>CLARIANT CHEMICALS: Capitalising on consumption boom

Supplier of specialty chemicals for value addition in host of consumption categories

Clariant Chemicals (India) (CCIL), a 63.4% subsidiary of Clariant AG, Switzerland, is a
leading specialty chemicals companies. India is witnessing one of the best growth rates ever
seen in consumption in various sectors including automobiles, paints, personal care, food
and beverages or textiles. With demand growing at a fast clip, CCIL is ideally placed to
capitalise on this favourable trend as it caters to most of the consumption categories.

Most of CCIL’s portfolio consists of specialty of products enjoying strong brand
and tremendous customer loyalty due to superior quality and technology. As the
consumption boom gathers steam, demand for value-added and well-finished products
will expand at a faster rate than the category growth. Hence, the company’s products
will enjoy faster growth.

The textile business of CCIL enhances the properties of apparel and other textiles in
applications as diverse as high fashion, home textiles, and special technical textiles. The
company is also a leading manufacturer and supplier of pigments and its preparations for
manufacturing paints, plastics, printing inks, cosmetics, detergents or special applications
like latex, and viscose. Its high performance pigments meet the exacting demands of the
automotive, coil and coating industries.

To read the full report: CCIL

>GLOBAL FORECAST: Cooling Trend In Global Growth

Scotia Economics now expects that global growth will advance by 4.4% this year and 3.8% in 2011 (based upon a purchasing power parity weighting of 34 countries), with emerging countries still outpacing the performance of the advanced nations by a considerable margin. This continues a recent pattern of trimming our economic and financial market forecasts to reflect a number of key developments that are restraining activity around the world.

First, we have pared back domestically generated growth in the United States from already soft levels, with the increased economic and financial market uncertainty since late winter further undercutting confidence and business expansion plans. In a chronically weak job market, Americans continue to focus on paying down high levels of household debt. Housing activity has been adjusted lower to reflect downward revisions to sales and building data. The one relative
bright spot in the U.S. outlook continues to be business investment in machinery & equipment as firms take advantage of increasing order books and expanding international trade, though the mildly lower trajectory now projected for U.S. real GDP will likely take a bite out of the comparatively solid pace of earnings growth.

Second, the economic fallout in Europe from the sovereign debt crisis and the budgetary problems in the United Kingdom will progressively ripple through the region and the rest of the world in the second half of the year and in 2011. Beyond the negative economic impact on the region from the financial upheaval, the expected slowdown in domestic spending will dampen activity internationally through reduced imports and the weaker euro. Nevertheless, we have adjusted our 2010 forecast for the United Kingdom slightly higher because of the much better-than-expected results in Q2 attributable to the slowly emerging recovery that preceded the recent turbulence. Looking ahead, the accelerated pace of fiscal consolidation points to a period of slower, rather than faster, economic activity in the second half of this year and into 2011. While 2011 growth prospects for Germany and France will be limited due to fiscal consolidation and an export sector slowdown, the impact will be offset by a pick-up in activity in the euro zone periphery as these countries emerge from recession.

To read the full report: GLOBAL FORECAST

>The Artificial Economic Recovery

Economic recovery in the U.S. and elsewhere has slowed rapidly and private and some
public forecasts are being downgraded accordingly. The Federal Reserve is sounding much
more cautious, although they are not yet prepared to talk of further monetary easing. The most
optimistic observers are now having to face reality. The massive stimulus packages did the job
of stopping a self-feeding downward spiral but they have given us an artificial recovery.

Growth is now gravitating back towards 1% in the U.S. and Europe, close to what final
demand has been. In the U.S. the inventory cycle has stopped adding growth, state and local
governments are slashing expenditures and jobs, the nascent housing recovery has gone into
reverse, and deleveraging continues. Realistically, it is difficult to picture where any new growth
surge may come from.

One of the most important implications of this dampened outlook is that government tax
revenues will be disappointing and expenditures will remain elevated. The cyclical component
of the deficit will remain high and the structural component will be hard to cut in a weak
economic environment with unemployment likely to rise further.

