The largest Dutch bank, ABN-Amro has been snapped up by my first employer, Barclays in a fairly spectacular deal that so far appears to have outwitted another group of suitors:

ABN Amro agreed today to be acquired by Barclays for 67 billion euros, or $91 billion, creating one of the world’s largest banks in a carefully crafted deal that reduces — but does not eliminate — the chances of another suitor coming in with a higher bid to buy and break up the bank.

In a surprise facet of the deal, ABN Amro, the largest Dutch bank, said that it had arranged to sell LaSalle Bank, its attractive American business, to Bank of America for $21 billion in cash. LaSalle is the corporate gem that had drawn Royal Bank of Scotland, the British bank that teamed up with two other European banks, to mount a counter bid for ABN Amro.

It's a good deal for shareholders and from that point I regret having dumped my ABN-Amro stock a few years too early, but that is not really all that big a deal. Much more important is having made an early career call after sitting through the now infamous UBS/SBC merger in 1998/99. There will be an awful lot of bankers walking the streets of London and Amsterdam trying to re-invent themselves, not always the easiest of tasks. And this deal will probably trigger a wave of further consolidation in a sector that will continue to rationalize and spit out valuable financial and entrepreneurial talent.

Another thought provoking piece from 2006 Nobel Laureate Edmund S. Phelps in the WSJ, arguing that differences in economic dynamism are not just instititutional, but to a large extent cultural:

The values that might impact dynamism are of special interest here. Relatively few in the Big Three report that they want jobs offering opportunities for achievement (42% in France and 54% in Italy, versus an average of 73% in Canada and the U.S.); chances for initiative in the job (38% in France and 47% in Italy, as against an average of 53% in Canada and the U.S.), and even interesting work (59% in France and Italy, versus an average of 71.5% in Canada and the U.K). Relatively few are keen on taking responsibility, or freedom (57% in Germany and 58% in France as against 61% in the U.S. and 65% in Canada), and relatively few are happy about taking orders (Italy 1.03, of a possible 3.0, and Germany 1.13, as against 1.34 in Canada and 1.47 in the U.S.).

Phelps should dig further and may care to bring in religion and history as Italy, France and to some extent Germany are all Catholic and all came late to empire building as opposed to the nations that rejected papal primacy and set out to conquer the world. Max Weber was one of the first sociologists to pioneer this theme. Of course, these factors have been overcome by time and dynamic capitalism as Phelps describes it has now made successful inroads in Catholic underperformers such as Ireland and for instance Poland.

The Dutch, together with the Brits and Nordic countries are very different from their big continental brothers, but I would still suspect that their entrepreneurialism comes in below the levels measured in North America. That however is probably more a function of institutions rather than values.

Canada has reached a settlement with Maher Arar for some $10.5 million, about 9 million in US funds. Good news for Arar who will no doubt use this as ammunition to go after US authorities in order to get compensation from them and to be removed from a US security watch list.

This is the fall-out of deporting terror suspects to nations that torture and it is very instructive in how not to fight the war on Islamist terror. I've discussed this case in detail a while ago in a lengthy post about the Arar case.

On both sides of the border the debate over the minimum wage has been reignited, sparking a lively debate. In the US, Mrs. du Toit rounds up some numbers and explains the futility of a minimum wage increase. In Canada, columnist Andrew Coyne explains some fundamental economic laws:

The point is not that those struggling to get by on very low wages should be left to their own devices. The point is that wages, properly considered, are neither the instrument nor the objective of a just society. When we say their wages are “too low,” we mean in terms of what society believes is decent. But that’s not what wages are for. The point of a wage, like any other price, is to ensure every seller finds a willing buyer and vice versa, without giving rise to shortages or surpluses -- not to attempt to reflect broader social notions of what is appropriate. That's especially true when employers can always sidestep any attempt to impose a “just” wage simply by hiring fewer workers.

Read both and ask whether the usual rebuke from the other side, "you're heartless", stands the test of logic.

Not just in Europe is boomer retirement a pressing issue according to Robert Samuelson:

I know many bright, politically engaged boomers who can summon vast concern or outrage about global warming, corporate corruption, foreign policy and much more -- but somehow, their own Social Security and Medicare benefits rarely come up for criticism.

Our children will not be so blinded to this hypocrisy. We have managed to take successful programs -- Social Security and Medicare -- and turn them into huge problems by our self-centered inattention. Baby boomers seem eager to "reinvent retirement'' in all ways except those that might threaten their pocketbooks.

And that explains why some real issues - and I can list a few of my own - which not only require a change in spending priorities but a change in thinking patterns hardly get any attention from those seeking public office these days.

Virginia Postrel travels Upper Class in order to retrieve the glamour of flying, but comes up empty handed:

But I didn’t find glamour—because airline glamour was never on the planes themselves. It was in the imagination, especially the imagination of people who could only dream of flying. Airline glamour never promised anything as mundane as elbow room, much less a flat bed, a massage, or an arugula salad. It promised a better world. Service and dress reflected the more formal era, but no one expected air travel to be comfortable. It was amazing just to have hot food above the clouds.

Yes. Since I experienced the tail-end of the 'flying-is-glamourous' era I still get some sort of kick out of air travel, but it is indeed nothing compared to what it ever was.

As some of you know, my previous career revolved around financing large infrastructure and energy projects in Asia and as such I have witnessed various forms of twisting overseas investor’s arms. The most blatant example however has been more recent and it concerns the way in which the Kremlin – using environmental issues as a proxy - rewrote the terms of the Sakhalin-2 liquefied natural gas project off Russia's eastern coast. The Guardian has an instructive round-up of how the Kremlin in gaining the upper hand in its energy dealings with the west. Royal Dutch/Shell, one of the main western investors in the deal reacted as follows:

Anglo-Dutch energy multinational Shell had experienced "a great deal of difficulty" with the way Russia's Gazprom had negotiated over the Sakhalin 2 oil and gas concession in the Far East, Shell chairman Jeroen van der Veer said Sunday.

"Regarding the pressure on the environmental side, we had large difficulties. We made clear to the Russians that we did not agree," Van der Veer told Dutch national public broadcaster NOS.

The talks were "among the most difficult I have participated in," Van der Veer said.

At the end of 2006, Shell and its Japanese partners, Mitsui and Mitsubishi, yielded majority control over the huge resources to Gazprom in a deal worth 7.45 billion dollars, after pressure from the Russian environmental authorities.

Big projects in emerging economies often get off the ground fast as overseas investors get the red carpet treatment and are able to sign incredibly lucrative deals. That is exactly what happened in Yeltsin’s Russia and Shell may have been able to get in on terms that would put the recent renegotiation in a very different light. Still, heavy handed political interference sets a terrible precedent for future investment and economic development. I don’t think we needed further evidence of the roguish nature of Putin’s Russia, but Shell’s LNG project is a worthwhile addition to the list of the political and economic challenges presented by the former Soviet Union.

Dan Drezner - in the WaPo - makes an inventory of the various ideas that seek to reinvigorate US foreign policy. This excerpt in particular struck me as thought provoking:

On at least one key dimension, all the contenders for Kennan's throne agree. They all stress the importance of fostering open markets to advance economic development and U.S. power. Just one problem: As Benjamin Page and Marshall Bouton point out in "The Foreign Policy Disconnect: What Americans Want From Our Leaders but Don't Get ," the greatest gap between U.S. policy elites and the American public revolves precisely around international economic policy. As the recent midterm elections demonstrated, economic populism plays far better with Americans today than does free trade.

The grand strategy that wins out in the end may be the one that -- regardless of specific positions on Iraq or terrorism -- convinces Americans that it is possible to have free and fair trade at the same time. By a hair, then, the front-runner is Lieven and Hulsman's ethical realism. By economizing on other forms of power projection, ethical realism potentially frees up resources to cushion the domestic costs of globalization.

As Drezner concedes, markets alone are insufficient to form a viable and sustainable platform for long-term foreign policy.

Most of my analysis of Europe's problems has always been that social and moral decay are going hand in hand with the inability to address the immediate challenges posed by globalization. The recent popularity of both Europe's extreme left and right plug into this new economic alienation, witness the rejection of the draft EU constitution.

The challenge it would seem for both the American and European elites is to initiate a steady journey towards further economic liberalization at home and abroad. On the domestic side, it will equip the West to better deal with challenges coming from for instance China and India and it will at the same time forge deeper relationships with these emerging economic powerhouses. And like us, these are equally interested in quelling the disruptive forces of jihadism or resurgent collectivism in their respective backyards.

It's always a guess as to who ends up being Time's Person of the Year and almost every year the choice is both surprising and accurate. This year - it will come as no real surprise to blogreaders - it is you:

But look at 2006 through a different lens and you'll see another story, one that isn't about conflict or great men. It's a story about community and collaboration on a scale never seen before. It's about the cosmic compendium of knowledge Wikipedia and the million-channel people's network YouTube and the online metropolis MySpace. It's about the many wresting power from the few and helping one another for nothing and how that will not only change the world, but also change the way the world changes.

The tool that makes this possible is the World Wide Web. Not the Web that Tim Berners-Lee hacked together (15 years ago, according to Wikipedia) as a way for scientists to share research. It's not even the overhyped dotcom Web of the late 1990s. The new Web is a very different thing. It's a tool for bringing together the small contributions of millions of people and making them matter. Silicon Valley consultants call it Web 2.0, as if it were a new version of some old software. But it's really a revolution.

