Season's greetings

It has been a challenging year. Whilst some have been brought down by their own greed, many families face difficult times through no fault of their own. If your circumstances allow it, please take some time to offer whatever support you can to someone you know who may be facing such challenges, or to a good cause - an investment that I can guarantee will be valued and appreciated.

This blog is normally focused on financial markets and the pursuit of wealth creation. Yet at this special time of year, let us put that to one side briefly and cherish the blessings of friendship and goodwill - the greatest wealth of all.

I'd like to wish all my readers a very Happy Christmas. I hope that 2009 brings you good health, happiness and success in your endeavours.

Have a peaceful and enjoyable holiday,

"Capital Novation"

Quantitative Wheezing

Several pundits are at pains to point out that there is a key difference between the US quantitative easing programme and the prior art of this technique (i.e. Japan in the 1990s). The argument is that the Fed is buying a range of non-government assets (MBS, commercial paper, loans...) rather than just Treasuries. Unlike Japan, this should spur a broader economic boost rather than simply rebooting bank lending. In other words, it's different this time.

"Different this time?" I've heard that one before. The problem here is that all these measures are of limited firepower at this stage. Every macroeconomic indicator of note is pointing due South, and it would be naive to assume that the consumer will suddenly revert to type as unemployment ratchets up. The economy is simply out of breath, and force feeding liquidity to the patient is not going to help.

However, all this liquidity will have a long term impact. Unless the Fed can snatch it back the second the economy starts to turn, we will face a horrible rise in inflation. Given their past record (thank you Mr Greenspan) I have my doubts that the Fed has the nerve to slam the brakes once prices start to move.

Trichet gets a lot of stick for his hawkish position on rates. Well we'll see - 2009 will either break the ECB's credibility, or seal its reputation as a new reserve currency manager.

Core Concept 2 - Total wealth picture

In this week's core concept, we'll look at the foundation for your wealth management plan. This is based on a getting a complete picture of your current wealth position. All your investment decisions should be based on this.

As I mentioned last time, you need to make a full list of all your assets. This includes all the usual financial pieces (savings, brokerage account, 401ks), any property you own, and other major assets (e.g. a car). And don't forget to add your own human capital (your skills, experience, current job).

Then scribble down your major commitments. For most people this will revolve on loans (mortgage, college tuition, credit cards). Add in any major expenses you are planning over the next ten years (such things as college fees, for example).

There are two principles when planning out future expenses. First, if you can pay down as much debt as you can. Second, always pocket a small amount each month for an emergency fund to cover the unexpected (e.g. additional medical costs). Life can throw lots of curve balls, so having some cash to tide things over is no bad thing.

Putting these two things together will help you understand how much "liquid" assets you will need at various points in time. It should also help you rationalise what is "necessary" versus "nice to have" spending. Be ruthless - there are always more things we'd like. Stick to the essentials - if things turn out better than planned, that's a bonus.

The end result of these lists is the raw material to start steering your investment decisions to meet these future needs. This will involve planning what investment strategy makes sense for each major "purchase" you need to fund. We'll walk through this in more detail in the next core concept.

A picture perfect company

Or so the banner says on Polaroid's press release web page. There's a tragic irony to the story, as a company founded on a great innovation lost its way and failed to invent itself a future. In this instance, there seems to be a nasty fraud coming out of the Petters venture capital group.

Of course, it pales into comparison with the Madoff debacle. Yet a common theme is emerging of relatively large organisations pursuing fraudulent activities without any of the supposed governance/audit controls being triggered.

A lesson from these recent failures is that the whole regulatory approach needs to change. Policymakers thought that Sarbanes-Oxley had solved the issues that were found in the Enron failure. Unfortunately all those reforms achieved was a huge fee windfall for consultants and auditors - fraud and governance failures seem to have continued more or less unchecked.

A central banker's Christmas Carol

It was the night before Christmas, and a dark shadowy figure sulked away from the festive crowd to his home (recently assessed in negative equity by the lender). The man was Ebernanke Screwed, the Fed Chairman.

After supping over a tepid bowl of gruel, he fuelled his measly log fire with copies of his recent testimony to Congress. “Best use for it!” Screwed chuckled.

