Monday's Top 10: BRICs crumbling; 'shadow banking is good'; hedge fund failure; big data solutions; limits to panic; Albert Einstein; Dilbert, and more

Here's my Top 10 links from around the Internet at 10:00 am today.

Bernard is back tomorrow with his version.

As always, we welcome your additions in the comments below or via email to bernard.hickey@interest.co.nz.

See all previous Top 10s here.

1. BRICs crumbling
Investors - or more accurately, investment analysts - love acronyms.

They chase decade-long fads, and so it should not be surprising that the fascination with the BRICs should be coming to an end.

I wonder when an investment acronym will include New Zealand?

(The latest ones are MIST – Mexico, Indonesia, South Korea and Turkey – and CIVETS – Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa.)

The Globe & Mail has a review:

From 2003 to 2012, the MSCI Emerging Markets index rose nearly 17 per cent a year on average, in U.S. dollar terms. But investments in emerging markets in the coming decade are “unlikely to deliver anything close” to the kinds of returns they did in the last one, Dominic Wilson, an economist at Goldman Sachs Group Inc., wrote in a note to clients last month. “To paraphrase the old expression, these are not your older brother’s emerging markets.”

Mr. Wilson’s opinion carries particular weight: Together with colleagues, he predicted in a report in 2003 that the BRIC nations – Brazil, Russia, India and China – would become an increasingly important driver of the world economy. Their contribution to global growth will remain high, he noted last month, but the real spike is likely “mostly over.”

Others echo that assessment, arguing that an investing era has ended. “Every decade there’s some theme that captures the imagination of people,” said Ruchir Sharma, head of emerging markets at Morgan Stanley Investment Management in New York. In the 1970s, it was gold; in the 1980s, it was Japan; in the 1990s, it was technology; and in the 2000s, it was the BRIC nations, he said.

“Now what we’re seeing is this is beginning to change,” said Mr. Sharma, the author of Breakout Nations, a recent book on the topic. “All the emerging markets booming together is last decade’s story.”

2. Low interest rates justify silly loans
The growth of China's shadow banking industry to its now-enormous position worries many. Like our own 'finance company industry', it is criticised by 'normal banks' as unstable, and regulators echo their views. But maybe they are wrong (again?). Joe Zhang writing on Bloomberg has a useful counterpoint:

The government and the media are scapegoating the wrong culprit. Shadow banking has flourished in China for one simple reason: financial repression. By keeping interest rates artificially low, authorities have forced savers to search for more lucrative financial products. By favoring banks -- which, in turn, favor state-owned or well-connected private-sector companies with loans -- they have forced small enterprises to seek out people like me and Wang.

Meanwhile, projects that might look sketchy at 9 percent interest rates suddenly look feasible at 6 percent. Under such conditions, traditional banks have steadily lowered their lending standards -- from prime loans to subprime and then to simply silly loans.

Sound familiar? That’s how the 2008 financial crisis began, too. Leaders are right to worry about the possibility of a banking crisis in China. But instead of focusing their ire on shadow bankers, they should raise benchmark interest rates in order to reduce the amount of credit flowing to dodgy loans through the formal banking sector. The threat to China’s financial system is right there -- out in the open -- not lurking in the shadows.

3. Hedge funds are for suckers
That's the headline in the latest issue of BusinessWeek. The 'smart money' can't beat the market - in fact, the markets beat hedge funds hands down. But Adrian Orr and his team at NZSF beat them both by a very handy margin. Investment benchmarks are not being set in New York, but Wellington!

According to a report by Goldman Sachs released in May, hedge fund performance lagged the Standard & Poor’s 500-stock index by approximately 10 percentage points this year, although most fund managers still charged enormous fees in exchange for access to their brilliance. As of the end of June, hedge funds had gained just 1.4 percent for 2013 and have fallen behind the MSCI All Country World Index for five of the past seven years, according to data compiled by Bloomberg. This comes as the SEC passed a rule that will allow hedge funds to advertise to the public for the first time in 80 years, prompting a flurry of joke marketing slogans to appear on Twitter, such as “Creating alpha since, well, mostly never” (Barry Ritholtz) and “Leave The Frontrunning To Us!” (@IvanTheK).

4. Today's raw market data ...
A quick new-week update:

5. Don't do regulators job
In the past few weeks we have had a clear lesson about the limitations of monetary policy. Berkeley professor Barry Eichengreen makes some interesting points on Project Syndicate:

A final lesson is that monetary policy is a blunt instrument for addressing asset-market problems. In the absence of inflation, it was mainly warnings about new asset bubbles that pressured the Fed to curtail its purchases of long-term securities. Similarly, worries about property prices drove the PBOC’s abrupt change of course.

Bubbles should be a concern, but the June 19 episode in the US and China reminds us that addressing them is first and foremost the responsibility of regulators. Central bankers cannot afford to ignore them, but they should be wary of reacting too soon. In the meantime, they have bigger fish to fry.