It has been in the making for a few years, but 2006 marked the end of the century of 'big'. We're now into the age of 'small', open source, do it yourself, whatever you want to call it. Whenver I get asked (or ask myself) why I keep blogging, this revolutionary trend is essentially the answer.

UPDATE: Ed Morrissey is unimpressed:

At least, however, they made a decision and selected someone. The entire point of a Person of the Year is to acknowledge that some people play larger roles in history. Naming all of us may make us feel good about our anonymity, but in the end it's either pandering to millions of readers or a refusal to take a stand on anyone. Choosing everyone is an abdication on the entire purpose of the project.

They didn't choose everyone, they picked a phenomenon that allows everyone to generate content. Looking around the blogosphere I get the impression that no matter what Time would have picked they would have received a gratuitous bashing from the 'unimpressed' crowd. More instructive is Paul Kedrosky's warning:

" ... from a financial perspective this has to mark some sort of near-term market top for user-generated content, blogs, social networks, me-media, etc "

Probably.

Putting Parents First is an excellent article from the hand of Yuval Levin and it addresses a Peaktalk core issue: the tension between capitalism and family values. And not only that, it digs deeper in arguing that this is one of the key challenges for conservatism to address now that state intervention in both the market place and the family are essentially bankrupt concepts. Here's an excerpt:

The worry of middle- and lower-middle-class families arises from a genuine tension between the two things they most eagerly strive to do: build families and build wealth. That tension, and the disquiet it causes, is especially acute for parents. Indeed, Americans in the middle class and what used to be called the working class would be better conceived of today as the parenting class. Their concerns and aspirations are no longer focused on their standing in the workplace, as they were when our political vocabulary was coming of age, but on balancing the pursuits of family and prosperity.

This is the anxiety of a successful capitalist economy filled with individuals who want to lead good lives. It is an anxiety produced by the kind of society conservatives seek to promote. It therefore calls for a response from the right, from those who share the aspiration to balance families and free markets, not those who think the system is about to collapse (and deserves to fall).

Levin argues that conservative parties thus find their challenge not in being either socially or fiscally conservative, but in mitigating the clear tension that exists between these two concepts.

It many ways this could serve as a cold shower for the unabashed free-marketeers who, like myself, have put a lot of stock in capitalism as providing unquestionable results. By taking on market deficiencies, the right will be forced to take the initiative and maintain its intellectual lead without resorting to the simple textbook of cutting taxes and rolling back government. As Levin argues, much of that has indeed been accomplished, at least in the US.

Interestingly, there is a North American conservative leader who may actually get this new approach and has already started experimenting with it in the areas of childcare and income-tax splitting. His name is Stephen Harper and his adversaries on the left have discovered that they are behind in the department of ideas:

In a press conference Tuesday, Mr. Goodale, who also serves as house leader for the Opposition, described Mr. Rae as the person to best confront the Conservative government, which he said was the “most rigidly ideological government in Canadian history”.

Yes – the mere audacity to define new ideas or a new ideological direction can land you in a most difficult spot. But there is a good reason for that as yesterday’s progressives are falling behind in defining a progressive vision for tomorrow and have in desperation turned the debate between left and right into one of "no ideas vs. ideas". At least in Canada, the conservatives are beginning to manifest themselves as today’s progressives by addressing some of Yuval Levin's points.

The markets were up today. And for a good reason:

Some investors said a divided government would prevent either party from controlling the economic agenda, clearing the way for corporate earnings and economic data to influence shares.

``A stalemate between the president and the Congress is usually a fairly bullish thing,'' said Barton Biggs, who helps manage $1.6 billion at Traxis Partners LLC in New York. ``The fundamentals are what's going to drive this market, not the political events that just happened.''

Exactly.

Following my post yesterday on how economic news can drive elections, here is the latest on that impending downturn in real estate:

Housing developers, who saw prices fall last month at the fastest rate in 36 years, are feeling it most. The Commerce Department reported that the median price for a new home sold nationally in September fell to $217,100, a drop of 9.7 percent from a year earlier, when the median price was $240,400.

While we may have seen a peak in overall US prices, any adjustments will be of a regional character. Here is a list of the nation's Top 10 foreclosure markets, and here is a list of the ten best places to buy now.

And Canada is lagging the US, which means house prices in the north are still on the rise and they are fueling an already strong economy:

Canadian consumers are looking a lot like Americans these days, borrowing against their houses to fund their substantial shopping sprees.

Personal lines of credit are surging as house prices rise, and household credit is growing at double-digit rates. But analysts say the similarities with U.S. consumers end there.

The British market in the meantime is also setting record price increases.

It's not very difficult to spin the Dow, but it will be much harder to deal with an electorate that is bruised by soaring interest rates, negative equity and foreclosures. But judging from the numbers today, that scenario will not play itself out all that soon.

A reader asks:

A lot of bloggers, like Instapundit, have been mentioning that current good economic news does not seem to be helping the Republicans. I wonder, if markets continuously discount for future events, are the markets showing a preference for a power shift to the Democrats? If so why? Are they sensing a change in War on Terror strategy would reduce costs and associated risks? A possible reversal on tax cuts is warranted? Or is the market predicting any power change in Washington DC will be over shadowed by positive earnings projections etc.

There are two things here. Firstly, despite public perception, there is not an awful lot of good economic news to speak of and secondly, I would argue that most market movements are fairly immune to possible election outcomes. But that doesn’t mean that you can’t manipulate the economic news. Note Amity Shlaes’ comments earlier today:

The politicization of economics is especially evident in the blogosphere, where supposed economic Web sites are really about economics and politics advancing the agenda of one or the other party.

It is tempting to argue that surging stock markets are evidence that sound Republican economic policies are paying off, but such claims lack any empirical basis. Yes, it is an argument propagated by the right during a challenging election cycle for them, but those commentators should bear in mind that they would also argue, correctly, that Bill Clinton was in no way responsible for the stock market boom of the 1990s.

The uptick in the Dow that we have seen over the past few weeks is largely due to the fact that US equities as an asset class have been undervalued in recent years. This, judging from my own portfolio, applies in particular to the heavyweights that constitute the Dow Jones whose recent rise everyone got so excited about. The real estate boom – to some extent influenced by Bush flooding the market with cash – and rising commodity prices have contributed to the relative underperformance of stocks. Slipping commodity prices may benefit the stock market, but any recent gains are sure to be wiped out if the expected downturn in real estate materializes. Neither the Republicans, nor the Democrats will have any material influence on these developments which to a large extent are driven by global market movements. For now I would prefer to keep my eyes on Ben Bernanke, rather than rely on short-term market movements and a set of desperate politicians trying to interpret them to their advantage.

In what may be a first, Germany has decided to start charging a licence fee for using the internet to access TV and radio programmes. And that relates to internet access only, what logically follows is that governments will eventually want to have a chunk of the ever increasing amounts of real cash that change hands in online virtual worlds. Let's see what revenue hungry country moves in first.

Here is an area where the EU is clearly failing to promote competition: taxes.

Consider this:

The CNV trade union federation feels that a Muslim feast should be introduced as a bank holiday in the Netherlands. The Christian trade union federation is willing to sacrifice a Christian holiday.

This is by no means a new idea; in fact former Labor leader Ad Melkert floated it during the turbulent campaign of 2002, the one which eventually doomed his political career. It is not exactly a surprise to see it back now that the immigration debate has taken on a very different tone compared to four years ago.

So here is what I think. There is no problem in sacrificing a few Christian holidays at all, in fact this is one of the better ideas we’ve heard in a long time. But rather than replace them with Muslim holidays I would suggest replacing them with actual working days. Now that will run into some real and serious opposition in The Netherlands.

What America's social conservatives have done to U.K. gaming companies, and Russia's siloviki are doing to international oil companies, E.U. protectionists are trying to do to American farmers.

According to Irwin Stelzer who argues that despite globalization, many barriers to free trade continue to be erected all over the world. Not all of his logic is sound - there is a difference between extra-territorial legislation and using domestic law to curb certain economic activity at home - but his basic point about the increasing complexity of economic interdependence stands.

Fascinating piece from the 2006 Nobel Prize winner for economics, Edmund Phelps which among other things touches on the fundamental differences between capitalism in the US, UK and Canada on the one hand and Western Europe on the other. The key focus is on dynamism and innovation and I loved this bit in particular:

I must mention a "derived" benefit from dynamism that flows from its effects on productivity and self-realization. A more innovative economy tends to devote more resources to investing of all kinds--in new employees and customers as well as new office and factory space. And although this may come about through a shift of resources from the consumer-goods sector, it also comes through the recruitment of new participants to the labor force. Also, the resulting increase of employee-engagement serves to lower quit rates and, hence, to make possible a reduction of the "natural" unemployment rate. Thus, high dynamism tends to bring a pervasive prosperity to the economy on top of the productivity advances and all the self-realization going on. True, that may not be pronounced every month or year. Just as the creative artist does not create all the time, but rather in episodes and breaks, so the dynamic economy has heightened high-frequency volatility and may go through wide swings. Perhaps this volatility is not only normal but also productive from the point of view of creativity and, ultimately, achievement.

