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  BRIC Economies Drop Like Bric(k)s

By Shlomo Maital

  While the world’s attention focuses almost exclusively on the death throes of the euro,  a more serious problem is emerging, in emerging markets.  The emerging-market BRIC countries (Brazil, Russia, India and China), whose growth in the past decade has been phenomenal, despite the global recession, are all slowing down.  This is very bad news indeed for the global economy.  We tend to forget that China is a huge importer, from other Asian nations. If China slows, so will the rest of Asia.

   Here is the evidence:

 *  Brazil’s economy grew only by 2.7 % in 2011, and in March, the economic activity index dropped for the third straight month. President Rousseff is considering a stimulus package, as Brazil threatens to dip into recession.

* Russia’s economy has recovered more slowly from the global recession than other emerging markets, the World Bank says.  It has an aging population, unproductive workers, corrupt opaque investment climate, and political unrest.  All this was papered over by high oil prices, but now oil prices have come down and fracking has brought new gas supplies online in Europe.  Russia’s growth will be an anemic 3.5% this year.

* India is in economic slowdown, perhaps even crisis.  Foreign investment is now half of what it was the previous year. The Finance Ministry has imposed a slew of new taxes to stem a growing budget deficit, deterring foreign companies.  Indian bureaucracy and corruption are rife.  Moreover, India has been loathe, for some reason, to trade with its neighbors (Bangla Desh, Sri Lanka), unlike China, which made itself into a part of a whole ecosystem of cross-border trade. 

* And worse of all, China. Growth in all of East Asia/Pacific is slowing from 10% in 2010 to 7.6% this year.  China’s growth may slow to 6 % or 7%.  China has a ‘wait for the second shoe to drop’ problem.  At government insistence, banks made huge loans to property investors. The property bubble hasn’t burst, but property prices have fallen. Many owners of property have lost heavily. Some can’t pay back their loans. Banks are slow to foreclose and sell the properties, as they do in America, because to do so would recognize the losses on their P&L’s.  But sooner or later, those losses will indeed be realized.  China’s government has very few good options to stimulate the economy, because banks have already overlent. 

    The last thing the world needs is an Asian crisis, to match the European crisis.  It seems that is what we have.

    Asian and European leaders need to sit down together and work out a joint stimulus plan.  But if the Europeans themselves can’t get along, what are the chances Europe can work harmoniously with Asians?   Zero. 

 The Phantom of AoL: Persistence Pays, or  “Stayin’ Alive!”

By Shlomo Maital

  Eric Simon




  The BeeGee’s


   This blog often stresses the crucial importance of dogged persistence in entrepreneurial success. For a startup, I believe persistence ranks way above IQ and even creativity.  Here is a great story from the San Jose Mercury, a paper that covers Silicon Valley startups, about persistence:

    To save money for two months, 20-year-old Eric Simons surreptitiously lived inside AOL’s Palo Alto office, sleeping on its couches, showering in its gym, sneaking its snacks and laboring there all day to develop his dream — the Internet site ClassConnect, which he launched to help teachers create and share lesson plans with students and other educators.   Simons said he managed to avoid detection because AOL regularly lets budding innovators not affiliated with the company use its building to work on their projects.  “The startup guys always stayed there really late,” he said, adding that he was merely doing what was necessary to get his business going. Sticking a few clothes and other belongings in two lockers in AOL’s gym where he washed up, he slept on the couches in several out-of-the-way rooms and took advantage of snacks AOL set out for everyone in the morning.   “I’d grab two cups of Ramen noodles and trail mix for lunch and dinner, and cereal for breakfast,” he said. Then he’d work in the building 15 hours a day or more developing his company’s website and software.

   “To put the odds in your favor, you’ve got to use all of the resources you can. You have to figure out ways of staying alive,” said Simon.

    Let’s pause here to pay tribute to the BG’s great hit Stayin’ Alive, by Maurice, Robin and Barry Gibbs, the anthem of entrepreneurs, and mourn Robin Gibbs, who passed away on May 20.  His brother Maurice died some years ago.

Life goin’ nowhere somebody help me

   Somebody help me, yeah

Life goin’ nowhere somebody help me, yeah

   I’m stayin’ alive, ah ha ha ha stayin’ alive

      A self-described “worst nightmare” as a high school student in Chicago, Simons said he became intrigued with assisting educators when a chemistry teacher pulled him aside one day and asked him, “What would make you interested in learning what I’m teaching?”  After moving to the Bay Area last year, he got a $20,000 grant to develop his startup from the business incubator Imagine K12, which was using AOL’s Palo Alto office. The money didn’t last long, however. No longer able to pay rent, Simons said he figured his best option was to move into the building until he could get ClassConnect on its feet. His badge to the building from Imagine K12 still worked.