All of a sudden, he heard a slithering sound and a rasping tone. “Eeeebernanke….” said the voice. Screwed turned, and to his horror was faced with a ghastly apparition. A gaunt man was standing beside him, wrapped in a heavy chain of rare unsigned copies of the Age of Turbulence. Those horrible, fashion-tragic glasses…

“Greenspan!” shrieked Screwed.

“Helloooo Ebernanke. I have come to intercede on your behalf, for you are currently on the path of doom and eternal despair…”

“You mean my policymaking?”

“No, I was thinking of your interior decorating. But now that you mention it, perhaps we need to discuss your recent statements.”

“Oh, I remember this part. Three spirits will come to show me the path to redemption.”

“Err, actually 2 and a half. We need to watch our expenses, so the third is part-time. Now I must go….”

“Back to the underworld?”

“Worse. An interview on Fox news. Farewell Ebernankeee….”

With that, Greenspan faded out of sight after turning a whiter shade of greenback. Screwed gulped a glass of his favourite wine, a vintage Two Buck Chuck. As he put the glass down, the first spirit appeared before him. To Screwed’s surprise, he was standing before a shadowy ghost of Bill Clinton.

“Are you Mr. Ebernanke Screwed?” it asked.

“Former President Clinton? You are the ghost of Christmas past?”

You betcha!”

“But you’re not dead yet!”

“Hey, since when have rules stopped me? Hillary can attest to that! Anyway, I’m here to show you the past, so here we go…”

They found themselves in a cheerful conference room at the US Treasury. A smiling Greenspan was at the head of the table. “Things are going brilliantly” he mused.

“But what about the risk of an asset price bubble?” quipped someone at the back of the room.

“Lighten up Shiller, sometimes you’re just tragically intense. All those numbers of yours make no sense. Quit worrying!”

The troublesome Shiller was bundled out of the meeting room to be given a cold shower at the Fed. In a quiet corner, a young Screwed was taking careful notes and nodding to all Greenspan’s platitudes.

The scene then faded away.

“What Greenspan said made so much sense. All those intelligent sounding words…” sighed Screwed.

“And look where you are now” laughed Clinton. “By the way, have you seen my cigar anywhere…?”

“Get away from me Clinton!” jumped Screwed.

“OK, OK, you’re not my type anyway. Hey, gotta go! You’ll be seeing my colleague soon…” With that, Clinton faded away.

Screwed shook his head. No sooner had the ring of Clinton’s voice gone from his ears than a trio of businessmen popped out of the garbage can.

He stood up and confidently introduced himself “I am Screwed.”

“Yeah, that sums it up!” quipped the first.

“Mind you, we should now!” laughed the second.

“Takes one to know one!” roared the third.

“Hold on…I know you. Nardelli, Wagoner and Mulally. The Detroit Three”

“Ho ho ho! Yes, or better known as the three Stooges!” they chorused.

“You can’t teach me anything - you’re the heads of bankrupt companies.”

“And you’re the head of a bankrupt central bank. Hahaha! Now that’s an achievement!”

“You’re idiots. You can’t even count. There’s only supposed to be one of you, not three. I read books, you know.”

“And you can’t read financial statements! We’ve been written down so much that it takes three of us to make one spirit!” they laughed.

All of a sudden Screwed found himself in a grubby tavern. A group of bedraggled central bankers were huddled around a table. To his amazement, he recognised his business partners: Mr. King of England, the snooty Baron de Trichet of France, the sneering Hank Paulson and the Financial Shogun Shirkawa.

“We’re doomed…what the hell is Ebernanke doing? Parachuting bailouts…” groaned King.

“It is tres bizarre. He’s crashing straight into le zero interest rate world” mused Trichet.

“For once we’re ahead of everyone else!” laughed Shirakawa.

“I tell you boys, that Ebernanke wouldn’t know finance if he tripped on it. Fiddling with the Fed Balance sheet whilst corporate America burns” snarled Paulson.

“Still, no one will miss him when he’s gone” whispered King.

“He’ll be the first Fed Chairman to have worse book sales after his time in office!” mused Trichet.

“Back to academia for Ebernanke then” added Shirakawa.

“Yeah, I hear Detroit Business School is hiring” laughed Paulson.

The tavern then faded into the mist. Screwed felt crushed by what he had witnessed.

“Woe is me! I thought they were my friends! Yet they laugh at me with contempt. I even gave them signed copies of my last book” he wailed.

