll.  Businesses and consumers cannot get loans in this bright new Obama world unless they are truly wealthy and don't need them.

From Obama's point of view, a financial services industry is merely a distraction.  As in the student loan arena, why not simply let the government make the loans.  Who needs a private financial services industry?  After all, a private industry seeks to make profit.  As China tries to extricate itself from a state run banking system, the US is busily adopting the same model that China is rapidly trying to discard.  As in other things, East and West are trading places.

So, who needs J P Morgan anyway?  Unemployed Americans -- that's who.

New Fund: AmDynamic Allocator

Another new fund launched by AmMutual in a short period of time (barely few days), AmDynamic Allocator aims to achieve capital growth over the Medium to Long Term and at the same time provide income by investing primarily in collective investment schemes. This is a Fund-of-Funds, which means the fund is comprise of multiple funds.

The Fund will be managed with the aim of achieving positive investment returns over the Medium to Long Term regardless of market conditions. To achieve the investment objective, the Investment Manager applies a strategy that seeks to generate returns through investments in Collective Investment Schemes (CIS), which has exposure to various asset classes including but not limited to equity, fixed income securities and money market instruments. There will be no cross-holding between the Fund and CIS.

More about Investment Strategy

In selecting the asset classes for the Fund, the Investment Manager will adopt an active asset allocation process. The Investment Manager will first review the macroeconomic trends in the global and local equity markets. Under general market conditions, the Fund’s investment will be tilted towards equities. When the Investment Manager believes that the equity markets are overvalued, experiencing excessive volatility or expected prolonged declines, the Fund may invest a substantial portion of its assets in fixed income securities and/or money market CIS to achieve the Fund’s investment objective in bearish or non-performing equity markets.

Once the asset allocation has been decided, the Investment Manager will then select CIS to fit the asset classes. In evaluating the suitability of a CIS for investment, the Investment Manager will, amongst other factors, review the track record, investment objective, investment policies and strategies, fund performance, income distribution policy and cost factors of the CIS. The Investment Manager will review the asset allocation of the Fund at least on a monthly basis. The Fund intends to ONLY invest in CIS that are managed by AmInvestment Services Berhad.

The Fund is suitable for investors who:

• wish to have capital growth with yearly income;

• have a Medium to Long Term investment horizon; and

• wish to invest in a fund that potentially gives higher return than fixed deposit rates.

Source: Fund Prospectus

New Fund: AmAsia Pacific Equity Income

If you think that Asia Pacific will remain the main engine growth driver of world economy, then you should look into this fund launched by AmMutual. The Fund is a feeder fund, which will invest into the BlackRock Global Funds-Asia Pacific Equity Income Fund (the “Target Fund”), a sub-fund of the BlackRock Global Funds (BGF) domiciled in Luxembourg.

The Fund seeks to provide income and to a lesser extent Long Term capital growth by investing in the Target Fund which has an investment focus on Asia Pacific ex-Japan equities. The Fund seeks to achieve its investment objective by investing a minimum of 95% of the Fund’s NAV in the BlackRock Global Funds-Asia Pacific Equity Income Fund at all times. This implies that this Fund has a passive strategy.

BLACKROCK GLOBAL FUNDS (BGF)

BlackRock Global Funds (“the Company”) is incorporated in Luxembourg as an open-ended investment company under the laws of the Grand Duchy of Luxembourg and qualifies as a Part I UCITS (Undertaking for Collective Investment in Transferable Securities). 

The Company has adopted an “umbrella structure”, which allows it to offer investors within the same investment vehicle, a choice of investments in one or more sub-funds (each “sub-fund” and collectively the “sub-funds”) in respect of which a separate portfolio of investments is held, which are distinguished by their specific investment objectives, policies and/or currency of denomination.

The Target Fund is a sub-fund under the Company. The Target Fund was launched on 18 September 2009 and the total fund size of the Target Fund was USD64.50 million as at 29 April 2011. The Target Fund is regulated by Luxembourg Supervisory Authority, the Commission de Surveillance du Secteur Financier (“CSSF”).

BGF-ASIA PACIFIC EQUITY INCOME FUND

The Target Fund seeks an above average income from its equity investments without sacrificing long term capital growth. The Target Fund invests at least 70% of its total assets in equity securities of companies domiciled in, or exercising the predominant part of their economic activity in the Asia Pacific region excluding Japan. Predominant part of the economic activity generally means that a major portion of a company’s business (which includes but is not limited to the company’s sales, earnings or assets) is derived from or located in the Asia Pacific region excluding Japan relative to that particular company’s business derived from or located in other regions. The remaining 30% of the total assets may be invested in financial instruments of companies or issuers of any size in any sector of the economy globally.

