Vol 4 - Issue 3 | June 2010 | Rs.3.
50
Behavioural shift story, still nascent
Perspective
Our series on `Economic Crisis Effects’ completes a year this month.
What we have had is many-a-tale of a heart rending nature. What
we have also had is evidence of a behavioural shift, which is still at a
nascent stage in the U.S, and probably has not even started in
Europe, including U.K. The tales that have been featured are only
select examples and the entire chronicle is several times the content
published in Economic Crisis Effects.
As was the case with The Great Depression in the 1930s, the
ongoing Great Recession (if it is that) is likely to alter behaviour on
a permanent basis. This is likely to be the defining feature that will
determine how the developed countries emerge out of this financial
and economic crisis. This may not be captured by numbers (which
are also amenable to manipulation); it will be important to focus on
anecdotal evidence.
We also read stories of how the U S consumer has returned to
spending (or in fact has never stopped spending). Indeed, the share
of the consumer in the U.S GDP pie is now larger than before the
onset of the crisis. This largely reflects more the collapse in other
parts of the economy and the economy as such.
What most of these stories do not emphasise is the sources of this
spend and how sustainable it is. Yes, the top1% of the population by
wealth – this group’s share has increased dramatically over the past
two decades – is in fairly good shape and spending. A few from this
group exhibit restraint in the interest of taking note of reality
elsewhere.
What is the status outside of the top 1% in the U.S context?
• Debt levers are still unacceptably high.
Sundaram BNP
Sundaram BNPParibas Asset Asset
Paribas Management: Investment Manager for Sundaram BNP Paribas Mutual Fund / Portfolio Management Services: Sundaram BNP Paribas Portfolio Managers
Management
• Official unemployment is 10% and the more broad-based
indicators of unemployment are closer to 18%.
• At least half the job losses are of a permanent nature.
• There has been no net job creation in the decade preceding the
crisis in the U.S.
• There has been an unprecedented extension in unemployment
benefits.
• Small businesses – the fulcrum of the U.S economy – do not
share the relative optimism of the larger companies or the U.S
stock market.
• There has also been a sharp reduction in job creation by the
small businesses in recent years.
• A second round of home-price declines has started in most
places.
• Applications for food stamps are in excess of 50 million or even
possibly closer to 60 million according to a recent Reuters story.
Usage is at a record 40 million.
• Wages are at best flat or declining.
This is just a selection of factors at play. In this backdrop, what are
the factors driving consumer spending?
• Unemployment benefits are the first source. More is perhaps
used for consumption than spending. Is this sustainable? No.
• People are defaulting on mortgages big time, banks are wary of
foreclosure as it could affect their balance sheet and so people
are enjoying a free ride-staying in the home despite no mortgage
payment and this means no rent, too. No mortgage payment and
no rent also appears to be fuelling consumption. Is this
sustainable? No.
• People are keeping credit cards current even as they default on
mortgages. This is also a source of spending though credit card
outstanding are on a downward trend. A part of population is
using this approach to maintain spending. Is this sustainable? No.
• Low rates (or shall we say closer to zero) mean interest
payments are less strenuous. Is this sustainable? Yes is the answer
for a few years but over the long term, No.
• Has there been a meaningful reduction in debt? No. And this
obviously means the current trend must eventually run out of
steam.
• Is there a possibility of more handouts by the U S government?
...continued on page 14
 Chart of the Month

Risk isn’t volatility

Risk isn’t a number. It is a concept. Ben Graham argued that we should focus on the danger of permanent loss of capital as a sensible measure
of risk:What is the chance that I will see my capital permanently impaired by this investment? This strikes me as a much more sensible viewpoint
than the mathematically elegant but ultimately distracting practice of assuming that risk is equivalent to standard deviation.
For instance, let’s look at equity volatility.The chart shows a measure of the volatility of the S&P 500. Were equities more risky in late 2007 or
early 2009? If you follow the edicts of standard finance, then 2007 was a much less risky year than 2009. Now, tell me again that risk and volatility
are the same thing! – James Montier
James Montier is a member of the Asset Allocation Team at GMO. Source: www.gmo.com Link to Montier’s White Paper I Want to Break Free,
or, Strategic Asset Allocation ≠ Static Asset Allocation http://bit.ly/9EEDIA

Global Market Snapshot

A comparison in 2007 (close to peak), 2008 (close to bottom), 2009 (recovery) & the present
Market Cap ( $ Billion) Share in World Market Cap (%) Returns (%) Distance
Region/Country from Peak
End Apr 2009 2008 2007 End Apr 2009 2008 2007 2010 2009 2008
2010 YTD (%)
World 42599 49722 31901 60880 100.0 100.0 100.0 100.0 -14.3 55.9 -47.6 -30.0
United States 13283 13748 10455 17660 31.2 27.7 32.8 29.0 -3.4 31.5 -40.8 -24.8
Canada 1651 1609 992 1749 3.9 3.2 3.1 2.9 2.6 62.2 -43.3 -5.6
Brazil 1141 1326 565 1273 2.7 2.7 1.8 2.1 -14.0 134.7 -55.6
Mexico 371 363 247 398 0.9 0.7 0.8 0.7 2.3 46.8 -37.9 -6.8
Chile 239 229 130 208 0.6 0.5 0.4 0.3 4.5 76.0 -37.5 14.9
United Kingdom 2648 2975 1981 4051 6.2 6.0 6.2 6.7 -11.0 50.2 -51.1 -34.6
France 1544 1900 1480 2736 3.6 3.8 4.6 4.5 -18.7 28.4 -45.9 -43.6
Germany 1169 1371 1075 2208 2.7 2.8 3.4 3.6 -14.7 27.5 -51.3 -47.1
Switzerland 941 1076 848 1217 2.2 2.2 2.7 2.0 -12.5 26.8 -30.3 -22.7
Japan 3467 3488 3268 4545 8.1 7.0 10.2 7.5 -0.6 6.7 -28.1 -23.7
Honk Kong 2069 2268 1312 2655 4.9 4.6 4.1 4.4 -8.8 72.9 -50.6 -22.1
India 1307 1294 640 1813 3.1 2.6 2.0 3.0 1.0 102.3 -64.7 -27.9
Australia 1089 1253 652 1415 2.6 2.5 2.0 2.3 -13.1 92.1 -53.9 -23.0
China + Others 11680 16823 8256 18952 27.4 33.8 25.9 31.1 -30.6 103.8 -56.4 -38.4
Data Source: Bloomberg;The last available figures for each year have been taken;Analysis: Sundaram BNP Paribas Asset Management. End December 2007 figures have been reckoned as the peak as different countries reached the point on different dates.
Sundaram BNP Paribas Asset Management 2 The Wise Investor June 2010

FII flows may stay volatile
Satish Ramanathan
Head-Equity
Sundaram BNP Paribas Asset Management
1 What are the additional flashpoints, if any, in the global financial
crisis and what would be the implications?
The global financial crisis has several issues that need to be
addressed chief being the high amount of debt in the banking
system. In order to come to a more reasonable level of debt-
equity in the banking system, there has to be a slower credit
growth and significant amount of equity that needs to be raised
by the financial system. This could stress the markets as the
supply of equity through fresh issuances could strain the market.
The second aspect of the financial system that is extremely risky
is the large amount of short- term debt, which could result in
extreme rollover risk and could therefore result in high interest
rate volatility. This is true not only for the financial system but
for the Central Banks as well.
Rollover risk in my view could result in volatile markets for
some time. The consequences of this would be that banks
could try to increase borrowings over a longer time frame
which could push up the yield curve. The key risk as we see it
is Asset-Liability Mismatch, which could stress the markets for
some time to come.
One of the major risks that we face is the rejection by investors
of sovereign debt. Sovereign debt was a very powerful tool in
the hands of policy makers and was always mis-priced, as
investors perceived low levels of default. But a flood of
sovereign debt is making investors realise that what they gain in
definiteness of payment may be eroded due to the value of
money coming down.
The CDS rates expanding on sovereign debt is one of the
Sundaram BNP Paribas Asset Management
India View Equity
indications that we are moving to a stricter and more rational
world.
How does it impact economies? An uncertain environment
does not increase confidence in spending for both corporate
and consumers. Volatility is availability and cost of money is likely
to continue for some more time creating large pools of liquidity
and extreme fear in markets. This is likely to give us
opportunities from time to time to buy assets cheap.
2 If fiscal stimulus gets removed over the next two years in the
developed world, is growth likely? If yes, what could be the drivers?
If no, what are the implications for emerging markets?
The fiscal stimulus till date has been more of rescuing the
banking system, with marginal stimulus in consumption by way
of tax credits. Much of that stimulus, too, has not moved
forward and there is an extreme reluctance to lend by the
banking system.
Some of the stimulus is aimed at the unemployed, which is more
for subsistence rather than jumpstarting the economy. Over the
next few years, the main effort will be an attempt to repair the
balance sheets of the developed world banking system and their
government balance sheets.
The changing dynamics in the West has left Governments poor
and corporate/banks rich. It would be reasonable to assume
that there will be higher taxes along the way and lower
government expenditure. Yet not all is lost, as there are nascent
signs of a recovery of consumption as well; this could sustain
and pick up momentum as the government subsidies reduce.
We have to remember that we are in the fourth year after the
global financial crisis, and the slow process of repair is already
underway across companies and individuals.
3 How is India placed in the wake of what may pan in the developed
world when the stimulus is gone?
More than the impact of the developed stimulus being
withdrawn, we have to focus on the domestic stimulus, which
has resulted in the spectacular rebound and growth in
consumption. What are they?
1. The Sixth Pay Commission which increased salaries
2. Inflation shocks being absorbed by Government.
With the recent crises globally on government debt, it is
increasing evident that the Indian government is now willing to
take some harsher measure to rein in subsidies and reduce its
debt. Towards this there are some actions which merit mention
– increased fertiliser prices, and fuel prices.
The government has also extracted its pound of flesh from the
telecom sector and is increasingly looking to raise revenues
3 The Wise Investor June 2010

from other sources as well. It will be interesting to observe as
to whether the economy slows down when the government
reduces the subsidies.
4 What are your views on the government debt position in India?
How vulnerable are we in terms of debt in foreign currency?
The consolidated government debt is 80%, which is high when
compared to other Asian peers. However, the advantage India
has is a higher rate of inflation and earnings growth, which helps
the government to tide over the debt comfortably. We think
that a reduction in fiscal deficit will help in several ways, chief
being access to low cost capital for industry.
There are a lot of projects on the anvil and this could spur the
next level of growth. As regards foreign currency debt, India is
fairly comfortable on this issue as most of this is trade related,
and there are equivalent claims by Indian businesses as well. So,
on a structural basis India is an improving story rather than a
deteriorating one.
From a market perspective, India will continue to remain
volatile, as it is highly dependent on foreign flows into equity
markets.
On a structural basis India is an improving story rather than a
deteriorating one. From a market perspective, India will continue
to remain volatile, as it is highly dependent on foreign flows into
equity markets.
5 You had indicated infrastructure as high-conviction idea about six
months ago.What is your stance now?
We remain positive on the infrastructure story, but are now
underweight this sector primarily because of a deterioration in
capital efficiency of this sector. We are seeing signs of
misallocation of capital and investment in to long-gestation
projects where returns are back ended. Consequently, we have
far more discriminating in the selection process of infrastructure
companies.
6 Are FII flows to India likely to stay robust?
FII flows will remain volatile on account of the global
uncertainties. Indian markets remain very dependent on FII
inflows as domestic savings in equities has declined significantly
on account of new marketing procedures in mutual funds and
insurance policies. While there is a growing consensus on the
longer-term prospects of Indian companies, the relatively higher
valuation is delaying inflows.
7 What is your take on valuation level of the broad market in India?
The Indian markets can be broken into two buckets – large-cap
stocks that are fairly valued relative to their current level of
earnings and small-cap stocks that are cheap across several
parameters. We think there could be a fairly prolonged time
correction for the large-cap stocks rather than absolute price
correction. Hence short-term returns may prove to be elusive.
8 What are the main concerns in the global, local context (please
indicate implications)?
The main issues from a global context that confront us today
are the stability of the financial system. The risk of a sudden
Sundaram BNP Paribas Asset Management
India View Equity
freezing up of the credit market still exists, but is becoming less
as there has been an extraordinary amount of intervention into
the credit markets. Further, the slowdown could exacerbate the
weak debt markets and increase defaults and non performing
loans further.
Debt markets are not adequately pricing currency risks, credit
risks and interest rate volatility for the developed markets. We
still think that interest rates will have to move up to reduce the
speculative frenzy in commodities and other asset classes.
A weakening currency of the developed world could result in
higher inflation as well, so we may see a situation of higher
inflation, higher interest rates and slower growth than we are
currently seeing. So the past high growth was on the basis on
low interest rates (mis-priced debt), and higher debt, the future
may be a more rational pricing of debt (including sovereign
debt) and lower debt.
The base effect of favourable growth wears off during the
course of first half of 2010 and markets will be edgy when
growth plateaus out. We have seen the sharp correction in
Chinese market on fears of lower growth, and could repeat in
other geographies as well.
Fears of a double dip are also increasing on account of
tightening in a higher growth countries and weaker growth in
the developed world. We believe growth would decline in the
second half of 2010, especially in the developed world, but that
need not be indicative of long-term potential.
Yet another concern that we have about the equity markets is
the supply of fresh equity which could dampen spirits for some
time to come. This could prevent or delay Indian companies
access to capital markets and hence their project
implementation.
The Chinese banking system is expected to raise close to $ 70
billion – a significant sum that could depress equity markets.
Similarly, Indian companies will also have to raise capital to
maintain the growth momentum, which may be difficult in a
volatile environment.
Corporate margins have been high on the back of a savage
compression in expenses, and we think that this should ease
lowering margins on an incremental basis. Should growth
moderate and margins decline, then it would be difficult to see
corporate earnings expand and keep pace with expectations.
This is especially true in India, where margins are high at record
levels.
Our concern is lower growth and margin compression eroding
the earnings growth and hence resulting in a correction. We are
seeing this trend in the cement and telecom sector and are
seeing this in some other sectors as well. Fresh capacities are
also being added and while the industry is confident of
maintaining pricing power it will be difficult in an era of lower
capacity utilisation.
Hence our central thesis for this year is one of cautious
opportunism-identify good companies with robust earnings
growth and buy them at attractive prices. There can be no
substitute for this common sense.
4 The Wise Investor June 2010

20 Investment Lessons of 2008
Seth Klarman is the President of The Baupost Group, a Boston-
based private investment partnership. The firm has achieved
investment returns of 20% compounded annually over 25-plus
years. He is also the author of Margin of Safety-Risk Averse
Investing Strategies for the Thoughtful Investor.
In his latest annual letter, he describes 20 investment lessons of
2008, which, he says, “were either never learned or else were
immediately forgotten by most market participants.”
#1. Things that have never happened before are bound to occur
with some regularity. Whatever adverse scenario you can
contemplate, reality can be far worse.
#2. When excesses such as lax lending standards become
widespread and persist for some time, people are lulled into a
false sense of security, creating an even more dangerous
situation.
Correlations between asset classes may be surprisingly high
when leverage rapidly unwinds.
#3. Nowhere does it say that investors should strive to make
every last dollar of potential profit; consideration of risk must
never take a backseat to return. Conservative positioning
entering a crisis is crucial: it enables one to maintain long-term
oriented, clear thinking, and to focus on new opportunities
while others are distracted or even forced to sell.
#4. Risk is not inherent in an investment; it is always relative to the
price paid. Uncertainty is not the same as risk.
#5. Do not trust financial market risk models. Reality is always too
complex to be accurately modeled. Attention to risk must be
a 24/7/365 obsession, with people – not computers –
assessing and reassessing the risk environment in real time.
#6. Do not accept principal risk while investing short-term cash: the
greedy effort inevitably leads to the incurrence of greater risk.
#7. The latest trade of a security creates a dangerous illusion that
The views presented by the author (s) do not necessarily represent that of Sundaram BNP Paribas Asset Management. The article / posts have been reproduced
with permission or from reports available in the public domain in order to provide readers access to a diverse range of views on the economy and asset markets.
Sundaram BNP Paribas Asset Management
Distilled Wisdom
its market price approximates its true value. This mirage is
especially dangerous during periods of market exuberance.
#8. A broad and flexible investment approach is essential during a
crisis.
#9. You must buy on the way down. It is almost always better to
be too early than too late, but you must be prepared for price
markdowns on what you buy.
#10. Financial innovation can be highly dangerous, though almost
no one will tell you this.
#11. Ratings agencies are highly conflicted, unimaginative dupes.
Investors should never trust them.
#12. Be sure that you are well compensated for illiquidity –
especially illiquidity without control – because it can create
particularly high opportunity costs.
#13. At equal returns, public investments are generally superior to
private investments as they are more liquid and amidst distress
more likely to offer attractive opportunities to average down.
#14. Beware leverage in all its forms.
#15. Many leverage buy-outs are man-made disasters.
#16. Financial stocks are particularly risky.
#17. Having clients with a long-term orientation is crucial. Nothing
else is as important to the success of an investment firm.
#18. When a government official says a problem has been
“contained,” pay no attention.
#19. The government – the ultimate short- term-oriented player –
cannot withstand much pain in the economy or the financial
markets. Bailouts and rescues are likely to occur, though not
with sufficient predictability for investors to comfortably take
advantage.
#20. Almost no one will accept responsibility for his or her role in
precipitating a crisis.
Source: www.zerohedge.com (http://bit.ly/aAjdxN)
5 The Wise Investor June 2010

S.Vaidya Nathan
The Products Team
Sundaram BNP Paribas Asset Management
If the global financial and economic crisis has had an impact that you
do not read about in the newspapers or magazines and do not hear
about on television news channels (without any exception), it is the
fact that they failed to report reality and reality in time.
These sources have become so much a part of the system – political,
economic and markets (and only stock markets) – that they peddle
news and views that are at most times bereft of value. Spin is
imparted to facts and negatives placed before us as positives or not
as bad as they are. There are a few exceptions that merit a check,
but even they are sanitised versions.
If you cared to follow, you had a much superior source of
information and insights, a take on reality ahead of time and multiple
sources that constantly check each other. The blogs have arrived
(and this is not confined just to economics, finance and markets).
Throughout this crisis and dating to as early as 1999, a couple of
hundred and more blogs from different parts of the world have
done a spectacular job of alerting citizens to economic reality as it
is. The writers of most of these blogs had called the crisis well in
advance.
If you had been following them closely, it is likely that you would not
have lost a dime in the meltdown of 2008 & Q1 2009.
If you had been tracking them from advanced countries, it is also
very likely you would have made a pile by switching funds across
asset classes in a timely manner.
Issues such as vested interest are cut out quickly, as usually quality
blogs do not hesitate to take apart each other or writers on other
Sundaram BNP Paribas Asset Management
Eye on the Market
10 Must–Read Blogs
media (including electronic) if there is genuinely a case. The
blogsphere is vast and can be daunting, if you are just trying to make
a start.
To make life easy, here are a list of 10 blogs that provide an useful
starting point.The best way to keep tab is to subscribe to them on
an RSS feed, receive e-mail alerts and track them on Twitter, which
enables you to get a gist of what they are focussing on as well as
links to the stories, views and takes on news/views in mainstream
media.
The pick of 10 (blogs that are more technical have been kept apart)
is featured in alphabetical order:
China Financial Markets (http://mpettis.com/ blogger: Michael
Pettis):This is the best place to go for a view on China. Posts are not
frequent but they are detailed.
Financial Armageddon (http://www.financialarmageddon.com/
blogger: Michael Panzer): A sustainable turn in the economic cycle is
more likely to be picked up here a bit ahead.
Mish Global Economic Analysis
(http://globaleconomicanalysis.blogspot.com/ blogger : Mike
Shedlock): Mish follows Austrian economics and has zero tolerance
for the Fed and unions.
Naked Capitalism (http://www.nakedcapitalism.com/ blogger
uses the name tag Yves Smith):This is a robust source for views on
the financial system, reforms and technical issues.
Of Two Minds (http://www.oftwominds.com/blog.html blogger:
Charles Hugh Smith):The focus is on viewing economic trends, social
trends, life and markets as a package.
Prudent Bear &The Bear’s Lair (http://www.prudentbear.com/
bloggers: Doug Noland and Martin Hutchinson). The focus is
intensely on credit and central bank actions in fuelling it.
The Automatic Earth (http://theautomaticearth.blogspot.com/
bloggers: Stoneleigh and Ilargi): Most dire, this blog melds economy,
politics, human behaviour, markets and money superbly.
The Big Picture (http://www.ritholtz.com/blog/ blogger: Barry
Ritholtz): In terms of quality, this blog has slipped over the past 18
months but is still a good enough place to keep track.
The Market Ticker (http://market-ticker.denninger.net/ blogger:
Karl Denninger): A relentless focus on wrong doings in the financial
sector and Wall Street is a trademark of this blog.
Zero Hedge (http://www.zerohedge.com/ bloggers use names of
characters in the movie The Fight Club – the lead is Tyler Durden as
in the movie).This is an in-your-face, but useful blog.
6 The Wise Investor June 2010