Remember that the next time we're in a downturn.

Europeans actually prefer to work longer than most governments and unions think is good for them, according to this TCS column. It surprises me, but maybe the average European worker is more astute than those that claim to represent them. The choice between working longer hours and not working at all is increasingly an obvious one. Again, global competitive pressures and the influx of more than just plumbers from Poland will materially change the way Europeans work. Let’s see if the regulators in Brussels are able to keep up with that reality.

Well, I am not the only one who has figured out that business air travel is slated for some major disruption in the form of open source air travel or by simply staying at home and conduct meetings from a safe and convenient distance. Paul Kedrosky and Seth Godin argue that air travel has indeed reached a tipping point.

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David Frum is not very happy either and labels the increased security measures around airports as perverse, as indeed they are. Of course, he has considered a solution:

Another approach: Perhaps if you fly often from New York to London, you might be willing to volunteer a whole mass of information to British Airways in return for a "trusted traveller" card that will allow you to walk on the plane with minimal fuss. Your name might be Omar Abdullah, but if they know that you are 57 years old, director of the Middle East collection at the Metropolitan Museum, own an apartment in Manhattan and a brokerage account at Merrill Lynch, carry a Visa card with a $50,000 limit, fly to London six times a year with tickets paid for by the museum, and so on and so on ... well, they can pretty confidently let you on the plane with minimal formalities.

Nice idea, but it only addresses a part of the problem and I can already picture the abuse and the rapid proliferation of forged “trusted traveler” cards. In the meantime, innovation in the airline industry proceeds swiftly, here is an example of one that has venture finance backing and this one in particular appears to be addressing the affordability aspect:

The Eclipse 500™ is the revolutionary twin-engine jet that's making private jet ownership a reality for more people than ever before. Through innovative technology, modern manufacturing techniques, and pricing models aligned with the high-tech industry, the Eclipse 500 is the lowest price very light jet (VLJ) available, yet features more performance, lower operating costs and the most advanced avionics and electrical system in its class. If owning a jet has been your dream, wake up and smell the jet fuel.

For a mere $1.5 million it's yours, no kidding.

Well, the increased security measures are starting to border on the ridiculous, the notion of having to check in your laptop and even the thought of going transcontinental without a book is just absurd. As I mentioned yesterday we adapt and improve, and we will, but it may well be that in the age of open source there is now a good chance of a fundamental restructure of business travel where the use of small jets or shared leases by a group of companies has good potential to replace the ubiquitous struggle to get on a big ticket commercial airliner.

Business travel has always been somewhat over the top in my opinion, I recall a Hong Kong to Washington, DC, flight where I had to attend a morning meeting that could well have been conducted by way of a conference call. The trip had entertainment value as I got to spent an extra day taking in the DC sights, but the cost-benefit ratio was totally off the charts. And that was in 1999, now with even better, faster and cheaper communication tools at hand there is a compelling argument to improve the bottom line by reducing corporate trips. And post-jihad travel will probably add another signifcant cost by adding longer waiting times at check-in and reducing efficiency if you can no longer use your laptop in the cabin. Not to mention that other cost-benefit analysis where the upside of closing a new deal will have to be weighed against the probability of being blown to smithereens by the jihadist sitting next to you in 5C.

In all seriousness, in an age where we move to smaller, independent and often non-corporate solutions – there’s a guy who wrote a book about that - we may well enter an age where small private jets will no longer be the provenance of the rich and famous. Creative financiers and risk takers will no doubt find a model whereby business travel can increasingly be channeled through small operators that operate light jets and who can offer their clients tailored flight plans. Too bad that Airbus failed to figure that out:

NOTE: Innovation is not something we're going to get out of large airline companies. But rather than confiscating books, cellphones and bottled water they may want to give it a try and consider alternative approaches:

Rafi Ron, former head of security at Tel Aviv, Israel's Ben Gurion Airport, said screeners should focus more on finding suspicious people than on hunting for potential terrorist tools.

"It is extremely difficult for people to disguise the fact they are under tremendous amount of stress, that they are going to kill themselves and a lot of people around them in a short amount of time, and all the other factors that effect their behavior," Ron said.

Makes sense, doesn't it?

In the past I have touched on General Motors and the drain that its many liabilities have on its overall competitiveness. One of my investment friends forwarded me this interesting piece, As GM Goes, So Goes the Nation by Bill Gross, which argues that GM is just a harbinger of things to come. It’s up to you to think about an asset shift, but Gross makes the compelling point that given the choice would you buy a car at a premium to fund someone else’s healthcare and pension plan? Or do you buy an equally solid but cheaper vehicle, made in Asia? If you think this has serious implications for the US, think about how ugly things are going to be in Europe when sustained emerging market strength will wipe out its manufacturing sector.

Last Friday Warren Buffett's Berkshire-Hathaway announced a major acquisition, but it was one of my readers who alerted me to the fact that it was one in Israel, and, Buffett's first outside the US. Of course, we can intepret the 80% purchase of family-owned Iscar as a vote of confidence at a critical juncture:

"This is a moment for Israel's economic standing and ability when a global investor guru such as Warren Buffett decides to make this crucial investment in Israel following the rise of the Hamas government," Shlomo Maoz, chief economist at Excellence Nessuah, told The Jerusalem Post. "It represents a high vote of confidence which will boost Israel's status in the world and attract other foreign investors to follow Buffett's lead."

The Tel Aviv 100 Index rose to record levels today. Good news, sure, but if I were living in Israel I would look very closely at how the Wertheimer family will re-invest the 4 billion they have just pocketed. That will be the real confidence test for Israel's economy.

In his TCS-column Lee Harris finds an answer to a question which has bothered me for quite a while and that is Why Isn't Socialism Dead? Key excerpt:

Thus, in the coming century, those who are advocates of capitalism may well find themselves confronted with "a myth gap." Those who, like Chavez, Morales, and Castro, are preaching the old time religion of socialism may well be able to tap into something deeper and more primordial than mere reason and argument, while those who advocate the more rational path of capitalism may find that they have few listeners among those they most need to reach -- namely, the People. Worse, in a populist democracy, the People have historically demonstrated a knack of picking as their leaders those know the best and most efficient way to by-pass their reason -- demagogues who can reach deep down to their primordial and, alas, often utterly irrational instincts. This, after all, has been the genius of every great populist leader of the past, as it is proving to be the genius of those populist leaders who are now springing up around the world, from Bolivia to Iran.

From socialism to jihadism - perish the thought that they join forces - the hard battle is again the one of reason against the one of irrational myths. Sorry for wrecking your Sunday, but it seems to me that this century may be as bloody as the last one.

If your professor is a noted conservative, but if you still can't figure out where he stands on Marxism then you are probably being taught by an unbiased giant. Thomas Sowell was interviewed by OpinonJournal this weekend and I thought this excerpt in particular was interesting:

"The left likes to portray a group as sort of a creature of surrounding society. But that's not true. For example, back during the immigrant era, you had neighborhoods on the Lower East Side [of Manhattan] where Jews and Italians arrived at virtually identical times. Lived in the same neighborhoods. Kids sat side by side in the same schools. But totally different outcomes. Now, if you look back at the history of the Jews and the history of the Italians you can see why that would be. In the early 19th century, Russian officials report that even the poorest Jews find some way to get some books in their home, even though they're living in a society where over 90% of the people are illiterate.

"Conversely, in southern Italy, which is where most Italian-Americans originated, when they put in compulsory school-attendance laws, there were riots. There were schoolhouses burning down. So now you take these two kids and sit them side by side in a school. If you believe that environment means the immediate surroundings, they're in the same environment. But if you believe environment includes this cultural pattern that goes back centuries before they were born, then no, they're not in the same environment. They don't come into that school building with the same mindset. And they don't get the same results."

An OECD-report suggests that Europe is falling behind in terms of skills and education when compared to Asia. Although this is not a surprising revelation, it is interesting to note that the report defines "class" as one of the more serious barriers to climbing the social ladder, particularly in France and Germany.

Failed integration policies and an ingrained but false sense of entitlement will generate a bill of incompetence, presented by Asia's eager and entrepreneurial masses. And, I suspect, some dynamic Eastern Europeans will form part of the new competition as well.

I stunned some co-workers at lunch a year or so ago when I mentioned that I didn't buy Fair Trade coffee because I thought it was really an anti-globalist movement to promote communism in impoverished countries. My reasoning was the Fair Trade movements insistence on dealing only with co-operatives. I may have slightly exaggerated my position because those old co-workers were pretty fun to shock. But I didn't over state it by much, as Kerry Howley explains in Reason.

"“It’s like outlawing private enterprise,” says former SCAA chair Cox, who now serves as president of a coffee consulting company. “What about a medium-sized family-owned farm that’s doing great, treats their employees great? Sorry, they don’t qualify.” In Africa, many coffee farms are organized along tribal, not democratic lines. They’re not eligible either, a problem that has prompted some roasters to charge cultural imperialism."

But of course, programs like Fair Trade are far more about how a consumer feels than any objective benefit. And for making coffee drinkers feel better about themselves, Fair Trade has been a roaring success.

Although most of the people I work with carry the damn thing, I personally have no use at all for a Blackberry. The laptop and cell phone give me sufficient access to the world and, quite frankly, I really don’t need to improve people’s access to me. Given the choice I’d rather reduce it.