“So that’s how they send themselves to sleep at night!” quipped Nardelli.

“OK Screwed, we hope you’re starting to get the picture” added Mulally.

“Your next visitor will be here shortly. We’ve got private jets to catch!” said Wagoner.

“But you promised Congress you’d drive from now on” wailed Screwed.

“Nah! We’re just using the hybrid SUVs to ship our books of excuses to Washington. After all, we’d have to hire a cargo plane otherwise. Time for us bail out…Hahaha!”

With that, the jovial executives disappeared in a cloud of airplane kerosene. Screwed was still reeling from the shock when another ghastly apparition materialised. The faint sound of news jingles seemed to surf around him.

“Nouriel Roubini!” gasped Screwed.

“Yes, it is me, the great Roubini! After years of predicting the credit crisis, and seeing stocks fly through the roof, I have finally been proved right! I can see the future…”

“Houdini has nothing on you. Wait a minute…you’ve been wrong before then?”

“Details, details. Yes, but at I least I’ve been proved right now! Unlike that turnip Anatole Kaletsky, and the ghastly Irwin Stelzer! Haha! They won’t be getting invites to CNBC anytime soon! Unlike me, the Great Roubini…”

“Can we get to the point?”

“Ah yes. Well, let me show you the future…”

Screwed suddenly found himself in a huge factory. Sullen individuals of all ages and creeds surrounded him, toiling away on a tractor assembly plant.

“What is this place? Communist Russia?” asked Screwed

“No, Washington DC. With your reckless policy actions, the United States became a basket case country, and the state had to takeover all commercial enterprises.”

“NOOO! I must stop this” screamed Ebernanke.

“The solution is simple, Ebernanke. “

“And it is…?”

“Sorry, I only work part-time. Got to go – I have another party in my uber-trendy New York apartment to go to. Gloomy macroeconomics is the new rock and roll, you know. Ciao”

With those parting words, Roubini vanished and the news jingles faded. Screwed looked around his empty house in total panic.

“We’re doomed! We’re as dead as corduroy!” he yelped. He rushed around the house, and crashed into a long object rapped in a tarpaulin. Curious, he took the cover off, and beheld…a printing press!

The next day, the town was awash with currency. Screwed was a changed man, smiling to all as he tossed bundles of fresh banknotes into mailboxes. All seemed to be well again, and Screwed felt he had learnt the true meaning of central banking Christmas: bailouts and banknotes for all.

Perched on a rooftop, the Detroit three were watching the newly pressed currency floating in the breeze.

“Haha! There’s a spelling mistake on your banknotes Ebernanke!” they laughed.

Unfortunately their voices were lost to Screwed, who was wrapped in the praise of his many, many bailout recipients.

“God bless the printing presses, every one and all!” sung Screwed.

Madoff and frenchmen

It is striking that up until a few quarters ago, the french banks were often criticised for not adopting a more "anglo-saxon" model, particularly in investment and risk management. With hindsight, this has probably positioned french banks quite well for the post-Lehman era (Kerviel aside).

With respect to Madoff, my previous point about due diligence has received an appreciated (although unconnected) boost from Societe Generale. Apparently a routine due diligence by Societe General picked up something awry in Madoff's track record nearly 5 years ago. Bernie went straight on their internal blacklist. It just goes to show that the boring number crunching pays off.

Madoff's mess

Even by the standards we've become used to during these interesting times, the fraud uncovered at Madoff this weekend is rather staggering. Having built up his pyramid scheme on the capital of wealthy US investors (in particular from Florida), Madoff snared them all. Reports hitting the wire today are reporting several institutional investors being caught in this pickle - BNP Parisbas, Santander and Pioneer to name a few.

I'm not sure whether this has anything to do with the Irish government's sudden decision to prop up its listed banks with a massive recapitalisation effort. People have been asking me this weekend how "sophisticated" investors could have fallen for Madoff's scam.

The reality is that investors tend to get seduced by the "investment" story (track record, strategy etc). It creates this weird mindset where people get so excited by the idea that they get too lazy to do the (boring) due diligence that is vital to weeding out the crooks. An unglamourous task, but essential to preserving wealth.