Andrew Haldane
Executive Director, Financial Stability
Bank of England
What is the right size for banks? Do we
need the kind of monster-sized banks we
have today in the developed world – the
ones that pushed the world to the brink,
from which for now, governments appear to
have pulled us back by risking trillions of
dollars.
Andrew Haldane has been one of the rare
persons in central banking systems of the
developed world who has outlined the
problems as they are and the possible
solutions; however unpalatable they are to
the banks and their peers in the central
banking system. In one such speech last
month, Haldane showcases the $ 100
billion problem.
We present the second and concluding
part of edited extracts from his
comprehensive speech on the topic in April
2010
In the light of the Great Recession, and
the large apparent costs of too-big-to-
fail, does Weitzman’s cost-benefit calculus
suggest there is a case for winding back
the clock to the reforms of the Great
Depression? Determining that requires
The views presented by the author (s) do not necessarily represent that of Sundaram BNP Paribas Asset Management. The article / posts have been reproduced
with permission or from reports available in the public domain in order to provide readers access to a diverse range of views on the economy and asset markets.
Sundaram BNP Paribas Asset Management
The $ 100 Billion Question
an assessment of the benefits and costs
of restrictions.
The Benefits of Prohibition
The potential benefits of restricting
activity in any complex adaptive system,
whether financial or non-financial, can
roughly be grouped under three
headings: modularity, robustness and
incentives. Each has a potentially
important bearing on systemic resilience
and hence on the social benefits of
restrictions.
Modularity: In 1973, Nobel-prizing
winning economist Robert Merton
showed that the value of a portfolio of
options is at least as great as the value of
an option on the portfolio. On the face
of it, this seems to fly in the face of
modern portfolio theory, of which
Merton himself was of course one of the
key architects.
Whatever happened to the benefits of
portfolio diversification? The answer
can be found in an unlikely source –
Al’Qaeda. Although the precise
organisational form of Al’Qaeda is not
known with certainty, two structural
characteristics are clear.
First, it operates not as a centralised,
integrated organisation but rather as a
highly decentralised and loose network
of small terrorist cells.
Second, as events have shown, Al’Qaeda
has exhibited considerable systemic
resilience in the face of repeated and on-
going attempts to bring about its
collapse.
These two characteristics are closely
connected. A series of decentralised cells,
loosely bonded, make infiltration of the
entire Al’Qaeda network extremely
unlikely. If any one cell is incapacitated,
the likelihood of this undermining the
operations of other cells is severely
reduced.That, of course, is precisely why
7 The Wise Investor June 2010
Focus Topic
To sum up, the maximum efficient
scale of banking could be relatively
modest. Perhaps it lies below $100
billion. Experience suggests there is at
least a possibility of diseconomies of
scale lying in wait beyond that point.
Al’Qaeda has chosen this organisational
form.
Al’Qaeda is a prime example of
modularity and its effects in
strengthening systemic resilience. There
are many examples from other industries
where modularity in organisational
structure has been deployed to enhance
systemic resilience.
Computer manufacture is one. During
the late 1960s, computers were highly
integrated systems. Gradually, they
evolved into the quintessential modular
system of today, with distinct modules
(CPU, hard disk, keyboard) which were
replaceable if they failed without
endangering the functioning of the
system as a whole.
This improved resilience and reliability. In
the computing industry, modularity
appears to have had an influence on
industry structure. Since the 1970s, the
computer hardware industry has moved
from a highly concentrated structure to a
much more fragmented one.
In 1969, IBM had a market share of over
70%. By this century, the market share of
the largest hardware firm was around a
third of that. Modularity has meant the
computer industry has become less
prone to “too-big-to-fail” problems.
Other examples of modularity in
organisational structures include:
• The management of forest fires,
which typically involves the
introduction of firebreaks to control
the spread of fire;
• The management of utility services,
such as water, gas and electricity,

where the network often has built-in
latencies and restrictions to avoid
overload and contagion;
• The management of infectious
diseases which these days often
involves placing restrictions on travel,
either within a country (as in the case
of foot-and-mouth disease in the UK)
or outside of it (as in the case of
H5N1);
• The control of computer viruses
across the world wide web, which is
typically achieved by constructing
firewalls which restrict access to local
domains;
• Attempts on the world domino
toppling record, which involve
arranging the dominos in discrete
blocks to minimise the risk of
premature cascades.
These are all examples where modular
structures have been introduced to
strengthen system resilience. In all of
these cases, policy intervention was
required to affect this change in
structure. The case for doing so was
particularly strong when the risk of viral
spread was acute. In some cases,
intervention followed specific instances
of systemic collapse.
The North American electricity outage
in August 2003 affected 55 million
people in the US and
Canada. It had numerous adverse knock-
on effects, including to the sewage
system, telephone
and transport network and fuel supplies.
A number of people are believed to
have died as a consequence. This event
led to a rethinking of the configuration of
the North American electricity grid, with
built-in latencies and stricter controls on
power circulation.
In the mid-1980s, an attempt on the
world domino-toppling record – at that
time, 8000 dominos had to be
abandoned when the pen from one of
the TV film crew caused the majority of
the dominos to cascade prematurely.
Twenty years later a sparrow disturbed
an attempt on the world domino-
toppling record. Although the sparrow
toppled 23,000 dominos, 750 built-in
The views presented by the author (s) do not necessarily represent that of Sundaram BNP Paribas Asset Management. The article / posts have been reproduced
with permission or from reports available in the public domain in order to provide readers access to a diverse range of views on the economy and asset markets.
Sundaram BNP Paribas Asset Management
gaps averted systemic disaster and a new
world record of over 4 million dominos
was still set.
No-one died, except the poor sparrow
which (poetically if controversially) was
shot by bow and arrow. So to banking -
it has many of the same basic ingredients
as other network industries, in particular
the potential for viral spread and
periodic systemic collapse.
For financial firms holding asset
portfolios, however, there is an additional
dimension. This can be seen in the
relationship between diversification on
the one hand and diversity on the other.
The two have quite different implications
for resilience.
In principle, size and scope increase the
diversification benefits. Larger portfolios
ought to make banks less prone to
idiosyncratic risk to their asset portfolio.
In the limit, banks can completely
eradicate idiosyncratic risk by holding the
market portfolio. The “only” risk they
would face is aggregate or systematic
risk.
In 2008, 145 banks globally had assets
above $100 billion, Together, these
institutions account for 85% of the
assets of the world’s top 1000 banks
and for over 90% of the support
offered by governments during the
course of the crisis.
But if all banks are fully diversified and
hold the market portfolio, that means
they are all, in effect, holding the same
portfolio. All are subject to the same
systematic risk factors. In other words,
the system as a whole lacks diversity.
Other things equal, it is then prone to
generalised, systemic collapse.
Homogeneity breeds fragility. In Merton’s
framework, the option to default
selectively through modular holdings,
rather than comprehensively through the
market portfolio, has value to investors.
The precise balance between
diversification and diversity depends on
banks’ balance sheet configuration. This is
consistent with evidence from
econometric studies of banking
conglomerates which has found that
larger banks, if anything, exhibit greater
8 The Wise Investor June 2010
Focus Topic
risk due to higher volatility assets and
activities.
This evidence is no more than illustrative.
But it suggests that, in the arm wrestle
between diversification and diversity, the
latter appears to have held the upper
hand. Bigger and broader
Banking does not obviously appear to
have been better, at least in a risk sense.
In banking, as on many things, Merton
may have had it right.
Robustness: There is a literature on
how best to regulate systems in the face
of such Knightian uncertainty that
suggests some guideposts for regulation
of financial systems.
First, keep it simple. Complex control of
a complex system is a recipe for
confusion at best, catastrophe at worst.
Complex control adds, not subtracts,
from the Knightian uncertainty problem.
The US constitution is four pages long.
The recently-tabled Dodd Bill on US
financial sector reform is 1,336 pages
long.Which do you imagine will have the
more lasting impact on behaviour.
Second, faced with uncertainty, the best
approach is often to choose a strategy
which avoids the extreme tails of the
distribution. Technically, economists call
this a “minimax” strategy – minimising
the likelihood of the worst outcome.
Paranoia can sometimes be an optimal
strategy.
This is a principle which engineers took
to heart a generation ago. It is especially
evident in the
aeronautical industry where air and
space disasters acted as beacons for
minimax redesign of aircraft and
spaceships.
Third, simple, loss-minimising strategies
are often best achieved through what
economists call
“mechanism design” and what non-
economists call “structural reform”. In
essence, this means
acting on the underlying organisational
form of the system, rather than through
the participants
operating within it. In the words of
economist John Kay, it is about regulating
structure not behaviour.

Taken together, these three features
define a “robust” regulatory regime –
robust to uncertainties from within and
outside the system. Using these
robustness criteria, it is possible to assess
whether restrictions might be preferable
to taxation in tackling banking pollution.
To illustrate this, contrast the regulatory
experience of Glass-Steagall (a
restrictions approach) and Basel II (a
taxation approach).
Glass-Steagall was simple in its objectives
and execution.The Act itself was only 17
pages long. Its aims were shaped by an
extreme tail event (the Great
Depression) and were explicitly minimax
(to avoid a repetition). It sought to
achieve this by acting directly on the
structure of the financial system,
quarantining commercial bank and
brokering activities through red-line
regulation. Glass-Steagall satisfied all
three robustness criteria.
And so it proved, lasting well over half a
century without a significant systemic
event in the US. The contrast with Basel
II is striking.This was anything but simple,
comprising many thousands of pages and
taking 15 years to deliver. Basel II was
underpinned by a complex menu of
capital risk weights.This was fine-line, not
redline, regulation.
In short, Basel II satisfied few of the
robustness criteria and so it proved,
overwhelmed by the recent crisis
scarcely after it had been introduced.
Incentives: Tail risk within some
systems is determined by God – in
economist-speak, it is exogenous.
Natural disasters, like earthquakes and
floods, are examples of such tail risk.
Tail risk within financial systems is not
determined by God but by man; it is not
exogenous but endogenous. This has
important implications for regulatory
control. Finance theory tells us that risk
brings return.
So there are natural incentives within the
financial system to generate tail risk and
to avoid regulatory control. In the run-up
to this crisis, examples of such risk-
hunting and regulatory arbitrage were
Source: Bank of England (www.bankofengland.co.uk) Speech link: http://bit.ly/cL4AKu
The views presented by the author (s) do not necessarily represent that of Sundaram BNP Paribas Asset Management. The article / posts have been reproduced
with permission or from reports available in the public domain in order to provide readers access to a diverse range of views on the economy and asset markets.
Sundaram BNP Paribas Asset Management
legion. They included escalating leverage,
increased trading portfolios and the
design of tail-heavy financial instruments.
This dynamic means it is hazardous to
believe there is a magic number for
regulatory ratios sufficient to insure
against tail risk in all states of the world.
Because tail risk is created not endowed,
calibrating a capital ratio for all seasons is
likely to be, quite literally, pointless.
The Costs of Prohibition: Turning to
the other side of the equation, what
does existing evidence tell us about the
costs to banks of restrictions, whether on
the scale or scope of their activities?
Economies of Scale: They appear
to operate among banks with assets
less, perhaps much less, than $100
billion. But above that threshold there
is evidence, if anything, of
diseconomies of scale.
Economies of Scope: Turning
from economies of scale to
economies of scope, the picture
painted is little different. Evidence
from US bank holding companies
suggests that diversification gains
from multiple business lines may be
more than counter-balanced by
heightened exposures to volatile
income-generating activities, such as
trading.
This mirrors the evidence from the
Great Depression. Internationally, a
recent study of over 800 banks in 43
countries found a conglomerate
“discount” in their equity prices. In other
words, the market assigned a lower value
to the conglomerate than the sum of its
parts, echoing Merton’s 1973 insight.This
is evidence of diseconomies of scope in
banking.
With hindsight, this crisis has provided
many examples of failures rooted in an
exaggerated sense of knowledge and
control. Risks and counterparty
relationships outstripped banks’ ability to
manage them. Servers outpaced
synapses. Large banks grew to comprise
several thousand distinct legal entities.
When Lehman Brothers failed, it had
almost one million open derivatives
9 The Wise Investor June 2010
Focus Topic
contracts – the financial equivalent of
Facebook friends. Whatever the
technology budget, it is questionable
whether any man’s mind or memory
could cope with such complexity.
Optimal scales for banks is less
than $ 100 billion: To sum up, the
maximum efficient scale of banking could
be relatively modest. Perhaps it lies
below $100 billion. Experience suggests
there is at least a possibility of
diseconomies of scale lying in wait
beyond that point. Conglomerate
banking, while good on paper, appears to
be more mixed in practice. If these are
not inconvenient truths, they are at least
sobering conjectures.
They also sit awkwardly with the current
configuration of banking. In 2008, 145
banks globally had assets above $100
billion, most of them universal banks
combining multiple business activities.
Together, these institutions account for
85% of the assets of the world’s top
1000 banks ranked by Tier 1 capital.
There are no examples during this crisis
of financial institutions beyond $100
billion being resolved without serious
systemic spillovers. Instead, those in
trouble have been bailed-out. The same
145 institutions account for over 90% of
the support offered by governments
during the course of the crisis.
$100 billion may not just be the question;
it may also be part of the answer.
Today’s financial structure is dense and
complex, like a tropical rainforest. Like
the rainforests, when it works well it is a
source of richness.Yet it is, as events have
shown, at the same time fragile. Simpler
financial eco-systems offer the promise
of greater robustness, at some cost in
richness. In the light of a costly financial
crisis, both eco-systems should be
explored in seeking answers to the $100
billion question.
(Concluded-the first part was
published in The Wise Investor May
2010)

Unreal economy trumps ‘real economy’
Zeus Yiamouyiannis
Something profound has happened, obscured by all the concerns
about economic details and speculation about whether we are in a
“deep recession” or a “depression,” a “nascent recovery” or a “W
shaped” downturn. We no longer have a global economic system
that is tethered to concrete reality. Parasitic, amoral, slight-of-hand
value-shuffling (what I would call the “unreal economy”) has
effectively trumped the “real economy,” the production and
exchange of meaningful goods and services.
Worse, we’ve let it happen with our acquiescence, our hope that we
can just ride this one out, and our denial of what we sense intuitively
to be true—pervasive fraud in the conduct of global financial
business and massive counterfeiting in the establishment of value.
We’ve allowed big banks and affiliated institutions to simply concoct
fake wealth out of thin air, and we have legitimized and rewarded
these concoctions with a massive transfer of real wealth to a very
small but powerful oligarchy through unregulated private bets
backed by public taxpayer money, stratospheric fees siphoned from
transactions, predatory lending, and private equity cannibalization of
once-productive firms.
A global economy mediated by an acceptance of a standardized,
reality-based rule of law and value between nations has given way
to the shrouded anarchy of transnational banks as overriding powers
Source: www.oftowminds.com Copyright 2010 ZeusYiamouyianni. For author background, visit his profile on the web. For a more detailed versions of this article, please visit http://bit.ly/amdiBM Note: By Invitation
features articles solicited by The Wise Investor from experts. It may, on occasions, showcase excerpts of exceptional papers/speeches, which are available in the public domain or published with permission.
The views presented by the author (s) do not necessarily represent that of Sundaram BNP Paribas Asset Management. The article / posts have been reproduced
with permission or from reports available in the public domain in order to provide readers access to a diverse range of views on the economy and asset markets.
Sundaram BNP Paribas Asset Management
By Invitation
driven by their own brand of anti-public “interest.”
What constitutes value has migrated from actual value, based in
something you earn and related to something you can actually
concretely use, to “references to value,” some number merely
assigned to some financial instrument attached to some good or
service somewhere several degrees removed from its source. (Think
“mortgage backed securities” where the actual deeds to properties
are no longer even in the picture after extensive “packaging” and
repackaging.)
This is all a fancy way of playing the age old game, externalize
liabilities, internalize gains, but on an unprecedented and potentially
cataclysmic scale. Just as with political coverage that largely deals
with the “horse race,” personalities, gaffes, and likeability of
candidates over actual policy, financial coverage has concerned itself
with a relentless boosterism, tea leaf reading, and a host of other
trivialities while the structural rot goes unreported.
Abstractions like the “velocity of money,” along with whitewashing
indicators like trading volume are used to gauge the health of an
economy without sorting out whether such indicators are attached
to some productive, underlying activity or asset. This all serves to
create a convenient smoke screen for moneyed interests, and
progressively makes the “new normal” one that thrusts citizens
deeper into debt servitude.
Post Mortem and Review : A post mortem is in order.The elements
of this worldwide con game are remarkably simple, not complex at
all. Apparently you only need a few things to make a mockery of the
entire global economic system, and big banks garnered these few
important things through “regulatory capture”:
• unregulated, unenforced rules (particularly for derivatives)
• license to “mark to model” (assign your own values to your
assets)
• ability to peg present value to irrational expected future returns
(based on unlimited, exponential growth)
• infinite leverage (no effective requirements for reserve capital in
unregulated “shadow” markets)
• massive size, so that the bank is "too big to fail"
non-transparency and non-accountability.
This combined with the moral, social, personal, and cultural approval
10 The Wise Investor June 2010
 By Invitation The Outside View
of maximizing profit at any cost, incentivizes massive fraud and Spanish Flu
counterfeiting.
This is less sin or malfeasance than just plain lunacy.Yet, this is what The issue today is that, if the European crisis is going to get worse
we have and what we have allowed to gain the upper hand. before it gets better, the obvious question is what will be the next
Literally, following the same formula with a little “solid reputation” catalyst for angst. In GREED & fear’s view the most likely answer is
sprinkled on, I can value my cat’s litter box at a million dollars, trade
Spain.
on its ostensible increased future value to skim myself a tidy sum in
profit and transaction fees, leverage my “marked to model” value of GREED & fear does not pretend to be an expert on Spain with
that litter box, a million fold to buy up Chrysler. I can then loot
recent visits there primarily confined to the Nou Camp (though in
Chrysler, stripping it of its real wealth and infrastructure, gut jobs, etc.
for short term boosts to profits, and then walk away a billionaire. the interests of full disclosure it should be revealed that 12 years
I can give any reason or no reason at all for what I’m doing. I don’t ago GREED & fear worked briefly for a Spanish bank).
have to tell anyone a thing, and no one is going to come after me. If
they do “come after me” it will be to lard me with hundreds of But a brief survey of the situation makes it clear that the most
billions of dollars of taxpayer money to keep the national or global remarkable thing about Spain is how long it has taken markets to
economy from collapsing. wake up to the problems there. In this there would seem to be a
Talk about throwing good money after bad. The most I can lose is
clear parallel with US sub-prime.
my litter box and now that everyone has a stake in the con, they
have every incentive to cover it up and make me whole, both to Thus, Spanish banks outperformed European banks until
protect against their anxiety and their feelings they’ve been conned,
December 2009. Indeed Spain has been the country with the
and to maintain a functioning dysfunctional system.
second largest current account deficit after the US since 2003.
We have currently already established and incentivized as “rational”
an irrational framework where outright, willful lying, theft, fraud, and Similarly loan growth ran way above the rest of the Euro area
counterfeiting are rewarded.The more parasitic and more inefficient during the credit boom. Clearly, the only way these macro
I am in this framework, the more I make.The more I trade an asset
excesses were allowed to grow to this extent was the false
back and forth, the more fees I get.
comfort provided by Euroland monetary union.
Even if those fees eclipse the entire value of the asset in question, I
am “rationally” compelled to continue trading as long as someone Equally clearly the debt dynamics in Spain will quickly become
else is paying. If I can inflate the value of my asset at will and pay
impossible to finance once markets start to price in the credit risk.
Moody’s or Standard and Poor’s to give me a AAA rating who’s
going to know? This is why Spain, not Greece, is probably the key stress test of
It is sobering to contemplate that the market for unregulated whether Euroland can manage its coming deflationary adjustment
derivatives alone, has exceeded the global GDP at a total volume and keep the common currency in place.
exceeding 600 trillion dollars and possibly more than a quadrillion
dollars (1,000,000,000,000,000 or a million billion dollars). This is because of Spain’s sheer size.Thus, BIS-reporting European
The way out: How can a world-wide economy unhinged from banks held US$832 billion in Spanish debt at the end of 2009,
concrete reality perhaps result in positive changes (after, no doubt, a
compared with “only” US$193 billion in Greek debt and US$240
lot of pain)? The answer is fairly brief.
billion in Portuguese debt
We can exercise civil disobedience, refuse to be stooges, create our
own spaces, and recommit to spend time and energy where our Christopher Wood, Managing Director & Strategist of
true heart lies, free from the delusional temptations of a corporate-
CLSA Asia-Pacific, an independent research outfit and
driven reason for life that has shown itself to be both conclusively
abusive and unfulfilling. author of the weekly report GREED & Fear.
In the end, they need us, and we don’t need them. This is the only
“this life” we are going to have. It’s a lot more adventurous and
enhancing to be a cultural creative then a debt slave. Source: CLSA

The views presented by the author (s) do not necessarily represent that of Sundaram BNP Paribas Asset Management. The article / posts have been reproduced
with permission or from reports available in the public domain in order to provide readers access to a diverse range of views on the economy and asset markets.