Anyway, that doesn’t mean I haven’t been following the Blackberry patent infringement case which is quite interesting and Dan Morgan argues why in the wake of this affair the US will need some patent reform. He may be right about that although I will argue that a reduced ability to patent new ideas will adversely affect investment in new technologies.

It's like going into Hollywood and argue against the merits of producing entertainment. Hong Kongers are perplexed:

Shouts of "People before profit," "No tariff cuts" and "Down with the WTO" echo through the city that prides itself on being one of the world's major financial centers and a poster child for laissez-faire capitalism.

"Most people in Hong Kong don't understand what they (the anti-free trade protesters) are doing. This is not in their culture. They like free trade," said K.K. Cheung, a 68-year-old retired construction engineer.

Money, trade, markets. It built Hong Kong. It's the lifeblood of Hong Kong.

NOTE: Others blogging the WTO event in Hong Kong are Flagrant Harbour and Freedom to Trade.

Hong Kong has seen many demonstrations, before and after the handover to China, but they have never been violent. That record will be tarnished this week when the anti-globalization movement makes its move on the WTO conference which is taking place in the territory this week. Some initial skirmishes took place today, but there were also other, more creative forms of protest:

Earlier, police intercepted dozens of South Korean farmers who jumped into Victoria Harbor and tried to swim a few hundred yards along the coast to the WTO venue. Two of the swimmers became ill in the cold water and were briefly hospitalized, police said.

Take it from me, you don't get ill because Victoria Harbour is cold: it's probably the most polluted piece of water on the planet.

NOTE: Dan Drezner is in Hong kong covering the conference and of course, Simon has lots of updates and links.

Whenever I lamented the power of unions in the past, readers would point to the imminent demise of America's once thriving car industry. The basic argument was, why pay extra for an average car in order to fund someone else’s healthcare and pension plan when there are far better alternatives (read Asian) on the market? Today, that particular train of thought was given further momentum when GM announced a massive job cut and factory closures. But even that may be too little to stop the bleeding as the Economist argues in a fairly depressing editorial on the issue:

Consumers will worry about warranties and the resale value of cars. What is clear is that GM’s options are steadily diminishing and its still sizeable financial resources are being drained away at a frightening rate. At the current pace, it may not have the momentum to reach a safe port.

For better or worse, this is globalization at work. Better adapt to it.

The actual number for fiscal 2005 is 2.6% and not the 4.1% that was quoted here before. Thanks to my readers for pointing out that the number from the Economist that I used earlier was not correct. However, it seems that the Economist uses forward looking numbers and this is their latest projection:

Given the lack of political will to cut discretionary spending and increase taxes, the White House and Congress will find it near-impossible to offset the cost of the Gulf Coast reconstruction effort. Federal finances, therefore, will remain weak, with the deficit expected to reach 3.9% of GDP in 2005/06.

What cronyism? It seems our corner store owner from Dallas, a strong favorite for the job, lost out to Ben Bernanke. He's got a impressive resume.

UPDATE: Marginal Revelution has lots on Bernanke, keep scrolling.

America’s poor are back in the news, earlier this month US census numbers reported an increase in the overall poverty rate and the fall-out from Katrina delivered some fresh imagery of life at the bottom of the socio-economic ladder. Dan Morgan sums it up and is right in pointing out that welfare hand-outs failed to work but also that welfare reform has not done enough to eradicate poverty, especially among America’s black population. While there’s no easy answer, it’s evident that we need to look beyond simple “more cash, less cash” solutions. Bill Cosby last year initiated this discussion by pointing to the responsibility of the poor themselves to lift themselves out of their misery and emphasized the crucial role of parents in raising responsible citizens that are able to undertake that journey. That was controversial stuff considering that the victim-culture had permeated this issue for generations and prevented the creative use of the concept of “self-help” in solving poverty issues.

But there’s ample evidence that poverty and ethnicity are not inextricably linked. Asians, Hispanics and many African-Americans as well as poor immigrants of different backgrounds have often successfully worked their way up from the bottom of the ladder. Now that we’ve walked through welfare and welfare-reform it’s time for cultural change and that usually takes longer to take effect than providing and withholding monetary help.

NOTE I: The Sunday Times has some comments on this issue today too in a piece called America's Underbelly. And read this commentary on Booker Rising too.

NOTE II: Of course the debate over poverty is always dependent on how you define the term itself, the Heritage Foundation last year argued the following:

The typical American defined as "poor" by the government has a car, air conditioning, a refrigerator, a stove, a clothes washer and dryer, and a microwave. He has two color televisions, cable or satellite TV reception, a VCR or DVD player, and a stereo. He is able to obtain medical care. His home is in good repair and is not overcrowded. By his own report, his family is not hungry and he had sufficient funds in the past year to meet his family's essential needs. While this individual's life is not opulent, it is equally far from the popular images of dire poverty conveyed by the press, liberal activists, and politicians.

But the living conditions of the average poor person should not be taken to mean that all poor Americans live without hardship. There is a wide range of living conditions among the poor. Roughly a third of poor households do face material hardships such as overcrowding, intermittent food shortages, or difficulty obtaining medical care. However, even these households would be judged to have high living standards in comparison to most other people in the world.

Conservatives - while never explicitly arguing for poverty – often point to labor market flexibility as an essential ingredient for a thriving free market. A poor underclass ensures a steady supply of cheap labor which in turn enhances the competitiveness of any economy. This is true and up to a point it is a justifiable argument in reducing welfare if it can be demonstrated that migration out of that underbelly is a realistically achievable option for the poor that constitute it. In pure free market economies such as the US and Hong Kong, that mechanism works, but only partially. The road out of poverty remains challenging but at least we have started to look at alternative options, unhindered by politically correct dogma

Earlier today it was reported that US Consumer Confidence is up:

Consumers reassured by the strengthening job market stayed optimistic in August despite the surging price of gasoline, giving a widely followed measure of consumer confidence an unexpected boost. The Conference Board said Tuesday its Consumer Confidence Index, compiled from a survey of U.S. households, rose to 105.6 this month up from a revised 103.6 in July. The August figure was better than the 101 analysts expected.

There are distinct signs however that the appetite of the US consumer to continue to spend is running out, according to the excellent Big Picture market blog. Growth in the US and a number of other mature Western economies has been sustained largely by consumers using their home equity as a cash dispenser. That model is only sustainable for so long and now that Greenspan's comments have formally heralded the end of the housing boom, it's time to prepare for some real caution in spending behaviour. And if you're not convinced about that, just take a look at the S&P Retail Index. It has peaked.

In Germany and Britain. It requires a lot of changes on the political scene, but it appears there's at least a little bit of momentum.

IT'S ALL ABOUT RISK

Some fifteen years ago I walked into a London office as a young banking trainee and my first boss, one of these seasoned and arrogant investment bankers, gave me only a few moments of his expensive time to tell me: “It’s all about one thing, risk”.

And how right he was. My journey across the globe was in essence a quest to strike the right balance between risk and reward, each time hoping a new equilibrium could help me move forward. Playing safe when you need to, roll the dice when you think you can. From the relative safety of investment banking to working with promising early stage companies, each time trying to find the right balance.

Capitalism in itself is a long historic journey where the participants always had to manage risk during their pursuit of wealth. From that perspective we're no different from the Dutch who settled Manhattan in the 17th century, only today the boundaries are no longer geographical. But the tools we use today to manage uncertainty are no different: sales techniques, legal documents, currency hedging, technology, insurance; they all have been around for ages.

This week I am proud to host a group of contributors who will update you on the state of affairs in their area of expertise. Each of them has assumed a measure of risk and is able to talk about an aspect of it. Marketing, sales, law, technology, entrepreneurship, it’s all capitalism, and it’s all about risk.

GENERAL BUSINESS

There's nothing like the confluence of politics and markets. Political Calculations has spent some time looking at Air America's viability as a business. Read it and draw your conclusions.

Craig at Lead and Gold argues that strategy may be more important to business than to a military general.

Now that we have 'budget airlines' and 'budget phones' says Interim Thoughts, are we witnessing the emergence of a parallel budget economy?

Pitiful is the capitalist who submits to the stupidity of others without a fight, says Goobage.

Coyoteblog looks at the recent economics study by a couple of business school professors and draws some conclusions about trading strategy and the NFL draft.

FINANCE, INVESTING AND COMMODITIES

Want to mitigate your risk when investing in media companies? To help you, The Media Stock Blog has a compilation of the best blogs and websites for investors interested in media and entertainment stocks.

Why is money in video-games never referred to as 'money' and how comes it's often accepted as a global currency, asks Multiple Mentality. If you have the answer, go here.

Ego reports that the price of tungsten metal has increased, and while China plays a dominant role in this market, North American companies could be back in business. Go long on tungsten is the message I guess.

THE LARGER ECONOMY

Timing your trip to the gas station these days is a form of advanced risk management too. However, is the surge in oil prices a result of increased demand or inflation, asks Mover Mike?

The Interested Participant notes that even if overseas economies are starting to prosper, the US remains a more desirable place to many living overseas. As you can see from the 17th century painting above, that has always been the case.

The Big Picture has one of the gloomier pictures this week, arguing that the post-bubble expansion is about to end. And he may indeed have a point.