The worst offenders are actually so-called "sophisticated" private investors who setup their own family offices. Think of the toy train version of asset management. You have people with far more money than sense, who often have never had to work in truly commercial settings (if they did, they only got the job through their father/mother's good offices). They hear about "smart investors" putting money with a fund manager, who seems to generate great returns. They pile in with little or no time spent actually kicking the tires.

One example springs to mind. I bumped into the son of a wealthy patriarch on Friday, who was whining about being caught in a similar situation. I asked him how he'd decided to invest. "A very good friend who invests his own money recommended it", came the response. I then asked what analysis he'd done of the manager's middle and back office operations. A blank stare. Come on, you did ask for an operations manual? "No". Not even an audit of some recent trades? "No".

I have trouble sympathising with such amateurs. Yes, Madoff appears to be a fraudster according to the news, and if proven he should be held accountable for that. Yet supposedly "sophisticated" investors wrote their cheques without the most basic due diligence. This may sound unfeeling, but let this be an abject lesson to these people - don't have delusions of grandeur. It's the quickest way to erode your wealth.

Core concept 1 - Portfolio and Wealth Management

Let's roll! I'll take things from the top for our core concept chapters. Today's focus is on two key terms which are often used (mistakenly) to mean the same thing. Before you make any financial decision, it's important to make a distinction between them. The following is not the only way of defining these terms, but I've found this approach quite helpful in the past.

What do people actually mean by "wealth management"? The way I look at wealth is to combine an individual's entire asset base. Not just financial assets (savings, retirement accounts, brokerage accounts etc). I add in cars, property, personal possessions - all the tangible stuff. The final piece is a bit controversial, but I think too many people ignore it - your own education, work experience and knowledge. I'll come back to this last point later on.

"Portfolio management" is generally used to describe how people manage financial assets, for example how much to put into equities in a 401k plan, and whether to use a fund run by Fidelity, Vanguard etc. It's a subset of wealth management.

Why do I add in things like work experience and education into the definition of "wealth"? Let's be clear here - all the fancy theories inside "portfolio management" don't run themselves. The way you look at information and act on it drives every decision you make, including how to manage money. Not appreciating that leads people into all sorts of trouble.

Unlike the talking heads you see on TV, I like to stick to a few simple rules. And the most important one of all (and the one that we all struggle with) is to understand our own biases. How we look at the world is based on our experiences (good and bad).

As an example, when I try a new trading strategy and I hit several home runs, I have a tendency to think "I'm really good at this". Sooner or later, a reckless decision stops me in my tracks. The trick I've learnt is not to get disheartened. I cut my losses, pause for a while and reflect on what actually happened. Total honesty can be painful, but it's the only way to learn. Then I pick myself up and try again!

You might ask "So what?". You need to have a picture of your overall wealth and how you plan to manage it. Diving straight into managing a portfolio of financial assets (stocks, bonds, options etc) is the way most people proceed - but I believe that's simply wrong. If you haven't got a full picture of your circumstances, how can you manage each "piece" properly. Or to put it in sports terms - a team of individuals (however well trained) can't win without an overall game plan.

In the next Core Concept, we'll take a look at how you build that game plan.

Suits and us - UBS

OK, so it's a bit cheap of me to poke fun at UBS' carefully crafted (and no doubt expensive) slogan - but you have to laugh! Stepping back from things, the sheer hubris of those ads in daily newspapers and TV slots should have been a warning that the once-prudent private bankers had gone completely off the rails.

Still, let it not be said that the Swiss don't have a sense of humour. A Zurich suit boutique is offering clients the option of paying for their purchases in UBS shares - at a 40% premium to Friday's closing price. I hope it goes well for that shop owner - at least someone might make some money out of this mess!

Canadian cool

It's taken an eternity, but the BCE buyout is officially history. As a reminder, this was a plan by a club of private equity firms to acquire BCE (the owner of Bell Canada) with an enormous $35 bln in debt. The deal was toast when the auditors finally saw sense and pointed out that such a level of borrowing would render the firm insolvent.

Whilst the Ontario Teachers Pension Plan (the lead acquirer) will be disappointed, they shouldn't be. It was a crazy deal to do in any climate, and you have to wonder whether pension plans are the best qualified people to be doing direct deals (after all, if they were that good why aren't they working for a private equity firm?).

Of course, the real winners are the banks who had so unwisely signed up to this, and are now free from having to fund the deal. The fortunate trio is RBS, Deutsche Bank and TDC. You can almost hear the bankers bursting into song. All together now: O Canada...!

