On the list of Madoff victims published in both the New York Times and Bloomberg is an organisation who are given as having a paltry $1.4m exposure. This is the Caisse des Dépôts et Consignations (CDC).

La Caisse is a pioneer - founded in 1816 it has evolved into France's sovereign wealth fund with €221bn of assets at end 2007. Its business review highlights some of its noble missions: provision of public housing, paying for university and hospital renovations, financing small and medium sized French businesses, undertaking renewable energy projects and so forth. Or as President Sarkozy put it in January this year to a press corps more interested in his wooing of Carla Bruni:

"The Caisse des Dépôts is an instrument of this policy of defending and promoting the nation's primordial economic interests"

But just what are some of the investments supporting these primordial economic interests? And readers ought to know before the partial answer below that there is surely no nation on earth that takes its leisure time as seriously as France (c/f the 35 hour week).

So look no further* than a wide assortment of ski, holiday and leisure resorts (Parc Asterix included) when giving thanks to the good works of the CDC. These investments, though labelled "regional development services" by the CDC, are arguably much more consistent with the enduring labour rights legacy of the remarkable architect of modern French socialism Léon Blum (note to Madame Aubry: he stopped at a 40 hour week).

As for Madoff, the CDC say that they carry no direct exposure: the $1.4m sat in fund of funds. Which, considering CDC has €16bn in mutual funds (as at year end 2007), is an amazing piece of fortune. Or skill.

Joyeuse fêtes et vive la France.

*OK, there is

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My local rag is not part of any of the well-known international media stables. It is a small island, fairly insular, reflective of the mainstream paper. One of the most durable sections has been the Agony Aunt column (sample letter: "Afraid friend is dating a bisexual").

Some things, however, are international.

Its uncritical report of this week's parliamentary debate for an increase in the public debt ceiling was littered with "we are in good shape", "banking sector is sound" and similar citations. Notwithstanding the stark reality that these are in context depressingly misrepresentative assessments of the risk horizon they are, of course, well-intended utterances meant to maintain confidence and smooth furrowed constituent brows.

But to what point must matters degrade until soothing chatter and presentationally inspired policy placebos are recognised as delusional? Recent history says right up to the moment when the wheels fall completely off the wagon.

Take, for example, the identically themed statements issued since 2007 beginning first in the US housing sector. Many pundits, some miscalculating the importance of perceived self-interest, were caught saying as early as 2007 that the worst was past. Many firms and business associations, as late as this summer (the Confederation of British Industry comes to mind) were caught issuing public releases of an overconfident and complacent nature.

20/20 hindsight one might conclude - easy to call them delusional post case. However, they were readily identifiable, more often than not, as delusional at the time of release.

The result is that credibility has been systematically sacrificed on the alter of good intentions whilst appropriate and imaginative forward planning has not, usually, been timely. Why it is policy makers and administrators, above all, do not grasp this obvious truth is a mystery: a little naked honesty clears the thinking admirably and represents a wise longer term political investment.

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Eliminates (some) double counting, updates Tremont* exposure. Grand total sits at $23.3bn (vs $24.1bn in prior graph). Mr Madoff might have bailed a Detroit car maker or two with that...

(Data via FT. Link here)

Significant caveat: graph data nearly certain to contain overlaps between Tremont, Fairfield and other names.

*Tremont estimated to have $3.3bn, not $1bn, of exposure said the FT citing unnamed sources. Union Bancaire Privée and Fortis numbers are also estimates.

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...admitted exposure to date:

(data from FT Alphaville)

Denunciations of the US regulatory regime for not detecting the scheme have been prominent over the weekend. In the UK the loudest has probably come from Nicola Horlick of Bramdean Alternatives who had 10% of funds under management with Mr Madoff.

There is, as usual, a depressing lack of self-blame by such professional money managers. Everyone claims, legal ramifications uppermost, that they (or, more helpfully for our Learned Legal Friends, qualified proxies) undertook amazing due diligence. It must therefore be the fault of regulators.

