“Hard-a-starboard! Full speed astern ... hard to port!” Part 2

On the positive side we were most taken with Dr. Jim Walker of CLSA who had recently published the informative Q107 Eye on Asian Economies, Apocalypse Now? An unnatural tale. Walker correctly diagnosed that the problem here was a clash between the government that makes the policies and the brokers who help to shape the markets, but was one of the first people outside of MBMG to recognise that the intention of the policy action was entirely understandable. Overwhelmed by “the capital flows encouraged by global central banks over the last few years,” Thailand could either ignore these and hope that the inevitable problems actually surfaced on someone else’s watch OR could try to do something about them. As Dr. Walker states, “Cheerleaders of stock market performance are happy to ignore the distorting consequences of the easy money policies that are still in place - as long as markets are going up, eh? Unfortunately that is just the same short-sightedness that could see no problems with the distorting capital flows that overwhelmed Asia in 1997/98.”
We agree - the markets are motivated by what’s good for the markets - professional politicians are generally motivated by what’s good for them (research shows that credit spreads in emerging economies deteriorate during election years as incumbent politicians weaken the economy by pursuing ill-considered populist policies). Professional politicians would never have introduced a measure such as the initial draft of the capital control policy which provoked so much negativity. Nor would they have ever introduced the final version of this which is probably one of the most effective damage limitation policies that could have been introduced right now.
What particularly pleased us about Dr. Walker’s piece was the rebuke delivered to a colleague at CLSA who had written a half-baked piece the previous day: “To complain about Thailand’s ‘mercantilistic export economic policy’ (as one of my colleagues did in a note yesterday) is to show even more naiveté than the Thai government. Of course Thailand is worried about the baht - as Korea is about the won - because a huge proportion of domestic investment and consumption is dependent on the export sector. This is where The Economist and analysts that parrot the notion that Asia is now driven by independent domestic demand have got it all wrong. There is very little sign of a domestic demand revival in Asia (outside India and, to a much lesser extent, China). Investment growth has been a drag on GDP this year and with exports ranging from 31% of GDP (Indonesia) to 108% (Malaysia) a sizeable proportion of income flows i.e., consumption are driven by exports ... yesterday also gave us the perfect example of why Thailand and other Asian countries will continue to face the same problem - too much capital chasing too few assets. The Bank of Japan failed not just the Japanese people but the global economy when it chose not to raise interest rates at its monthly meeting. The Yen carry trade is one element of the fuel that is firing leverage and risk taking around the world, but more specifically in emerging markets - the ones least able to cope - at this time. The dollar automatic telling machine that is the US current account deficit coupled with yen leverage can make their highest returns by focusing on the narrowest asset classes ... The danger for the global economy is the sudden reversal of these sources of capital ... We see the US super-boom, an expansion that has more or less lasted since 1992 fed by Greenspan’s fixation with keeping asset prices rising, coming to an end in 2007. Correlated with the end of the US super-boom will be an unwinding of Chinese malinvestment (while markets concentrate on the obvious mistakes that the Thai government has made they seem oblivious to the equally catastrophic mistakes that Beijing has made in undervaluing its currency and undervaluing capital. For the malinvestments to unravel all it will take is a deterioration in the external capital/trade flow from the US consumer and US investors). And finally, there is the yen and its attendant carry trade. While all around - Thailand and Korea especially - are fretting about their strengthening currencies the Japanese have instituted policies that perpetuate Yen weakness. Just how long G7 politicians will wear this state of affairs is difficult to tell but frustrations are clearly rising. Episodes like the baht capital controls debacle will put more international pressure on the Japanese to normalise their rate structure and to do it quickly. If the yen then appreciates on the back of protectionist and interest rate differential pressures then asset prices will be undermined further ... then there is China. There will be no sharp appreciation of the renmimbi. Instead Beijing will scurry to deal with even greater capital inflow which will further increase excess capacity, drive up property prices and concentrate money in the hands of local government rentlords that will go on to squander it in hubris projects. The party will continue while the malinvestments build up - and until the combination of slowing global capital flows (which will only be effected through a US recession) and inadvertently tight domestic monetary policy expose the cracks in Chinese profitability and economic structure.”