A new initiative for Capital Novation

I've been doing some thinking about the situation we find ourselves in. I had originally designed this blog as a commentary on headlines and emerging trends in capital markets and business. I intend to keep that as my main focus, but I think it's time to expand the agenda.

Yes, there are many "exciting" headlines, but I've become concerned at how the severity of this crisis is impacting the wealth of so many ordinary citizens. People who have worked hard and saved are seeing their capital eroded, in large part due to poor advice and simplistic "investment ideas" touted in the media.

How do you manage your portfolio in this new world we find ourselves in? What assumptions still hold, and what "theories" have been shown to be wishful thinking? Starting this week, I will add "Core concept" posting each week on this topic- to help you adapt your investment thinking to these circumstances.

Of course, I can't offer individual advice - but what I will try and do is help you look at the investment world from a different perspective. The end decisions are always your own, but I'll give you a different angle from which to look at things.

Why this new initiative? One of my favourite academics is Robert Shiller. Whatever you may think of his economic theories, he made a brilliant point that citizens need some truly independent (i.e. not sales commission-based) advice to help them make sensible investment choices. Sadly none of the TARP billions have been committed to that great idea. So I'm donating my own time in order to plug that gap, albeit at a very modest level.

My first "Core Concept" item will be online this weekend, but feel free comment with any areas of investment that you would find useful to look into.

United in discord

So much for European unity! The threadbare "common front" on economic stimulus packages is unravelling in style. The UK government got a very public dressing down from their German counterparts, who deemed the UK Labour Party's record borrowing as "breathtaking".

At last! Someone in the political space has come out with an iota of common sense. It's great politics (in the short run) to try and spend your way out of recession, but the ballooning debt burden could take decades to work off. A fine legacy indeed. Thank goodness that Gordon Brown has saved the world - talk about delusional!

Of course, there is a political agenda here. Within the Eurozone, there is great tension between the fiscally efficient German economy and some of the more "basket case" members (such as Spain, Italy and Greece). Berlin is reluctant to weaken the euro as a quick fix for less efficient Euro countries, and rightly so.

Retail nightmare

In the midst of the retail gloom, I'm surprised at how the media can overlook some deep structural problems that have popped up in specific countries. Take the UK, which is lurching from one retail setback to another.

There's very little coverage (if any) of the fact that credit insurers have virtually disappeared from the market. For reference, these are firms that provide insurance to retail firms. For example, when a shop purchases stock on 30 day terms, the insurer provides protection in the event of the purchaser failing to meet the obligation.

In the past six months 90% of that capacity has vanished, led by large players such as Euler Hermes. Why does this affect retail? All of a sudden, suppliers can't get that insurance, so they demand payment at time of shipping. Suddenly your shop has to come up with the money there and then, rather than in 30 days. It may simply not have that cash, particularly in a period where they need to buy a large amount of stock (such as the Christmas season).

Add in the 24th December rent payments that come due on many commercial leases, and you have a recipe for retail disaster. I spoke with a distressed investor this morning, who is aware of hundreds of small and medium businesses that are two weeks away from going under. It's a frightening scenario, and in this festive season a harrowing one.

Chinese currency whispers

Hank Paulson had to undertake (another) difficult assignment this week with a visit to China. The meeting is technically an annual summit between Chinese and US economic representatives, but the agenda is much more pressing this time round.

Having belatedly woken up to the fact that China is one of the largest holders of US government debt, Paulson is in effect meeting one of his chief creditors. An ever-awkward discussion revolves around the yuan valuation.

The Bush administration has been keen to press for an appreciation against the dollar, thus encouraging American exports. Yet in the current climate this is a bit futile, given that China's economy is decelerating fast. As most Chinese citizens have no affordable access to welfare systems (a visit to hospital will easily cost more than a whole year's wages), it's naive to expect a material fall in the savings rate.

It's doubtful that the Chinese will be enthusiastic buyers of further US corporate assets for now, given the disasters of some of their investments (e.g. Blackstone). And even if they did want to tip their toe in again, will the US be a bit more open to this capital this time. Remember the xenophobic reaction to Sinopec's 2005 offer to buy Unocal?

You can bet the Chinese haven't, Hank.

Renewable capital?