Sundaram BNP Paribas Asset Management 11 The Wise Investor June 2010
 Investing Environment

Asset Allocation
• 2 •

The important aspect is to

Lifetime goals Income Net worth Age Personality Time frame
ensure a healthy balance

between
Return Expectation Liquidity Preferences Risk Tolerance

• Owning the right mix of

Investor Profile
financial assets

Conservative Moderate Aggressive • Realistic returns

• Ability to take risk (absorb

Capital Secure Income/Growth likely losses)
Growth Growth Plus
Preservation Growth (Balanced)
• Liquidity
Low Risk/Return High
• Flow of income at desired
EPF / PPF Money Fund FD Gold MIP Balanced Equity Global Markets Commodities Real Estate
level at each desired time
Balance risk and reward Asset allocation Diversify your portfolio point

Check if the following are in place and constantly reviewed:

✓ Defined goals & a well-thought out time frame for attaining the ✓ Know clearly the tax effects in your investment plan
goals
✓ Use of a credible, professional financial advisor
✓ Understand risks and ability to absorb losses (short-term and
long-term) ✓ Periodic review with long-term performance, risk measures and

✓ Matching of time frame, objective and risk-return preference objectives

✓ Planned cash flows and a plan for exigency ✓ A portfolio view and not by security

✓ Focus on long-term investment strategy and requirement of
liquidity
✓ Clear idea of income, surplus available for investment and likely
future income
✓ An investment plan that fits in with all the key aspects
✓ Ignore short-term volatility effects and avoid panic decisions
✓ Reallocate, reinvest and rebalance
✓ Alter asset allocation if there is a permanent change in any
preference

✓ High degree of discipline in sticking to basic investment plan at all ✓ Take cash calls when markets are overvalued or a major crisis
times
appears possible
✓ Enhancement of investment level over time based on comfort
level ✓ In taking risk off the table, Being Early is better than Being Wrong

✓ Understand effect of exit loads, expenses and fees ✓ Be patient to achieve long-term goals
Sundaram BNP Paribas Asset Management 12 The Wise Investor June 2010

At less than 200 pages, this book has remained perhaps the best
snapshot on events of 1929 – the crash in markets and the year that
to which is dated the birth of the Great Depression.This book was
interestingly, first published, when the Dow Jones Industrial Average
just about managed to recover the massive losses suffered in 1929
and through the 1930s – a period interspersed with a few sharp
rallies of the kind we have witnessed since March 2009.
You may have problems with ideological stance and its impact on
dealing with the economic/financial/market issues of the period.You
could vehemently contest comments on persons and policies at
multiple places through the book. That is exactly how it should be.
Even for those who are at the other end of the spectrum, this book
has utility as a definitive chronicle of the times.
What also sets the book apart is also the simple manner in which
complex issued have been dealt with. Littered with anecdotes, it
provides a broad sweep and captures ground reality in a manner
that numbers do not and cannot. As a phase in the U.S economy
that altered behaviour of people in a profound way, the anecdotal
approach proves the appropriate way.
The author of the book – John Kenneth Galbraith – needs no
introduction. If you are interested in a detailed background, just do a
web search to multiple sources. The financial crisis that officially
Sundaram BNP Paribas Asset Management
The Book of Choice
The Great Crash 1929
started in 2007 and is still in place with more sources of pain, this
book has been a useful re-read to check how 1929 panned out.
While we are on this topic, you could get a great snapshot of the
1930s from the News From 1930s blog
(http://newsfrom1930.blogspot.com/) – a meticulously compiled
summary from The Wall Street Journal of the corresponding date in
that decade. This blog has no links to the book and has been
referred for sheer contextual relevance.
The book now has a foreword by James Kenneth Galbraith that
provides a background to the ongoing financial crisis. One sentence
in the foreword inks the two periods nicely: `As in 1929, the
architects of disaster will form a rich rogue’s gallery to go shooting
in’. This book is a useful read now as the advanced world appears
headed toward one more lost decade, if not worse.
We present select extracts to provide a flavour of what is in
prospect for a reader.
• On December 4, 1928, President Collidge sent his last message
on the state of the Union to the reconvening Congress. Event
the most melancholy Congressman must have found
reassurance in his words. No Congress of the United States ever
assembled, on surveying the state of the Union, has met with a
more pleasing prospect than that which appears at the present
time. In the domestic field there is tranquillity and
contentment…. And the highest record of years of prosperity. In
the foreign field there is peace, the goodwill which comes from
mutual understanding. The main sources of these unexampled
blessings lie in the integrity and character of the American
people’.
• One thing in the twenties should have been visible even to
Coolidge. It concerned the American people of whose character
he had spoken so well. Along with the sterling qualities he
praised, they were also displaying an inordinate desire to get rich
quickly with a minimum of physical effort. The first striking
manifestation of this personality trait was in Florida.There, in the
mid-twenties, Miami. Miami Beach, Coral Gables,The East Coast
as far north as Palm Beach, and the cities over on the gulf had
13 The Wise Investor June 2010
 The Book of Choice
been struck by the great Florida real estate boom. The Florida
boom contained all of the elements of the classic speculative
bubble. There was the indispensable element of substance. On
that indispensable element of fact, men and women had
proceeded to build a world of speculative make-believe.
• Andrew W Mellon said `There is no cause for worry. The high
tide of prosperity will continue’. Mr. Mellon did not know. Neither
did any of the other public figures who then, as since, made
similar statements. These are not forecasts; it is not to be
supposed that the men who make them are privileged to look
farther into the future than the rest. Mr.Mellon was participating
in a ritual which, in our society, is thought to be of great value for
influencing the course of the business cycle. By affirming solemnly
that prosperity will continue, it is believed one can help insure
that prosperity will, in fact, continue. Especially among
businessmen the faith in the efficiency of such incantation is very
great.
• Some of those in positions of authority wanted the boom to
continue.They were making money out of it, and they may have
had an intimation of the personal disaster which awaited them
when the boom came to an end. But there were also some who
saw, however dimly, that a wild speculation was in progress and
that something should be done. For these people, however,
every proposal to act raised the same intractable problem. The
consequences of successful action seemed almost as terrible as
the consequences of inaction and they could be more horrible
for those who took the action.
• Stocks, it was agreed, were again cheap and accordingly there
would be a heavy rush to buy. Numerous stories from the
brokerage houses, some of them possibly inspired, told of a
fabulous volume of buying orders which was piling up in
anticipation of the opening of the market. In a concerted
advertising campaign in Monday’s papers, stock market firms
urged the wisdom of picking up these bargains promptly “We
believe” said one house, “that the investor who purchases
securities at this time with the discrimination that is always a
condition of prudent investing, may do so with utmost
confidence”. On Monday, the real disaster began.
Book: The Great Crash 1929. Author: John Kenneth Galbraith Paperback: 194
pages Publisher: Houghton Mifflin Hardcourt ISBN-13: 9780395478059; ISBN
10 - 978-0395478059 Price: Rs 547 at www.flipkart.com (the price is after a
discount of 15% and there is free delivery in India). Comment and pick of
extracts by S.Vaidya Nathan
Sundaram BNP Paribas Asset Management
Perspective
...continued from page 1
This is possible but the political contours of the U.S Congress has
changed over the past year and will do so in a more pronounced
way, come elections in November. Even if more handouts are
initiated, is this a sustainable avenue? No.
It is an interplay of similar factors that is forcing Japanese consumers
to become more prudent despite the passage of 20 years since the
deflation was triggered. In an editorial in February 2010 on The
Economics of Eating In,The Japan Times noted with concern:
Japanese culture has long respected practicalities and shunned
wastefulness. However, the current trend of not eating out signals
much deeper concerns about personal spending. The drop in the
number of people dining out may not seem large compared with
downturns in other sectors of the economy, but restaurants
comprise a vital part of consumer spending. Eating out often
combines with other consumer activities, like shopping and
entertainment.
When one drops, they all may drop. It would be a pity, too, if the fast-
food chains' low-price menus wiped out the cuisine and dining
experience of the traditional Japanese izakaya and kissaten.The shift
to fast food may only be temporary, but let's hope that economic
forces will not just benefit those places that offer the cheapest
choices for the longest time. The tradition of dining out is deeply
rooted in Japanese socializing customs and hopefully the decline will
not be permanent.
This is all about behaviour – many are clearly hoping the cloud will
pass, but is now officially four years and barring the rescue of big
banks, little else of a sustainable nature has been achieved. What we
may be looking at is a long-drawn period of lack of growth in the
U.S and other parts of the developed world. As the Japanese
example shows, policy makers can do little about behavioural
change.
In this context, the ongoing divergence between growth in advanced
nations and emerging markets is here to stay, even if China were to
have a bumpy ride. Bouts of liquidity could chase stocks in emerging
markets, every now and then.
What this developing economic story means for investment is the
need to adhere to asset allocation across security types, be dynamic
about the parts of money that is allocated to risky assets and not to
necessarily expect returns of the magnitude obtained in the past
decade (if there is a repeat, it will be as part of liquidity-driven
bubble and you must know when to get off). The reality is the
economies of the developed world are still to experience the full
brunt of change in behaviour. Japan is the way forward, if you need
a reference point on what is in store.
T P Raman
Managing Director
Sundaram BNP Paribas Asset Management
14 The Wise Investor June 2010

Volatility in Capital Flows
Duvvuri Subbarao
Governor
Reserve Bank of India
Recovery in capital flows & related concerns
As the crisis is ebbing, capital inflows into emerging market
economies (EMEs) have resumed - a consequence of a global
system awash with liquidity, the assurance of low interest rates ruling
in advanced economies over ‘an extended period’ and the prospects
of robust growth in EMEs. According to the IMF, net private financial
flows to emerging and developing economies increased from US$
254 billion in 2006 to US$ 689 billion in 2007 and then declined, at
the height of the global financial crisis, to US$ 179 billion in 2008 and
US$ 180 billion in 2009.
The resumption of capital flows has triggered familiar concerns in
EMEs about macroeconomic and financial stability. This has also
sparked off a vigorous debate internationally on the policy approach
to capital flows at the country level and at the international level. My
comments as chairman of this session will cover the theoretical
arguments for and against capital flows, the collective experience to
date in managing capital flows and issues on the way forward. I will
also allude to India’s approach to capital account management.
Arguments For and Against Capital Flows
The theoretical arguments in support of capital flows are quite
persuasive. Capital flows aid growth by providing external capital to
sustain an excess of investment over domestic savings.
By affording the opportunity of using the world market, an open
capital account permits both savers and investors to diversify their
portfolios to maximize returns and minimize risks. Capital flows
could also potentially develop nascent financial markets, promote
financial discipline and reduce the borrowing costs both for the
government and the corporates.
Sundaram BNP Paribas Asset Management
India RBI-Speak
On the flip side, however, capital flows are known to be pro-cyclical
and they complicate macroeconomic management. An open capital
account interferes with the simultaneous management of a
fixed/managed exchange rate peg and an independent monetary
policy – a phenomenon familiarly known as the ‘Impossible Trinity’.
Potential threat to financial stability
Large and persistent capital flows can potentially jeopardize financial
stability. Large speculative flows in ‘search for yield’ typically go into
investment in assets leading to rapid and destabilizing build up of
asset prices. Since such speculative flows are volatile by nature, they
can impair the orderly functioning of the financial markets.
When investors exit from securities markets abruptly in a herd,
stock and bond prices get affected, and when investors take the
redemption proceeds out of the country, the exchange rate gets
affected.
Should the central bank intervene to stabilize the forex market, the
resultant tightened liquidity can affect the money markets. Thus,
speculative flows affect all financial markets - the securities markets,
the forex market, the money market and the credit market, with
contagion spreading from one market to another rapidly.
If not contained, these swift developments can threaten financial
stability and lead to output and employment losses.
Managing Capital Flows
Surely, capital flows are important to meet the investment needs of
EMEs. Problems arise when the flows are largely in excess of the
economy’s absorptive capacity and also when they are highly
speculative in nature. EMEs have responded to managing the
adverse macro impact of volatile capital flows through a variety of
policy actions. Stylistically, these can be categorized into three
options.
• The first option is to do nothing (exchange rate option) in which
case the exchange rate will appreciate.
• The second is to allow the flows to come in but intervene in the
forex market (reserve accumulation option).
• The third option is to deploy capital controls.Typically, EMEs have
adopted a mix of all the options. Let me briefly discuss the
implication of these options.
The Option of Doing Nothing
The most straight forward option for the central bank is to allow
flows to come in without any intervention. However, when capital
inflows are large, this can lead to currency appreciation unrelated to
fundamentals and trigger a 'Dutch Disease' syndrome. Experience
has shown that a flexible exchange rate system is prone to
overshooting, and this has engendered the 'fear of floating' among
many countries.
15 The Wise Investor June 2010

The Option of Reserve Accumulation
The second option for a central bank, confronted with a surge of
capital flows, is to intervene in the foreign exchange market to
dampen disorderly movements of the exchange rate.This will result
in accumulation of foreign exchange reserves and release of
additional liquidity into the system. If left unsterilized, the additional
liquidity so generated in the system will have potential inflationary
implications.
Typically central banks have sterilized the flows, either partly or fully,
using a variety of tools including open market operations, tightening
the access of banks to the discount window, adjusting reserve
requirements, using a foreign exchange swap facility, easing
restrictions on capital outflows and pre-payment of external debt.
In theory, each of these tools holds out the prospect of achieving the
same effect as open market operations. However, one should be
mindful of the law of unintentional consequences. Such intervention
would prevent the domestic money market interest rates from
falling which would attract more inflows and thus actually accentuate
appreciation pressure, the problem that was sought to be contained
in the first place.
In the case of EMEs, intervention may also entail large quasi-fiscal
costs if the domestic assets yield higher returns than the foreign
exchange reserves.
Despite the costs of accumulating and holding reserves, reserves so
built up come handy in preserving financial stability in the face of
outflows. In fact, besides being an intrinsic good, foreign exchange
reserves confer several other important advantages such as
automaticity, fungibility and usage in both crisis prevention and crisis
resolution.
In its January 28, 2010 issue, The Economist said, “Capital, like
water, tends to flow around such obstacles (taxes). Try to dam its
movements at one point, and slowly but remorselessly, it will find
its way around.”
Because of the potential for rapid outflows and the associated
liquidity risks, EMEs have tended to build up reserves as a means of
self-insurance. During the recent crisis, EMEs which had built up
reserves as self-insurance found that they could weather the crisis
more effectively.
The very possession of an ample level of reserves helped to
maintain market confidence as measured by lower spreads on credit
default swaps and also blunted the penetration of the crisis in these
economies.
Such self insurance has, however, faced intellectual inclement. It has
been criticized as being costly and inefficient and also as contributing
to global imbalances. To wean EMEs away from self insurance,
international financial institutions like the IMF have recently come up
with revised instruments such as a flexible credit line and high access
precautionary arrangements.
There were also cases of regional swap arrangements during the
recent crisis. It is not yet clear if such external safety-nets can fully
substitute for national level self-insurance in terms of speed,
effectiveness and autonomy.
Sundaram BNP Paribas Asset Management
India RBI-Speak
The Option of Capital Controls
The third standard option for EMEs is to impose controls on capital
flows. Experience in this regard has been mixed. Protagonists of
controls have argued that capital controls are distortionary, difficult
to implement, easy to evade, and that they become ineffective fairly
quickly and entail negative externalities.
On the other hand, proponents of capital controls contend that
controls are desirable because they preserve monetary policy
autonomy, save sterilization costs, tilt the composition of foreign
liabilities toward long-term maturities, and ensure macroeconomic
and financial stability.
The challenge for policy makers is to design and implement controls
where the cost of compliance is lower than the cost of evasion.
A hurt rather than a help
Capital controls were a central issue during the Asian crisis, but the
orthodox view that ‘controls are not desirable’ largely survived the
crisis. Capital controls are now once again a central issue, as the
recent crisis witnessed, across emerging economies, a rough
correlation between the extent of openness of the capital account
and the extent of adverse impact of the crisis.
Surely, this should not be read as the denouncement of open capital
account, but a powerful demonstration of the tenet that premature
capital account opening hurts more than it helps.
The Tobin Tax on Transactions
The advisability of a Tobin tax has figured prominently in the
discussion on capital controls in the post crisis period. Several
countries have used variants of Tobin tax to discourage heavy, short-
term capital inflows. It has been argued that the tax helps reduce
exchange rate volatility and consequently curtails the intensity of
“boom-bust” cycles engendered by international capital flows.
However,Tobin tax has been criticized on many counts: the tax can
be evaded easily through modern financial instruments like
derivatives; it reduces liquidity in the markets; and to be effective, the
scope of the tax needs to be continuously widened which may lead
to inefficiencies.The efficacy of a Tobin type tax remains a debatable
issue.
IMF Changes Tack, At Last
Refreshingly, the IMF has shed its long held orthodoxy against capital
controls.The policy note of the IMF published in February 2010 has
referred to certain ‘circumstances in which capital controls can be a
legitimate component of the policy response to surges in capital
flows’.
The IMF’s Global Financial Stability Report (April 2010) has gone
further into this issue and observes that capital controls are
reasonable instruments in the 'toolkit' of developing/EME
economies facing volatile capital flows.
The World Bank and the Asian Development Bank too have echoed
the view that capital controls may be advisable, indeed inevitable, in
certain circumstances.
16 The Wise Investor June 2010

India’s Approach To Capital Flows
India has experienced both ‘floods’ and ‘sudden stops’ of capital flows.
Net capital flows to India increased from as low as US$ 7 billion in
1990-91 to US$ 45 billion in 2006-07, and further to US$ 107 billion
during 2007-08, the year just before the crisis. They dropped to as
low as US$ 7 billion in 2008-09 at the height of the crisis. Capital
flows are estimated to have recovered to around US$ 50 billion in
2009-10.
India has followed a consistent policy on allowing capital inflows in
general and on capital account management in particular. Our
position is that capital account convertibility is not a stand alone
objective but a means for higher and stable growth.
Gradual path to capital convertibily
We believe our economy should traverse towards capital
convertibility along a gradual path - the path itself being recalibrated
on a dynamic basis in response to domestic and global
developments.
To learn to ‘dam’ the flows so that the benefits of capital flows
exceed their costs remains an intellectual and policy challenge for
EMEs. We believe our economy should traverse towards capital
convertibility along a gradual path - the path itself being
recalibrated on a dynamic basis.
We will continue to move towards liberalizing our capital account,
but we will revisit the road map to reflect the lessons of the crisis.
As regards a Tobin type tax, we have not so far imposed nor are we
contemplating one. However, it needs reiterating that no policy
instrument is clearly off the table and our choice of instruments will
be determined by the context.
Approach to types of flows
Among the components of capital flows, we prefer long term flows
to short-term flows and non-debt flows to debt flows.The logic for
that is self-evident. Our policy on equity flows has been quite liberal,
and in sharp contrast to other EMEs which liberalized and then
reversed the liberalization when flows became volatile, our policy
has been quite stable.
Historically, we have used policy levers on the debt side of the flows
to manage volatility. Contrary to popular perception, we have used
both quantity and price based variables to moderate debt flows.
There is a ceiling on the extent of FII investment in sovereign and
corporate debt (quantity variable) and there is also a withholding
tax (price variable).
External commercial borrowings (ECB) by corporates come in
through both an automatic route and an approval route. ECB flows
under both the automatic and approval routes are moderated by
interest rate ceilings (a price variable) and those under the
automatic route through an additional ceiling on total quantity (a
quantity variable). Non-Resident Indians (NRI) deposits are
monitored through an interest rate ceiling, a price variable.
Comments of Dr. Duvvuri Subbarao, Governor, Reserve Bank of India at the High-level Conference on ‘The International Monetary System’ jointly organised by
the Swiss National Bank and the IMF in Zurich on May 11, 2010. Source: www.rbi.org.in
The views presented by the author (s) do not necessarily represent that of Sundaram BNP Paribas Asset Management. The article / posts have been reproduced
with permission or from reports available in the public domain in order to provide readers access to a diverse range of views on the economy and asset markets.
Sundaram BNP Paribas Asset Management
India RBI-Speak
Exchange Rate & Flows
Our exchange rate policy is not guided by a fixed or pre-announced
target or band. Our policy has been to intervene in the market to
manage excessive volatility and disruptions to the macroeconomic
situation.This ‘volatility centric approach’ to exchange rate also stems
from the source of volatility which is capital flows.
Despite not having a fully open capital account, we have
experienced large volatility in capital flows.The exchange rate of the
Indian rupee vis-à-vis US dollar appreciated when there were large
capital inflows; and it depreciated when the capital inflows thinned
out. The two way movement is a clear demarcation of our flexible
exchange rate policy.
India’s exchange rate policy is said to have imposed some costs. Last
fiscal (2009/10), the rupee appreciated by 13 per cent in nominal
terms but by as much as 19 per cent in real terms because of the
inflation differential between us and our trading partners. This has
implications for our external competitiveness at a time when world
trade is recovering and concerns about protectionism are
resurfacing.
Also, if we have a flexible exchange rate, and if other countries which
are our trading partners or competitors for the same export
markets have a fixed exchange rate, we get disadvantaged.
Although India does not have a deliberate strategy of building up
reserves for self insurance, our reserves got built up as a result of
our relatively flexible exchange rate policy. The reserves so built up
have been used to contain volatility in the event of capital flow
reversals. Our reserves comprise essentially borrowed resources,
and we are therefore more vulnerable to sudden stops and reversals
as compared with countries with current account surpluses.
More flexible, open-minded approach
For several decades now, EMEs have struggled with capital flows in
their own ways. The orthodox view that capital controls are
inherently inefficient and should not be resorted to has inhibited
mainstream research on the topic. But that orthodoxy has now
changed, and a more flexible and open-minded approach is gaining
ground.
For example, the April 2010 Global Financial Stability Report of the
IMF says, “there are a number of different types of controls that can
be imposed with varying degrees of success under different country
circumstances. Overall, the message is that one size does not fit all.
Since the use of capital controls is advisable only to deal with
temporary inflows, in particular those generated by external factors,
they can be useful even if their effectiveness diminishes over time.”
There is a need to follow up this revised world view with research.
The IMF and other multilateral bodies and research institutions must
embark on researching the negative externalities arising from large
and volatile capital flows, the ways to address the negative
externalities, explore when it is appropriate to use controls, what
kind of controls work best and under what circumstances.
17 The Wise Investor June 2010