“It was pretty hellish,” he said. “In some respects, it totally sucked. But if I didn’t put in that much time, the product wouldn’t have launched.”

  Class Connect is now a big success, and young Eric has money and a place to live.

   “Among those willing to make a bet on Simons is Clink Korver of Palo Alto-based Ulu Ventures, who also met Kopf through Imagine K12. He was so impressed that Ulu and investor Paul Sherer recently pumped $50,000 into ClassConnect, giving some financial breathing room to Simons, who now rents a Palo Alto house and sleeps in a bed.  “Eric was just a really compelling individual,” Korver said. “You’ve got to love somebody who’s willing to put everything out there to make his dream come true.”

 If you’re willing to eat trail mix and sleep in your office, because you believe in your idea – well, maybe, just maybe, you have what it takes to launch a business.  Eric Simon did.  By the way: Check out   

Did Facebook Lose Face?  Why Its IPO Was A Success!

By Shlomo Maital


     Wall St. and the media are combining to sell a baldfaced lie – that Facebook’s IPO was a flop.  It was actually a big success.  Here is why.

   Some 17 years ago, Netscape made a “successful” IPO on August 9, 1995, according to all accounts.  “ The stock was set to be offered at $14 per share. But, a last-minute decision doubled the initial offering to $28 per share. The stock’s value soared to $75 on the first day of trading, nearly a record for first-day gain, the stock closed at $58.25 meaning a market value of $2.9 billion.”

   Hey! Success for whom?  Let’s ask, what’s the function of an initial public offering IPO of stock?  To raise money for the company so that it can invest and grow!  NOT to make money for Wall St. traders, insiders, bankers and fat cats.  It’s for the company!  Facebook raised nearly $16 b. for the company, for future growth and investment. That, my friends, is a big success.   By putting a low initial price on Netscape stock in 1995 (even after doubling it), the underwriters cost Netscape massive sums that could have helped it battle Microsoft’s Internet Explorer, which eventually blew Netscape’s browser out of the water. If they had priced Netscape stock at $50 a share, instead of $28, they would nearly have doubled Netscape’s funds raised from the IPO.

  Why then all the talk about failure?  Here is what Bloomberg is saying:

    Facebook Inc. (FB)’s initial public offering, plagued by trading errors and a 16 percent drop in the share price, will push more individual investors out of a stock market they already distrust after the financial crisis.  “This is clearly the latest in a long string of events that is eviscerating the confidence investors have in the market,” said Andrew Stoltmann, a Chicago attorney who represents retail investors. “The perception is Wall Street jiggered this IPO so the underwriters made money, Facebook executives made money and the small investor got left holding the bag.”  Buyers of the stock have sued Facebook, the sale’s underwriters and Nasdaq OMX Group Inc. (NDAQ), the exchange handling the listing.  Federal securities regulators and the U.S. Senate’s banking committee have said they will or may review the Facebook offering.   Federal securities regulators and the U.S. Senate’s banking committee have said they will or may review the Facebook offering.     Individual buyers’ willingness to venture into stocks was undercut by difficulties in executing trades on the first day of trading on May 18, Facebook’s subsequent decline and questions over whether the firm and underwriters selectively disclosed material, nonpublic information.  “If you have a lot of angry people out there, they’re going to express their anger in different ways,” said Steve Sosnick, equity risk manager for Timber Hill LLC, the market- making unit of Greenwich, Connecticut-based Interactive Brokers Group Inc. (IBKR) “One of them may be with their feet.”   The IPO produced the worst five-day return among the largest U.S. deals of the past decade. The 13 percent decline through May 24 exceeded the 10 percent drop by MF Global Holdings Inc. in its first five sessions. Visa Inc. did best among the biggest deals, rising 45 percent.

  Failure? Sure – for the small investors who were duped into buying Facebook shares, hoping for a quick ‘flip’.  And for the insiders,  close to the warm fireplace of Morgan Stanley, the underwriter, who get to buy shares at a discount before ordinary people do.   But that’s not the goal of an IPO. The goal is to raise money for Facebook. And it did.  When  will the media stopped propagating Wall St.’s egocentric view of the world, that measures everything by the bottom line of financial services and individual traders? 

    The bottom line is, the initial price of a sale of an initial offering of shares should reflect true value.  Facebook’s $38  price did that.   If Wall St. didn’t cash in and make billions, well, tough.  Those billions belong to the company, not to Wall St.  Why is that simple point so hard to understand?  Why should we mourn the loss of another Netscape – an episode that ushered in the bubble, and the 2000/2001 disaster, that heralded the 2008 global collapse?   