Last week's COTC host, Brian Gongol points out that the world risks running out of food and offers a solution.

Hamster Motor suggests that barter economies have contributed to the misogyny of primitive cultures. A discussion ensued.

Patri Friedman at Catallarchy turns a negative article about modern consumption on its head and concludes that America is a rich nation.

TECHNOLOGY

Now here's a risk you can't run: having your site being banned by Google. It happens from time to time, and Blog Business World has some useful recommendations in case it happens to you.

The Mobile Technology Weblog looks at why developing economies often leapfrog a stage in technology deployment. Leapfrogging: another way to manage risk.

ENTREPRENEURSHIP

A new age of transportation is upon us, argues Jeff Cornwall of The Entrepreneurial Mind. And yes, that will create lots of entrepreneurial opportunities.

Lip-Sticking rounds up some solid advice from women entrepreneurs.

PEOPLE

Transient human resources pose a risk too. This CTO raises an important issue: How does a leader ensures his legacy if he leaves his company?

Talking Story has been busy debunking some management myths, this week arguing why managers shouldn't know everything.

When it comes to employee bargaining power, Half Sigma argues why there should be some government regulation. Yes, governments help neutralize risks, but in doing so create that other famous business impediment: regulatory risk.

The BusinessPundit points out that with the increasing number of women in leadership positions we may see more egalitarian power structures in business.

THE LAW

The ever present risk of lawsuits. The (Legal) Underground looks at obesity lawsuits and wonders if threatened legal action against fast-food chains and restaurants was nothing but a hoax.

Managing the Business of Law has three key criteria for making the hiring of a lawyer a success.

The Conglomerate argues that strong fiduciary duty laws are necessary to foster entrepreneurship. It also looks at the interesting assumption that common law systems offer minority investors more protections than civil law systems.

SALES & MARKETING

Although he doesn't think drug marketing is all that bad, Galen's Log argues why he can do without drug reps.

Marketing eYe discusses how you can leverage trends to sell more products.

The team at Modern Marketing looks at a new model of marketing, describing it as a vast satellite dish scanning the marketplace for issues and conversations.

Miss O'Hara is deeply annoyed with GM and its inability to get things right. And slapping the GM label on every vehicle won't do it any good in the long run.

Reduce market risk. TopLineCreators tells us how to boost customer loyalty.

Mitigating sales risk? Ticket sales are crucial says Pro Wrestling Impact. It gets people in the door.

How should companies deal with public online criticism? It depends if you're large or small, says pc4media.

GOVERNMENT

The discussion about a 'flat tax', a great remover of uncertainty, has been gaining momentum over the past few months. The Skeptical Optimist explains why even this tax is still progressive.

Here's a disingenuous way to manage your risk: getting subsidies. Mad Anthony takes a look at sugar subsidies.

Social Security reform: shifting retirement risk from the public to the private sector. The AARP has come up with some suggestions to keep Social Security solvent and Will Franklin of WILLisms grades the nine-point effort and isn't very happy.

BUSINESS BLOGGING

Is there a risk that your business lacks exposure? Matt Rosenberg of BlogConsultingPro has some good advice on what to do and what not to do if you set up a business blog.

The Montreal region has been doing very well in attracting international businesses, says Barry Welford of The Other Bloke's Blog.

Tax Updates says that the proliferation of computer technology has enabled the mind-numbing complexity of the tax law.

Business Promos has lots of promotional products and ideas and is updated regularly.

And last but not least, a new business blog aptly named The Business of Better. Their aim: applying operations intelligence to reduce business risk.

*****

And that's it. A big thanks to Jay Solo who is the great organizer behind the Carnival of the Capitalists, I admire his patience in re-scheduling the weekly event whenever that is necessary.

Next week the party is hosted over at Incite.

Here's an interesting globalization question: are multinationals ultimately destined to produce one uniform global product or are they shrewd enough to vary their global brand sufficiently to meet a variety of local tastes? It's not easy and as a Mattel shareholder I was intrigued by the new line of South-East Asian Barbies. The point is: aren't South-East Asian tastes moving in a western direction and would a California Barbie not be more successful in, let's say, Kuala Lumpur?

Judging from the stock price, Mattel still hasn't figured out how to revive the Barbie brand and improve their bottom line in a way that will excite investors. It may involve some global rethinking.

NOTE: Of course, there is now also a Globalization Blog and it's pretty good.

Time for some business. At Actenum, one of the technology firms I am involved with we have been working on a few additions to our website and I want to link to it. Operations Intelligence is the field we're in and the solutions we provide are a result of combining techniques from two separate fields, Operations Research and Artificial Intelligence. If that's too theoretical a take, look at its practical applications that help improve resource management and reduce operational disruption.

To give you some background I can summarize the opportunity the company provides in simple terms. Planning and scheduling is a critical part of management activity, but existing technologies used for this purpose are proactive, rather than reactive. They are used to create tomorrow’s or next week’s schedules. Unplanned events occur on the ‘day of operations’ (a snowstorm, people don't show up for work, some equipment is not delivered on time) and schedule disruption will become a major issue. When things like this happen, even the most carefully-prepared schedules will drift from their intended course and often become useless. Real scheduling problems are dynamic and must be resolved as the environment and/or requirements change. Actenum's technology provides immediate benefits in situations where the best utilization of resources, people, time, processes, vehicles, equipment and materials are essential for running a profitable business. Simply put: one of our trucks has broken down, can you run me a new schedule for the entire fleet, now?

NOTE: Virginia Postrel has written about the field of operations reseearch (or O.R. as it is better known) in a good article for the Boston Globe here.

I never particularly cared for the whole Martha Stewart saga, really, but I did pay attention to her stock price. When she was convicted it hit an all-time low of $8.25. That's a time to buy in my book - which of course I didn't - and now that the whole affair is over it's trading at a healthy $31.72 after reaching $37.45 a little while ago.

The lesson of all of this is that markets overreact and that even as a convicted felon Martha's brand remained extremely valuable. The value may actually increase further as the shrewd media queen will no doubt capitalize on her experiences in jail, that however may already be discounted in today's price so be careful.

UPDATE: Indeed, the stock probably has reached its peak:

But analysts say the company still faces a smorgasbord of problems, chiefly diminished advertiser interest in its magazines. The company also has competition from a host of newer lifestyle magazines like Time Warner Inc.'s (TWX) Real Simple.

Owen Fitzpatrick, a managing director at Deutsche Bank Private Wealth Management who does not hold Omnimedia shares in portfolios he manages, says the company will need to bring in a lot of new revenue to justify its stock price.

And Stewart's frying pans weren't that great either as I can personally attest to.

Stern warnings from Alan Greenspan earlier today:

"Addressing the government's own imbalances will require scrutiny of both spending and taxes. However, tax increases of sufficient dimension to deal with our looming fiscal problems arguably pose significant risks to economic growth and the revenue base"

The problem with Bush's economic managment has been the complete reluctance to bring spending in line with government revenue, an issue that has baffled fiscal conservatives. Now, a real conservative guru has spoken, pointing to the politically hard task to cut government expenditure in order to avoid new taxes down the road. The speed at which such cuts can be implemented will determine which future president gets the honor to introduce a hefty tax bill.

It’s a subscriber link only but Stephen Roach’s column in the FT last week reiterates what many experts have been arguing for quite a while: the US housing market is set to tank, and in a big way too. The Morgan Stanley economist calls it the “cruellest bubble of all”

Housing analysts and central bankers are typically reluctant to draw macro conclusions from a highly fragmented US property market. The risk is they focus on the trees and miss the forest. The latest OFHEO tally shows house price inflation has run at double-digit rates over the past year in 25 of 50 US states plus the District of Columbia. Housing is an asset class just as prone to excess as stocks, bonds, currencies and commodities. If it feels like a bubble and acts like a bubble, it probably is one.

What compounds the problem is the low savings rate in the US, largely the result of excessive consumption and the notion that savings are realized by appreciating home values. If you then add in that these increased values are tapped into as were they an ATM, you can see why a property crash is going to be cruel. And not only that, previous experiences tell us that it will take a long time before such excesses are digested by an economy:

While it is only a few years since the bursting of the equity bubble, memories of that speculative excess have already dimmed. Yet in retrospect, that may have been only the warm-up for the main event. Bubbles have a way of feeding on each other - ultimately leading to an even more treacherous shakeout. That is certainly the lesson from Japan and could well be the case in the US. America, so short of savings, will not be spared - especially if it must now come to grips with the biggest asset bubble of them all.

I am the last one to play Dr. Doom and start hyperventilating about interest rates and collapsing markets but Roach’s warnings are real and credible. The last burst was mitigated by low-interest rates and rising property values that helped sustain consumer demand, but this there will be no safety valve to help engineer a soft landing. It will be hard, very hard.

OTB TJ Entry

Last week at the age of 82 one of the icons of 1980s capitalism, Lord Hanson, died. He became synonymous with the reinvigorated culture of entrepreneurship spawned by the Thatcher and Reagan reforms and put shareholder value back in mainstream culture as the key determinant of business success:

The exploits of corporate raiders did not go down particularly well even in America's capitalist heartland; they appalled many people in a Britain still struggling to get out of its post-war socialist slump. Although knighted by a Labour prime minister, James Hanson was ennobled by an admiring Lady Thatcher, who said that she wanted to run the country like he ran his businesses. By the mid-1980s Lord Hanson was widely viewed as the very essence of the supposedly ruthless capitalism that characterised the decade. After buying Imperial, he was likened to a dealer who bought a load of junk, tarted it up and sold it on as antiques.