Regulators will doubtless carry their fair share of blame. But the most interesting question remains one of fiduciary duty. Investment fund clients do not make contracts with market supervisors.

So how exactly does a fund carry out thorough due diligence on what is in all essence a black box system pleading commercial secrecy?

It, I submit M'Lord, cannot. Next to the alleged and astoundingly stable returns of over 1% per month come rain or shine marketed by Mr Madoff it appears only the prudent and intellectually honest honoured their fiduciary duty to protect and preserve clients' capital in the face of the uncertain and unknown.

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He began earlier this year by wanting to "whip" Switzerland for harbouring German tax dodgers. He forecast the demise of the USA as a financial superpower. And now, Germany's Finance Minister Peer Steinbrück (FT profile here), has only gone and again said what plenty think. The key passage from That Newsweek Interview is below - obviously Herr Steinbrück is not gunning for the diplomatic portfolio.

The speed at which proposals are put together under pressure that don't even pass an economic test is breathtaking and depressing. Our British friends are now cutting their value-added tax. We have no idea how much of that stores will pass on to customers. Are you really going to buy a DVD player because it now costs £39.10 instead of £39.90? All this will do is raise Britain's debt to a level that will take a whole generation to work off. The same people who would never touch deficit spending are now tossing around billions. The switch from decades of supply-side politics all the way to a crass Keynesianism is breathtaking. When I ask about the origins of the crisis, economists I respect tell me it is the credit-financed growth of recent years and decades. Isn't this the same mistake everyone is suddenly making again, under all the public pressure? (link)

He might have added something along the lines of "talk about trying to buy an election!" but, perhaps, with one eye on the German €31bn plan, refrained.

But still, it is surely a good thing the "crass Keynesiansm" has been put on the debating table rather than swallowed entirely untempered by every single major economic power as part of their ongoing spectacle of one upsmanship using Other People's Money.

Not that the fiscal boosters will see it that way.

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This section from FT Alphaville's Markets Live, an excerpt from a Nomura report, caught my eye yesterday:

DSGi is priced to fail, in our view. We believe the probability of this is over-stated, and see significant upside potential to DSGi’s share price. We therefore upgrade the stock to a Buy rating. DSGi has a number of strategic options, including disposals which could help to raise cash, pay down debt and increase headroom versus covenants. This will see DSGi trade through peak and allow it to execute its transformation plan. Execution of the plan will be key as the market continues to deteriorate. Failure to execute effectively could see further downside risk. We believe management is well positioned to see DSGi through the cycle. (link)
There is contrary. And then there is what FT Alphaville term kamikaze. But far be it for anyone to suggest that the analyst in question is out on a weekend pass - DSG shares have risen +70% on the back of this call.

Still, DSGi is one of those short list short favourites of mine. And everyone else until this bounce. The case against is brief: catastrophic UK high street retail environment for discretionary electronics; cash bleeding away; mucho leverage; and covenants most definitely under dire threat.

The elegant 5 point plan cited on FT Alphaville assumes a smooth and timely disposals process and wholly ignores Murphy's Law. The key lesson of Mr Murphy is that models fail. DSGi's has and it cannot today be repaired. It will be an expensive failure unless you believe, ardently, in the "transformation" (to what?) story.

The price approaches shortdom once more.

Top 10 Murphy Sub-laws:
  1. Just when you see the light at the end of the tunnel, the roof caves in.
  2. Anything you try to fix will take longer and cost more than anticipated.
  3. The things that go missing end up broken.
  4. If there is a worst time for something to go wrong it will happen then.
  5. If you make it idiot-proof someone will make a better idiot.
  6. If everything seems to be going well you have overlooked something.
  7. The cool solutions are never cheap.
  8. Everyone has a plan for getting rich that won't work.
  9. The repair guy will never have seen a model quite like yours before.
  10. Smile! Next year will be worse.