John Mauldin
Best-Selling Author, Recognized Financial Expert
and Editor of Thoughts From The Frontline
What is a Hail Mary Pass?: In a 1975
playoff game, the Dallas Cowboys were
nearly out of time and facing elimination
from the playoffs, down 14-10 against a
very good Minnesota Vikings team. The
Cowboys future Hall of Fame
quarterback Roger Staubach had no
very good options. He later said he
dropped back to pass, closed his eyes
and, as a good Catholic, said a Hail Mary
and threw the ball as far as he could.
Wide receiver Drew Pearson had to
come back for the ball and, in a very
controversial play, managed to catch the
ball on his hip and stumble into the end
zone. Angry Vikings fans threw trash onto
the field, and one threw a whiskey bottle
that knocked a referee out. After that
play, all last-minute desperation passes
became known as Hail Mary passes.
(That was a very thrilling game to
watch!)
The European TARP: And that is
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with permission or from reports available in the public domain in order to provide readers access to a diverse range of views on the economy and asset markets.
Sundaram BNP Paribas Asset Management
Thoughts From The Frontline
Europe’s Hail Mary Pass
what Europe did last month.They threw
a Hail Mary pass in an attempt to avoid
the loss of the eurozone. Jean-Claude
Trichet blinked. Merkel capitulated.Today
we consider what the consequences of
this new European-styled TARP will be
for Europe and the world. We do live in
interesting times.
On Thursday of last week (May 13) Jean-
Claude Trichet, president of the
European Central Bank, said three times
"Non! Non! Non!" when asked in a press
conference if the ECB would consider
buying Greek bonds.
His exclamation was accompanied by a
forceful lecture on the need for
eurozone countries to get their fiscal
houses in order, some of which I quoted
in last week's letter. Trichet was
remonstrating about the need for the
ECB to remain independent, and was
rather definite about it.
Then on Sunday he said, in effect, "Mais
oui! Bring me your Greek bonds and we
will buy them." What happened in just
three days?
Basically, the leaders of Europe marched
to the edge of the abyss, looked over,
decided it was a long way down, and did
an about-face. It was no small move, as
they shoved almost $1 trillion onto the
table in an "all-in" bet.
Bailing out Greece is very unpopular in
Germany. So why did Chancellor Merkel
agree to do so? This is the story that has
come out in the last few days.
• "French President Nicolas Sarkozy
threatened to pull out of the euro
18
unless German Chancellor Angela
Merkel agreed to back the European
Union bailout plan at a summit last
week in Brussels, El Pais newspaper
said.
• "According to El Pais, which didn't say
how it obtained the information,
Spanish Prime Minister Jose Luis
Rodriguez Zapatero said (in a private
meeting of his Socialist politicians)
that Sarkozy demanded 'the
commitment of everyone, that
everyone should help Greece,
everyone according to their means,
or France would reconsider the
situation of the euro.'
• "Sarkozy banged his fist on the table
and threatened to quit the euro,
which forced Merkel to cave in,
Zapatero told the Spanish politicians,
according to the El Pais account.
• " 'If at this point, given how it's falling,
Europe isn't capable of making a
united response, then there is no
point to the euro,' the newspaper
quoted the French President as
saying.
• "It wouldn't be the first time Sarkozy
linked the fate of the euro to a
willingness to support Greece. On
March 7, before meeting Greek
Prime Minister George Papandreou
in Paris, Sarkozy said: 'If we created
the euro, we cannot let a country in
the eurozone fall. Otherwise there
was no point in creating the euro.We
must support Greece because they
are making an effort." (Bloomberg)
The German Perspective: I find this
The Wise Investor June 2010

interesting when I compare it to the
analysis from my friends at Stratfor:
"Germany now senses the opportunity
to reform the eurozone so that similar
crises do not happen again. For starters,
this will likely mean entrenching the
European Central Bank's ability to
intervene in government debt as a long-
term solution to Europe's mounting fiscal
problems. It will also mean establishing
German-designed European institutions
capable of monitoring national budgets
and punishing profligate spenders in the
future. Whether these institutions will
work in the long term - or fail as
attempts to enforce Europe's rules on
deficit levels and government debt have
in the past - remains to be seen. But from
Germany's perspective, they must."
Well, at least France and Germany are
not looking at each other over the
Maginot Line. But it is the age old-
struggle: who will lead?
There are so many implications of this
latest action, it is hard to know where to
begin.
Buying Time: Above all, this is a move
to buy time.There is enough in this fund
to purchase all the expected debt of
Greece, Portugal, and Spain for three
years.The money could actually last a lot
longer, as Spain might not need to tap
the fund for some time.
There were clearly some other quid pro
quos that came out of this weekend.
Both Spain and Portugal announced new
austerity moves, which will help them get
back below the 3% deficit limit mandated
by the Maastricht Treaty within (they
hope) a few years.
It was the usual combination of tax
increases, some budget cuts, and across-
the-board pay cuts for government
workers.
These are very left-wing socialist
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with permission or from reports available in the public domain in order to provide readers access to a diverse range of views on the economy and asset markets.
Sundaram BNP Paribas Asset Management
Thoughts From The Frontline
governments, and their announcements
were not popular with their followers or
the unions. But they are enacting these
cuts before a durable recovery has come
about. They are committing themselves
to a very rough road.
Austerity is coming all over
Europe: But it is not just the PIIGS
countries that are out of compliance in
Europe. France has a budget deficit of
over 8%. There are going to have to be
austerity measures enacted all over
Europe.
Notice that Ireland has the largest deficit,
at 14.7%.This is in spite of (or more aptly
because of) the enactment of severe
austerity measures, far beyond what
Greece, Portugal, and Spain have
contemplated. And what has that gotten
them? An economy that has shrunk by
almost 17% in the last two years, 14%
unemployment, and a country in the grip
The world is better off with a united
Europe. That being said, I have my doubts
that the European Union in its current form
will exist in 5-7 years. I hope I am wrong.
of outright deflation. Property prices
have fallen by 34% and are still falling.
Their banks are in shambles.
And their debt-to-GDP is rising, because
even as they borrow their GDP is falling.
It is hard to cut that ratio when GDP is
falling. If GDP falls 20%, then the debt-to-
GDP ratio rises by 25%. And that means
your interest-rate costs are an ever
bigger chunk of your tax revenues.
These are not growth plans: Let's
be clear. These austerity measures are
not growth plans. They are not designed
to help countries grow their way out of
the problem.There is no reason to think
that if Greece enacts the measures that
have been proposed, that what
happened to Ireland will not happen to
19
them. It almost certainly will. Credible
estimates I have seen suggest that the
Club Med countries will see their GDP
drop at least 4% this year.
It is not just the PIIGS. All of Europe will
be making cuts. And in the short term
that is going to be a drag on growth and
a headwind for the euro.
It's More Than Just Government
Debt: A recent study by Portuguese
economist Ricardo Cabral shows that
the PIIGS have even deeper problems.
With the exception of Italy, they have a
large percentage of their debt owned by
foreigners.(http://voxeu.org/index.php?q
=node/5008)
"Greece, for example, has approximately
79% of government gross debt held by
non-residents and has a net international
investment position of -82.2% of GDP.
Interest payments on public debt
represented nearly 40% of Greece's
already large 2009 budget deficit - and
this is set to increase."
These interest payments leave the
country, making their already bad trade
imbalances even worse. And the taxes
that might be paid on the interest go to
other countries, too.
Cabral looks at the average external
debt during 16 debt crises over the past
30 years. On average, Greece, Spain, and
Portugal are now 30% worse off than
these other countries when they went
into crisis and restructured debt.
Cabral notes (as I have done in past
letters) that there are no good choices.
Continuing to increase debt owed to
foreign creditors just digs a deeper hole
that they must dig out of. His conclusion
is that some sort of debt restructuring
will ultimately be required.
Their unemployment is already high and
is going to get worse. They are not
enacting pro-growth policies. Spain, for
The Wise Investor June 2010
 Thoughts From The Frontline
instance, has a rule that a company must birth rates are low. And you increase pension promises made all over Europe
pay a one-month severance fee for each productivity by investing private capital must be dealt with. The US has the
year an employee has worked. Thus, if into businesses, the way the Germans option of raising taxes, reducing benefits,
you have worked for ten years, you get a have done, which is why their labor unit and means testing, should we so choose
ten-month severance allowance if you costs are so low compared to their to do so to meet the demands of
are laid off. competition. entitlement problems. Europe already
What that does is discourage new Euro-TARP almost mandates that capital has tax rates that are high and growth-
employment, and it means that newer be misallocated into non-productivity- inhibiting. The entitlement problems in
workers are laid off first. That is one of enhancing government programs and many countries are more onerous, and
the reason Spain has such a high debt. their working populations are not
unemployment rate among young Europe is run by Keynesians (as is growing.
people. the US): They see everything as a This is just the beginning of their woes.
The woe for Germany: The PIIGS liquidity problem. And sometimes it is. They have a long way to go and a short
have much higher labor costs per unit of But the PIIGS have a debt problem. And time to get there. Can it be done? Yes, of
production than Germany, as much as you don't cure a debt problem with course. But it is going to require a great
50% higher! Germany runs large trade deal of change. I hope they pull it off, I
surpluses while the Club Med countries Europe is run by Keynesians (as is the really do. I have been to most of Europe
have large trade deficits. US). They see everything as a liquidity and love every bit I have seen.The world
problem. But the PIIGS have a debt is better off with a united Europe.
A country may want to reduce its
problem. And you don't cure a debt
government debt, its businesses and problem with more debt. That being said, I have my doubts that
individuals may want to reduce their the European Union in its current form
debt, and they might like to run a trade will exist in 5-7 years. I hope I am wrong.
deficit. However, the rules of accounting more debt unless you have a clear path
One implication is parity: The euro
are such that you can only do two of the to grow your way out of the debt. But as
is on its way to parity with the dollar. So
three. I have demonstrated, there is no clear
is the pound. That is going to help their
path to growth with the current policies.
The reality is that the coming austerity exports vis-à-vis the US. Watch the yen
measures are going to reduce the ability They will produce deflationary fall rather sharply over the next few
of the PIIGS to buy products from recessions, lower government tax years. Senators Schumer and Graham
outside their countries. Germany's receipts from reduced GDP, and higher gripe about China.
surplus will thereby suffer. unemployment.
What are they going to say about
The Grand Misallocation: What this At the end of the day, Greece will just Europe, Britain, and Japan, all of which are
Euro-TARP does is take money from have more debt. Perhaps Spain and on course to premeditated devaluation?
mostly good credit and give it to weak Portugal can work through their This is going to be just one more
credit. It will crowd out private savings problems, but that will be very difficult challenge for businesses in countries with
that go into private enterprise (which is and will involve considerable economic the world's stronger currencies.
where jobs come from) and put it to pain. Italy can succeed if it decides to.
Another side bet?: The ECB says it
unproductive uses in the government This new program simply buys time to will sterilize those government bonds it
debt of weak countries. try and figure things out. It is Germany buys (meaning, it will make sure it does
There are only two ways to grow an saying, "Ok, I give you 3-4 years. But don't not add to the money supply). My bet is
economy: you can grow your population come back asking for more." that when deflation starts to run
or you can increase productivity.That's it. Bridge to nowhere: All this does is throughout Europe, the ECB will decide
The Club Med countries are not growing bridge to the middle of the decade, that maybe not so much sterilization is
their populations appreciably, as their when the truly massive health and required after all.

John@FrontLineThoughts.com Copyright 2009 John Mauldin.All Rights Reserved John Mauldin, Best-Selling author and recognized financial expert, is also editor of the free Thoughts From the Frontline that goes to over 1 million readers
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Sundaram BNP Paribas Asset Management 20 The Wise Investor June 2010

Life in the time of the Great Recession
This is the twelfth part of how the Great Recession is touching lives in many-a-different way.
Summer Schools Cancelled: Amber
Bramble had to scramble to arrange
summer plans for her 5- and 7-year-old
daughters after their suburban Kansas
City school district gutted its summer
school program this spring. Her
daughters were among about 2,500 of
the Raymore-Peculiar district's 6,000
students who enrolled for free last
summer in a program that combined
traditional subjects with enrichment
classes like music.
But with state funding uncertain, the
district decided to focus this year on
about 800 students who either need to
make up credits to graduate or are
struggling to keep up with classmates.
Across the country, districts are cutting
summer school because it's just too
expensive to keep. The cuts started
when the recession began and have
worsened, affecting more children and
more essential programs that help
struggling students.
Sign of a very sick system: Loans
guaranteed by the Federal Housing
Administration, the U.S.-owned
mortgage insurer, may be involved in
more home-purchase transactions than
borrowing financed by Fannie Mae and
Freddie Mac.
FHA lending last quarter may have
topped the combined volume of
government-supported Fannie Mae and
Freddie Mac in a home-lending market
that’s still a “government-financed
market,” David Stevens, the agency’s
head, said today at a conference in New
York, citing research by consultant
The views presented by the author (s) do not necessarily represent that of Sundaram BNP Paribas Asset Management. The article / posts have been reproduced
with permission or from reports available in the public domain in order to provide readers access to a diverse range of views on the economy and asset markets.
Sundaram BNP Paribas Asset Management
Economic Crisis Effects
Potomac Partners.
“This is a market purely on life support,
sustained by the federal government,” he
said at the Mortgage Bankers Association
conference. “Having FHA do this much
volume is a sign of a very sick system.”
The FHA backs loans with down
payments as low as 3.5 percent.The FHA
and Fannie Mae and Freddie Mac, which
regulators seized in 2008, have been
financing more than 90 percent of U.S.
home lending after a retreat by banks
and the collapse of the market for
mortgage bonds without government-
backed guarantees.
Cosmetic Plastic Surgery Down in
2009: Although it's been a sluggish year
for plastic surgery due to the economy,
the long-term outlook is more
encouraging. According to statistics
released today by the American Society
of Plastic Surgeons (ASPS), 12.5 million
cosmetic plastic surgery procedures
were performed in the United States in
2009, down 1 percent from 2008; up 69
percent since 2000.
Crisis Fuels Rise in Left-Wing
Extremist Violence: Following the
2007 protests at the G-8 meeting in
Heiligendamm, the number of attacks by
leftist extremists has risen dramatically in
Germany. The government is increasing
its focus on the autonomists, but
authorities know little about a new
generation that is torching cars, and
worse, in its fight.
The opposition in this struggle --
Germany's federal government -- has
21
observed the same trend and is worried
about this renaissance of left-wing
violence in the country. German Interior
Ministry crime statistics for 2009 show a
53 percent jump in the number of left-
wing attacks, the largest increase seen in
many years.
Police recorded a total of 1,822 left-wing
acts of violence in all of Germany,
considerably more than those
committed by right-wing extremists. The
number of potential militant activists
rose from 5,500 to 6,600 from 2005 to
2009.
2010 Class enters as 2009 Class
awaits jobs: Ten months after
graduating from Ohio State University
with a civil-engineering degree and three
internships, Matt Grant finally has a job -
- as a banquet waiter at a Clarion Inn
near Akron, Ohio.
“It’s discouraging right now,” said the 24-
year-old, who sent out more than 100
applications for engineering positions.“It’s
getting closer to the Class of 2010, their
graduation date. I’m starting to worry
more.”
Schools from Grant’s alma mater to
Harvard University will soon begin
sending a wave of more than 1.6 million
men and women with bachelor’s degrees
into a labour market with a 9.9 percent
jobless rate, according to the Education
and Labour departments.
Depressed earnings in prospect
for years: The scramble for jobs may
depress earnings of new and recent
college graduates for years to come and
The Wise Investor June 2010