6. The end of the [land]line
The superstorm in New Jersey at the end of 2012 may be an important tech turning point. The local phone company has refused to restore copper wires for landlines in some communities, insisting they will only supply mobile service from here on. And the are getting support from other big telecom suppliers. Maybe the restoration of Christchurch's copper network will be one of the last? More at Slate.com:

In Washington, the Federal Communications Commission is looking at an application from the country’s largest landline phone company, AT&T Inc. AT&T isn’t dealing with storm damage, so it has the leisure of taking a longer view. It wants to explore what a future without phone lines will look like by starting trials in yet-to-be-decided areas.

“We need kind of a process where we can figure out what we don’t know,” says Bob Quinn, one of AT&T’s top lobbyists in Washington. “The trouble is not going to be identifying the issues everybody can see. It’s going to be finding the unexpected issues that you have to conquer.”

“There are all kinds of state and federal rights around your phone bill … which don’t apply to these competitive alternatives,” Feld says.

The FCC put together a formal task force on the issue in December, after AT&T put in its request, and has asked the company for more details.

Sean Lev, the FCC’s general counsel, said in a blog post that “we should do everything we can to speed the way while protecting consumers, competition, and public safety.” But he also points out that most phone companies aren’t set to retire their landline equipment immediately. The equipment has been bought and paid for, and there’s no real incentive to shut down a working network. He thinks phone companies will continue to use landlines for five to 10 years, suggesting that regulators have some time to figure out how to tackle the issue.

AT&T would like to have all its landline phone equipment turned off by 2020. Verizon’s Maguire envisions a gradual phase-out, starting right now.

7. Making sense of nearly everything
Physicist Mark Mills says the age of all-seeing, all-knowing information analytics is nearly upon us.

Big data may not so much change “the way we make sense of the world” as amplify our ability to make sense of nearly everything in it - from terrorism to disease to restaurant preferences to subatomic particles.

He sees important, even troublesome, public-policy and social implications. More in City Journal:

Soon big-data analytics will cross a Rubicon: we won’t have to guess or approximate what’s going on with many activities, we will know. Until now, given the scale and complexities of commerce, industry, society, and life, you couldn’t measure everything; you approximated by statistical sampling and estimation. That era is almost over. We won’t have to, for example, estimate how many cars are on a road, we will count each and every one in real time as well as hundreds of related facts about each car. Ditto soon for such things as your heartbeat or blood glucose, and much more.

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8. What is bank capital?
William Alden at Dealbook has written a nice primer on bank capital, and why bankers don't like holding very much. They prefer to play the leverage game - which is interestingly something they won't tolerate with the clients they lend to. Double standard?

Think about capital this way: It designates the percentage of assets that a bank can stand to lose without becoming insolvent.

If a bank’s assets decline in value, it has to account for that by adjusting the source of financing that it used. Liabilities like debt and deposits can’t be reduced, as they represent money that the bank has promised to pay to bondholders or depositors.

But what’s useful about capital is that it can be reduced, or written down. That’s the whole point. Shareholders, who contribute to capital, agree to absorb losses if the bank falls on hard times. So, rather than a “rainy day fund,” capital is a measure of a bank’s potential to absorb losses.

9. The limits to panic
We often hear how the world as we know it will end, usually through ecological collapse. Indeed, more than 40 years after the Club of Rome released the mother of all apocalyptic forecasts, The Limits to Growth, its basic ideas are still with us. But time has not been kind, claims Bjorn Lomberg in Project Syndicate:

That message still resonates today, though it was spectacularly wrong. For example, the authors of The Limits to Growth predicted that before 2013, the world would have run out of aluminum, copper, gold, lead, mercury, molybdenum, natural gas, oil, silver, tin, tungsten, and zinc.

Instead, despite recent increases, commodity prices have generally fallen to about a third of their level 150 years ago. Technological innovations have replaced mercury in batteries, dental fillings, and thermometers: mercury consumption is down 98% and, by 2000, the price was down 90%. More broadly, since 1946, supplies of copper, aluminum, iron, and zinc have outstripped consumption, owing to the discovery of additional reserves and new technologies to extract them economically.

Similarly, oil and natural gas were to run out in 1990 and 1992, respectively; today, reserves of both are larger than they were in 1970, although we consume dramatically more. Within the past six years, shale gas alone has doubled potential gas resources in the United States and halved the price.

As for economic collapse, the Intergovernmental Panel on Climate Change estimates that global GDP per capita will increase 14-fold over this century and 24-fold in the developing world.

The Limits to Growth got it so wrong because its authors overlooked the greatest resource of all: our own resourcefulness.

Obsession with doom-and-gloom scenarios distracts us from the real global threats. Poverty is one of the greatest killers of all, while easily curable diseases still claim 15 million lives every year – 25% of all deaths.

The solution is economic growth. When lifted out of poverty, most people can afford to avoid infectious diseases. China has pulled more than 680 million people out of poverty in the last three decades, leading a worldwide poverty decline of almost a billion people. This has created massive improvements in health, longevity, and quality of life.

10. Today's quote
"Many of the things you can count, don't count. Many of the things you can't count, really count." Albert Einstein