Latvia — Europe’s Poster Boy

By Shlomo Maital   


   Name Europe’s fastest-growing economy in the first quarter of 2012, a time in which Europe and the euro sank into deep crisis. 

   If you got Latvia – you are a genius.  Tiny Latvia, with only 2.2 m. people (a fifth the population of Greece) grew by 5.5 per cent (annual GDP growth).   There are  two reasons this is astonishing. First, Latvia was a total basket case two years ago, when its economy contracted by 17.7% (in 2009), one of the largest contractions in Europe.  Second, Latvia has been imposing austerity.

   Austerity??  This blog has blasted austerity policies, like Cato the Elder calling for the destruction of Carthage in the Roman Senate. 

   Here is what Latvia’s tough courageous political leaders have done.  Cut public wages by 20%.  Slashed the budget deficit from 10% of GDP to 2.5%.   Slashed Latvia’s import surplus from 25% of GDP (!) to 1.2% last year. 

    How did they do this?  And why?

    Latvia is utterly determined to dump its weak unstable currency, the ‘lat’, and adopt the euro.  Its terms of membership in the EU enable it to do this, provided it meets tough conditions.  One of those conditions is to keep the ‘lat’ fixed relative to the euro for the pre-euro period.  That means that none of Latvia’s recovery has been helped by a currency devaluation (an ‘easy’ policy). 

   Why has austerity worked in Latvia, and failed elsewhere? First, Latvia had no choice; it was going down the tubes. Second, Latvia has very strong tough political leadership.  Third, the people of Latvia understand the reason for austerity – enabling Latvia to switch to the euro, and benefit from foreign investment and EU funds.

    The picture is not all rosy.  Some 200,000 Latvians emigrated abroad in the past decade. And the austerity program is eroding support for the euro, as is the crumbling euro itself.

    But despite this, we should ask:  Are other European nations asked to impose severe austerity for a decade, just so they can pay back wealthy European banks, able to meet the conditions Latvia meets?  If not, they won’t be able to sustain austerity.  And of course, the answer is:  Greece is not Latvia. Not even close. 

 * source: Wall Street Journal, Heard on the Street:  May 23.

  Why is Europe Repeating Churchill’s Horrendous Mistake?

“Those who forget history….”  Chapter Two

By Shlomo Maital  


 Winston Churchill


Santayana’s dictum, those who forget history are condemned to repeat it, is being proved true today in Europe. 

   Some 88 years ago, in 1924, Churchill was appointed Chancellor of the Exchequer in Stanley Baldwin’s Tory government.  He was given the task of returning Britain to the gold standard, meaning, re-fix Britain’s pound sterling/dollar exchange rate at the old pre-war parity of one pound equals $4.86.  Because there had been high inflation during WWI, the pound sterling wasn’t worth anywhere near $5.  To restore this exchange rate, Churchill had to impose a disastrous austerity program (sound familiar?).  Slash the budget, cut wages, drive prices down, tighten money, raise interest rates, and create a deep bitter recession or near-Depression.   There were fierce strikes, and when the Army was called out to quell them, a number of deaths.  (Churchill is reported to have recommended using machine guns on the striking coal miners).  The overvalued pound sterling (worth, say, $2.50, but not $5) killed Britain’s exports.   Driving down prices to validate a $5 exchange rate created huge suffering; it was a massive case of the tail (exchange rate) wagging the dog (people’s wellbeing).

    Why  was all this suffering imposed? Simply, because of a mythical exchange rate that was no longer valid. Churchill later admitted  he regarded  this policy as the greatest mistake in his life.  Had he not been brought back to lead Britain against the Nazis, history would remember him as a cruel misguided Finance Minister. 

     How is all this relevant?  Led by Germany’s Merkel, Europe is imposing austerity everywhere – all this, to maintain a currency, the euro, which is today overvalued, largely because of Germany.  As with Churchill’s Britain, there is terrible unemployment in the countries imposing austerity – Greece, Spain, Portugal, even Italy.  All this, to preserve a currency, instead of  relating to the wellbeing of the people, the workers, the families, the children.  Europe is imposing deflation, making people suffer to sustain the euro, instead of managing the euro to enhance people’s wellbeing.  It’s that old déjà vu all over again. 