handicap their future career
opportunities, according to Lisa Kahn, an
assistant professor of economics at Yale
University’s School of Management.
Students who graduated in the early
1980s -- when two recessions drove
unemployment to a peak of 10.8 percent
-- suffered wage losses of more than
$100,000 in the next 15 years compared
with those who came into the job
market during the decade’s boom years.
A new listserv of “Hot Opportunities”
Harvard’s career-services office began
compiling in March garnered 1,000
student subscribers in its first two days.
“This is the first year we have seen such
a demand for our services this close to
graduation,” said Robin Mount, director
of the office in Cambridge,
Massachusetts. Thirty-three percent of
Harvard’s graduating seniors had
accepted a job as of commencement last
year, down from 51 percent the year
before.
Building Is Booming in a City of
Empty Houses: In a plastic tent under
a glorious desert sky, Richard Lee
preached the gospel of the second
chance.
The chance to make money on the next
housing boom “is like it’s never been,” Mr.
Lee, a real estate promoter, assured a
crowd of agents, investors and bankers.
“We’re going to come back like you’ve
never seen us before.”
Home prices in Las Vegas are down by
60 percent from 2006 in one of the
steepest descents in modern times.
There are 9,517 spanking new houses
sitting empty. An additional 5,600 homes
were repossessed by lenders in the first
three months of this year and could soon
be for sale. Yet builders here are putting
up 1,100 homes
They are frantically buying lots for even
more.
The views presented by the author (s) do not necessarily represent that of Sundaram BNP Paribas Asset Management. The article / posts have been reproduced
with permission or from reports available in the public domain in order to provide readers access to a diverse range of views on the economy and asset markets.
Sundaram BNP Paribas Asset Management
Economic Crisis Effects
Supposedly everyone wants a new
home. Well, today's new home is
tomorrow's resale. In a sea of empty
houses, one year from now, who would
be able to sell them and at what price if
they needed to move?
Home Seizures Reach Record: U.S.
home foreclosures climbed to a record
in April, a sign that government
mortgage relief efforts have yet to turn
the tide of property seizures, according
to a report by RealtyTrac Inc.
Bank repossessions rose to 92,432 in
April, up 45 percent from a year earlier,
Irvine, California-based RealtyTrac said
today in a statement. Foreclosure filings,
including default and auction notices, fell
2 percent to 333,837. One out of every
387 households received a filing.
About 5 million delinquent loans will
probably end up in the foreclosure
process in addition to the 1.2 million
homes already taken back by lenders.
Defaults may not peak until 2011
depending on how lenders process them
Jobs gone for good: Fewer
construction workers will be needed.
Don't expect as many interior designers
or advertising copywriters, either.
Retailers will get by with leaner staffs.The
economy is strengthening. But millions of
jobs lost in the recession could be gone
for good.
And unlike in past recessions, jobs in the
beleaguered manufacturing sector aren't
the only ones likely lost forever.
What sets the Great Recession apart is
the variety of jobs that may not return.
Already, the percentage of the labour
force unemployed for six months or
longer is 4.3 percent. That's the highest
rate on records dating to 1948.
Diminished home equity and investment
accounts have made shoppers more
cautious, too. And their frugality could
endure well into the recovery.That's why
22
fewer retail workers, among others, will
likely be needed.
At 40 million, food-stamp tally at
record: Nearly 40 million Americans
received food stamps -- the latest in an
ever-higher string of record enrollment
that dates from December 2008 and the
U.S. recession, according to a
government update.
The Agriculture Department said 39.68
million people, or 1 in 8 Americans, were
enrolled for food stamps during
February, an increase of 260,000 from
January.
Enrollment has set a record each month
since reaching 31.78 million in
December 2008. USDA estimates
enrollment will average 40.5 million
people this fiscal year, which ends Sept
30, at a cost of up to $59 billion. For fiscal
2011, average enrollment is forecast for
43.3 million people.
"This is the highest share of the U.S.
population on SNAP/food stamps," said
the anti-hunger group Food Research
and Action Center, using the new name
for food stamps, Supplemental Nutrition
Assistance Program (SNAP). "Research
suggests that one in three eligible people
are not receiving ... benefits."
Degrees of Debt: As private college
costs climb, families are borrowing a
record amount of federal money to pay
for education. Al Eng, like a growing
number of parents, soon may take on
debt to cover the soaring costs of his
child’s private college education.
“I’m going to do whatever it takes to pay
for school,” Eng says.
After losses in the stock and housing
markets, families took out a record
amount of U.S. government-backed loans
in 2009, according to Palo Alto,
California-based research group Student
Lending Analytics LLC.
“Many of the other options have dried
The Wise Investor June 2010
 Economic Crisis Effects
up,” says Tim Ranzetta, president of SLA. 1980, there were 28 million, or 12%. battered by the economic downturn.
“The federal loan dollars are still According to a recent Pew Research Donations have dipped, investment
available.That’s why you’re seeing such a Center report, the growth is due to returns have plunged and bank credit is
dramatic increase.” demographics, cultural shifts and high still hard to come by.
One way or another, families will pile up unemployment. Pentagon asks for hold on pay rise,
more debt as the cost of college climbs. Carbon emissions drop most since sees fiscal calamity: The Pentagon,
In the 2009-10 school year, tuition and 1949: President Obama can now count not usually known for its frugality, is
fees rose by an average of 4.4 percent to among the political pearls of his first year pleading with Congress to stop spending
$26,273 at private four- year colleges-- in office a record drop in U.S. carbon so much money on the troops.
the highest increase in 21 years when emissions.
In the midst of two long-running wars in
adjusted for inflation, according to the The sand in the oyster, however, is that Iraq and Afghanistan, defense officials are
New York-based College Board. this was mainly the result of the increasingly worried that the
“I expect debt at graduation to continue recession. government's generosity is unsustainable
to grow by leaps and bounds,” says Mark The federal Energy Information and that it will leave them with less
Kantrowitz, publisher of FinAid.org, a Administration reported last week that money to buy weapons and take care of
Cranberry Township, Pennsylvania-based greenhouse gas emissions fell 7% last equipment.
Web site about educational lending. year—the largest-ever percentage and Now, Pentagon officials see fiscal calamity.
A first in 100 years, household size absolute decline since the EIA started
rises: The number of people living Overall, personnel expenses constitute
tracking the relevant data in 1949.
under one roof is growing for the first about one-quarter of defense spending.
Holy bubble! Churches struck
time in more than a century, a fallout of Since 2002, wages have risen 42 percent,
down by foreclosures: Thanks to its
the recession that could reduce demand 10,000-member congregation and compared with about 32 percent for the
for housing and slow the recovery. connections with business and civic private sector. Housing and subsistence
The Census Bureau had projected the leaders, Ebenezer AME Church expects allowances, which troops receive tax-free,
average household size would continue to avoid the fate of a growing number of have gone up even more....
to fall to 2.53 this year. Instead, the U.S. churches, which are defaulting on Income-tax collections slump in
average is likely to hit 2.63, a small but loans, facing foreclosure and even usually most lucrative period: A
significant increase because it is a declaring bankruptcy at an decline in personal income tax revenues
turnabout. unprecedented pace. collected by the federal government
"A funny thing happened on the way to "It's happening to virtually every church," through the end of April 2010 suggests
the future" says Arthur C. Nelson, said the Rev. Grainger Browning, senior that state governments may suffer
director of the Metropolitan Research pastor of Ebenezer. "At a recent meeting significant declines in such tax collections
Center at the University of Utah. with the 100 top pastors in the country, compared to 2009, a period which itself
"Household size increased." it was amazing how all of us were facing was down dramatically from the year
The USA could end this decade with up some sort of challenge with the banks." before, according to Rockefeller Institute
to 4 million excess housing units because Super-cheap, few-questions-asked loans fiscal experts.
of the reversal in household size, he says. were a temptation even churches could The weeks just after the April 15 filing
A key factor: "The Great Recession not resist, but now they are paying for deadline for income-tax returns is the
has forced doubling up among both their sins as the debt crisis enters the most important tax-collection period of
family and non-family members," Nelson house of God. the year for most states, and particularly
says. Long considered among the safest of those that rely heavily on income taxes.
Multi-generational households are borrowers, churches gambled on real Through April 30, the federal
on the rise: 49 million, or 16% of the estate at a time when credit copiously government’s non-withheld income taxes
population, live in a home that had at flowed and lenders were startlingly lax. are down 17.6 percent from a year
least two adult generations in 2008. In But places of worship have since been earlier.
Sources: Huffington Post, Bloomberg, Risk.Net,American Society of Plastic Surgeons, Der Spiegel, NewYork Times, Mish Global Economic Analysis, Reuters, Bloomberg Markets,Associated Press, Financial Armageddon, USA Today, Rockefeller Institute
The views presented by the author (s) do not necessarily represent that of Sundaram BNP Paribas Asset Management. The article / posts have been reproduced
with permission or from reports available in the public domain in order to provide readers access to a diverse range of views on the economy and asset markets.

Sundaram BNP Paribas Asset Management 23 The Wise Investor June 2010

Michael E. Lewitt
Author
The Death of Capital
Two years ago, John Mauldin was kind enough to publish my initial
proposals for reforming the financial system. Entitled "How to Fix It,"
the April 2008 issue of The HCM Market Letter raised a lot of
eyebrows and upset many established interests on Wall Street with
its outspoken call for financial reform. Among the changes I called for
were the following:
• Compensation reform to better align the interests of Wall Street
executives with those of society at large.
• Requiring private equity firms and hedge funds to be registered
with regulators.
• Taxing private equity partners' carried interests at ordinary tax
rates instead of capital gains tax rates, and prohibiting private
equity firms from going public.
• Sharply reducing the leverage of financial institutions (including
hedge funds).
• Banning off-balance sheet vehicles such as Structured Investment
Vehicles.
• Reining in quantitative trading strategies.
• Reinstituting the downtick rule with respect to short selling
stocks.
At the time these proposals were considered controversial; in
The views presented by the author (s) do not necessarily represent that of Sundaram BNP Paribas Asset Management. The article / posts have been reproduced
with permission or from reports available in the public domain in order to provide readers access to a diverse range of views on the economy and asset markets.
Sundaram BNP Paribas Asset Management
Perspective Global
The Death of Capital
retrospect it is clear that they were not aggressive enough.While
many of these suggestions have been adopted or are in the
process of being adopted, much more needs to be done to
stabilize the financial system.
Since the publication of that essay, I have written a new book that is
being published by John Wiley & Sons this month. Entitled The
Death of Capital: How Creative Policy Can Restore Stability, the
book explores the origins of the 2008 financial crisis and
expands the call for reform. In addition to the recommendations
listed above, the book calls for additional regulatory changes
including:
• Derivatives reform, with a preference for an outright ban on
naked credit default swaps or, recognizing that such a ban is
politically unrealistic, calling for such contracts to be listed on
exchanges and requiring substantial capital commitments by
their participants.
• A Tax on Speculation that would apply to the types of
speculative activities that have so badly damaged the American
economy, including naked credit default swaps, leveraged buyout,
quantitative stock trading strategies and other stock and bond
transactions.
The book also takes an unvarnished look at the private equity
industry, which has been a prime abuser of capital as it has diverted
an inordinate amount of capital into unproductive uses while
producing (at best) mediocre returns and charging unjustifiably
exorbitant fees.
The recent problems experienced by Goldman Sachs highlight just
how far the financial system has lapsed from the days of gentlemanly
capitalism.
Change in itself is neither good nor bad – it is an inevitable feature
of human life and it must be managed. Change on Wall Street has by
and large been managed poorly by being left to the most self-
interested forces.
My April 2008 essay began with a quote from Adam Smith that
should be etched into the brains of every Wall Street CEO and
included in the oath of office of every new member of Congress.
24 The Wise Investor June 2010

The quote is from Adam Smith, who is best known as the author of
the bible of capitalism, The Wealth of Nations, but who wrote an
equally important book two decades earlier entitled The Theory of
Moral Sentiments. Smith wrote the following:
"This disposition to admire, and almost to worship, the rich and the
powerful, and to despise, or, at least, to neglect, persons of poor and
mean condition, though necessary both to establish and to maintain
the distinction of ranks and the order of society, is, at the same time,
the great and most universal cause of the corruption of our moral
sentiments."
What Adam Smith pointed out more than two hundred years ago
is equally true today – our society, fed by the media, worships wealth
at the expense of other values that are far more important to a
cohesive and healthy society.
The entire mission of The Wealth of Nations was to try to recognize
man for what he is – a social animal who is reliant on the good
opinions of his neighbors – and to develop the optimal economic
system to harness that human essence for the good of all mankind.
Smith believed that system was a free market, and history has by and
large proven him correct. But the United States has strayed from a
free market model to a system that privatizes gains and socializes
losses.
During the last two decades, the American economy has suffered
from a series of legal, fiscal and monetary policies that have favored
speculation over production.The result has been the financialization
of the economy, which has been characterized in economic terms by
an unhealthy growth in debt at all levels of the economy and in
cultural terms by the monetization of all values.
Entities such as Fannie Mae and Freddie Mac were perfect examples
of how the free market had been corrupted before the 2008
financial crisis. The crisis itself demonstrated, however, that the logic
of the system required all large institutions to suffer from a similar
flaw. Yet these flaws were not inevitable, even at the height of the
crisis; they were deliberate political choices.
While stakeholders of some institutions, such as Lehman Brothers,
were wiped out, those of other firms were not and some were even
made whole. The most egregious example of this was the handling
of American International Group (AIG), the insurance giant that
morphed itself into a giant hedge fund while enriching the officials
responsible for some of the most ill-informed judgments in financial
history.
There was no reason for the government to handle the AIG failure
The views presented by the author (s) do not necessarily represent that of Sundaram BNP Paribas Asset Management. The article / posts have been reproduced
with permission or from reports available in the public domain in order to provide readers access to a diverse range of views on the economy and asset markets.
Sundaram BNP Paribas Asset Management
Perspective Global
in a manner that made whole foreign counterparties and Goldman
Sachs; alternatives including offering a blanket credit guarantee to the
insurance company that would have calmed markets and obviated
the necessity of the company paying out one hundred cents on the
dollar for its reckless insurance bets on synthetic mortgage
obligations.
While the result – avoidance of the extinction-level-event that an
AIG failure would have been for the financial system – was the
correct one, the means by which it was achieved furthered the
agenda of socializing losses and privatizing gains and bred deep
distrust in the government and the system.
Much of the crisis could have been avoided had policymakers and
investors operated under realistic assumptions about how markets
and economies work. Several years ago, former Federal Reserve
Chairman Alan Greenspan described the failure of interest rates to
react in the manner he expected as a "conundrum."
We now know that Mr. Greenspan was operating under a false set
of assumptions about human nature, as well as a misguided
understanding about how market participants behave.
As noted in my book, had Mr. Greenspan been an acolyte of Hyman
Minsky instead of Ayn Rand, he would have been less susceptible to
such a fatal conceit. But beyond that, the real conundrum in modern
markets is the continued reliance of investors and policymakers on
two false mantras.
The first is that markets are efficient; and the second is that investors
are rational.
Both assertions are so decidedly specious that one has to question
both the sanity or the intelligence of those who cling to them. Yet
these two bugaboos are supported by reams of academic research
and much of the investment establishment! It is my contention that
these delusions are why capital continues to be terminally
mismanaged by the professional investment class.
With few exceptions, professional investors in all asset classes have
produced at best mediocre returns for their investors. There are
exceptions, of course, but they are essentially of statistical
insignificance.
Private equity is one asset class that I pay particular attention to in
my book, but the same criticism can be applied to virtually all asset
managers.The reality is that most managers do a very poor job for
their investors.This is not only because they cling to the false Gods
of market efficiency and investor rationality; it is because they
misunderstand the true nature of capital.
25 The Wise Investor June 2010
 Perspective Global
Capital is not a thing or a category; capital is a living, breathing
phenomenon. Capital is an expression of the human relationships
that generate economic value. Just as these relationships are
dynamic, so is capital. The most important attribute of capital as it
functions in the real world is that it is a relationship; as such it has
the capacity to change form.
This is often described as its liquidity function.
Capital is also a human construct; it is not something found in nature
or subject to scientific laws, despite the misguided attempts of
today's rocket scientists to claim that it possesses such qualities.
Most importantly, capital is unstable. If capital were better
understood for what it is, it could be better managed and regulated.
Because capital is not properly understood, however, it is abused.
And the consequences of that abuse are not theoretical – they are
human. Our ill-begotten economic policies have exacted an
incalculable toll on the citizens of this country and around the world.
Millions of people have lost their jobs and their homes.
The official jobless rate is still around 10%, and the real jobless rate
is closer to 20% when discouraged and underutilized workers are
included. Economic hardship and the stresses of unemployment
have led to the break-up of families and higher rates of addiction and
suicide.
At the end of last year, one in eight Americans was receiving part of
his or her nutrition from food stamps, including one in four children.
Communities around the country are being destroyed by house
foreclosures, and the American heartland has been decimated by
the failure of the American automobile industry.
And our country is facing even greater challenges ahead in terms of
caring for its aging population, dealing with unsustainable fiscal
deficits, reducing the growing cost of healthcare, not to mention the
incalculable costs of dealing with the inevitable but unknowable
Black Swans that are bound to occur, such as Gulf oil spills, terrorist
attacks, or nuclear proliferation.
Only a sound financial system will place us in a position to deal with
these challenges. The Death of Capital is intended to contribute to
the discussion of how we achieve such a system.
John Mauldin’s Note: This week's Outside the Box is an essay by Michael Lewitt. He has
written a brilliant book, the Death of Capital, which should be on your short reading list. I
asked him to give us a note for Outside the Box and he graciously complied. It is a thoughtful
and fun read with wonderful lines you will want to read again peppered all the way through
this all-too-short piece.The book is a ringing indictment of both the regulatory and money
management worlds. Get it at Amazon.com. Source: This article is reproduced (with
permission) courtesy John Mauldin and InvetsorsInisght.(JohnMauldin@InvestorsInsight.com).
Copyright 2009 John Mauldin. All Rights Reserved
The views presented by the author (s) do not necessarily represent that of
Sundaram BNP Paribas Asset Management. The article / posts have been
reproduced with permission or from reports available in the public domain in order
to provide readers access to a diverse range of views on the economy and asset
markets.
The Rosenberg Take
Scary Math
• 1 in every 10 American homeowners missed a mortgage
payment in Q1 (a record)
• 1 in 6 Americans are either unemployed or underemployed
• Over 4 in 10 unemployed Americans have been out of work
for at least six months.
• 1 in 4 Americans with a mortgage have negative equity in their
homes.
• 1 in 10 Americans believe their income will rise in the next six
months.
• 1 in 5 Americans see business conditions improving in the next
six months.
• 1 in 50 Americans plan to buy a home in the next six months.
• 1 in 8 Americans believe that current government policy is
actually helping the economy.
• 1 in 10 American small businesses have a job opening.
• 1 in 10 American’s credit card usage is being written off (a
record).
• There are 5 unemployed workers competing for every job
opening (hence downward pressure on wage growth).
Deflation The Primary Trend
• Credit is contracting.
• Wage rates are stagnating.
• Money supply growth is vanishing
• The U.S. dollar is strong.
• Commodities have peaked.
• U.S. home prices are rolling over … again.
• Lumber prices tumbling (down nearly 17% from April 2010
highs)
• Wal-Mart is cutting prices on 10,000 items.
• Home Depot just cut prices on flowers, fertilizers, lawn
equipment and outdoor furniture.
• Taco Bell is offering two dollar combo meals.
• The April U.S. retail sales report hinted at deflation in groceries,
electronics, apparel and sporting goods.
Given all these, the U.S. bond market looks poised to outperform.
Nuff said. In the U.S. equity markets, April 26 was very likely the
peak of the bear market rally.
Source: These are edited extracts from the daily report by David Rosenberg,
Chief Economist & Strategist, Gluskin & Sheff + Associates Inc, a wealth
management firm based in Canada. This report must be part of your daily
read and you can subscribe to the report at http://bit.ly/bUtnU6.
The views presented by the author (s) do not necessarily represent that of
Sundaram BNP Paribas Asset Management. The article / posts have been
reproduced with permission or from reports available in the public domain in
order to provide readers access to a diverse range of views on the economy
and asset markets.

Sundaram BNP Paribas Asset Management 26 The Wise Investor June 2010
 Blog Picks

Nations Over Banks

(Who Serve Only Themselves)
Are you listening Mr. Obama? “The lack of rules and limits can make Unlawful? Yep. We have at least two known examples among the
behavior in financial markets driven purely by the profit motive banksters (the GIC conspiracy and Jefferson County), including this
destructive and lead to an existential threat to financial stability in fabulous quote I cited yesterday:
Europe and even the world,” Angela Merkel told lawmakers in Berlin “The whole investment process was rigged across the board,”
“The market alone won’t correct these mistakes.” This isn't capitalism. It's thuggery and when institutionalized and
Yes indeed. But the profit motive isn't evil or bad. It's only bad and formalized as a policy of "we have a legal shield behind which we will
troublesome when it comes with lawlessness and conflicts of do this as we won't be prosecuted for breaking the law in the
interest. process of ripping everyone off" it can also be thought of as fascism.

For example, Goldman Sachs: As the housing crisis mounted in Remember that John Dillinger "made money" too. But he was, at
early 2007, Goldman Sachs was busy selling risky, mortgage-related least, honest about the fact that he stole it.
securities issued by its long-time client, Washington Mutual, a major The banks, on the other hand, are dishonest about how they steal it:
bank based in Seattle. they rig bids, they intentionally obscure bids and offers so as to be

Although Goldman had decided months earlier that the mortgage able to screw people on the spread, they trade against their clients

market was headed for a fall, it continued to sell the WaMu securities using the information they gain from them, thus giving them an unfair

to investors. While Goldman put its imprimatur on that offering, advantage, they browbeat governments into unsound reductions in
capital requirements (example: Hank Paulson's petition to remove
traders in the same Goldman unit were not so sanguine about
the 14:1 leverage limit less than two years before he became
WaMu’s prospects: they were betting that the value of WaMu’s stock
Treasury Secretary) and then when their bets blow up they extort
and other securities would decline.
taxpayer bailouts and changes in the law so they don't have to
Got that? Oh, and it wasn't just WaMu; the article documents trades
recognize their own bankruptcy.
against Bear Stearns, the State of New Jersey, AIG and Thornburg,
Then there's the old-fashioned "advice" that Goldman hands out to
with the worst being AIG that they profited from twice - first by
"clients" and which Bloomberg compiled a list of since the first of the
their demise, then again when they managed to get paid at "par" for
year: Seven of the investment bank’s nine “recommended top trades
bets with AIG that were in fact worth zero as the company was
for 2010” have been money losers for investors who adopted the
bankrupt! Yet Lloyd has said:
New York-based firm’s advice, according to data compiled by
“Questions have been raised that go to the heart of this institution’s Bloomberg from a Goldman Sachs research note. Has Goldman
most fundamental value: how we treat our clients.” — Lloyd C. been taking the other side of those recommendations?
Blankfein, Goldman Sachs’s C.E.O., at the firm’s annual meeting in
You can best look at Germany's action as The Banks .vs. The
May.
Sovereigns. In Germany, the government is reasserting it's primacy
Oh there's no question at all Lloyd. Goldman and the rest of the over those entities it licenses to do business, as it should. But in Italy,
large banks have made clear that their interest is singular: Whatever the response was to suspend mark-to-market on government
makes money the banks will do, irrespective of how "clients" are securities held in "available for sale" portfolios, demonstrating that in
treated or, in many cases, whether what is being done is legal. that country, primacy goes to the banksters, and that they in fact run
The views presented by the author (s) do not necessarily represent that of Sundaram BNP Paribas Asset Management. The article / posts have been reproduced
with permission or from reports available in the public domain in order to provide readers access to a diverse range of views on the economy and asset markets.