When I arrived in London in 1990 to start my career he had reached the nadir of his power with a bold bid for ICI ( which in the end fizzled) and wherever you looked you would see Hanson and his partner Lord White with flashing cuff-links extolling the virtues asset-stripping and creating shareholder value. All of this is now mainstream and textbook stuff, but in the 1980s it was both remarkable and revolutionary.

Mattel has been sitting in my portfolio for quite a while now, not really doing anything which is somewhat of a disappointment as I bought it as a turn-around opportunity quite a while ago. Companies that have turn-around potential but whose performance continues to be lackluster revert to an endless deluge of press releases, image overhauls and a mixture of rebranding and restyling and so it is with Mattel who have now relaunched their flagship doll Barbie as, you got it, a presidential candidate. But the company hastens to add it is not about improving the bottom line at all:

The company is working to capitalize on its best-known product, which has been losing its appeal to older kids. The move is less a money-making initiative for Mattel, and more a labor of love, Mattel spokeswoman Julia Jensen told Reuters.

Doubtful claim. It would seem more like Mattel is trying to catch up with Talking Presidents who have launched a successful range of political dolls, now even marketing a turkey dinner Bush. Since my four-year old daughter loves Barbie-type dolls, what do you think I as a politically engaged parent would be buying if I had the choice between Barbie for President or the famous Ann Coulter doll? Yes, even as a Mattel shareholder I would still opt for the blonde pan-conservative babe. So if Mattel wants to improve its bottom line, acquiring Talking Presidents would be far better than restyling Barbie for the umpteenth time. And to be honest, even today’s kids would see right through a Barbie candidacy as a feeble attempt to grab some publicity. Give us the real thing!

The Wal-Mart wars are not running out of steam it seems. The first outlet in North America could be unionized, but Wal-Mart is fighting back.

The huge dividend announced by Microsoft this week, combined with a multi-year share repurchase program, appears to be a final admission that the money printing machine from Redmond has reached its ceiling in terms of growth. The company has not been able to identify opportunities to further increase shareholder value and has chosen to do what is best in a situation like this: return cash directly to the shareholders. That’s the simple business analysis, but it appears that the decision is also tax-driven:

"The prospect of Senator Kerry becoming president could be viewed by some companies as an incentive to pay out dividends this year," said Garay, who said he could not discuss Microsoft because it is a Deloitte audit client. "It would be even more of an incentive for closely held companies whose owners will be directly affected" by large dividend payments, he added, saying that there could be a flood of such dividends declared after a Kerry victory if there appeared to be a good chance the tax law would be changed.

As one of the largest shareholders Bill Gates is likely to reap 3 billion dollars from this arrangement and if the dividend tax rate were to be raised back to 35 percent for high-income taxpayers as Kerry might do, Gates would pay a tax of $1.05 billion, or $600 million more than under the current tax laws. Gates is planning to divert the proceeds of this "super-dividend" to his Bill & Melinda Gates Foundation, supporting the notion that if governments keep cutting taxes and roll back public programs, somehow the private sector will pick up the slack. Now there’s a campaign theme for Bush.

And again a sizzling number, GDP growth at 8.2% for the third quarter which appears to be not just consumer driven. Great numbers and it is to be hoped that this creates real confidence in the business community which in turn would spur sustained investments and jobs.

One reader pointed out to me that in comparing unemployment numbers last week, the Dutch number is not exactly representative of the situation on the ground. I should indeed have remembered that Dutch businesses have very often used the generous state-sponsored permanent disability insurance schemes as an effective tool to trim some excess overhead form the corporate payroll, while ensuring that those laid-off would not find themselves in the streets begging for food. Many disgruntled workers have equally taken advantage of the WAO (translated literally as Law on Work Disability), as a great form of paid early retirement, there is a plethora of diseases and disabilities that you can apparently fake to the satisfaction of Dutch government appointed doctors. The numbers are hard to track but if we include regular unemployed residing in the WAO, the Dutch unemployment number would come perilously close to the Eurozone average, maybe even exceed it.

I was cautious about the 7.2% growth number a few weeks back as it seemed to be primarily a consumer driven number, today’s numbers on the job front however are definitely encouraging and pointing to the much needed increase in business investment. It seems to me that the US economy is moving in the right direction and similar positive signs are recorded north of the border, the Euro-zone however is lagging. For those of you who love cross-border comparisons: the unemployment rate in October in the US stood at 6%, in Canada at 7.6%, in the Eurozone the number for September was 8.8% with Germany and France scoring 9.4% and 9.5% respectively. I guess the Eurozone’s number is saved by those small European tigers whose jobless rates were pretty low even by American standards: Luxembourg, at 3.8%, the Netherlands 4.2%, Austria 4.5% and Ireland 4.7%. All of these numbers, I think, speak for themselves.

Here’s some ammunition for the Bush campaign although it seems to me that the surge in US economic growth is driven primarily by consumer spending. A strong and sustained economic recovery requires not just consumer spending, it requires business spending as it is investment over a long period of time that will create new jobs and put the economy on a strong and solid footing.

As I mentioned earlier, things are busy these days for me and the key reason is that one of my client companies is taking off. It involves the merger of three smaller software entities combined with a seed financing round, which means raising some money from friends and family as well as securing some government grants. We are formalizing the business plan, hiring a development team and I have to ensure that everything stays on track in the start-up phase and beyond. I can not tell you what a rush of energy this has given me and even the more boring stuff that falls into my lap as the CFO is pretty exciting. There’s really nothing like an energized team of people who are thrilled to take an idea or technology to the next level, especially when it is all done in harmony and good spirits. One of my other firms has a similar great concept/product but there the human aspect leaves a lot to be desired and the atmosphere and ability to be successful has suffered considerably just because of that. I will tell you more about my new venture once we formally launch the firm, there are a few minor legal issues that need to be cleared up and of course, selecting an appropriate and very cool new name (my insistence on URL availability for the name only has not exactly facilitated this process).

The reason I write about this today is that I discovered (thanks to the Seablogger) that there are a number of venture bloggers, notably the aptly named VentureBlog which is an informative blog with great links to other blogs and online sources that deal with technology and venture financing. The public at large may have turned its back on tech deals but my argument has always been that what is left standing after the meltdown is probably of good enough quality to survive and expand, and new deals need to be structured very well in order to attract financing. The deal that I am currently working on falls into the latter category and as I mentioned I will try and discuss some of the aspects of venture financing if and when I think there’s good reason to, life is of course not always about politics, markets are equally important (I used that line before, but it is good enough to recycle it from time to time).

Last week the Dutch media blew up a storm over the compensation package for the new CEO of troubled retailer Ahold. When economies hit troubled waters the search for culprits is an attractive way to cleanse the general consciousness, and what better way to do that then attack those whose compensation packages are out of the ordinary, or as we would say in Asia back in the 1990s, “unusually wealthy”. In New York this week New York Stock Exchange chairman Richard Grasso was forced out of a job as details of his $140 million package began to make it into the public realm, which was probably even a little too much for the influential chairmen of Goldman Sachs and Merrill Lynch, who assisted in the ouster of Grasso from the NYSE’s board.

Compared to Grasso’s package, Anders Moberg’s (formerly with IKEA and Home Depot) deal with Ahold is peanuts, but if ever there is a country where wealth, success and unrestrained capitalism are frowned upon it is The Netherlands, especially when the economic tide is turning. Check-out workers at Albert Heijn, Ahold’s Dutch retail subsidiary, were harassed over the CEO’s package, a boycott of the stores was called for, and the unions got involved, all of which individually could have been handled by the Ahold board but taken together it was enough for them to sit down with Moberg and calibrate the numbers a bit. Moberg’s package was adjusted and his bonus was more directly linked to certain performance criteria giving the unions and upset shoppers a pyrrhic victory and avoiding a loss of face for Moberg. It may be interesting to note for my American readers that Ahold operates about 1,600 retail outlets along the eastern seaboard in the US; if they operate your local store you can check that here.

What now was the problem? The key was that the new CEO had negotiated an annual pay package of $1.7 million and a guaranteed bonus of $1.7 million annually, as well as an option package and a royal arrangement in case of early dismissal. The guaranteed bonus, it would be better to call it a ‘lock-in payment’, created most of the fury but in order to understand why I need to emphasize that Ahold is in deep trouble following some undisclosed accounting problems which caused the share price to tumble in January this year, and there is a risk that more misery is beneath the surface. If the company does not meet the September 30 deadline to produce audited accounts as required by a syndicate of lending banks there could be real trouble and the survival of Ahold has still not been secured. When the company had reached bottom pit earlier this year the appointment of Moberg brought hope and the share price rebounded sharply. Many argued that given Moberg’s track record in the industry and his relative youth he would have thought very carefully about taking the helm at Ahold and his acceptance of the job was viewed by many as a seal of approval that things were not that bad. And they probably aren’t, the company has always been profitable and continues to generate strong cashflows, accounting scandals can be cleared up and debt can be restructured. What was needed was a sign of confidence and Moberg was the man to bring that to the table. The surge in the stock price would by itself have paid for his package, but very few people will mention that, in fact left, right and center people have gone out of their way to bash Moberg and the supervisory board that appointed him. I haven’t. And I am not exactly a disinterested party as I do have some Ahold stock in my portfolio, but I think that his compensation package is far from outrageous.