    In his book The Economic Consequences of Mr. Churchill J.M. Keynes, the leading British economist in 1925, bitterly blasted Churchill’s policy.  To no avail.  Churchill and the Tories did it anyway.   One result was that by slashing defense spending, Churchill was responsible for the fact that Britain’s army was not ready to fight the Nazis.  This endangered Britain’s very existence in 1940-41.   It is an irony of history that Churchill had to fight a war that he himself had created by leaving Britain weak and nearly defenseless.

    UK 1925.  EU 2012.  When will they ever learn?

Henry Mintzberg’s Truly Innovative MBA: Worth a Try!

By Shlomo Maital  



Henry Mintzberg

The May 21 Global New York Times (p. 13) has a lovely article about “seeking success with the anti-MBA”.   It’s about a truly innovative MBA program (all MBA programs teach innovation, but almost none of them practice it – they’re all cookie-cutter versions of the same stuff).  The inventor is famed management educator Henry Mintzberg, McGill Univ., and after (or while) he wrote his famous article, “The Five Mindsets of the Manager”, (HBR), he invented an MBA program tailored to it.  In five 10-day modules, participants visit five different venues, in Brazil, Britain, India, China and Canada. Each venue features a different managerial mindset:  Reflective; Analytical; Worldly (not global – Mintzberg wants to stress differences in global markets, not sameness); Cooperative/Collaborative; and Action.

  In each module, participants work together on projects that are highly unconventional. For example, they study a long poem by Wordsworth, “Prelude”, as part of the reflection mindset module.  This 13,000 line poem is, the students are told, a management handbook. Now – figure out how and why. 

   Mintzberg is highly critical of standard MBA case study methods. “The philosophy of the case study method is that you simulate management practice on the basis of reading a 20-page study.  George W. Bush went to HBS and I don’t think he even read 20 pages. But he’s a good example of how disastrous that approach can be”, he says.

   If you’re looking for an MBA program, consider this one.  If you want to become more innovative, it’s not a bad idea to study in a program that is itself innovative.  It’s pretty hard to become creative in sliced-white-bread MBA programs that teach the same case studies in the same way.  Mintzberg says, “we have three centuries of management experience right in this room” – and that’s not counting the faculty!  He leverages the wisdom of the participants, to create a unique learning experience. 

 Why Greece Should Emulate Iceland 

By Shlomo Maital  


    Writing in the Wall St. Journal (May 19-20/2012, page one), Charles Forelle enlightens us about Iceland’s remarkable recovery. All the world’s media covered Iceland’s disastrous crash, in 2008.  Very few are covering its remarkable recovery.  Here is what Iceland did, after its banks crashed:

* devalued its currency by half.  That made imports very expensive, true, and brought inflation,  but it turned Iceland’s trade deficit into a surplus and made its goods (mainly fish) very competitive in world markets.

* Iceland let its banks fail. It did not bail them out. That made the British furious, because they bore some of the losses.  But unlike Ireland, it did not saddle a relative handful of Icelandic taxpayers with burdensome debts for the rest of their lives.

* Iceland imposed strict capital controls to prevent flight of capital.  Of course, the financial services industry screamed bloody murder.  But it avoided the disastrous flight of money out of Iceland that Spain, Italy, Greece, Ireland and Portugal are experiencing.

* Iceland avoided austerity, and instead, increased social welfare payments to its poorest citizens.

   Iceland has only 320,000 citizens. Some say its tiny size make it irrelevant as a case study, or ‘experiment’.  This is not true. It doesn’t matter what its size is.  Iceland avoided austerity and did the opposite. It avoided bailing out banks and assuming huge debts.  Job creation is huge.

      Is anyone listening?  Hello, Angela?  IMF?  Economists?  Anyone? 


 More Lessons Learned from J.P. Morgan 

By Shlomo Maital  

  The Wall Street Journal * provides a few more insights into the J.P. Morgan fiasco.

1. Tighter regulation is NOT the solution.  The Office of Comptroller of the Currency, which regulates the JP Morgan unit that made the disastrous trades, “says it has roughly 70 people monitoring the bank’s trading activities”.  Seventy people!  Full-time.  That’s bigger than many investment companies.   On April 13 CFO Douglas Braunstein said all of JP Morgan’s trades done by the “London whale” were “fully transparent to the regulators”.   That was just weeks before the collapse.  Can regulators paid 1/100 of what the traders earn, truly regulate?  No way. 

2.  The essence of great speculative trading is secrecy.  You have to disguise your trades, because if other traders get on to what you’re doing, they’ll do the same, and you’ll lose, or they’ll figure it out and bet heavily against you, and again you lose.  Even within JP Morgan, “the size of its individual positions have been a closely guarded secret”.   That means, by the way, a secret, even to the CEO Jamie Dimon.   In future, other top CEO’s, revered as great risk managers, will crash and burn, because of secret trades disguised by traders and hidden even from the back office. 