Sundaram BNP Paribas Asset Management 27 The Wise Investor June 2010

the government, not the other way around.
Then we have Spain, which had an actual bond auction failure. Yes,
it was a real honest-to-God failure, with the nation trying to sell ⇔8
billion but only managing to place ⇔6.44 billion. That's a fail. And
let's remember that Spain is one of the nations that has been tapped
to "bail out" Greece, and that they have to issue to do it. How's it
working out to choose the side of the banksters, Spain?
In this nation, we saw a plethora of "let the banksters steal from all
of you" candidates get blown to bits. There wasn't an establishment
candidate who thought that letting banks rob the people was a good
idea who won.
The people of this nation have had it with this crap, yet Washington,
thus far, doesn't appear to be listening. November is going to be a
bloody month for incumbents if they don't cut it out here and now,
stopping the looting and starting with the prosecuting!
Oh, and the "reaction" in the capital markets to Germany's
announcement? How much more clear can it be?
The Stock Market has been advancing not on improving economic
prospects but because the banks were given a license to rob the
people in 2009, and they have done so. But now the people, along
with a few wise governments (cough-Germany-cough) are saying
"enough!" to robbery not of, but by the banks.
No nation can survive when the rule of law becomes subordinate
to a handful of rich and powerful people who simply steal anything
they want with impunity. The economy of such a nation ultimately
is bled dry by that corruption and theft, with the people over time
refusing to innovate and provide their effort when it will simply be
robbed away from them.
There's a lesson in here for Washington and President Obama, but
the time available for both to act is limited; should the "let 'em rob
'em all" mentality persist the market will solve this problem in a
most-unpleasant fashion.
It is time to choose Washington. Choose.
Blog: The Market Ticker; Blogger: Karl Denninger; Link to this post:
http://bit.ly/bnQa4K
The views presented by the author (s) do not necessarily represent that of Sundaram BNP Paribas Asset Management. The article / posts have been reproduced
with permission or from reports available in the public domain in order to provide readers access to a diverse range of views on the economy and asset markets.
Sundaram BNP Paribas Asset Management
Blog Picks
Alice's Restaurant Theory of Central Banking Rapidly
Falling Apart
Central banks are about to learn the global economy is not Alice's
Restaurant (http://bit.ly/mkrJw).
In case you don't know the tune, here is the crucial line: "You can get
anything you want at Alice's Restaurant"
Anything you want, seems to be the attitude of central banks. The
problem is, it is virtually impossible for every central bank to get
what it wants at the same time, when they all want the same thing,
cheaper currency relative to each other to stimulate jobs and
exports.
Here are a few examples to help explain what I mean.
China’s Trade Surplus Shrinks 87%: China’s trade surplus
shrank 87 percent in April from a year earlier as imports grew
faster than exports because of stimulus-driven domestic
demand.
A 79 percent decline in the trade surplus in the first four
months of 2010 from a year earlier may ease pressure for
gains in the yuan and support Premier Wen Jiabao’s argument
that the currency isn’t undervalued. The sovereign-debt crisis
in Europe that prompted a loan package of almost $1 trillion
to help nations under attack from speculators may also
encourage Chinese officials to delay ending the yuan’s peg to
the dollar.
Yuan gains would be “a disaster,” Song Zimin, an executive in
the import and export department of apparel maker Shanghai
Dragon Corp., said in an interview at China’s biggest trade fair
in Guangzhou on May 3. “If the yuan rises 3 percent, where’s
our profit? Many, many factories will close.”
India and Brazil have backed calls from the U.S. and Europe for
a stronger yuan.
India, Brazil, the US, Europe, and Japan all want the Yuan to rise.
That is not what China wants at all.
Europe is China's biggest export partner. Since China pegs to
the US dollar, China's exports to Europe just got a lot more
expensive following this mini-crash of the Euro.
Adding fat to the trade war fire, the US is threatening to label
China a currency manipulator on the misguided notion that
US exports will rise if the yuan rises.
28 The Wise Investor June 2010

Japan Wants the Yen to Sink
The Bank of England is counting on a weak pound to boost
exports.The sovereign debt crisis in Europe has darkened the
outlook for U.K. exporters at a time when domestic demand
may come under pressure from measures to tackle the public
finances.
Make no mistake.. Trichet wants a cheaper Euro to help
European exports, even as the UK is at the mercy of demand
in Eurozone countries.
To top it off, the US does not want a cheaper Euro or a
stronger dollar out of fear of losing Boeing contracts to Airbus,
and grain exports to Brazil and Australia.
In 2001-2002 Greenspan thought slashing interest rates and printing
money was a free lunch. Instead, it spawned the biggest real
estate/debt bubble the world has ever seen. For a while,
Greenspan's efforts created jobs.Then came the global bust.
The debt still remains, the jobs don’t.
Now the EU has adopted the same nonsensical plan.Yet all the EU
has accomplished is to increase the amount of debt that cannot be
paid back. Trichet needs a clue, and here it is: You cannot fight
deflation by taking on more debt. Here's a second clue: central banks
can print, but they cannot dictate where the money goes.
The housing bubble collapsed years ago, but the global central
banker’s fight against deflation still remains, with one big beneficiary:
Gold.
Amazingly, until this crisis started last week, there was near
unanimous opinion that the US dollar needed to sink and for the
Yen,Yuan, Pound, and Euro to strengthen.
"Near Unanimous" is the opportune phrase because Japan wanted
the Yuan to rise but not the Yen, and China was just happy with the
status quo.
If that is not one totally *upped daisy chain of impossible Central
Banker wants and needs, what is?
Hello Ben Bernanke, Jean-Claude Trichet, and Mervyn King, this is
Alice, and you are in Wonderland, not my restaurant. At Alice's
there is no free lunch.We only take gold.
Blog: Mish Global Economic Analysis; Blogger: Mike Shedlock; Link
to this post: http://bit.ly/b4erGO
The views presented by the author (s) do not necessarily represent that of Sundaram BNP Paribas Asset Management. The article / posts have been reproduced
with permission or from reports available in the public domain in order to provide readers access to a diverse range of views on the economy and asset markets.
Sundaram BNP Paribas Asset Management
Blog Picks
The Wrong Kind of Thinking
One misconception that helped bring about the worst financial
crisis this century (and which persists to this day) stems from a
failure to acknowledge the natural limits that apply in every
aspect of our lives.
It's one thing, for example, to believe that home prices can keep
going up over the long run; it's an altogether different story to
assume, as many did during the bubble, that prices could
outpace rents and incomes until the end of time. People now
know this is ridiculous.
The same holds true when it comes to the issue of debt
burdens. Back when credit was easy to come by, many believed
that individuals, households, businesses, municipalities, and
countries could take on virtually unlimited amounts of debt as
long as they could handle the short-term carrying costs.
As we've learned from the latest European debt crisis, this
perspective is dangerously short-sighted.
The notion that certain industries, including finance, real estate,
and retailing, could garner an ever-growing share of the
economy is another example of simplistic and short-sighted
thinking. In the end, it is clear that this kind of outcome is the
result of bad policies and unsustainable malinvestment, and is
not the natural course of events.
A similar delusion about the mess Washington has created is
also coursing through mainstream discussions about what
needs to be done. Many "experts" argue that a debt burden like
ours can be wiped out by sustained growth, even though the
assumptions involved are unrealistic and largely unprecedented
(not to mention the fact that there are other serious financial
challenges ahead).
In contrast, others say that the real "solution" is for our
government to extract more ransom resources from the
existing tax base. But again, such thinking seems seriously
misguided.
Blog: Financial Armageddon; Blogger: Michael Panzer; Link to this
post: http://bit.ly/ac0QeM
29 The Wise Investor June 2010

Carmen M. Reinhart
Kenneth S. Rogoff
First posted 17 November 2008, this
column's analysis is more relevant than
ever. It asks why investors rush to
government securities when the US was
at the epicentre of the financial crisis?
This column attributes the paradox to
key emerging market economies’
exchange practices, which require
reserves most often invested in US
government securities. America’s
exorbitant privilege comes with a cost
and a responsibility that US policy
makers should bear in mind as they
address financial reform.
A familiar script has played as the global
financial crisis has spread, picking up
speed and intensity.The drama has three
acts that have been written out in the
historical record for as long as there have
been open financial markets.
• Act One: Unbounded Enthusiasm.
The views presented by the author (s) do not necessarily represent that of Sundaram BNP Paribas Asset Management. The article / posts have been reproduced
with permission or from reports available in the public domain in order to provide readers access to a diverse range of views on the economy and asset markets.
Sundaram BNP Paribas Asset Management
Is the US too big to fail?
Some markets find favour with
global investors.1 Credit becomes
readily available, asset prices
percolate, and many categories of
spending are buoyed.
• Act Two: Day of Reckoning.
Recognition that some of that
enthusiasm was overdone spreads
among investors. New credit flows
cease, collateral is sought, asset
prices crash, and prominent private-
sector icons crumble.
• Act Three: Restoration. Here
governments pick up the pieces,
typically passing on the cost to
future generations by issuing a vast
volume of debt. The cost can be
punishing because investors pull
away from the governments of
emerging market economies as
forcefully as they do from private
creditors.
American exceptionalism: But there has
been one prominent exception to this
classic tale. With fitting irony, the US,
which is the epicentre of the crisis, has
avoided Act Three. The US enjoyed a
capital inflow bonanza that funded
yawning current account deficits, and
asset prices spiralled upward only to
crash. While the crash has constricted
credit and is redrawing the financial
landscape, the US has not been punished
by investors in typical Act-Three fashion.
If this had happened to any other
30
Insight
government in the world whose national
financial institutions were in as deep
disarray as those of the US, investors
would have run for the hills – cutting off
the offending nation from global capital
markets. But for the US, just the opposite
has happened.
Rather than facing prohibitive costs of
raising funds, US Treasury Bills have seen
yields fall in absolute terms and markedly
in relative terms to the yields on private
instruments.This has been called a “flight
to safety”.3 But why do global investors
rush into a burning building at the first
sign of smoke?
The answer lies in part with the
exchange market practices of key
emerging market economies.
Since the last global market panic, the
Asian Financial Crisis of 1998, many
governments have stockpiled dollars in
their attempts to prevent their exchange
rates from appreciating.
At the same time, the long upsurge in
commodity prices has swollen the
coffers of many resource-rich nations.
International reserves of emerging
market economies are expected to have
increased $3.25 trillion in the last three
years.The bulk is in dollars.
The dollar portion of these reserves is
most often invested in US government
securities, which offers excellent market
liquidity, and US government debt is also
considered as safe as anything (following
The Wise Investor June 2010

a precedent laid down by the first
Secretary of the Treasury, Alexander
Hamilton).
All this explains the dollar’s popularity
with foreign investors who might
otherwise be expected to shun the US.
Foreign official entities now own almost
one-quarter of outstanding government
securities. These holdings of securities
constitute about 10% of non-US nominal
GDP.
Our currency, your problem: Herein lies
the special status of US government
securities. For a few of the world’s key
decision makers, it is not in their
economic interest to stop, or even slow,
the purchase of Treasury Bills. As Keynes
once said: “If you owe your bank a
hundred pounds, you have a problem.
But if you owe a million, the bank has a
problem.” Potential capital losses on
existing stocks keep foreign investors
locked into US government securities.
The last time foreign official purchases
bulked so large in the US government’s
financing was from 1968 to 1973, when
the Bretton Woods system of managed
exchange rates broke down. At that time,
keeping the system going required
increasing support from abroad,
primarily from Europe.
This time around, the source of that
support has shifted to Asian-Pacific
economies and Middle East exporters. In
both cases, the message from the US
seems best summarised in the words of
then-Treasury-Secretary John Connolly,
who famously advised, “the dollar is our
currency, but your problem.”
Hyperlink to this article: http://bit.ly/aVTNz9 Source: www.voxeu.com (VoxEU.org is a policy portal set up by the Centre for Economic Policy Research (www.CEPR.org) in
conjunction with a consortium of national sites)
The views presented by the author (s) do not necessarily represent that of Sundaram BNP Paribas Asset Management. The article / posts have been reproduced
with permission or from reports available in the public domain in order to provide readers access to a diverse range of views on the economy and asset markets.
Sundaram BNP Paribas Asset Management
As the tone of those words suggests,
another lesson from the earlier
experience is that foreign resentment
with a US-dominated arrangement
grows over time. That America could be
a source of financial instability and a
haven of sovereign financial security
seems to some, to quote Valerie Giscard
d'Estaing, to be an “exorbitant privilege.”
In this episode,Treasury yields have fallen
and the foreign exchange value of the
dollar has appreciated recently.
Moreover, many European financial firms
have had funding difficulties associated
with a lack of access to dollar liquidity.
This has made it necessary for European
officials, caps in hands, to seek swap
arrangements with the Federal Reserve
to acquire dollars to re-lend to their
national champions.
Recent enthusiasm in Europe for
fundamental reform of the international
monetary system finds its roots, in part,
in this resentment.They do not want our
dollar to be their problem, and they want
to erode some of that privilege. Put it
those terms, however, it seems clear that
this will mostly be a one-way
conversation.
US officials must recognise that their
nation’s funding advantage rests on the
unrivalled, for now, position of US
government securities in global financial
markets. Thus, they will listen and agree
to work-streams for groups to report
back in the future. But whether it is this
Administration or the next, advantages
to the US, unfair as that may seem as
viewed from abroad, will seem worth
preserving.
31
Insight
An exorbitant privilege that comes with
a cost and a responsibility: These
advantages come with a cost and a
responsibility. Open access to markets
probably allowed US officials to drift in
their response to the financial crisis.They
initially mistook a solvency problem for a
liquidity one.When action was ultimately
forthcoming, Treasury officials failed to
articulate a clear sense of principles and
priorities for intervention.
This ad hoc improvisation has probably
stretched out and intensified the crisis. In
a crisis in an emerging market economy,
the sudden stop of credit to the
government forces painful adjustment to
be done quickly. These adjustments may
have been painful, but a quick response
tends to reduce the overall bail-out cost.
As for responsibility, officials must
recognise that investors have granted the
US its reserve-currency status for
reasons. Size matters, but other reasons
include a respect for the rule of law and
for contract enforcement and the
predictability and transparency of the
policy process.
When US officials move to the next
stage of the crisis – the search for
legislative protections to prevent a
recurrence – it will be important to
preserve these attractive aspects of US
markets.
Author Background: Kenneth Rogoff &
Carmen Reinhart are co-authors of This
Time Is Different – Eight centuries of
Financial Folly. For more, please check the
hyperlink to the article.
The Wise Investor June 2010

The biggest oil spill in history
• Explosion of the Deepwater Horizon, a rig owned by BP (British
Petroleum) in the Gulf of Mexico has now caused the worst oil
spill in history placing the Exxon Valdex of 1989 in second slot.
• BP oil spill hits the coast, death and devastation – and it's just the
start.
• Oil has washed up on a vast stretch of beaches and poisoned
wildlife in the ecologically sensitive area.
• It could take months or years for the true impact of the spill on
surrounding ecosystems to emerge,
• BP clashes with scientists over quantum of spill and deep sea oil
pollution & denies existence of underwater oil clouds.
• Scientists say the have detected huge underwater plumes of oil,
including one 120 metres (400feet) deep about 50 miles from
the destroyed rig.
• Team Obama incensed that the company failed to inform it for
a day and a half after suspending the failed "top kill" operation to
plug the spill using rubber tyres and mud.
• Heart-broken and enraged Barack Obama now says the buck
stops with him.
• BP hit by avalanche of compensation claims over US oil spill as
business owners claim company ignored evidence of broken seal
on Deepwater Horizon well.
• BP went ahead with the casing (which had been described
internally as worst case scenario in June 2009), but only after
getting special permission because it violated safety policies and
design standards.
• Lloyds expects to meet claims of $300m and $600m arising
from the loss of the offshore platform.
• The five affected US Gulf states alone have, between them, a
$2.2 trillion economy.
• There’s a serious threat that the entire Mississippi watershed and
river will have to be closed for -much of its- traffic.
• Fury and despair as BP admits oil could leak for months and
Obama administration warns that the most environmentally
disastrous spill in US history may continue until August
• The only thing that will help BP as a going concern retain some
of its value is that Exxon and Shell are both eager for a take-over.
Source for facts and opinions cited in this compilation:The Guardian, McClatchy, The Automatic Earth, Project Syndicate and The New York Time
The views presented by the author (s) do not necessarily represent that of Sundaram BNP Paribas Asset Management. The article / posts have been reproduced
with permission or from reports available in the public domain in order to provide readers access to a diverse range of views on the economy and asset markets.
Sundaram BNP Paribas Asset Management
Taking note of
We have not been able to stop the flow.This scares everybody, the
fact that we can't make this well stop flowing, the fact that we
haven't succeeded so far. Many of the things we're trying have been
done on the surface before, but have never been tried at 5,000 feet.
Doug Suttles, Chief Operating Office of BP
It may take 9000 days, or 24 years, before the first oil leak to
threaten a US presidency will stop a-gushin’-and-a-flowin’.
Matt Simmons, writer of several highly insightful books on black gold,
recently warns
It's all lose, lose, lose here.The failure of the top kill really magnified
this disaster exponentially. I think there's a realistic probability that
this enormous amount of oil will keep coming out for a couple
months.This disaster just got enormously worse.There is a lot of oil
going into the sea there. It does degrade over time, but before it
degrades it is toxic, and it wreaks havoc.
Rick Steiner, a retired University of Alaska marine scientist who's
familiar with both the current Gulf oil spill and the Exxon Valdez
disaster two decades ago.
Whether or not to “disperse” oil has been a key strategic question
since combating spills began in earnest in the 1960’s. The answer
depends on whether the priority for protection is birds and beaches,
or other forms of marine life such as fish, shrimps, and mollusks. If it’s
birds and beaches, disperse; if it’s fisheries, don’t.The decision has an
obvious public-relations dimension. Oil-contaminated birds and
beaches make appalling pictures, whereas dead fish and shrimp
larvae go unnoticed by cameras.
Arne Jernelov, a UN expert on environmental catastrophes, is Professor
of Environmental Biochemistry, an honorary scholar, and former Director
of the International Institute of Applied Systems Analysis in Vienna.
32 The Wise Investor June 2010
 Voices
Jeremy Grantham, Co-Founder and Chief Investment Strategist of GMO, articulates his views on the economy, financial world and markets
once in a quarter. His quarterly report to investors is a recommended must-read and can be accessed at www.gmo.com. In his latest report
published in the last week of April, Grantham, is as usual, forthright and relentless. We present a selection from a 14-page report, which also has
great charts on market trends.

Bernanke is, in fact, begging us to speculate, and is being mean only to conservative investors like pensioners who cannot make a
penny on their cash. Collectively, we forego hundreds of billions of potential interest, but at least we can feel noble because we are
helping to restore the financial health of the banks and bankers, who under these conditions could not fail to make a fortune even if
brain dead

Bernanke begs us to speculate, and we are obedient. Despite being hammered down twice in 10 years and getting punished for
speculating, we again pick ourselves up off of the canvas and get back into the good fight. Such persistence is unprecedented – 20
years for each really painful experience has been the normal recovery time – but Uncles Ben and Alan have treated us so well in
these two disasters that, with hindsight, they don’t feel so bad after all.

The key shift seems to be the confidence we now have in Bernanke’s soldiering on with low rates and moral hazard to the bitter end,
if necessary, cliff or no cliff. The concept of moral hazard has changed. It used to be a vague expression of intent: “If anything goes
wrong, I will help you if I can.” It seems to have been transmuted into a cast-iron commitment.The Fed seems to be pledging that it
will bail us out after every flood. All that is lacking is a rainbow!

Speculators are not stupid.They see that after each crash, a long, artificial period of low rates and easy financial borrowing has been
delivered.They see that Bernanke is an unreconstructed Greenspanite in that he refuses to address bubbles, but will leap to help ease
the pain should a bubble break. With asymmetry like that, why not speculate? And so another bubble appears and then another.

Greenspan was lucky enough to inherit Volcker’s good work, and that gave him a base from which he could launch or blow a huge
equity bubble; he also had the advantage that the country’s balance sheet was in excellent shape. Even Bernanke inherited a reasonably
solid position from which to fund a second bailout. But a third time? It is hard to work out where the resources would come from
to resuscitate the economy.

We all know that there is plenty that could go wrong. Some combinations would be enough to break the market but still leave the
economy limping along.This would be far better than having the market rise through the fall of next year by, say, another 30% to 40%,
along with risk trades similarly flourishing and then all breaking (possibility: nerve-wrackingly high).The developed world’s financial and
economic structure-none too impressive- would buckle at the knees.

