Forcing the heart attack victim on the treadmill


by Cam Hui

Posted: 08 Dec 2011 08:05 PM PST

In a previous post*, I used the analogy of Europe as a heart attack patient:

Imagine that a man (the “eurozone”) experiences severe chest pains and looks like he is headed for a heart attack (“Lehman moment”). The protocol is well defined in these circumstances. Take steps to stabilize him (“inject liquidity via the ECB”) and then address the causes with a program of diet, exercise and medical treatment (“longer term solutions such as balanced budgets, pro-growth policies, possibly closer fiscal integration, two-speed eurozone, etc.”). Berating him about being lazy and overeating (“you lazy Greeks, Italians…”) and making him get on the treadmill to work off his Thanksgiving feast (“more austerity and IMF monitors”) while he is on the verge of a heart attack (“Lehman like financial crisis”) is less than helpful under the circumstances.

If the ECB was supposed to be the Emergency Room doctor, then yesterday’s decision by Mario Draghi to rule out further bond purchases was like throwing the patient out on the street with instructions of “take an aspirin and call me in the morning.”

What’s more, the patient’s family then gathered around to berate him for his bad habits over the years and forced him to get on the treadmill (the latest Grand Plan for greater fiscal integration) in order to lose weight and improve his health.

Heart attack time?
The markets promptly responded and Italian 10 year yields shot up an astounding 47 bps.

European stocks took a similar pounding in the wake of the news:

Euro STOXX 50

Fiscal policy does the heavy lifting
Instead of a combination of fiscal and monetary policy to save the eurozone, we now have to rely purely on fiscal policy. Will a new Brussels-on-the-Rhine, even if it were to be ratified by the eurozone governments, be able to do such heavy lifting without plunging Europe and the rest of the world into a deep recession?

There is a tool from The Economist that allows a user to specify economic assumptions, i.e. GDP growth, budget balance, interest rates and inflation, for a country’s to see what is needed to stabilize national debt-to-GDP ratios. When I played around with it, getting from A to B looks a tough task once you assume the recessionary effects the combination of an austerity program and credit crunch. (If the tool below doesn’t work, try this link instead).

The markets had been focused on ECB action to buy the eurocrats some time to fix the long-term problems. Now, we have a credit and liquidity squeeze occurring in the European banking system that is technically insolvent. These issues need to get addressed now.

As I write these words late Thursday night, it appears that the latest Grand Plan is already falling apart. Maybe Merkozy and the eurocrats can pull a rabbit out of the hat, but I am not optimistic.
The markets are going to take this very, very badly.

* In the past, I mistakenly referred to the December 9 EU Summit as the Marseilles summit. It is being held in Brussels. I apologize for the error.

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. (“Qwest”). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

Immigration: The double-edged sword for America

Posted: 08 Dec 2011 12:57 AM PST

Lately, this blog has been focusing on all Europe, all the time. I wanted to step back and write about something else.

With an election year coming up in the United States, immigration is one of those hot-button issues that has been dividing people. But the electorate has to remember that the immigrant experience is part of the American Dream of rags to riches. The trend toward rising barriers to immigration, legal and otherwise, is also raising barriers to job creation and, longer term, barriers to the nurturing of human capital in America.

Consider this story about the blowback in Alabama’s tough stance on illegal aliens without proper documentation:

[T]wo foreign workers with the Mercedes-Benz and Honda auto assembly plants in Alabama have run into problems.

To wit, they were caught without proper drivers’ licenses and arrested under Alabama’s anti-immigration laws:

On Nov. 16, a German manager with Mercedes-Benz was arrested under the law in Tuscaloosa for not having a driver’s license with him while driving a rental car.

First Mercedes, then Honda:

Last week, a Honda employee from Japan was detained under the law in Leeds.

Police at a roadblock found him carrying an international driver’s license and passport, but not an Alabama license or Japanese license as required by the law.

Great way to attract employers to locate in your state, guys! Auto assembly plants produce jobs – good paying jobs. Stunts like that give locales a reputation for being difficult to do business.

Where does “American” brain power come from?
One of the sources of American competitiveness has been its human capital, but increasing barriers against immigration is drying up foreign sources of human capital to migrate to its shores. Richard Florida recently wrote:

Since September 11, America’s increased concern with security has threatened to undermine its ability to attract global talent. Foreign-born scientists and engineers provide a critical element of America’s talent base: in the last decade, more than half of all Silicon Valley start-ups were launched by immigrants. In 2007, I warned that by making itself less hospitable to immigrant students, scientists, and entrepreneurs, the United States was undermining its own interests. “What if,” I asked, “Vinod Khosla, the co-founder of Sun Microsystems and venture-capital luminary who has backed so many blockbuster companies, had stayed in India? Or if Google’s Sergey Brin had decided to apply his entrepreneurial talents in Europe?”

Many startups, such as Intel and Sun Microsystems, were co-founded by foreigners. True, universities like Stanford and Harvard are still the envy of the world, but as top students find it difficult to go to America to study and to work afterwards, how long before their rankings start to slip. Florida wrote that things are getting so bad that some entrpreneurs are trying to find ways around the system by building a “floating offshore Silicon Valley”:

Blueseed, a Silicon Valley start-up, is trying to do an end run around the broken immigration systems by dreaming up a “floating startup incubator.” It would circumvent immigration laws the same way that gaming businesses once avoided gambling restrictions, by parking their clients on a ship in international waters.

Has it come to this? Trying to figure out ways to game regulations is not a path to long-term sustainable competitiveness. The New York Times recently reported that Despite Economic Slump, Europe Gets More Tech Start-Ups (h/t FT Alphaville). Is this a tipping point?

Is the American electorate being penny wise and pound foolish when it comes to immigration? Is this another American step towards being Argentina? We shall find out after this electoral cycle.

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. (“Qwest”). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

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