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Stay cheerful heading into the weekend:


Whats the difference between Vladimir Putin and George Bush?
Putin nationalises only profitable assets….

What do you say to a hedge fund manager who can't short-sell anything?
Quarter pounder with fries please.

How do you get a banker out of a tree?
Cut the rope.

What’s the capital of Iceland?
About €3.50.

You know it’s a credit crunch when…
...your builder asks to be paid in Zimbabwean dollars.

What’s the difference between a no-claims bonus and a banker’s bonus?
You lose your no-claims bonus after a crash.

How many Keynesian economists does it takes to change a light bulb?
All of them if you want to generate employment, more consumption and shift the aggregate demand curve to the right..

A priest, a rabbi, and a mortgage broker were all caught in a shipwreck. Sharks were soon circling around. The sharks eat the priest. The rabbi starts praying fervently, but to no avail, as the sharks eat him as well. The mortgage broker is really getting worried, as a shark is coming for him. But instead the shark puts him on its back, carries him to shore, and lets him off. The mortgage broker asks, “How come you didn’t eat me too?” And the shark replied, “Professional Courtesy!”

Bradford & Bingley employees are dismayed they were given no notice of the takeover by Santander. A spokesman explained: “Nobody expects the Spanish acquisition.”

Gordon Brown, Alistair Darling and Peter Mandelson are flying to a world economic summit. Peter looks at Alistair and chuckles: ‘You know, I could throw a £50 note out of the window right now and make one person very happy.’ Alistair shrugs his shoulders and says: ‘Well, I could throw five £10 notes out of the window and make five people very happy.’ Gordon says: ‘Of course, but I could throw ten £5 notes out of the window and make ten people very happy.’ The pilot rolls his eyes, looks at all of them, and says: ‘I could throw all of you out of the window and make the whole country happy.


Spank the banker

NB: Jokes from all over but most can be found at Credit Crunch Jokes

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Screw the pooch non-farm payroll numbers in the last hour, far worse than consensus. Even the increase in unemployment rate to 6.7%, better than expectations by a tenth of a percent, appears due to contraction of the labour pool.

(Graphic from Bureau of Labor Statistics release here)

More focus, if that is possible, is now fixed on housing and foreclosures. Factors that recently looked major positives for home owners- cheaper petrol and lower mortgage rates on the back of the Fed's plan to buy $600 billion of Government Sponsored Entity and mortgage backed security obligations - now look seriously mitigated by the scale of emerging job losses (although caveats on single data points apply).

Société Générale published a useful, pre-data release tour d'horizon and commentary on the problems of and choices for tacking foreclosures today (see especially page 2) - here is a small excerpt:

"There are two major problems that emerge from foreclosures. First, they continue to add to excess inventory, forcing even deeper cuts in housing starts and exerting further drag on the economy. Secondly, foreclosures have put significant pressure on home prices which compounds the problems for financial institutions.

There is a circular relationship between foreclosure rates and home price declines. A drop in prices not only reduces recovery rates on defaulted loans, but it also raises the incentive to default, further boosting foreclosure rates. One estimate quoted by Bernanke is that about 15% to 20% of all mortgage loans in the US are “under water”. That means that almost 1 out of every 5 mortgage holders has a fairly strong incentive to walk away."

And, crunched between the systemic financial problem and worsening macroeconomic outlook, this is what a small but key piece of that circular relationship looks like - pending urgently desired relief:

(data from the US Census Bureau release of 26 November)

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A small addendum to the last gold entry.

A performance graph of gold versus the similarly scarce, but more industrial demanded (particularly since 2000), platinum is below.

(graphs from TradingEconomics)

Similar overall performances but, on this tiny sample, more than double the price dispersion for platinum.

This reflects platinum's growing exposure to the industrial economy since 2000. Before then something like half of production was met by industrial demand. Forecast data for 2008 shows this share up to nearly three quarters of the total.