Just like the Titanic, it may be that the real causers of the disaster are not the obvious candidates - if we had to nominate our arch-villain in this piece it would be none other than Alan Greenspan. US economic policy of the 1990s created a bubble - policy since then has done everything possible to sustain and increase this. Maybe like Capt. Smith, Big Al believes that there cannot be any condition which would cause the US/global economy to founder because modern economic theory has gone beyond that … either way, we’d recommend looking for an economic life raft right now and we wouldn’t criticise either Tarisa or Pridiyathorn for doing so (although they could have made a better selection than picking what appears to have been the first lifeboat that caught their eyes on Monday).
In the global economy emerging economies are generally hostages of the developed ones (China has the capital base to be an exception to this rule). Any attempt by any emerging economy at this time to de-link from the US economy (which seems more determined than the Titanic ever was to sink itself without a trace) is bound to be greeted with opprobrium from the vested interests that want to keep the world’s currently number 1 economy not only afloat but manically spewing liquidity into the global economy until the very last minute. The more countries that de-link from this belief and cause others to question it, the sooner that the day of reckoning will come for the US and global economies. Can it be completely unrelated, in the aftermath of the announcement of the policy that amounts to the single most significant declaration of disbelief in the widely propagated gospel according to Greenspan, that US sources have tried to discredit Thailand for mis-using tsunami disaster relief funds? Whether or not there is any truth in this, the timing doesn’t seem accidental to us.
The extent of the stock market decline and the rash of foreign and domestic criticism was clearly worse than anything that the BoT and MoF had anticipated and by the end of a turbulent Tuesday, Pridiyathorn grudgingly conceded that the cure was probably worse than the disease, with Thailand’s credibility as an attractive venue for foreign investment seriously damaged.
As a result a revision was announced that the capital controls should be imposed specifically on foreign players in the Thai bond market who brought their short-term capital into the country to take advantage of high interest rates while at the same time speculating on the baht’s rise and that capital inflows destined for the local stock market would be exempted from the capital control measures.
Just as we’ll never know whether Smith, Ismay or Murdoch (or a combination of all 3) was ultimately responsible for piloting the iconic vessel into the iceberg that caused its sinking, we’ll probably never know why the capital flow controls weren’t introduced in a way that would have made them more palatable (such as their revised format). For the past several weeks, the Bank of Thailand had issued warnings about impending capital control measures, which also impose a 10 percent fee, similar to withholding tax, on foreign investors who want to take their short-term speculative funds out of the country. It is believed that the Thai stock market will suffer significant ongoing reputational damage (and reputational damage for an economy or stock market has a serious effect on inflows and outflows).
However, the country’s 2 most productive sectors have been safeguarded. We don’t doubt that this is an extremely strong positive and that the really valid criticism is that the implementation of this wasn’t managed in a more effective way. The revised format rather then the original format was probably the best solution available here (either that or Teerana’s reduced 10% measure). However, damning the authorities for the detail is failing to recognise the huge big picture benefits of the outline of the policy and we can’t help but notice that most of the vested interest critics of the less than perfect implementation of this process have been quite happy to cheer the Greenspan put and Ben Bernanke’s subsequent helicopter policies that have created this situation where emerging economies are being forced to choose between a rock and a hard place. We should be pleased that at least the leadership in this country has the benefit of political impartiality and that goes along way to explaining why Thailand alone has actually made that choice while other administrations have essentially said the equivalent of ‘we’ll get back to you on that - maybe ... perhaps after the next election...’
If you can see the berg coming straight for you, it’s hard not to panic - “Hard-a-starboard! Full speed astern ... hard to port!”