As a provable, statistical fact, industries are more dependably mean-reverting than stocks, for individual stocks can on rare occasion,
permanently change their stripes à la Apple. Sectors, like small caps, are more provably mean-reverting than industries.The aggregate
stock market of a country is more provably mean-reverting when mis-priced than sectors. And great asset classes are provably more
mean-reverting than a single country.

Asset classes are the most predictable of all: when a bubble occurs in a major asset class, it is a near certainty that it will go away. (A
bubble for us is defined as a 2-sigma event, statistical talk for an event that would occur randomly every 40 years under normal
conditions, a definition that is arbitrary but at least to us feels reasonable. And we define a “near certainty” as over 90% probable.)

Serious economic setbacks can give us serious value traps.We had one starting in late 2006, where cheap companies became cheaper
and cheaper and quite a few ceased to exist. And several more that were blatantly bankrupt were bailed out by the government for
reasons that still seem quite arbitrary and desperate rather than capitalistic. With a less corporate-friendly government, the loss
involved in this value trap would have been far worse.

Even though the “quality” factor is now cheap, it has still outperformed by a decent (maybe you’d say “modest”) 40% over almost 50
years. But this 40% is an amazing free lunch. Warren Buffett doesn’t really talk much about the fact that he is playing in a superior
universe. Why should he? It’s like having the Triple A bond outperforming the B+ bond in the long term by 1% a year when, in a
reasonable world, it “should” yield, say, 1% less.
Source: www.gmo.com
Sundaram BNP Paribas Asset Management 33 The Wise Investor June 2010
 The journey of Rs 100 invested every month in the Sensex
Years Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2010 107.3 106.9 100.2 100.0

2009 186.3 197.5 180.9 154.0 120.1 121.1 112.1 112.1 102.5 110.5 103.7 100.5

2008 99.5 99.9 112.2 101.6 107.0 130.4 122.3 120.6 136.5 179.4 193.1 182.0

2007 124.6 135.7 134.3 126.6 120.7 119.9 112.9 114.6 101.5 88.5 90.7 86.6

2006 177.0 169.3 155.7 145.8 168.9 165.5 163.4 150.1 141.0 135.5 128.2 127.4

2005 267.8 261.5 270.4 285.3 261.5 244.1 230.0 225.0 203.4 222.5 199.8 186.8

2004 308.3 309.8 314.1 310.5 368.9 366.2 339.6 338.2 314.5 309.6 281.6 265.9

2003 540.2 534.7 575.9 593.2 552.0 486.8 463.0 413.7 394.3 357.8 348.1 300.7

2002 530.3 492.9 506.1 526.0 561.7 541.2 587.7 551.9 587.0 595.3 543.8 519.9

2001 405.8 413.4 487.1 498.9 483.5 507.9 527.4 541.1 624.5 587.4 534.1 538.2

2000 337.3 322.3 351.1 377.0 396.0 369.8 410.3 392.2 429.3 473.2 439.2 442.0

1999 529.6 543.0 469.5 528.0 443.0 424.0 386.6 358.5 368.5 395.1 379.9 350.8

1998 544.6 484.7 451.1 438.2 476.3 540.2 546.8 598.5 566.0 624.3 624.7 574.7

1997 519.1 480.8 522.4 457.1 467.6 412.6 407.8 453.0 450.0 461.7 493.2 479.9

1996 598.9 517.7 521.6 458.8 471.4 460.6 496.4 499.6 542.0 555.0 607.5 569.1

1995 485.2 513.2 538.5 560.4 523.9 540.7 518.5 524.6 502.7 512.9 586.4 564.5

1994 438.7 409.7 464.6 468.7 459.3 429.7 416.4 382.7 410.2 411.2 425.8 446.8

1993 655.0 624.2 769.9 827.3 800.8 788.3 754.2 666.7 648.0 656.7 543.1 522.2

1992 762.6 620.2 409.8 451.6 584.1 570.0 650.6 579.2 532.6 620.7 697.3 671.4

1991 1787.5 1438.8 1503.4 1421.6 1343.1 1382.7 1075.4 977.7 931.4 929.1 922.5 919.9

1990 2569.6 2596.6 2248.1 2208.3 2192.6 2064.5 1699.5 1407.5 1236.5 1355.7 1467.8 1675.0

1989 2587.0 2645.0 2460.6 2250.1 2540.5 2216.5 2451.1 2394.5 2347.2 2351.9 2545.8 2255.0

1988 3973.0 4282.4 4407.6 3724.0 3028.4 3009.2 2909.0 2957.2 2649.5 2684.1 2482.0 2635.4

1987 3170.6 3190.0 3440.5 3663.7 3798.4 4046.0 3589.9 3636.9 3906.1 3899.2 4081.7 3971.0

1986 2936.9 2673.0 3058.4 2933.6 2806.5 2899.5 2944.4 3201.8 2984.1 3049.8 3513.1 3348.0

1985 6104.8 5782.9 4962.0 4537.7 4396.1 3673.7 3410.5 3750.7 4036.8 3687.7 3537.6 3329.5

1984 7067.0 7010.3 7157.2 7463.2 7293.3 7039.3 6920.2 7047.7 6610.7 6556.4 6767.9 6458.5

1983 7921.5 8024.3 8301.6 8198.9 7395.6 7394.7 7457.2 7360.0 7433.5 7411.2 7309.7 6942.4

1982 7983.8 7698.8 8065.2 7772.8 7670.2 8250.9 8124.5 8205.4 7693.8 7904.3 7702.2 7445.5

1981 11974.8 10963.2 10123.8 9425.5 9916.8 8296.5 8440.9 9074.7 8548.5 8425.5 8183.6 7710.7

1980 14213.0 13695.3 13656.9 13798.6 13938.8 14374.7 13653.7 12475.1 13063.5 13411.8 12529.4 11844.0

1979 13823.6 14148.8 14001.0 15155.1 15122.5 14676.3 14177.4 15190.5 14785.0

Source: Bloomberg, Analysis: Sundaram BNP Paribas Asset Management Analysis: S Vidhya
Sundaram BNP Paribas Asset Management 34 The Wise Investor June 2010
 Analysis

Growth Across The Cap Curve

Top 100 Stocks by Market Cap on the NSE - Sector Composition
Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 March-10 Change
GICS Classification
% % % % % % % % % % % % Points
Consumer Discretionary 4.6 3.5 3.5 4.4 4.1 4.9 5.0 2.9 3.1 5.0 4.8 0.2
Consumer Staples 18.0 19.8 13.6 8.5 5.7 6.1 4.9 3.0 6.0 4.1 4.5 -13.5
Energy 15.2 18.5 25.9 29.2 22.8 22.0 17.0 19.2 19.7 18.6 17.0 1.8
Financials 7.5 9.0 12.4 14.3 14.5 15.0 14.2 15.3 15.8 14.9 14.8 7.2
Financials - Real Estate 0.4 — — — — — 2.0 6.2 2.3 2.1 1.7 1.4
Health Care 7.0 8.3 6.8 6.6 6.4 4.2 3.4 2.0 3.9 2.8 3.1 -3.9
Industrials 4.3 4.5 5.5 7.2 6.6 10.5 11.0 12.8 9.2 10.0 13.5 9.2
Information Technology 30.1 21.8 18.9 11.4 16.1 16.1 16.3 7.7 7.0 10.7 9.9 -20.1
Materials 7.2 7.7 7.5 10.0 9.8 8.1 10.6 11.4 10.2 15.8 15.7 8.6
Telecommunication Services 3.3 3.8 2.8 3.6 4.7 4.9 8.9 8.7 9.4 4.2 3.8 0.4
Utilities 2.3 3.3 3.1 4.9 9.3 8.1 6.7 10.8 13.3 11.8 11.1 8.8
Market Cap (Rs. Crore) 471209 397407 490012 986014 1303883 1828863 2650440 4875498 2333891 4475171 4656951 9.88
% to NSE Market Cap 89.4 90.4 89.1 86.7 84.2 80.1 79.0 75.6 80.6 78.0 77.0 -12.40
NSE Market Cap (Rs. Crore) 527081 439609 549912 1136790 1548742 2281975 3356910 6451640 2895264 5740082 6048121 11.47

The Next 100 (101 - 200) Stocks by Market Cap on the NSE- Sector Composition
Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 March-10 Change
GICS Classification
% % % % % % % % % % % % Points
Consumer Discretionary 21.1 23.3 16.9 22.0 18.2 17.5 13.5 11.5 11.6 11.4 11.2 -9.9
Consumer Staples 5.1 6.1 5.7 4.2 10.0 15.1 11.4 5.2 11.3 11.0 9.7 4.6
Energy 3.0 3.4 2.8 2.2 0.8 2.4 5.3 3.3 3.9 4.1 5.5 2.5
Financials 9.5 11.8 12.3 9.6 12.8 11.0 9.0 18.5 20.6 16.0 16.0 6.6
Financials - Real Estate — 1.2 — — — — 3.2 7.8 4.2 2.3 2.5 2.5
Health Care 6.5 9.6 11.1 11.9 14.1 13.3 11.2 5.3 4.6 11.2 8.8 2.3
Industrials 13.5 11.8 10.5 13.2 12.7 15.9 24.0 21.8 16.2 19.6 17.3 3.8
Information Technology 12.6 10.6 11.0 7.6 5.4 2.8 4.7 3.2 6.7 2.1 5.6 -7.0
Materials 28.0 21.7 27.3 26.5 24.1 18.8 14.4 17.2 12.6 13.6 14.5 -13.5
Telecommunication Services — — — — — — 1.0 0.9 3.3 2.4 2.7 2.7
Utilities 0.7 0.6 2.3 2.7 1.9 3.3 2.4 5.4 5.0 6.4 6.3 5.6
Market Cap (Rs. Crore) 31902 23563 35262 88556 131575 219309 340934 694419 268354 579526 636904 20.0
% to NSE Market Cap 6.1 5.4 6.4 7.8 8.5 9.6 10.2 10.8 9.3 10.1 10.5 4.5
NSE Market Cap (Rs. Crore) 527081 439609 549912 1136790 1548742 2281975 3356910 6451640 2895264 5740082 6048121 11.5

The Third 100 (201 - 300) Stocks by Market Cap on the NSE - Sector Composition
Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 March-10 Change
GICS Classification
% % % % % % % % % % % % Points
Consumer Discretionary 29.1 21.5 23.8 25.9 22.3 20.7 18.8 13.7 9.7 8.1 14.2 -14.9
Consumer Staples 3.6 4.5 2.8 5.1 4.9 4.5 5.1 13.5 6.7 8.1 6.8 3.2
Energy 1.2 2.2 4.0 1.9 2.2 0.9 — 2.0 2.9 2.4 2.2 1.0
Financials 9.4 10.7 8.1 9.2 6.2 13.0 15.8 11.7 14.5 17.6 15.8 6.4
Financials - Real Estate 2.9 — 1.0 0.8 0.7 2.2 — 5.1 3.5 5.6 6.8 3.9
Health Care 6.8 6.2 5.5 5.0 5.7 8.6 7.7 7.5 11.5 4.7 4.7 -2.1
Industrials 14.7 19.6 19.6 15.6 19.6 18.9 17.9 17.2 16.7 22.7 19.8 5.1
Information Technology 8.1 8.0 9.6 12.5 12.4 11.7 9.7 7.9 5.9 8.9 8.9 0.8
Materials 22.9 26.3 24.6 24.0 21.9 17.7 20.4 19.2 22.4 16.4 14.4 -8.6
Telecommunication Services — — — — — — 1.8 2.2 1.2 2.2 2.1 2.1
Utilities 1.3 0.8 1.0 — 4.0 1.8 3.0 — 5.0 3.3 4.3 3.0
Market Cap (Rs. Crore) 12027 9356 14042 34934 59316 109921 156962 341971 119713 279142 305420 25.4
% to NSE Market Cap 2.3 2.1 2.6 3.1 3.8 4.8 4.7 5.3 4.1 4.9 5.0 2.8
NSE Market Cap (Rs. Crore) 527081 439609 549912 1136790 1548742 2281975 3356910 6451640 2895264 5740082 6048121 11.5

Source: Bloomberg, Analysis: Sundaram BNP Paribas Asset Management Analysis: Satish Mahadevan
Sundaram BNP Paribas Asset Management 35 The Wise Investor June 2010
 Performance Tracker Global
Year-To-Date One Month Three Months Six Months One Year Three Years Five Years
Index
Return Rank Return Rank Return Rank Return Rank Return Rank Return Rank Return Rank

S&P 500 -2.3 8 -8.2 14 -1.4 14 -0.6 14 18.5 12 -28.8 21 -8.6 23

Dow Jones -2.8 9 -7.9 12 -1.8 15 -2.0 15 19.2 11 -25.6 20 -3.2 21
Nasdaq Composite -0.5 6 -8.3 15 0.8 8 5.2 4 27.2 5 -13.3 13 9.1 18
Nikkei 225 -7.4 19 -11.7 22 -3.5 19 4.5 5 2.6 25 -45.4 25 -13.4 25
Dax 0.1 5 -2.8 2 6.5 4 6.0 3 20.7 9 -24.3 18 33.7 15
FTSE 100 -4.1 12 -6.6 5 -3.1 18 0.0 12 17.4 13 -21.6 17 4.5 19
S&P GSCI Index Spot -6.9 17 -11.2 21 -5.7 24 -4.8 19 10.2 22 3.7 7 37.6 14
MSCI World -7.6 21 -9.9 19 -4.7 22 -6.0 22 11.3 20 -33.2 22 -5.3 22
MSCI Europe -3.7 11 -5.7 3 -0.4 10 2.2 8 16.9 15 -38.4 24 -10.2 24
MSCI Asia ex-Japan -6.2 15 -8.8 16 -0.5 11 -2.2 16 17.0 14 -9.2 11 53.3 10
Crude -4.5 13 -14.2 25 -3.8 20 -5.4 20 13.5 18 7.7 4 48.0 11
Gold 10.9 1 3.1 1 8.8 3 3.1 6 24.2 6 84.1 1 191.5 1

Emerging Markets (MSCI Indices)

BRIC -8.7 23 -9.0 17 -3.0 17 -7.3 23 15.5 17 -1.0 9 122.8 6

Brazil -12.5 25 -10.9 20 -5.9 25 -11.5 25 19.3 10 15.6 3 187.2 2
Russia -7.1 18 -12.3 23 -4.3 21 -4.1 18 11.1 21 -33.2 23 45.0 12
India -2.0 7 -8.2 13 2.1 7 1.3 11 22.3 7 1.8 8 136.2 5
China -8.5 22 -6.5 4 -2.0 16 -8.1 24 11.4 19 5.6 6 137.8 4
Korea -5.9 14 -13.4 24 0.0 9 1.9 9 28.1 4 -21.3 16 43.2 13
Taiwan -11.1 24 -9.8 18 -1.3 12 -3.5 17 6.3 24 -16.1 14 2.0 20
Singapore -6.5 16 -7.5 10 -1.3 13 -0.4 13 16.4 16 -24.6 19 27.8 16
Honk Kong -7.5 20 -6.8 7 -4.7 23 -5.6 21 6.5 23 -10.6 12 25.1 17
Indonesia 7.7 2 -7.7 11 9.5 2 13.6 2 62.5 1 37.4 2 170.3 3
Mexico 0.5 4 -6.6 6 2.8 6 2.4 7 34.0 3 -21.1 15 85.5 8
South Africa -3.0 10 -7.4 9 2.9 5 1.7 10 21.3 8 -7.4 10 72.2 9

Turkey 1.5 3 -7.3 8 10.2 1 19.0 1 49.5 2 7.4 5 89.1 7

Top Performer Gold Gold Turkey Turkey Indonesia Gold Gold

Worstt Performer Brazil Crude Brazil Brazil Nikkei 225 Nikkei 225 Nikkei 225

Source: Bloomberg; P/E: Price-to-Earnings ratio; P/B: Price-to-Book ratio; 12-M: 12 Months; Returns is in percentage and in U.S. Dollar terms for each period and not on an annualised basis. Analysis: A Preetha
Sundaram BNP Paribas Asset Management 36 The Wise Investor June 2010
 Performance Tracker India
Year-To-Date One Month Three Months Six Months One Year Three Years Five Years
Index
Return Rank Return Rank Return Rank Return Rank Return Rank Return Rank Return Rank

Cap-Curve Indices
BSE Sensitive Index (Sensex) -3.0 18 -3.5 13 3.1 16 0.1 19 15.9 17 16.5 18 152.3 8

S & P CNX Nifty -2.2 15 -3.6 15 3.3 14 1.1 18 14.3 19 18.4 17 143.6 12

Nifty Junior 4.2 6 -2.3 6 7.1 7 8.9 5 44.8 6 34.9 8 147.9 10

Nifty 100 -1.2 12 -3.4 11 3.9 12 2.3 13 18.5 15 20.9 14

CNX Mid-Cap 4.3 5 -3.8 17 8.2 5 8.5 7 44.9 5 37.4 6 153.7 7

BSE Mid-Cap 1.7 9 -4.9 20 6.8 8 6.5 8 35.2 10 9.8 20 109.4 18

BSE Small-Cap 2.3 8 -7.2 21 5.9 10 13.6 3 42.8 7 15.3 19 98.7 20

BSE 100 -2.0 14 -3.6 14 3.2 15 1.4 17 18.6 14 21.1 13 151.0 9

BSE 200 -1.3 13 -3.5 12 3.9 13 2.2 14 21.4 13 21.9 12 142.0 14

BSE 500 -0.9 11 -3.7 16 4.0 11 3.0 11 22.9 12 20.1 15 139.7 15

S & P CNX 500 -2.4 16 -3.2 9 2.4 18 2.0 15 18.1 16 18.6 16 130.4 16

Sector Indices

BSE Auto 3.6 7 -1.3 5 7.4 6 9.7 4 67.0 2 53.6 2 173.0 5

BSE Banks 6.2 4 -4.5 19 8.4 4 6.1 9 29.0 11 40.1 5 180.2 4

BSE Capital Goods -3.3 19 -2.6 7 1.4 19 2.5 12 14.6 18 22.4 11 279.8 1

BSE Consumer Durables 18.9 1 -3.1 8 12.5 1 29.0 1 63.2 3 7.3 21 142.3 13

BSE FMCG 6.8 3 3.6 1 12.0 2 3.8 10 42.2 8 56.3 1 147.7 11

BSE Healthcare 9.4 2 2.7 2 11.8 3 15.2 2 59.8 4 42.9 4 102.4 19

BSE IT -0.2 10 -3.4 10 0.0 20 8.8 6 72.6 1 6.7 22 88.4 21

BSE Metal -12.9 22 -14.3 23 -7.7 23 -7.0 22 39.2 9 45.6 3 171.5 6

BSE Oil & Gas -2.8 17 2.6 3 6.1 9 -1.0 21 -2.3 22 30.6 9 228.7 2

BSE Public Sector -4.2 20 0.2 4 -0.9 21 -0.1 20 8.4 20 35.5 7 111.2 17

BSE Power -4.9 21 -4.4 18 2.4 17 1.8 16 5.2 21 29.6 10 188.6 3

BSE Realty -19.7 23 -11.3 22 -4.3 22 -15.4 23 -18.9 23 — — — —

Top Performer Consumer Durables FMCG Consumer Durables Consumer Durables IT FMCG Capital Goods
Worst Performer Realty Metal Metal Realty Realty IT IT