AmAsia Pacific Equity Income is suitable for investors who seek:

• regular income from their investment;
• Long Term capital growth on their investment;
• participation in the upside potential of the Asia Pacific ex-Japan market; and
• medium to high risk investment vehicle.

Source: Fund Prospectus

Semiconductor Sector Poised to Rebound? (May 2012)

According to the Semiconductor Industry Association (SIA), despite an annual decline of 7.9% in March, global chip sales increased 1.5% MoM to USD23.0bn as sequential growth resumed across all regions, especially in Europe and Japan. SIA expects seasonal moderate growth to continue in the 2Q and build momentum as 2012 progresses.

While there may be concerns on the sector’s outlook due to the EU’s descent into a recession and China’s economic slowdown, it was believe that the growth momentum of the semiconductor market is sustainable. In our view, the EU’s decline will be offset by the recovery in the US while chip demand from China should remain resilient, driven by the tech hungry consumers and the proliferation of the IT market.

Outlook for local players

Management of most companies under our coverage has turned more optimistic about the coming quarter as customers raised orders in March. Analysts do foresee some stability, although the sustainability will depend greatly on how the global economy pans out. We believe the tremendous growth of smartphone and tablet PC, coupled with easing HDD shortages and lean inventory level ahead will lead to the revival of the semiconductor industry.

RHBRI believe recent industry data and indications by the major tech players’ supports their view that the sector has reached the trough and is on the path to recovery. Thus, to reflect the beginning of the industry growth cycle, RHBRI have raised their benchmark forward P/BV to 1.2x (from 1x previously) which is 1 standard deviation above Unisem’s 5-year historical average forward P/BV. Fair value estimates for Unisem and MPI are raised to RM1.84/share and RM4.09/share (from RM1.53 and RM3.40) respectively. Thus, upgrading Unisem and MPI to Outperform (from market perform previously).

Meanwhile, TA Securities believe Unisem and MPI will benefit from an increase in orders arising from the consumer electronics and wireless communications sectors. With that, TA upgrade the Semiconductor Sector to OVERWEIGHT and reiterate a BUY recommendation for both Unisem and MPI with a target price of RM2.15 and RM3.90, respectively.

Source: RHB Research Institute report, TA Securities

Next Stop -- Bond Auctions

Now that it is clear that political support for the Merkel-Sarcozy plan has disintegrated, the next step will be escalating bond yields across Europe.  For a while, Germany will be spared rising yields, but, in time, they will join their European neighbors.

Essentially, the political upheaval in France and Greece and earlier in Spain and Italy means there is no possibility of budget cuts and economic reform in these countries.  Their political leadership intends to sell the same discredited bill of goods to their fellow countryman that they have been selling them for decades.  You can have it all.  Essentially, the Obama plan.  Everyone can have everything and no one need put aside any funds to get it. 

But, the one group that isn't buying it anymore are bond buyers.  They will be departing in droves, which means declining bond prices and spiking bond yields across the Eurozone.  The one day reaction on Monday was the opposite -- bond yields actually dipped in Europe once the election outcomes in France and Greece seeped into the markets.  But that is a head fake.  The future is for dramatically higher bond yields, effectively eliminating any prospect of avoiding default.

This could have been limited to Greece had Greece been permitted two years ago to go down the structured bankruptcy route.  Since that time, Greece has received a massive amount of new funding from other countries in the Eurozone.  Now, 75 percent of the 270 billion euro Greek outstanding sovereign debt is owned by governments and banks in the rest of the Eurozone.  Now, the Greek disaster spreads automatically to the rest of the Eurozone, no matter what happens in Greece.

As debt yields rise in Spain and Italy, they too will join Greece in the disaster zone.  There now is no policy solution available.  It is too late.

So, it may no longer matter much for the economic future who wins what election.  The outcome of economic chaos is on the way regardless.

You reach a point where foolish policies can no longer be corrected and countries will descend into chaos and political radicalism.  We are at that point in Europe. 