Which, then, is the more surprising? That platinum remained so closely correlated to gold as a safe haven product for so long? Or that it fell out of the matrimonial bed so disastrously this year?

Without the long history of gold it appears that platinum does not, scarcity and all, enjoy similar caché as a hedge/haven. For this producers can thank their exposure to catalytic converters and media coverage of Detroit Goes to Washington.

But, with flat and problem-riddled supply and industrial demand that has grown over the last 6 years at the direct expense of jewelery, platinum's crash this year still looks mighty odd.

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It “looks as if the bottom has been made” earlier this year. (Bill Miller, December ‘08)
“stock prices are now so extraordinarily cheap that I would be very surprised that if an investor who bought a diversified portfolio today did not make at least 20% or more on his investment in the next twelve months” (Jeremy Siegel, October ’08)
“Equities will almost certainly outperform cash over the next decade, probably by a substantial degree.” (Warren Buffett, October ’08)


"Stocks are reasonably cheap, not spectacularly cheap”..."With the S&P at 900, stocks are cheap in the U.S. and cheaper overseas. We will therefore be steady buyers at these prices."...[but]..."Two to one it will be down quite alot next year" (Jeremy Grantham, November ’08 and link to excellent interview)
“this is not a time to be committing large amounts of money. Stocks are cheap but they can get cheaper; we know that. We got back to the Dow having a multiple of 5.9 in December of '74, which was the foundation of Warren Buffett's wealth because he started buying at that level” (Donald Coxe, November ’08)


“Stocks are cheap when valued within the context of a financed-based economy once dominated by leverage, cheap financing and even lower corporate tax rates. That world, however, is in our past not our future.” (Bill Gross, December '08)
Stocks “are still expensive on any historic valuation method…We may be hitting ‘a’ bottom. I don't know if it's ‘the’ bottom.” (Jim Rogers, November ’08)


(graph from Robert Shiller, updated and annotated by the scribe)

Ad: Free subscriptions for qualified pros. Full catalogue here

(BusinessWeek offer is a free trial)

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Tidy infographic from Le Monde aiming to put G20 fiscal stimulus plans into their budgetary context:

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AIG, if nothing else, have learned very fast from their dealings with Goldman Sachs. If you are going to take bets you don't really, really understand you ought to scour the republic's villages for idiots upon whom you can lay off the risk.

And so, via a Wall Street Journal report, AIG are setting expectations for another re-negotiation with the US Treasury. A couple of priceless (or maybe not so priceless) quotes from CEO Liddy:

(on the Government's AIG stake of 79.9%) "It kind of chokes out any private market investment"
"in financial services if your name is besmirched it can be hard to recover from that."

On that last point, a note to man-of-the-world but Brooklyn-born Geithner: in administration too.

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Apparently, the persistent resistance to narrowing of the Libor:OIS spread since 12 November is all about year-end funding according to this Bloomberg report.

That's great news! No need to worry about diminishing returns of the various liquidity "facilities" (note to self, check the definition of that word): the Primary Dealer Credit Facility; the Asset-Backed Commercial Paper Money Market Fund Liquidity Facility; the Term Securities Lending Facility etc etc.

So, rest easy, for the slight widening of the spread over the last month will be reversed by Christmas when banks will, perhaps, gift taxpayers some more of their precious assets.

UPDATE, 3 December - Just off DJ Newswires (excerpt only):

"The cost of borrowing longer-term U.S. dollars in the interbank market fell Wednesday after the Federal Reserve announced it would extend the terms of three of its recently implemented emergency liquidity facilities in light of the ongoing strains in financial markets.

The Fed said its Primary Dealer Credit Facility (PDFC), the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF) and the Term Securities Lending Facility (TSLF) would run until the end of April 2009."

Here's wishing for the programmes' (continued) success.

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…a go run him belly.'* This, for non-West Indian readers, is a Jamaican proverb cautioning that what tastes oh so sweet now does not digest too well later. Think asset backed securities and Citigroup, for example.