Although I tend not to put too much currency into coincidences, two recent articles about the UK did stop me in my tracks. I'm now concerned that the dangerous alchemy being put in motion in London might move stateside.

Here are the two stories: first, the UK government is expecting to issue records amount of new debt to fund a foolhardy and short-lived sales tax rebate, amongst other goodies. Story number two: the UK regulator for financial services (the FSA) has indicated that it is considering a change in solvency rules for banks, forcing them to hold far higher amounts of sovereign debt.

So let's see, a spendthrift government issuing so much debt that buyers might be scared away. Forcing the banking system (which is by the way quasi-nationalised) to hold more government debt? Even your average investment banker could put that together.

Has the inept duo of Gordon Brown and Alistair Darling come up with financial alchemy? A financial perpetual machine? Unfortunately not - given that the banks are now government controlled in all but name, the funding to buy all these new gilts is itself government money! Still, it has a certain symmetry to it.

Of course in the medium term this cranky trade will break down, and damage the commercial value of the banks in the process. But it plays well to the peanut gallery with a possible election looming.

In dire straits

There's no way to sugar-coat it: today's US payroll data was simply awful. Dire. Catastrophic. I thought I was pessimistic with a forecast of -450,000, but the reality was even worse. Over 530,000 jobs were lost last month, and digging into the details shows how the recession is spreading across all sectors.

The figures show the emergence of a deep and painful spell for white collar workers, as services bore the brunt with cuts of 370,000, of which 196,000 were in professional services. A graphic demonstration of the white collar recession we're entering (assuming that the carmakers dodge implosion with a Congress bailout).

Things are unfortunately not going to get better anytime soon, with the twin storms of mortgage delinquencies surging and further job losses announced today. It is unfortunate, to the say the least, that the hubris of a few has affected so many.

Regular readers will know that I have a deep-seated suspicion of regulation and state intervention, but I can't argue with the need for some recalibration of the system. One can only hope regulators don't go too far, which could potentially damaging the United States' commercial reputation for decades.

But for now, I hope that Congress shows restraint in bailing out inept management teams - where a restructuring needs to take place, use funds to give a safety net to the innocent instead. Our external credibility rests on accountability - the people who got their industries into this mess should not be allowed to walk away.

Bernanke's Waterloo

It's come about even faster than his most ardent critics could have predicted. Ben Bernanke has finally fallen off the helipad of his ivory tower. In his latest statement, Bernanke is urging yet more government action.

Having realised that the series of uncoordinated and half-baked responses aren't making any difference, the Fed Chairman is more or less shrieking desperately bad ideas to anyone who'll listen. Something along the lines of "buy delinquent mortgages, approve the FDIC mortgage guarantee proposal, subsidize Ginnie Mae rates!"

Let it not be said that these ideas haven't been evaluated by Ben. True to his academic roots, he has carefully analysed the sources of fund. They will require "some commitment of public funds" - i.e. even more taxpayer capital at risk.

It goes without saying that running the money press 24/7 may help fund the paper game of buying up all this mortgage debt junk for the state balance sheet. Yet in the long run you can expect inflation to roar back to life. I wonder if the Fed will rack up the rates as fast as they cut them? In any case, those treasury yields will be moving back north soon.

Raise the drawbridge!

As if to illustrate how bad things are for hedge funds in spite of all the policy fiddling by lawmakers and central bankers, Fortress announced today that it is suspending redemptions on its flagship Drawbridge Macro Fund. Now those redeeming investors besieging Fortress have to wait out by the legal moat generously provided by the partnership agreements.

The figures are scary. Taking the fund's reported size of $8Bln as read (no mean assumption in this day and age), the amount that investors are trying to take out amounts to c. 40% of the entire portfolio ($3.5 Bln).

The optimists will say that this is a temporary move to preserve capital and prevent forced sales. Yet it doesn't take much to puncture that bubble - assuming credit markets remained in limbo for a few more quarters, those valuations aren't going to move up any time soon.

If you're having trouble keeping up with the hedge fund quagmire, check out this site which is keeping a tally on the mayhem.