First of all the numbers by themselves reflect a market level and are in line with what is paid to other key executives and we have to note that Moberg came from the US. In order to attract him his salary and bonus arrangement needed to be at least comparable to what he was getting at Home Depot. The ones who protest it argue that Ahold could not afford this given its precarious financial situation but nothing is farther from the truth. Ahold is cash rich and was in dire need to find someone to guide it through the drifting waters it had found itself in. It was next to impossible to find executive talent that was willing to take on such a task while at the same time putting their reputation on the line by assuming risks for a situation that was not entirely transparent. The risk-reward equation came into play and by agreeing to Moberg’s demands Ahold not only assured itself of the continued services of a CEO (the lock-in will keep Moberg on his seat for a while), it also sent a phenomenally strong signal to the investment community. Remember, if Ahold’s balance sheet has very serious holes, Ahold will have to tap the equity markets and what would existing shareholders have preferred, to raise it at $3 pre-Moberg or $10 post-Moberg’s appointment?

Simple economics are often lost in the emotion of decimated share portfolios and forced redundancies. The media are all too willing to up the ante and unions are just waiting for stuff like this to reclaim some of the territory they have lost during the 1990s. The net result is that such pressure could have seriously endangered the willingness of some individuals to put their necks on the lines and turn-around and save a troubled conglomerate, its shareholders, its employees. We can argue forever over the numbers, and yes the performance component should be substantial, but on balance as a shareholder I would say, let’s take a chance on Moberg and accept the package he has negotiated.

I have received quite a few e-mails from US readers in the past that complained that Peaktalk’s mountain slowed the download for those on dial-in, and today Outside the Beltway alerts us to some interesting broadband numbers, noting that the US is not a world-leader in this field with a majority still using dial-in for internet usage. This is not entirely new but it is interesting that Hong Kong and Canada, two countries that could not be more different geographically, politically and economically are the respective numbers two and three in terms of broadband penetration. South Korea is leading the pack. I know that in Canada the government has been highly supportive of supporting broadband proliferation, but the implementation is largely executed by privately owned telcos and cablecos. Same for Hong Kong, although the city-state’s geographical lay-out probably has some definite advantages.

The low penetration rates of broadband have had a significant impact on content distribution and in the late 1990s many believed that video, DVD and game rental stores would disappear and be replaced by online distribution. They will eventually, but slow penetration of broadband is one of the factors that have delayed this distribution revolution. Stock market valuations for content plays were out-of-whack during the final stages of the technology boom, but for those who dare there are some very interesting opportunities with very low valuations to be had today. With steady broadband proliferation we are still on our way to a world in which all entertainment will one day be pumped into residential homes via broadband connections.

John Hawkins continues to find creative ways to attract traffic to his Right Wing News and today he interviews Nobel laureate Milton Friedman. Two things stand out in the interview, the first one that Milton Friedman debunks the notion that Clinton's policies were instrumental in establishing the platform for economic growth during the 1990s, a point that I have made very often with those that have an unfavorable view of Ronald Reagan as I strongly believe that fiscal decisions taken during the Reagan years were essentially the foundation on which the growth years of the 1990s were built. Friedman acknowledges that, but he also says that the Clinton years benefited from this phenomenon:

“ … and indication of the virtues of a President of one party and a House and Senate of the other. That's best combination for economic growth … the Clinton administration, in terms of the budget, has one of the best records of holding down spending. Spending went up less under Clinton than almost any other President “

Interesting. If that’s indeed the case then what we are seeing today in terms of unrestrained spending could well mean a cap on economic growth going forward. Here’s the other thing that struck me:

"I'd like to promote lots of things. I'd like to promote elimination of drug prohibition. I think that our policy with respect to drugs is fundamentally immoral and it's really disgraceful that we cause thousands of deaths in South America because we cannot enforce our own laws"

There’s a refreshing thought coming from someone on the right. Milton Friedman fits right into what we would call the conservative-libertarian school of thought and I believe that his views on drugs warrant further examination.

Update: If you want to balance your diet, go over to CalPundit who runs an intreresting interview with Paul Krugman.

It seems I am beating the credit card companies at their own game. For a little while now they have been increasing my credit limit and this month they have even offered me to forego the monthly required minimum payment. The reason for this is simple. Irene and I use both our personal and business credit cards as a finance deferment tool and not as a tool to finance things we can’t afford and we therefore always pay the entire balance on the due date. The net benefit is that if you time your purchases correctly, you end up owning stuff for free for a little while and I personally do get some satisfaction out of using a new laptop for 7 weeks without having paid for it. Not everyone is gifted to use credit cards in this manner, but if you have some discipline they are unusually effective tools to defer payment without incurring interest payments. The credit card company caught on to that and they figured out that they are not making any money on us, and they are now testing us with increasing our limits, which is what we do not want and do not need. There are people who do, only last weekend weekend I met a couple that had leveraged itself to the hilt in order to build up a portfolio of revenue generating properties, but when they were not able to make the downpayment of the purchase price of a new property they simply put the $20,000 on their credit card. Now there’s the kind of client credit card companies love.

Update: A reader informs me that credit card companies do make money per transaction even on calculating clients like myself, but there is some break-even point.

I referred to the Antirealist a little while ago, a good blog by my standards as the writer produces interesting and original content on an ongoing basis. The test is always to see if he is able to keep it up but since Peaktalk has been around for just a little over four months (which I realize is the same amount of time the Antirealist is blogging) I have not quite passed that test so I will not comment too much on others’ consistency, at least not for the time being.

Today he reflects on executive compensation as he has done before, disagreeing with my argument that executive compensation is essentially market driven. The root of the problem, or so it seems according to academic evidence the Antirealist points to, is that executives in publicly traded companies with dispersed ownership have in general developed too good and too close a relationship with board members who are expected to represent shareholder interests. As a result, these executives and board members are very often able to hammer out fairly extravagant packages without too much input or control from those whose interests they are ultimately playing with: the shareholders. On a smaller scale I have often come across investors who were wiling to invest their money in new ventures but often balked at the compensation demands of CEOs, CTOs and CFOs, usually consisting of a combination of cash, shares, options and some fringe benefits such as loans and expense reimbursements. So, yes, large investors and shareholders have influence whereas a group of smaller shareholders may not be able to exercise any form of influence on how a company’s funds are being spent and, equally important, how many shares and options are being printed diluting them without end.

This is a strong and valid argument arguing against executive compensation being market driven, but one that only addresses part of the problem. I am willing to accept that exit arrangements and redundancy payments are often not able to stand a market test and tend to be ridiculously generous, but rich packages always reflect in some measure that what is common in the market place at large, even the most entrenched board member would instinctively shy away from agreeing to a package that he or she could not ultimately defend to other interested parties or the world at large. I have seen many arrangements that at first sight were excessive, but after close scrutiny were defendable and justifiable in light of the contribution of a particular individual and the market at large.

Since the death of Fortuyn, demonization has become a fashionable term in the Netherlands. If the media targets a certain person or group of persons they are being “demonized”, creating a situation where psychotic elements may find justification in harming those that have been demonized by the press. This weekend former Philips and Compaq executive Roel Pieper and his wife were attacked by a knife wielding man in the garden of their house in the western part of Holland. Pieper, wounded during the attack, was able to disarm the man together with his son but his wife was severely injured and is now recovering in hospital. The deranged attacker used terms along the lines of ”you filthy rich” during the attack and there is little doubt that this is the culmination of an ongoing campaign in Dutch media against generous executive pay packages and those who benefit from them. During my trip over the past week I have not been able to open a single newspaper or magazine without coming across a rant against compensation packages for senior executives. Even some of my right-leaning free-market friends expressed their anger over what they feel are outrageous salaries and stock option deals for business leaders.

Truly surprising I have to say. I firmly believe that executive remuneration is market driven, and it is a bit childish to start whining about this now that we have fallen on harder times. This is by no means a European phenomenon, I have received a lot of e-mails from (what I think were right of center readers) blasting Warren Buffett for his wealth and arrogance. Come on, it is no time for envy now that our portfolios have been hammered and unemployment is more common than it was in the 1990s. Competitive executive pay is a function of our free-market based economy and no one but shareholders should have a say in how business leaders are being compensated. In Pieper’s case it was probably important to provide him with an attractive package in order to give him the incentive to return to Holland from the US where he was a Compaq board member during the 1990s. If we want to restrict market flexibility that determines compensation levels or if governments want to tax it away in order to placate those who are offended by it, we may be hurting ourselves more than we realize. In the latter case we start to nibble away at the very mechanisms that are bringing us wealth in the first place.