But also bear it in mind, maybe, when considering investing in, rather than simple hedging with, bullion (though it’s doubtful the downside runs would be of subprime severity).

Is gold an especially attractive asset right now? There are reasons to think so:

  • recessionary global conditions and systemic weakness in financial systems in the US and EU are pushing interest rates down. The relative cost of holding physical gold over sovereign bonds is thus particularly low;
  • bullion is safe harbour against volatile equities (and financial systems), an asset with no counter party worries;
  • few signs that mine production is set to materially increase. [An aside - my personal nightmare is, having loaded up on gold, waking up to headlines that South Africa’s Gold Fields, for example, have discovered an enormous vein 50 metres below the surface (rather than at their current 3,000m depth) and doubled the world’s known reserves at a stroke. However, despite technology and miners’ best efforts that has not happened. Yet];
  • poor, apparently, dollar prospects. Over 60% of the change in the price of gold is explained by movement in the dollar/euro rate. With the Federal Reserve and US Treasury flooding the banking system with liquidity the chance that they fail to mop up it all up in time to stop inflation once expansion starts is a gold catalyst in waiting. However, this is not entirely convincing - there is also reason to believe that, in relative terms, the dollar economy may end up faring better than the euro area;
  • lower energy prices, while not doing much for bullion, should be improving miners’ margins making them an attractive proxy; and
  • with rumours swirling of eventual diversification out of dollars and into gold by Asian central banks, there is a potential shoot the moon deal for gold bulls

On the other hand, gold is not only a store of value - it is also a genuine commodity. There are industrial and commercial (jewellery) markets for it and these are also sensitive to market cycles (ie this demand element is down).

Then there are the stories of ongoing forced gold sales to cover losses of other asset classes. Furthermore, and despite the Central Bank Gold Agreement (CBGA) which aims to minimise market disruption, should a sovereign government decide to join this action – and with Keynes partying like mad there may be the temptation - there would be significant downward pressure on bullion.

This includes the potential action by the IMF, party to the CBGA and third largest official holder of bullion, to dump stock (pending US Congressional approval). Originally conceived in late 2007/early 2008 as a way to strengthen the organisation’s finances the growing role of the IMF in stabilising member nations might, possibly, widen the scope of sales (should they ever materialise).

I’d spare a place for the high gold to oil ratio as an additional counter argument but it probably says a lot more about the oil markets than bullion prices.

Lots of speculation, then, around gold. Which amounts in the aggregate, I think, to an argument for its exclusive use as a portfolio hedge. Perhaps the key argument against it as a pure investment is that competing asset classes are, at today’s levels, obviously cheap. Some, like corporate bonds, are building up a momentum of positive news flow via Bloomberg et al. But even lowly equities harbour some very interesting prospects. And both can offer capital appreciation as well as a revenue stream - and thereby highlight the opportunity cost of gold.

So why, and this is said with an open mind, would one want it as a major investment class?

*ska fans can hear Desmond Dekker use it here in “It mek”

Photo credit: Joe Lencioni

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GE say in a press release 8 minutes ago and just ahead of their Financial Services Meeting webcast (link here, starts in a couple):

GE will also update that its fourth quarter earnings per share are trending toward $.50-.52, the low end of its previously guided range of $.50-.65.

For the champs of managed earnings that sounds a bit ominous. Tune in for more...

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Official - the National Bureau of Economic Research (NBER) today declared that the United States is in recession:

The committee identified December 2007 as the peak month, after determining that the subsequent decline in economic activity was large enough to qualify as a recession. (link)

I wonder if one might very respectfully suggest that the NBER work to improve the timeliness of its declarations? I realise the committee wants to be sure but a year is what it took to construct the Empire State Building (and Disneyland if that's significant). Seems like calling a recession "officially"' might be a task requiring less time.

Plus if they'd delayed another month the Intrade bet would have been void.

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