To read the full report: ARTIFICIAL RECOVERY

>The ingredients that contributed to the European crisis are many:

■ Slow-growing, unproductive and uncompetitive economies.
■ Low birthrates and aging populations. (“In the 1950s there were seven workers for every
retiree in advanced economies. By 2050, the ratio in the European Union will drop to 1.3 to
1.” – New York Times, May 23)
■ Generous benefits and social services; cradle-to-grave safety nets.
■ Extensive vacations and strict limits on the work week.
■ Early retirement.
■ Artificially high debt ratings and resultant low interest rates.

To read the full report: EUROPEAN CRISIS

>Thinking ‘outside the box’ on economic policy

• The markets are currently imposing on Europe a more brutal tightening of fiscal policy earlier than expected. But that does not mean that the two other constraints have disappeared: central banks should normalise the settings of their monetary policy as soon as conditions are met, while there is a ‘strong obligation’ to maintain a certain level of growth. How this can be done is not at all clear, and there are fears that the markets will find it difficult to extract themselves from this new ‘Bermuda Triangle’ – not forgetting that the triangle can easily shift from one place to another within the region formed by the advanced countries.

• Recent European experience shows that the management of fiscal policy appears to be a more complicated issue than previously thought: how is the decision made when to cut off stimulus and start coming back to fiscal discipline? Cutting it off too soon is taking the risk of the economy plunging into a new downturn; letting it run for too long could build more investor fears and create a hard landing scenario. Defining the main risk between Scylla and Charybdis is
never easy. Perhaps the choice should depend on the importance of both private domestic savings and the ability to attract foreign capital.

• The decision of the ECB to purchase government bonds on the secondary market has triggered a debate about the impact on its credibility. The latter would be reduced because of too close proximity to the behaviour of governments. From an academic standpoint, a distinction has to be made between an environment of high inflation or of very limited inflation. In the face of high inflation, often related to excessive monetisation of government debt, a central bank’s
independence is its cardinal virtue; if very limited inflation is associated with weak growth and fiscal austerity, greater co-operation between the central bank and the government is more easily understandable.

• The link between the sovereign debt crisis and banking crisis has been borne out historically. However, the aim of the rescue plan for member states from the European Union, with IMF support, no doubt changes the nature of that link. In fact, the plan is designed to head off for a period (almost two years in the case of Greece) the emergence of liquidity risk for the Greek Treasury, with the breathing space gained being devoted to reducing solvency risk via credible public account rebalancing plans. For a short time, therefore, the plan staves off the transfer of risk from the sovereign to the banking sector. It is, in fact, a sort of ‘mutualisation’ of risk between sovereigns: from the weaker to the healthier. In this respect, it is probably not entirely legitimate to link the two types of risk so strongly.

To read the full report: MACRO PROSPECTS

>ASSET ALLOCATION THOUGHTS

"Let every man divide his money into three parts, and invest a third in land, a
third in business, and a third let him keep in reserve."

-Talmud, circa 1200 BC - 500 AD1

This letter is the start of a process we will, in the future, develop into a more useful and
practical asset allocation framework for investors’ portfolios that reflects our macro view,
concerns about the general riskiness of the financial world and a variety of issues that go into the
asset allocation process.

As a starting point, it is important to understand what real long-run rates of return have
been for different assets.2 Good data exists on developed country equity markets by sector and
on real estate. For example, most people know that the real long-run return on U.S. equities is
about 6.5%. Small-cap stocks outperform large companies by a wide margin, value stocks
outperform growth stocks, also by a wide margin, and small value stocks easily outperform small
growth stocks. However, small companies have much greater volatility and business risk.

It is also well known that the real return on bonds lags the real return on stocks, but risk is
much less. In a portfolio, the inclusion of some bonds along with stocks lowers risk faster than it
lowers returns up to a point.

To read the full report: ASSET ALLOCATION

>Oil Subsidies: Costly and Rising

Reducing subsidies worldwide can bring substantial environmental benefits and create much - needed fiscal space

Who subsidizes?
Whereas all pretax subsidies are found in emerging and developing economies, advanced economies account for a sizable share of tax-inclusive subsidies. Of projected pretax subsidies totaling $250 billion in 2010, emerging economies account for 65 percent, developing economies for the remaining 35 percent. Of projected tax-inclusive subsidies of $740 billion in 2010, emerging economies account for 57 percent, developing economies 20 percent, and advanced economies the remaining 23 percent.