Watch the rising bond yields across the European plain.  They are the smoke signals that will signal the end of a united Europe and the beginning of a new era of political and economic chaos.  This is the ultimate and predictable outcome of the entitlement state.  No country or collection of countries that make unlimited and unaffordable promises can escape this fate.  We are witnessing the breakup of modern civil society in Europe.

Elections in Europe are No Surprise

Why would voters support expanding debt levels combined with austerity?  Across Europe, voters tossed out the political parties that foisted the Merkel-Sarcozy plan upon them.  Now what?

Those replacing the bad guys in France and Greece are even worse.  This is the political nightmare to which the entitlement society ultimately leads. 

Francois Hollande promises to raise marginal tax rates to 75 percent and end the austerity being imposed in various European countries.  Raising marginal tax rates to 75 percent will lower tax revenues and make the French deficit even worse than it is.  Not to mention the chilling impact of 75 percent rates on business activity.  As for ending austerity, we are back to the same old question.  Who pays?

French citizens, on paper, have a great life.  Such are things in the entitlement society.  The only minor headache is who is out there willing to fund this great life?  Bond buyers have been the answer for the last two generations.  No longer.  So, who is out there to step up to the plate to provide the good life for French citizens?  We're waiting.

Hopefully, Hollande will reveal who the good samaritans are who will provide the funding to bankroll the French entitlement society, because it is certainly not apparent at this point.

Ditto in Greece.  No more austerity, keep entitlements in place, but how?  Who funds this?

I think we know where this is headed.  We have the German experience of the 1920s to see where this goes.

Meanwhile what will modern day Germany do?  By next year, it should be apparent that German citizens will toss out Merkel and her grand bailout and austerity schemes.  In time, Germany will be forced to abandon the Euro unless they want to be the funding source for the life of leisure that Hollande promises French citizens and the various groups trying to gain leadership in Greece promise Greek citizens.

By insisting on unfunded entitlement programs and labor laws that effectively outlaw hiring new employees, European politicians have succeeded in imposing the Obama Plan throughout Europe.  The outcome is no longer really in doubt -- economic catastrophe and political chaos.  Coming soon to your neighborhood.

Greek Political Solution Unravels

Today's election in Greece seems to have created a majority for those opposing the austerity measures agreed to by Greek politicians in exchange for the bailout by the European Union.  Now what?

The real tragedy here is that if Greece abandons the austerity program, which frankly they should do, then they will be booted out of the Eurozone and forced back onto their own currency.  Some economists think this is great.  Now, Paul Krugman would say, Greece can simply deflate the heck out of their currency and prosperity will be just around the corner.  That, of course, is ridiculous.

The best solution would have been for Greece to do a structured bankruptcy while remaining in the Eurozone.  The Eurozone is a good thing not a bad thing.  The US has benefitted greatly from being a single currency union and the same beneficial effects have flowed to Europe.  Remaining in the Eurozone should be a completely separate issue from the question of dealing with Greek sovereign debt.  There is simply no reason that those issues seem to be joined at the hip by commentators and some economists.

Again the current fiscal problems in Illinois are a perfect analogy.  If Illinois does a structured bankruptcy (and it will be forced into some kind of bankruptcy unless Congress bails Illinois out), there would be no reason to create an Illinois currency and proceed down the road of deflation.  That would be absurd.  So, it is with Greece.

Had Greece done a structured bankruptcy refinancing two years ago, we wouldn't be where we are now.  But, we are where we are.  Difficult times lie ahead in the Eurozone.

The Big Corporations

The President continues to attack the "big corporations" and promotes his concern for the "middle class."  But who owns the big corporations?  When the big corporations make obscene profits, who gets them.  The answer -- middle class Americans.  Yes, middle class Americans own the big corporations, mostly through their pension funds.  So, an attack on "big corporations" is an attack on the retirement hopes and dreams of middle class Americans.

What the attack on "big corporations" doesn't do is reduce the excessive compensation of senior executives of the big corporations.  After all, these senior executives are mostly Democrats and support the President, so let them keep all the perks and obscene compensation that we can arrange for them.  Instead let's go after the big corporations' owners -- the middle class.  Let's chop them up.

This parallels the President and his allies approach to big financial institutions.  Let's make them too big to fail, so that their senior executives can be guaranteed a future.  Meanwhile, let's discourage them from making loans to lower and middle income Americans -- after all, that is "predatory" lending. But, it is okay to lend to rich people and business that are already prospering and to give tax dollars to businesses that promote intiatives the president likes (think Solyndra).