Those of you who have read my piece on how the Canadian government has destroyed value and covered up poor economic practices by encouraging a low value of the Canadian dollar in order to sustain exports to the US will no doubt have asked what to make of the bizarre collapse of the US dollar over the past few weeks. Many people may not realize it but the Bush administration, Treasury Secretary Snow taking the lead, has actively supported this reversal of dollar fortune, no doubt betting on an export led recovery for the US economy. Warren Buffett yesterday reintroduced the term Voodoo economics to criticize the Bush dividend tax cut, and I did not really agree with him. But the term Voodoo economics may well apply to those who tinker with the value of a currency in order to secure some political mileage. Some argue that the fall of the dollar is a fundamental correction, adjusting a situation where the dollar was overvalued. That is true, but it seems to me that many players in the economic process take their cues from the Treasury department and Secretary Snow’s comments have not exactly been helpful. If you want the markets to set the price you do not say anything, now the markets are aggressively shorting the dollar, leading to an unwarranted and dangerous slide. Yes, a cheap dollar may fend off deflation but it may also lead to foreign investors abandoning Wall Street. In any case, there's more uncertainty ahead according to Federal Reserve Chairman Greenspan today.

While on the subject, I received an e-mail from a not so rich American taxpayer who also disagreed with Warren Buffett but took a different angle. Many Americans have, following the technology crash, refocused their stock portfolios and tilted them toward safer, dividend paying stocks. The proposed plans thus have some very tangible benefits to these not so wealthy investors, as they will see that these dividends will hit their accounts untaxed. Benefits like this may be small in dollar terms, but relative to average and lower incomes they may be quite significant. And these investors may not only boost the economy with the extra few hundred bucks in their accounts, they may well cast their vote for Bush in 2004.

The sage from Omaha, Warren Buffett, argues against the proposed dividend tax cut in the Washington Post today. When the sage speaks, one listens. He is making the point that tax-cuts that benefit the wealthier classes in society do not necessarily work. The traditional argument is that an economy that is stalled because investors are on the sideline needs an impetus that will prompt investment. Hence a tax cut that benefits those who invest will help society at large as it creates new jobs across the board. This as opposed to stimulating the economy by creating consumer demand through a tax cut that benefits all. Buffett dismisses this logic:

Administration officials say that the $310 million suddenly added to my wallet would stimulate the economy because I would invest it and thereby create jobs. But they conveniently forget that if Berkshire kept the money, it would invest that same amount, creating jobs as well.

This point is well taken, although I do not agree entirely. A tax cut funneled back to the wealthy is more likely to lead to the creation of new jobs than if it stays in the coffers of Berkshire Hathaway, Buffett’s company. In my consulting work I see first hand the enormous amounts of money that wealthy individuals pump back into the economy by investing in start-up situations or invest money in business propositions that Berkshire would not even touch. I know of many companies where the road to profitability has been long but where, thanks to wealthy investors, many people have stayed on the payroll and many (young) families have been fed. True, that flow has dried up over the past few years, which is why the Bush administration wants to get it going again. Where Buffett makes a real strong point however is in the staging of the tax cut:

The Senate's plan invites corporations -- indeed, virtually commands them -- to contort their behavior in a major way. Were the plan to be enacted, shareholders would logically respond by asking the corporations they own to pay no more dividends in 2003, when they would be partially taxed, but instead to pay the skipped amounts in 2004, when they'd be tax-free. Similarly, in 2006, the last year of the plan, companies should pay double their normal dividend and then avoid dividends altogether in 2007.

Let’s see what happens. I for one would love to see some numbers that support my thesis that a tax refund to the wealthy promotes investment in areas that do not attract traditional sources of capital.

On the professional side I have spent the past few weeks working with a company that is about to be taken over by a larger one and the key hurdle that needs to be taken is always valuation, or relative valuation: what is the value of each company relative to the other or how many shares are we getting for rolling our company into the other company? This usually leads to fairly interesting negotiation sessions as most of the executives and key employees in these companies tend to be significant shareholders, they have a lot at stake and this may be the one chance they get to realize some great upside or achieve a measure of safety and survival by becoming part of a larger entity. What has changed since the 1990s is of course that valuations have come down to realistic levels, the tech-boom expectation level resulted in absurd numbers and these days you can look at companies, their balance sheets, intellectual property, people and revenue and accomplish a valuation level that bears some relation to what a company actually can realistically be expected to deliver in terms of revenue going forward. It is never an exact science, hardly, but the days of highly inflated valuations of below average start-up companies are well beyond us and that provides us with an opportunity to do deals that make sense in building companies that have a good chance of survival and long-term profitability.

The importance of adjusted valuations can not be overestimated. I have lived through one major meltdown in the late 1990s which was the Asian currency crisis and the lesson from that was that whatever was left standing after the crash is probably for real, has quality and will survive. So if you are in the investing or financing business a meltdown will probably hurt a lot but it will also give you a very clear perspective of where to go next and how to get there. There are no risk free investments and there is always a good chance that survivors will go down after all, but it is much easier to navigate the landscape once the storm is over. One of the basic reasons for unrealistic valuations and consequent risky deals is the enormous pressure that people are under to make money and I am talking from direct experience here. Either they work for a company in the finance business that requires them to bring in lucrative deals or they have a company of sorts and they know that now is the time to cash in and realize the value that they believe they have built up in that company. During my investment banking days in Asia, especially when the markets peaked in the mid 90s the boom attracted many players which in turn made it a very competitive place. This put a lot of pressure on those participating in the market to deliver profitable deals. Working for a bank that often meant bending backwards to accommodate to the wishes of the client, working for a venture capital firm that often meant accepting ridiculous valuations just in order to get a deal signed. I have seen first hand how intelligent, well-educated business people started to chase deals that had no solid footing in reality whatsoever. As an example one of my superiors in Asia launched what he called an Asian template for telecom financings. This effectively meant throwing large amounts of money at telecom deals (and I am talking in the hundreds of millions of dollars) in the form of loans with the idea that these loans could be taken out (refinanced) by way of an equity offering or IPO, bond offering or a combination thereof. The complication was that these were very often shaky deals in the first place as the clients took advantage of the competitive situation and negotiated aggressive deal structures, and secondly by the time the refinancing was due the market to launch an equity or bond offering had practically evaporated as a result of the financial crisis. During the peak in Asia I spent a lot of time working on deals that had a fantasy imprint on them and as a sound businessperson I had to very often question the underlying rationale of these transactions. On many occasions there was none and the only justification was: “we have a deal, let’s finance it!” Next time you think that we are heading for a meltdown you know what one of the warning signs is: seeing established players executing questionable deals.

The benefit for some of the financial players in retrospect was that once the collapse in Asia had taken effect there was a ton of work in terms of restructuring deals. All the money spent on pie-in-the-sky financings needed to be recouped one way or the other, and the companies that were left standing needed some serious help in their survival process. By the time I had started my consulting efforts in North America a similar crunch was enveloping the markets and it was impossible to raise money for technology and media companies based on the valuations for some of the early stage ventures I worked with. Today is even worse but the reality is that the financing deals that are being done are deals that have a basis in reality and contrary to what happened in the 1990s, scrutiny of deals by the various players is intense, people have learned their lesson and are not very likely to repeat the errors made during the 1990s.

I will return to discussing the most recent decades in the months to come but I want to start here by qualifying the 1980s as a period of restructuring. The welfare state of the 1960s and 1970s was reformed in the age of Reagan and Thatcher and together with the liberalization of markets in Asia, Eastern Europe and Latin America these reforms set the stage for the unprecedented economic growth during the 1990s. With the 1980s qualified as the restructuring years, the 1990s as the years of excess, I will not hesitate to label the decade that has started only recently as the years of moderation. Moderate growth, moderation of valuations and, more importantly, moderation of expectations. If we are able to moderate our expectations, and that is not an easy thing to accomplish for many given the wealth that some thought was coming their way during the 1990s, we are able to live and transact business in a more down-to-earth and sensible manner.

Today the stock of Robert Mondavi, the winemaker, took a beating as the company reported a loss for its most recent quarter and adjusted revenue projections. I had been following the Mondavi stock for a while given its low price-to-earnings ratio and it does not really come as a surprise that wine consumption is down. Think about it, the 1990s are long over and with a war going on, is this a time to drink? I asked myself that question when Irene and I had a few glasses of chardonnay last Friday. For some reason it felt totally inappropriate to drink with scenes of war being beamed into our living room. The old Calvinist in me emerged and I felt I could not drink as long as there are troops out there fighting on our behalf. We had to suffer as well. Yet, I had a glass anyway as Irene convinced me that there was nothing wrong with it, if we had to implement a battlefield regimen at home we would have to cut back on our daily rations of food and deprive ourselves of sleep. Nonsense, life goes on, yet somehow I was not totally comfortable with the concept and I bet there are a lot of people out there that feel exactly the same way. Expect further reductions in some areas of entertainment spending and expect Mondavi’s stock to drop further.

Gathers momentum. According to Bob Dole we are dealing with a hangover from the 1990s and Clinton goes on about the tax cut. Look at my "Worried Bush" post below: it is going to get very interesting from here on.

Politics and Markets I promised but I have posted precious little on the 'markets'. As you can read in the 'About' section 'markets' is a pretty wide concept so I guess I am still within my mandate. The real reason I did not report on anything relating to financial markets is that this blog is proving to be therapeutic, I have hardly looked at the markets since starting Peaktalk, the political scene is taking most of my time now. That is probably for the better as markets have been moving in one direction only: down.