Source: Bloomberg; P/E: Price-to-Earnings ratio; P/B: Price-to-Book ratio; 12-M: 12 Months; Returns is in percentage for each period and not on an annualised basis. Analysis: A Preetha
Sundaram BNP Paribas Asset Management 37 The Wise Investor June 2010
 Best & Worst Performers India
Month/Year/Category S&P S&P 2009 One Three Six One Three Five
CNX Nifty CNX 500 YTD Month Months Months Year Years Years
May-10 Best 5086 4227 Consumer Durables FMCG Consumer Durables Consumer Durables IT FMCG Capital Goods
Worst Realty Metal Metal Realty Realty IT IT
Apr-10 Best 5278 4368 Consumer Durables Consumer Durables Consumer Durables Consumer Durables Consumer Durables Metal Capital Goods
Worst Realty Oil & Gas Public Sector Realty Oil & Gas IT Healthcare
Mar-10 Best 5249 4313 Consumer Durables Metal Consumer Durables Metal Metal Metal Capital Goods
Worst Realty Public Sector Realty Realty FMCG IT IT
Feb-10 Best 4922.0 4128.0 Consumer Durables Consumer Durables Consumer Durables Metal Metal Metal Capital Goods
Worst Realty Realty Realty Realty MCG IT Healthcare
Jan-10 Best 4882 4156 Consumer Durables Consumer Durables Small-Cap Small-Cap Metals Metals Capital Goods
Worst Realty Realty Realty Realty FMCG IT Healthcare
Dec-09 Best 5201 4329 Metals Small-Cap Metals Auto Metals Metals Capital Goods
Worst FMCG FMCG Realty Capital Goods FMCG IT Healthcare
Nov/09 Best 5033 4145 Metals Metals Metals IT Metals Metals Capital Goods
Worst FMCG Reality Reality Reality FMCG IT Healthcare
Oct/09 Best 4712 3853 Metals FMCG Healthcare Metals Metals Oil & Gas Capital Goods
Worst FMCG Realty Realty Oil & Gas Oil & Gas IT Healthcare
Sep/09 Best 5084 4119 Auto Banks Small Cap Realty Auto Oil & Gas Capital Goods
Worst FMCG FMCG FMCG FMCG Oil & Gas IT Healthcare
Aug/09 Best 4662 3840 Auto Realty IT Realty Auto Oil & Gas Banks
Worst Healthcare FMCG Oil & Gas FMCG Capital Goods IT Healthcare
Jul/09 Best 4636 3764 Metals Auto Realty Metals Auto Oil & Gas Capital Goods
Worst Healthcare Capital Goods Oil & Gas FMCG Realty IT Healthcare
Jun/09 Best 4291 3470 Metals IT Realty Metals Public Sector Banks Capital Goods
Worst FMCG Realty FMCG FMCG Realty IT Healthcare
May/09 Best 4449 3580 Auto Realty Auto Power FMCG Oil & Gas Capital Goods
Worst Consumer Durables FMCG Consumer Durables Consumer Durables Realty Consumer Durables Healthcare
Apr/09 Best 3474 2663 Auto Realty Auto Power FMCG Oil & Gas Capital Goods
Worst Consumer Durables FMCG Consumer Durables Consumer Durables Realty Consumer Durables Healthcare
Mar/09 Best 3021 2295 Auto Metals Auto FMCG FMCG Oil & Gas Capital Goods
Worst Realty FMCG Realty Realty Realty Small-Cap Auto
Feb/09 Best 2764 2113 Auto Auto Auto FMCG FMCG Oil & Gas Capital Goods
Worst Realty Realty IT Realty Realty Consumer Durables Metals
Jan/09 Best 2875 2209 Oil & Gas Oil & Gas Power FMCG FMCG Oil & Gas Capital Goods
Worst Realty Realty IT Realty Realty Small-Cap Auto
Dec/08 Best 2959 2296 FMCG Realty FMCG FMCG FMCG Oil & Gas Capital Goods
Worst Realty IT Metals Metals Realty Auto Metals
Nov/08 Best 2755 2093 FMCG FMCG FMCG FMCG FMCG Oil & Gas Capital Goods
Worst Realty Realty Realty Realty Realty Auto Metals
Oct/08 Best 2886 2226 FMCG IT FMCG FMCG FMCG Oil & Gas Capital Goods
Worst Realty Realty Realty Realty Realty Small-Cap Metals
Sep/08 Best 3921 3059 FMCG FMCG Public Sector Healthcare FMCG Oil & Gas Capital Goods
Worst Realty Realty Metals Realty Realty Small-Cap Healthcare
Aug/08 Best 4360 3489 Healthcare Banks Healthcare Healthcare Healthcare Oil & Gas Capital Goods
Worst Realty Small-Cap Realty Realty Realty Small-Cap Healthcare
Jul/08 Best 4333 3457 Healthcare Public Sector Healthcare Healthcare Oil & Gas Capital Goods Capital Goods
Worst Realty IT Realty Realty Realty Auto FMCG
Jun/08 Best 4041 3203 Healthcare Capital Goods Healthcare Healthcare Oil & Gas Capital Goods Capital Goods
Worst Realty Realty Realty Realty Realty Auto FMCG
Dec'07 Best 6139 5355 Power Consumer DurablesSmall-Cap Metal Power Capital Goods Capital Goods
Worst IT Capital Goods IT IT IT Healthcare IT
Rank based on returns in INR terms. Sector Information is based on BSE Indices; Data Source: Bloomberg; Analysis: Sundaram BNP Paribas Asset Management Analysis: A Preetha
Sundaram BNP Paribas Asset Management 38 The Wise Investor June 2010
 Best & Worst Performers Global
Month/Year/Category MSCI MSCI 2010 One Three Six One Three Five
Emerging Market World YTD Month Months Months Year Years Years
May-10 Best 926 1080 Gold Gold Turkey Turkey Indonesia Gold Gold
Worst Brazil Crude Brazil Brazil Japan Japan Japan
Apr-10 Best 1020 1199 Indonesia Indonesia Turkey Indonesia Indonesia Gold Brazil
Worst China Honk Kong Russia Honk Kong Japan Japan Japan
Mar-10 Best 1010 1201 Indonesia Turkey Turkey Mexico Indonesia Gold Brazil
Worst Taiwan Gold Taiwan Taiwan Gold Japan Japan
Feb-10 Best 936 1133 Gold Crude Japan Russia Indonesia Gold Brazil
Worst Taiwan Turkey China Japan Gold Japan Japan
Jan-10 Best 934 1119 Russia Turkey Turkey Russia Indonesia Gold Brazil
Worst Brazil Brazil Honk Kong Honk Kong Gold Japan Japan
Dec-09 Best 989 1168 Brazil Turkey Crude Indonesia Brazil Gold Brazil
Worst U S (Dow) Gold Korea Japan U S (Dow) Japan S&P 500
Nov/09 Worst 953 1149 Brazil Gold Brazil Indonesia Indonesia Gold Brazil
Worst Japan Japan Japan Japan Japan Japan Japan
Oct/09 Best 914 1106 Indonesia Crude Russia Indonesia Indonesia Gold Brazil
Worst U.S (Dow) Korea Japan Japan US (Dow) Japan US (Nasdaq)
Sep/09 Best 914 1127 Indonesia Brazil Russia Indonesia Indonesia Brazil Brazil
Worst Gold Japan Crude Crude Commodity UK US (Dow)
Aug/09 Best 839 1086 Indonesia Turkey Turkey Indonesia Gold Brazil Brazil
Worst US (Dow) Hong Kong Russia Gold Russia Russia US (S&P 500)
Jul/09 Best 844 1045 Indonesia Indonesia India Indonesia Gold China Brazil
Worst UK Commodity Gold Gold Russia Russia US (Nasdaq)
Jun/09 Best 761 964 Crude Indonesia India Crude Turkey China Brazil
Worst UK Russia Gold UK Russia Russia UK
May/09 Best 773 970 Russia India Russia Indonesia Gold Brazil Brazil
Worst US (Dow) US (Nasdaq) Gold US (Dow) Russia Japan Japan
Apr/09 Best 663 893 Brazil Russia Russia Indonesia Gold Gold Brazil
Worst US (Dow) Gold Gold Crude Russia Russia Japan
Mar/09 Best 570 805 Crude Korea Crude Gold Gold Gold Brazil
Worst Dax Gold Dax Crude Russia Russia Taiwan
Feb/09 Best 499 751 Gold Taiwan Gold Gold Gold Gold Gold
Worst Mexico Korea Mexico Russia Russia Russia Taiwan
Jan/09 Best 530 839 Crude Crude Gold Gold Gold Gold Gold
Worst South Africa South Africa Russia Russia Russia Russia Taiwan
Dec/08 Best 567 920 Gold Indonesia Gold Gold Gold Gold Gold
Worst Russia Crude Crude Russia Russia Russia Taiwan
Nov/08 Best 527 893 Gold Gold Gold Gold Gold Gold Brazil
Worst Russia Crude Russia Russia Russia Russia Taiwan
Oct/08 Best 571 957 Gold UK US (Dow) Gold Gold Gold Brazil
Worst Russia Indonesia Russia Russia China Japan Taiwan
Sep/08 Best 787 1182 Gold Gold US (Dow) Crude Crude Gold Brazil
Worst India Russia Russia Russia China Japan Taiwan
Aug/08 Best 956 1345 Crude Turkey Crude Crude Crude Brazil Brazil
Worst India Russia India India Europe Europe US (Dow)
Jul/08 Best 1042 1367 Crude Turkey Crude Crude Crude Brazil Brazil
Worst India Russia India India Europe Europe US (Dow)
Jun/08 Best 1087 1402 Crude Gold Crude Crude Crude Brazil Brazil
Worst India India India India Europe Europe US (Dow)
Dec'07 Best 1246 1589 Brazil India India India Brazil Brazil Brazil
Worst Japan China Japan Japan Japan US (S&P 500) US (Dow)
Europe: MSCI Europe; Commodity: S&P GSCI Index; Rank based on returns in $ terms.Date Source: Bloomberg Analysis: A Preetha
Sundaram BNP Paribas Asset Management 39 The Wise Investor June 2010
 Equity Chart Book
MSCI World MSCI Emerging Markets

1600
1600
1400
1400
1200
1200 1000

1000 800
600
800
400
600 200
Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10
Open 1422 High 1682 Low 689 Close 1080 Open 496 High 1338 Low 246 Close 925

MSCI Brazil MSCI Russia

1600
4300

1100

2300
600

300 100
Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10
Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Open 874 High 4728 Low 278 Close 3170 Open 223 High 1642 Low 139 Close 714

MSCI India MSCI China

780 100
680
580
480
50
380
280
180
80 0
Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Open 160 High 694 Low 701 Close 460 Open 34 High 104 Low 13 Close 59
The horizontal in each graph indicates the average level of the respective index since January 2000 Source: Bloomberg, Analysis: Sundaram BNP Paribas Asset Management
Sundaram BNP Paribas Asset Management 40 The Wise Investor June 2010
 Relative performance
MSCI World MSCI Emerging Markets
MSCI World MSCI Emerging Markets
140 MSCI Emerging Markets 300 MSCI World 249.1
120 250
100
200
80
150
60
100
40
40.1 50
20
0 0

Oct/07

Oct/08

Oct/09
May/00

May/01

May/02

May/03

May/04

May/05

May/06
May/00
Aug/00
Dec/00
May/01
Aug/01
Dec/01
May/02
Aug/02
Dec/02
May/03
Sep/03
Dec/03
Apr/04
Aug/04
Dec/04
May/05
Aug/05
Dec/05
May/06
Aug/06
Jan/07
May/07
Aug/07
Jan/08
May/08
Sep/08
Dec/08
May/09
Sep/09
Dec/09
May/10

Feb/08

Feb/09

Feb/10
Sep/00

Sep/01

Sep/02

Sep/03

Sep/04

Sep/05

Sep/06

Jun/07

Jun/08

Jun/09
Jan/01

Jan/02

Jan/03

Jan/04

Jan/05

Jan/06

Jan/07
Both indices re-based to 100 for January 2000 and expressed as MSCI Both indices re-based to 100 for January 2000 and expressed as MSCI
World relative to MSCI Emerging Markets to reflect relative performance Emerging Markets relative to MSCI World to reflect relative performance.

MSCI Brazil MSCI Russia

250 400
MSCI Brazil MSCI Russia
MSCI Emerging Markets 350 MSCI Emerging Markets
200
300
188.3 250
150
200
100 150 175.0
50 100
50
0 0
May/00
Aug/00
Dec/00
May/01
Aug/01
Dec/01
May/02
Aug/02
Dec/02
May/03
Sep/03
Jan/04
May/04
Sep/04
Jan/05
May/05
Sep/05
Jan/06
May/06
Sep/06
Jan/07
May/07
Sep/07
Jan/08
May/08
Sep/08
Jan/09
May/09
Sep/09
Jan/10
May/10
May/00
Aug/00
Dec/00
May/01
Aug/01
Dec/01
May/02
Aug/02
Dec/02
May/03
Sep/03
Jan/04
May/04
Sep/04
Jan/05
May/05
Sep/05
Jan/06
May/06
Sep/06
Jan/07
May/07
Sep/07
Jan/08
May/08
Sep/08
Jan/09
May/09
Sep/09
Jan/10
May/10

Both indices re-based to 100 for January 2000 and expressed as MSCI Both indices re-based to 100 for January 2000 and expressed as MSCI
Brazil relative to MSCI Emerging Markets to reflect relative performance Russia relative to MSCI Emerging Markets to reflect relative performance

MSCI India MSCI China

190 MSCI India 130
MSCI China
170 MSCI Emerging Markets 120 MSCI Emerging Markets
150 110
100
130 163.4
90
110 93.9
80
90 70
70 60
50 50
May/00
Aug/00
Dec/00
May/01
Aug/01
Dec/01
May/02
Aug/02
Dec/02
May/03
Sep/03
Jan/04
May/04
Sep/04
Jan/05
May/05
Sep/05
Jan/06
May/06
Sep/06
Jan/07
May/07
Sep/07
Jan/08
May/08
Sep/08
Jan/09
May/09
Sep/09
Jan/10
May/10

May/00
Aug/00
Dec/00
May/01
Aug/01
Dec/01
May/02
Aug/02
Dec/02
May/03
Sep/03
Jan/04
May/04
Sep/04
Jan/05
May/05
Sep/05
Jan/06
May/06
Sep/06
Jan/07
May/07
Sep/07
Jan/08
May/08
Sep/08
Jan/09
May/09
Sep/09
Jan/10
May/10

Both indices re-based to 100 for January 2000 and expressed as MSCI India Both indices re-based to 100 for January 2000 and expressed as MSCI
relative to MSCI Emerging Markets to reflect relative performance China relative to MSCI Emerging Markets to reflect relative performance
Source: Bloomberg, Analysis: Sundaram BNP Paribas Asset Management
Sundaram BNP Paribas Asset Management 41 The Wise Investor June 2010
 Commodities Chart Book
Crude Oil Gold
170 1200
150
130 1000

110 800

$/oz
90
$/bbl

70 600
50
400
30
10 200

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10
Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10
Open 23.9 High 145.7 Low 16.6 Close 73.7 Open 288.0 High 1215.7 Low 255.6 Close 1216.2

Baltic Freight Index LME Metals Index

21700 5000
18700 4500
4000
15700
3500
12700
3000
9700
2500
6700 2000
3700 1500
700 1000
Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Apr-00

Apr-01

Apr-02

Apr-03

Apr-04

Apr-05

Apr-06

Apr-07

Apr-08

Apr-09

Apr-10
Open 1782 High 19687 Low 830 Close 5217 Open 1254.2 High 4556.6 Low 958.3 Close 3178.1

S & P Goldman Sachs Commodity Index S&P Goldman Sachs Agflation Index

1000 700
900
600
800
700 500
600
400
500
400 300
300
200
200
100 100
Jan-00
Jul-00
Jan-01
Jul-01
Jan-02
Jul-02
Jan-03
Jul-03
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jan-00
Jul-00
Jan-01
Jul-01
Jan-02
Jul-02
Jan-03
Jul-03
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10

Open 194.5 High 890.3 Low 162.0 Close 899.5 Open 162.8 High 499.2 Low 149.6 Close 291.3

Source: Bloomberg

Sundaram BNP Paribas Asset Management 42 The Wise Investor June 2010
 %

4
6
8
10
12
14

3
5
7
% 9
USD Million

11
13
15
Dec/01 Jan/00
Jul/00

10000
70000
130000
190000
250000
310000
370000

Sundaram
Jun/02
Jan/00 Dec/00

Sundaram
Open 35.1
Open 8.05
Dec/02

Open 11.23
Jul/00 Jun/01

BNP
Jan/01 May/03 Dec/01

BNP
Jul/01
Nov/03 Jun/02
Jan/02

Paribas
May/04 Dec/02
Jul/02
Jan/03 Nov/04 Jun/03

Paribas
Jul/03 Dec/03

High 316.2
High 13.91
High 11.77
May/05
Jan/04 Jun/04
Jul/04 Nov/05 Dec/04

Asset Asset
Jan/05 May/06 Jun/05
Jul/05
Nov/06 Dec/05

Management
Jan/06
May/07 May/06
Jul/06
Nov/06

Low 34.7
Low 4.80
Low 4.99
Jan/07 Nov/07
May/07
10-Year G-Sec Yield (%)

Jul/07
May/08

Management
Jan/08 Nov/07
Jul/08 Oct/08 May/08

India Forex Reserves ($ billion)

Jan/09 Apr/09 Nov/08

1-Year AAA Corporate Bond Yield (%)

Jul/09
Oct/09 May/09
Jan/10
Nov/09

Close 6.55
Close 7.53
Apr/10

Close 273.3

43
bp bp

0
2
4
%6
8

-2
10
12
14
45
85

5
125
165
205
245
285
325
365

10.0
100.0
190.0
280.0
370.0
Jan/00
Jul/00 Dec/01 Jan/00
Jun/02 Jul/00

Open 210
Open 126

Jan/01

Open 3.55
Dec/00
Jul/01 Dec/02
Jun/01
Jan/02 May/03 Dec/01
Jul/02
Nov/03 Jun/02
Jan/03
May/04 Dec/02
Jul/03 Jun/03
Nov/04

High 423
High 341

Jan/04

High 12.82
Dec/03
Jul/04 May/05
Jun/04
Jan/05 Nov/05 Dec/04
Jul/05 May/06 Jun/05
Jan/06 Nov/06 Dec/05

The Wise
Jul/06 May/06

WPI Inflation (%)

May/07
Low -16
Low -64

Jan/07 Nov/06

Low -1.01

The Wise
Nov/07 May/07
Jul/07
Jan/08 May/08 Nov/07

Investor
Jul/08 Oct/08 May/08

Investor
Jan/09 Apr/09 Nov/08

June
G Sec 1-10 Year Spread (basis points)

Jul/09 May/09
Oct/09
Nov/09
Close 82

Jan/10
Close 245
Fixed-Income Chart Book

Close 9.59
Apr/10

2010
May2010
5-Years G Sec AAA Bond Spread (basis points)

Source: Bloomberg
 In a lighter vein
In a lighter vein features incidents from 1930s to reflect the atmosphere of the times – the only period that was, as of now, worse than now.

• Two New York brokers recently went out for lunch, and in crossing Broadway noticed an open manhole. Surrounding it was the usual iron fence, with the
painted notice "Men at Work". Said one to his companion: "Don't pay any attention to that sort of junk. "It's just Hoover propaganda."

• (Note: it's funny because it's true.) A mechanic who has lately started buying small lots of stock asked his banker for some suggestions on railroad shares.
The banker suggested Pennsylvania Railroad and presented a list of statistical information.The investor perused the information, and was particularly drawn
to the huge number of shareholders reported. "Well, there's one sure thing," he remarked, "if I am making a misstep I'll not be alone."

• "How's business?" a traveling salesman asked the new barber. "Boy," replied the barber, "it's so quiet here you can hear the bonds drawing interest at the bank."

• Guide - Why not go to the top of the mountain? The famous six-fold echo is now twelve-fold.Tourist - How is that? Guide - In the busy season we hire more
men.

Source: http://newsfrom1930.blogspot.com/ - A daily summary based on reading of The Wall Street Journal from the corresponding day in 1930.)

BackPage Investment Quiz

1 Who is the author of Fooled by Randomness-The Hidden Role of Chance in Life and in the Markets?

Compiled by S.Vaidya Nathan

2 What is maximum amount of a single-issuer’s security that can be owned by a fund / fund house in India?
3 Who invented the ATM?
4 Who heads the Office of the Special Inspector General for Troubled Asset Relief Program (SIGTARP)? This is a rare U.S official who has acted
with objectivity and without being swayed by the too-big-to-fail banks?
5 In whose tenure as Prime Minister did the first major devaluation of the Indian rupee take place?
P
R Answers must be mailed to iq@sundarambnpparibas.in
I The first 25 responses with correct answers to all questions will receive a prize. Please mention your mailing address in your e-mail. Employees of Sundaram BNP Paribas
Z Asset Management, its Sponsors and Associates & Group Companies of the Sponsors shall not be entitled to prizes even if they participate and mail correct answers.
E

Answers for May 2010 Quiz

1 Greece 4 Sun Trust Bank
2 10% of the assets (and not owning more than 10% of a company’s
equity) 5 UTI Mastershare enjoys the distinction (17 years) though it has been
3 Yves Smith, pseudonym name for the writer of the Naked Capitalism
blog an open-end fund since September 2003

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securities investments are subject to market risks. There can be no assurance or guarantee that a scheme's objective will be achieved. NAV may rise or
decline, depending on factors and forces affecting the securities market. There is risk of capital loss and uncertainty of dividend distribution. General Disclaimer:
The Wise Investor, a monthly publication of Sundaram BNP Paribas Asset Management, is for information purposes only.The Wise Investor is not and should not be
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necessarily represent that of Sundaram BNP Paribas Mutual Fund or Sundaram BNP Paribas Asset Management or Sundaram BNP Paribas Trustee Company or the
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Sundaram BNP Paribas Asset Management 44 The Wise Investor June 2010