The rhetoric used by the President to promote the "middle class" is a mask to hide the daily assault on the future of middle and lower middle income Americans by this administration and its allies.  The rich have nothing to fear from Obama's attack on big corporations and financial institutions (that's why rich folks mostly support Obama), but the middle class will see their hopes and dreams for their future and the future of their children wither on the Obama vine, as he decries capitalism, big corporations and "the rich."

Sarcozy -- Another Conservative Flop

Nicolas Sarcozy was supposed to bring a return of free enterprise back to France.  To do this, you have to tackle two things: 1) the entitlements and the entitlement mentality; 2) the regulations that stifle commerce including the absurd laws that effectively prohibit the firing of employees.  Sarcozy did neither.

Sarcozy's strategy was to substitute smaller issues for the bigger issues and to join hands with Angela Merkel to promote an expansion of sovereign debt and force austerity on their fellow countries in the Eurozone.  In the waning moments of the campaign for the Presidency in France leading up to tomorrow's vote, Sarcozy has stooped to thinly-veiled anti-Muslim appeals to motivate far right voters.  Gone is any interest in free enterprise and promoting entrepreneurship.  All of that disappeared in Sarcozy's alliance with Angela Merkel, another conservative leader gone astray.

Meanwhile, the fruits of the Merkel-Sarcozy alliance are everywhere to see as the Eurozone economy collapses in a sea of hypocrisy, exploding debt, expanding unemployment, collapsing GDP, and growing anarchy.

Virtually every bad piece of legislation and regulation in the US in the past quarter century has a Conservative Republican stamp on it. In recent years both Bushes, Bob Dole, Newt Gingrich all penned their names to things that dramatically increased the role of government and reduced ever further the scope for free enterprise.  Granted the Republicans are not outright, vocal opponents of free markets -- an apt description of President Obama, who spent yesterday on the campaign trail decrying those who "maximize profits" -- but still.  Republicans are no friend of free markets.

So, Sarcozy's apostasy is not a new, unique episode in political history.  He is business as usual.  Elect a conservative and what you get is a wheeling, dealing big government statist.  That pretty much describes Sarcozy and Merkel.

Francois Hollande is, at least, more forthright about his opposition to free markets and not likely to deviate from Sarcozy's grand European vision.  Look for Merkel to follow Sarcozy to the sidelines in the next election in Germany and a re-emergence of the German Socialist party.

That's okay.  Let the socialists preside over the destruction of the European economies.  They largely created the problems in the first place, so why not let them have the throne as the kingdom collapses.

There are no Margaret Thatchers or Ronald Reagans available on the modern political landscape.  Instead, we have the "kindler, gentler" version and you can see where that leads.  Inevitably, when you promote free enterprise and reduce the size of government, someone, somewhere will produce an example of an inequity or a tragedy.  There are always such examples.

It is all about costs and benefits.  Nothing is perfect.  But, if you can't live with some inequities and tragedies, then you can't live with free enterprise and capitalism.  Asking the government to cure every ill is asking government to stamp out free markets.  Conservative Republicans and Liberal Democrats walk hand in hand in wringing their hands over inequities and tragedies and putting more and more obstacles in the way of free markets.

The problem with this is that free markets represent the only hope for middle class Americans and lower middle income Americans.  There is no other path to prosperity for these folks.  Expanded government means creating a large group of haves -- government employees, politicians and political workers, union workers -- and a large group of have nots -- average and below average income Americans seeking employment and opportunity in the private sector.   Big government picks winners and losers.

In time, of course, as we are now witnessing in the collapse of Europe, there are no funds to support the growing army of the haves.  The have nots run out of money and bond investors begin to see the light.   The end game of the liberal dream is economic chaos and political anarchy.  We are watching it unfold in Europe.

Free markets permit people to improve their situation through their own efforts in the process of supplying goods and services to their fellow citizens.  Big government emboldens those who think they should be telling everyone else what they should be doing and how they should be running their lives.  Big government views free enterprise, taking personal responsibility and trying to achieve personal prosperity essentially as crimes against the state.  Listen to President Obama for a while.  His message is pretty clear. Check out the "Julia" website.  It is all about depending upon big government and shirking personal responsibility. At least, Obama is upfront about his contempt for free market capitalism.

It is too bad that, in this critical juncture in history, there are no defenders of free markets.  Certainly, Sarcozy and Merkel are not defenders of free markets and they will both soon be on the dustbin of political history.