3.  The fundamental problem is global (especially European) uncertainty.  What rattled markets, and cost JP Morgan what may be $5 b. in losses, was Europe’s chronic inability to deal with its Grecian urn.  The Europeans, led by German intransigence, are sinking not only Europe and the euro, they are dragging the rest of the world down with them.   At the G8 meetings in Camp David, did Obama say this to the Europeans?  No way.  Is there ANYone who can tell the Europeans to quit dithering and resolve their conflict once and for all?  Let Germany leave the euro. Or let Greece leave the euro.  But take decisive action, deal with the problem, because continuing nervous breakdowns in global capital markets is a disaster. 

* Gregory Zuckerman and Scott Patterson, “JP Morgan Struggles to Unwind Huge Bets”, WSJ, May 10, page 1.

  Germany Should Leave the Euro

By Shlomo Maital  

   In his Foreign Affairs blog, Clyde Prestowitz proposes a radical idea for ending the slow death of the euro and the prolonged agonies of Greece and Spain.  Let Germany (not Greece!) leave the euro. 

  The reasoning is so simple.  Germany’s economy is the most powerful in Europe. Because of its strength, the euro is far too strong, given the weak condition of France, Italy, and other countries.  So Germany, far from being the savior of the euro with its money, is in fact the enemy of it.  If Germany were not included in the euro, the euro would drop to parity with the dollar. That would make the euro nations 30 per cent more competitive. 

  So, let Germany leave the euro, and restore the deutschemark.  The good old DM.  There would be massive support in Germany for this move. Merkel’s re-election would be assured.  The euro of the remaining 16 nations would then plummet.  And this would boost their struggling economies and end the current recession.

    It’s perhaps the only way to save the euro.  Let the strongest nation leave the euro bloc, not the weakest.  This idea deserves serious discussion. It’s time Europe marshaled some innovative thinking, as it drags America, Asia and the rest of the world down into the maelstrom with it.


JP Morgan: Post Mortem

By Shlomo Maital  



 Joe Bftplsk Morgan


The chances are good that by the time JP Morgan manages to unwind its disastrous credit default swap trades, its losses will far exceed $2 b.  NYT:  “the trades could continue to spill red ink for months, costing the bank several billion dollars.”

  Here are a few things that contributed to this bungle.

  1. CEO Jamie Dimon is also the Chair.   When you invest in a company, you should prefer firms that have a strong independent Board of Directors, including a Chair who is NOT the CEO.   Nothing can destroy an organization faster than a charismatic leader, someone once said.  And, they should add, chairs the Board as well.  NYT:  “…four out of 10 directors wanted to replace Mr. Dimon as chairman with an independent director”. Just short of a majority….

  2. Value-at-risk, as a risk management system, should never be used.  Does anyone remember Bankers Trust?  The world’s greatest, sharpest, money-making investment bank?  Well, they were destroyed by the “world’s best” value-at-risk risk management system.  Nobody remembers them today.  What IS value at risk?  Basically, picture a normal curve (a ‘bell curve’).  Picture the left-hand tail, where the losses are. Shade in the part of the left hand curve that covers, say, 5% of the area.  Estimate that area. That’s your value at risk.  Track it daily, manage it, control it… Sounds reasonable, right?  Except – returns and losses are not distributed normally, like a bell curve, and their actual distribution constantly shifts.  When there is systemic risk, and if you are blindly using value-at-risk, you will miss it – by the time you wake up, it’s too late. J.P. Morgan, by their admission, used value-at-risk.  Why?

 3. Beware of chief executives who draw obscene pay.  Dimon earned $23 m. annually.  His Board of Directors, representing the shareholders, approved it.  There is now talk of clawback.  There should have been no claws in the first place.  Even if he gives all of it back, it will be less than 1 per cent of the bank’s losses from the disastrous uncontrolled gamble.

4.  Permanent black clouds.  A cartoon character in L’il Abner, Joe Btflpsk, had a permanent black cloud over him.  Now so does J P Morgan.  NYT: “The F.B.I. case will examine potential criminal wrongdoing at JPMorgan, according to people briefed on the matter, representing the most serious inquiry to stem from the losses.”   Even if nothing at all comes of this inquiry, it will be a black cloud hanging over JP Morgan for a very long time..and then, afterward, it will be remembered.  JP Morgan will never be quite the same. The SEC will investigate as well, apparently.  Two black clouds.

Blog entries written by Prof. Shlomo Maital

Shlomo Maital