To see full snapshot: OIL SUBSIDIES

>Are we building the foundations for the next crisis already? The case of central

1. Introduction
Counterparty credit risk has played a pivotal role in the credit crisis due to the insolvency of large prestigious financial institutions such as AIG, Bear Sterns, Lehman Brothers, Fannie Mae and Freddie Mac. The size of over-the-counter (OTC) derivatives markets means that counterparty risk is a key concern for financial institutions and many corporate users of derivatives. OTC derivatives are widely seen as having the natural ability to create systemic risk. Due to the increased focus on
counterparty risk in OTC derivatives, especially credit derivatives, there has been a significant interest in central clearing. A central counterparty (CCP) is an entity that stands between parties with respect to some or all contracts traded between them.

Because a CCP intervenes between buyers and sellers, it bears no net market risk but does take the counterparty risk. An institution trading through a CCP no longer needs to worry about the credit quality of its counterparty. Effectively, the CCP is the counterparty to all trades.

A CCP may reduce systemic episodes that were so highlighted within the financial markets during the 2007-2009 period. If an institution becomes insolvent then the CCP will guarantee all the contracts of that counterparty executed through them. This will mitigate concerns faced by institutions and may prevent any extreme actions that could worsen the situation, behaviour characterising the domino effect that is so associated with a severe systemic risk episode. The CCP will have initial margin and reserves to absorb losses due to the insolvency of a member. It may also require that excess losses caused by the failure of one or more counterparties be at least partially shared amongst all members of the CCP.

Whilst the presence of one or more CCPs might seem like a “silver bullet” with respect to counterparty risk, it is not all good news. A CCP must have a fine tuned structure with respect to margining, settlement and risk management and ultimately should be extremely unlikely to fail. The bigger a CCP becomes, the more catastrophic its failure would be. Furthermore, the homogenisation of counterparty risk and removal of the need for institutions to assess their counterparty’s credit quality may cause problems. The aim of this article is to discuss the strengths and weaknesses of CCPs and assess their viability in reducing counterparty risk.

2. The drive towards central clearing
The housing crisis, credit crunch and financial and economic downturns during 2007- 2009 led policymakers to propose laws that would require most standard OTC derivatives to be centrally cleared. This was largely driven by fears surrounding the credit default swap (CDS) market. A CDS is a derivative instrument whereby the credit quality of one of more underlying assets is traded. Due to their nature, CDS contracts can lead to large exposures being built up in rather small periods. The failure of American International Group (AIG) and some monoline insurers was
linked to CDS contracts and so surely having all such contract derivatives cleared will be a big step forward in terms of limiting counterparty risk?


To read the full report: CENTRAL COUNTERPARTY

>Enough Blood in the Streets?

Almost everything on world markets from stock prices, oil, other commodities, non-dollar currencies, then proceeded into a near panic sell-off while the usual safe-haven assets such as the U.S. dollar, Treasury bonds and gold rose. This was not a happy performance for most investors and those, like us who have been relatively positive on risk assets for some time (new readers can check out our views for the past 18 months on our website www.BoeckhInvestmentLetter.com which provides back issues). So let’s back up a bit and see whether our relatively positive view needs to be reconsidered. The first point is that readers of this publication and of our recently released book, “The Great Reflation” will know that we are not exactly oblivious to the deep and scary problems of the financial, economic and political world (discussed below). These continue to call for a clear focus on wealth preservation, a profound understanding of risk and return prospects and some sense of timelines and benchmarks to watch closely. So far, the key benchmarks of stability in U.S. Treasury bonds, the U.S. dollar, U.S. corporate bond spreads and low to zero price inflation are still flashing green. This means that the Federal Reserve can continue to pump liquidity into the banking system and economy.