The above data and research was compiled from sources believed to be reliable. However, neither MBMG International Ltd nor its officers can accept any liability for any errors or omissions in the above article nor bear any responsibility for any losses achieved as a result of any actions taken or not taken as a consequence of reading the above article. For more information please contact Graham Macdonald on [email protected]

Snap Shots: by Harry Flashman

Creative controls in digital photography

Turning the flash off manually.

There seems to be a very common notion that ‘somehow’ digital photography is totally different from the old fashioned film photography. I do not know how this happened, but let me assure you that digital and film cameras do exactly the same job. It is only where the light falls and how it is stored and recorded that is different.
First, a little basics. All photography has worked on the principle of allowing light carrying the image to go through a lens and then fall on to a sensitized surface. Originally this was a glass plate coated with silver compounds which got darker when exposed to light. The degree of darkness depended upon how much light came through the lens, and for what length of time. This is the principle covering aperture (or lens opening), and shutter speed (how long the aperture is left open). That principle still holds good today.
Originally, the aperture was literally as large as you could get, and the time was measured in hours. This was because the sensitized material was really not too sensitive at all, but we improved.
The first improvement came in the lens design. These could let more light through in a shorter period of time, and the aperture only needed to be left open for a few minutes, rather than hours.
The next major development was sensitized film which could record an image in fractions of a second. Photography as we went into the 1900s was very similar to the technology today. You could capture an image at an aperture size of f 11 open for 1/60th of a second, on the film of the day.
During the next 100 years, lenses got better and gave less distortion, film became more sensitive and gave clearer, sharper images, and the mechanical shutter speeds approached 1/4000th of a second. This was enough to stop a speeding railway train without the aid of Superman!
Then came what people called the “digital revolution”. A completely new way of photography, requiring special new cameras which could show you the image you had just taken, immediately! No more agonizing waits at the film processing shop. Instant gratification for the “me now” generation.
However, this is where the misnomer occurred. It was not a “revolution” it was merely an “evolution”. The principles of photography (sometimes called ‘painting with light’ by the romantics) were just the same. And the application of them was just the same. A lens let in the light, for a proscribed length of time, and this was recorded by light sensitive electronic “film”. The difference was that you did not have to develop this new electronic “film” in chemicals. It could be viewed immediately by using electronic processing. Really, there was no difference.
Now, just as the old film cameras had aperture and shutter speed controls that were adjustable by the photographer, guess what? The new digital cameras have apertures and shutter speeds that are adjustable by the photographer as well. And in the same way, you can get creative results from your digital camera, exactly the same as you could with your film camera.
This is where some differences occur, however. With the ‘old fashioned’ film cameras you rotated a dial on the lens barrel to open or close the diameter of the aperture, and you had a dial on the top of the camera that you rotated to give you different shutter speeds. The two factors could be operated independently, and this was called Fully Manual Mode. However, they could also be operated in conjunction with each other, called Aperture Priority if the aperture was set first, or Shutter Priority, if the shutter speed was set first. However, with these new-fangled revolutionary digital cameras you got things called ‘drop down menus’ and you had to push multi-purpose up, down and sideways buttons to select different apertures or shutter speeds.
The message here is that all the old controls are still there, under your control. It is just not as easy in my opinion (but I am still struggling with the remote for the TV set). Simple rotary dials are quicker and easier than drop-down menus for my money! But you are still in control.
Try a little creativity this weekend!

Modern Medicine: by Dr. Iain Corness, Consultant

Abominable operations!

Of course that should be “abdominal” operations, but I have heard it described that way more than once. A genuine medical Malapropism. Today I’d like to take you through the situation of inflammation of the Appendix, which we medico’s call Appendicitis (remember that “-itis” at the end of the word usually means inflammation).
Appendicitis is one of the commonest surgical conditions, and is generally experienced by about 1 person in 500 every year. Males suffer from this more than females and it can strike at any age, though under two is exceptionally rare. The most affected age group is between fifteen and twenty-four. However, don’t think you have escaped if you are 25. There have been a few cases recently at the hospital of more mature age groups with this condition.
The appendix is a little “finger” shaped appendage that hangs off the bowel and connects with it. Ruminants such as cows have large ones, if size really matters! For us, it is also one of those cute “vestigial” organs which has no apparent functional use these days, but can give us lots of problems if things go wrong. And things often do go wrong for the 1 in 500 each year, with abdominal pain, originating around the navel and then moving to the right lower quadrant being the usual presenting symptom. Sometimes there can be some diarrhea, but it is the abdominal pain that is the main complaint.
So what causes Appendicitis? It is a form of infection which is generally from the food passing through the gut and can be bacterial or even viral. Sometimes the poop (nice medical term) in the gut gets jammed into the appendix and causes the initial problem. Just for the record, we call it inspissated faeces, just to make it sound grander than it really is.
While the signs and symptoms of Appendicitis are straightforward, the diagnosis is not so easy as a number of other abdominal conditions will mimic the symptoms of centro-abdominal pain which radiates to the right iliac fossa, nausea, low grade fever and occasional diarrhea. From my medical student days I can even remember the last one being the Abdominal Crises of Porphyria! I must admit that in 35 years of medicine I’ve never met one!
There are some laboratory tests which can be done, especially a blood test to see if the White Cell count has gone up, and some centers will perform ultrasound to try to differentiate what is going on inside the belly.
The definitive “cure” is to whip out the offending organ, and this is usually one of the first operations a young surgeon does on his own. (Mine was a Russian seaman in Gibraltar and I think I was much more worried and apprehensive than he was. He lived through the surgery, and so did I.)
And here is a trade secret. My old surgical boss always told me to make sure the skin incision was as small and as neat as possible, because that was all the patient had to go by to judge one’s competency. It didn’t matter what went on inside - just make sure the outside looked good! This was particularly important with young females and a two cm scar, level with the top of the bikini bottom was the ideal.
Post-operatively the vast majority of patients do well and are up and about in a few days, happily living without their appendix, but if you’re having some grumbling gut pains, perhaps you should let the doctor cast his practiced eye over it. Or rather, pass a practiced hand over the abdomen.