Debt crossing

An interesting little headline ran across my Bloomberg terminal today about the stress in the credit markets. The iTraxx Crossover Index has soared to a record of 10%, compared to c. 3.4% at the end of last year. For those of you who aren't derivatives fans, this index represents the cost of buying insurance against credit default for a basket of sub-investment grade debt.
The trend isn't a surprise given the economic mess we're in. However I was curious enough to dig into the index composition, and I started to appreciate just how awful some of the debt sitting on banks' balance sheets must be. For example:

• HeidelbergCement - Overleveraged german conglomerate wrecked by nutty family patriarch: 3654 bps
• DSG International - A UK version of Circuit City with worse customer service: 1700 bps
• Alcatel-Lucent - Telecoms manufacturer disconnected from reality: 1240bps
• Nielsen BV - Levering up a ropey market research firm (brilliant idea Blackstone!): 1042 bps
• Virgin Media: Another vanity project from Richard Branson: 940bps

Having said that, the yields on some higher quality names are really starting to look attractive. Rather than rushing in, I'd suggest being quite careful and do some thorough credit analysis, as I've bumped into several "smart" private clients and institutions who jumped on the trade way too fast, and got hit by recent corrections. And I'd avoid the passive vehicles, as the indices they use are so overweight financials.

Mr Detroit goes to Washington (again)

The Detroit carmakers, in true Three Stooges fashion, are back in Washington with yet another bailout plea...sorry, I meant "viable plan for survival". It looks like Chrysler will be the sacrificial lamb, with its remnants carved up between GM and Ford - although I wonder if the US might allow (heaven forbid!) a foreigner to buy some of these beleaguered assets?

One of the bizarre proposals is to siphon off funding for fuel efficiency programmes to rescue the carmakers. I might be missing something, but Honda and Toyota got their promising hybrid/electric businesses up and running under their own steam.

It took them a decade of R&D investment, but they innovated and created a great product that is in demand. Doesn't this sound familiar? Yes, it's free enterprise, and the Japanese carmakers should be admired for being so forward-thinking. Of course, if helps that they can build cars that work, unlike the cobbled junk coming out from the US carmarkers.

In comparison, the gruesome threesome of Detroit are a pretty rotten lot. Like a manufacturing Dorian Gray, the reality is actually a long history of laziness and efficiency. They all deserve to hit the wall, and the sooner the better, so that they can be restructured into a half-decent business.

How Gordon mortgaged Sterling

It's been a stealthy decline till now, but the Great British Krone has taken another hit today and is now surfing near its record lows for the year. Of course, part of that is driven by worries of recession in a country that's forgotten how to make anything tangible. The only thing I saw manufactured the last time I was there were "services" (i.e. memos, meetings and committees).

There's a much darker force at work however - the catastrophic level of government debt that's been hived off the state balance sheet. The architect of this lunacy is the insidious Gordon Brown, who has managed to bend the rules for years.

In the spirit of public service (as the BBC doesn't seem to care about it any more), I've had a read of some tedious information on the UK government sites. The table below starts with the "official" government debt figure, then adds back the two main sleights of hand: PFI (off-balance sheet public works finance) and the cost (to date) of those generous bank bailouts.

So, even excluding some other liabilities (such as unfunded public pension deficits, future costs of the wars in Afghanistan and Iraq), the UK is twice as levered up as the official figures. So from about 40% of GDP, we're sailing north of 80%!

That uncomfortable fact is the root cause of the pound's slide. Sterling used to have a connotation of strength - it's now becoming a bit of a joke unfortunately.

Secondary effects

The fact that many US and overseas endowments, including the much-lauded Harvard fund, are seeking to sell large chunks of their private equity portfolio is old news. What has surprised me is the lack of focus on why the problem surfaced.

True, there may be some marginal need to raise capital given the rapid falls in the listed markets. Yet a prudent asset allocation would have never exposed these funds to such a liquidity squeeze.

There are two factors at work. The first is plain old hubris - alternative assets, real estate and private equity all seemed to be heading ever higher, so Investment Committees put less and less into boring bonds, stocks and cash. This reached a point where some endowments had hardly any liquid assets at all: distributions from private funds were providing the cash to meet their obligations. Heavens, some pension funds even took stakes in the General Partners themselves!

The second factor was over-committing to some of the asset classes, particularly private equity. When the public markets turned, endowments and pension funds suddenly found themselves horribly over-exposed, with large capital calls outstanding. Hence the stampede into the secondary market. Although don't believe the public bid quotes - take that number and halve it, at the very least.