The overall environment, particularly in North America, should remain positive for risk
assets. We think the recent panic in financial markets has been overdone. Having said that, the
economy and financial systems are fundamentally unsound and confidence is fragile, vulnerable
to periodic shocks, like the recent Greek/euro crises. However, recovery from the near collapse
of 2008-2009 is still underway, driven by improving balance sheets and liquidity, the exact
opposite of conditions in 2007-2008 when the economy and financial systems were unravelling.
Further shocks will no doubt occur and will have a significant impact on markets. The rollercoaster ride is still intact and the great reflation has added some steroids. Eventually, the piper will have to be paid, but we think that this can be put off for a while longer. But this view must be tempered with the notion that anything can go wrong at any time with little or no warning— like the euro crisis of recent weeks. Brittle confidence snaps easily and causes financial bloodshed. We think the recent sell-off qualifies, in good part, for Baron Rothschild’s quip about when to buy. While this is no time for complacency, it is probably not the time to lose your nerve.

The big negatives for financial markets are well documented, as are many of the smaller
ones. Frightening news sells well when people are scared and this obviously creates a feedback
loop. The coverage in the press, investment research and subscription services, blogs and TV
have done an excellent job of thoroughly informing us all as to the world’s problems. (Where
were they in 2006-2007 when the problems were being created?). There is no need to cover the
same ground, so we will instead provide our own take on some of the issues.

To read the full report: ENOUGH BLOOD IN THE STREETS?

>Correction in a Bull market? Or beginning of a Bear market?

“When popular opinion is nearly unanimous, contrary thinking tends to be most profitable. The reason is that once the crowd takes a position, it creates a short-term, self-fulfilling prophecy. But when a change occurs, everyone seems to change his mind at once,” wrote Gustave Le Bon in his book “The Crowd.”

For almost fourteen un-interrupted months, stock markets around the globe were climbing higher, recouping $21-trillion of wealth since hitting bottom in March 2009. The global economy was pulling out of its worst recession since the 1930’s, led by locomotives in China, India, and Brazil. On May 4th, a survey taken by JP-Morgan showed that global manufacturing expanded at its fastest pace in six-years in April, as output and new orders surged to new multi-year highs.

In the United States, factory activity was firing on all cylinders, lifting the Purchasing Manager’s Index (PMI), to a six-year high at 60.4 in April, with employers becoming increasingly confident about hiring. Although manufacturing is not a huge component of the US-economy, the factory industry is still where recessions tend to begin and end. For this reason, the factory PMI is very closely watched, setting the tone for the upcoming month and other key economic indicators.

The US-economy added 570,000-jobs during the first four months of 2010, - a sharp contrast to what occurred a year earlier, when the US-economy was losing more than 700,000-jobs /month
during the depths of the “Great Recession.”

To read the full report: BULL OR BEAR MARKET

>WHITE PAPER: I Want to Break Free, or, Strategic Asset Allocation ≠ Static Asset Allocation

In the English speaking world, we all use keyboards known as QWERTY. However, this well-known keyboard is not optimal. When you prepare to type, your hands rest on the second row of letters known as the home row. Now, you might be forgiven for thinking that the most frequently used letters would appear in this row in order to minimize travel of the fi ngers. However, this isn’t the case. In fact, only 32% of strokes are on the second row, while 52% of strokes are on the upper row. Other such quirks include two of the least used letters in the English language, J and K, positioned on the home row. And this is only the start of a long list of ineffi ciencies with this keyboard.1

So, why do we still use the QWERTY keyboard? The answer lies in historical inertia. QWERTY was originally designed in 1874. It was built to solve a specifi c technological problem with early typewriters: when keys were struck in rapid succession, the hammers that hit the ink ribbon would often jam together. The QWERTY layout was designed specifi cally to slow typists down. Letters that frequently occurred close together in words were spaced irregularly on the keyboard, causing the typist to pause, thus reducing the likelihood of jamming hammers.

So, due largely to technological limits, the fi rst commercially produced typewriters were manufactured with the QWERTY keyboard. Users became adept with QWERTY, and this comfort level acted as a barrier to change. This barrier created enormous inertia such that the majority of us use QWERTY today, despite the fact that more effi cient keyboard layouts are
available.

I maintain that policy benchmarks are the QWERTY of the investment world. They are effectively an accident of history, and if you were starting afresh today, you probably would not come up with a policy benchmark.

It often strikes me that questions surrounding investment are rarely answered from an investment perspective. For instance, when discussing the death of policy portfolios, one of the questions I encounter most often is, “So, how should we measure you?” It appears that many investors prefer measurement precision over investment returns.

In this paper, I argue that policy portfolios and various successors (such as risk parity and life-cycle/glide-path funds) are deeply fl awed from an investment perspective. In particular, two common failings they share are a mismeasurement of risk and an indifference to valuation. I conclude that a strategic asset allocation that alters the asset mix based upon the opportunity set offered by Mr. Market makes far more sense from an investment perspective. (In modern parlance, this translates as a benchmark-free, real return focus.)

To read the full report: STRATEGIC ASSET

>The Great Reflation: The Mother of all Financial Experiments

Chuck Prince, the former CEO of Citigroup, who presided over the bank’s collapse, famously remarked in July 2007 that "as long as the music is playing, you’ve got to get up and dance. We’re still dancing.” Shortly after, the music stopped, the financial system broke, and Citigroup and other financial behemoths went under.

To rescue the economy and financial system from near‐total meltdown, the government created
an unprecedented package of bailouts, stimulus, free money and massive fiscal deficits. It succeeded, and a 1930s style debt deflation and depression were aborted. Liquidity, on a vast scale was unleashed into the financial system, demonstrating, once again, the power of such flows to drive up the prices of stocks, commodities and other risky assets.

In The Great Reflation we focus on how the authorities pumped air back into the balloon, and
got the music playing again. Investors and banks, including Citigroup, are back out on the dance floor. However, just because the system was saved, doesn’t mean it has been fixed.

Why do we say that the system isn’t fixed? The major theme running through The Great Reflation is that we have been living through a multi‐decade period of money and credit inflation that started back in the 1960s when the post‐World War II global monetary system (Bretton Woods) began to break down. The Great Reflation is about this inflation and the consequences of the Act II, which is now unfolding.

The Engine of Inflation
Inflation is the biggest enemy of investors in the long run. However, in the short term, inflation
in its early stages is often a wonderful elixir, greasing the wheels of the economy and causing riskier assets like stocks, commodities and corporate bonds to levitate. Euphoria tends to build as people get richer. But, it is important to understand that inflation is an undue expansion of money and credit. It can have the effect of raising the prices of things we consume or the prices of assets that we own or want to buy. But those are the symptoms of inflation that, if extreme, tell us that a bust is coming. In the case of rising consumer prices, the central bank ultimately has to raise interest rates and curtail credit. Recession follows. Or, if asset prices rise on the back of credit expansion, debt servicing ultimately becomes unbearable and asset prices—the collateral—start to fall, but debt levels are fixed in the short term. When people can’t service or repay debt, panics and crashes follow, and the risk of a debt deflation and depression rises dramatically.

Too much debt and falling asset prices caused the depression of the 1930s and almost another
one in 2008‐2009. One Important reason that debt rose to such extremes, both in 1929 and 2007 was that the monetary system had a built‐in inflationary bias. In the 1920s, it was called the gold exchange standard, whereby countries held both gold and currencies in their reserves. In the post‐1971 world, it was called the floating dollar standard or Bretton Woods II. Countries held mainly dollars in their reserves. As a result, the U.S. could inflate at will and foreign countries had to buy the excess dollars on the foreign exchange market if they wanted to prevent their currency from rising. In a world of low and falling price inflation, as was the case after 1982, almost all countries want a cheap currency.

To read the full report: THE GREAT REFLATION

>What is the economic outlook for OECD countries?

To see the charts and report: OECD COUNTRIES

>What lessons can be learnt from Japan’s lost decade?

The worldwide recession that followed the subprime crisis was unprecedented in many
ways, but not so unique that no lessons can be learnt from previous experiences. Japanese’s lost
decade comes probably closest. Both episodes were preceded by the bursting of speculative bubbles, with led to a prolonged banking crisis. In the case of Japan, it took the economy more than 10 years to recover. At the end of the period, GDP was around 20% below the level it would have achieved if capital spending growth had followed more normal patterns. Moreover, the slump in world’s second largest economy was not without repercussions for the country’s trading partners.

Even though this episode was followed by the longest boom in Japan’s post-war history, some
scars have remained, making the economy still very vulnerable to external shocks. Indeed, the country was among the most affected by the subprime crisis, even though its banking sector was not particular exposed to this market. The most obvious sign of weakness is that more than 20 years after its dramatic collapse, the Nikkei is still 75% below its peak reached by the end of 1989. In addition, the government accounts have seriously deteriorated.

Gross public sector debt amounts to almost 200% of GDP, and the government does not have a plan to reduce the debt to more manageable proportions. Finally, the economy is still confronted with substantial overcapacity, which has been weighing on prices. In November, the government declared that the economy went again into deflation. In the coming two years, GDP is expected to grow by around 2%, well above Japan’s potential growth rate, estimated at 0.8%. As a result, excess capacity will gradually dissipate. The Bank of Japan (BoJ) expects the economy to exit deflation in FY2011.

The lost decade
Japan’s lost decade was sparked by the bursting of bubbles in the stock and real estate markets in the early 1990 (cf. chart 1). Between December 1989 and December 1991, stock prices fell by 40%, returning them to their pre 1987 level. The property market started to falter in 1991. Between 1991 and 1993, land prices in the six major cities fell by 30%. These two asset categories might have destroyed JPY 1 500 000 billion in wealth, about three times the country’s GDP1.

In the following decade, the economy was characterised by slow growth, falling prices and
dysfunctional financial markets. Between 1992 and 2002, GDP growth averaged only 0.8%, compared with 4.5% in the preceding ten years. The OECD estimates that over this period, the potential output growth declined to 1.4% on average, down from around 4% before the bursting of the bubble.

To read the full report: JAPAN'S LOST DECADE

>A strengthening recovery, but also new risks

Growth is picking up in the OECD area – at different speeds across regions – and at a faster pace than expected in the previous Economic Outlook. Strong growth in emerging-market economies is contributing significantly. However, risks to the global recovery could be higher now, given the speed and magnitude of capital inflows in emerging-market economies and instability in sovereign debt markets.

Keeping markets open has been a strong positive factor in the upturn. The rebound in trade, while incomplete, has been substantial and is proving to be a major force pulling the global economy out of recession. The ongoing recovery in activity could surprise on the upside, with a policy-driven expansion giving way to self-sustained growth. Fixed investment could bounce back more robustly and household consumption could recover more rapidly with household savings rates having risen more slowly than previously anticipated, especially in Europe. The spillover from growth in non-OECD Asia could be stronger than expected, especially in the United States and Japan. From this point of view, the overall economic environment is relatively auspicious.

As activity gathers momentum, global imbalances are beginning to widen again. However, in some emerging-market economies, notably China, strong domestic, policy-driven demand is keeping a large external surplus from rising to the levels seen prior to the crisis. This does not obviate the need to tackle global imbalances through appropriate policies. As discussed in this Economic Outlook, strong, sustainable and more balanced growth can be achieved through a combination of macroeconomic, exchange-rate and structural policies, while delivering fiscal consolidation. Identifying and implementing such a combination of policies is a major goal of international collaboration, most notably within the G20.

Progress in financial market reform will also require international collaboration. Internationally agreed rules and regulations will need to be established to strengthen the stability of the global financial system. Articulating more clearly the roles of monetary and prudential policies in dealing with future credit and asset-price developments is also a priority.

While activity is picking up, employment growth is still lagging. Over the two years through the first quarter of 2010, the ranks of the unemployed rose by over 16 million in the OECD area as a whole, employment fell by 2¼ per cent and many more workers were working shorter hours than before the crisis. But the surge in unemployment, while dramatic and notwithstanding the attendant human and social costs, has been smaller than initially anticipated. The OECD-wide unemployment rate may now have peaked at just over 8½ per cent. At the same time, the pick-up in activity, notably in Japan and in some European economies, will likely be met by increasing average hours worked per employed person and hourly labour productivity, rather than significant net job creation. Thus, prospects for strong employment growth in these countries appear weak. By contrast, firms in the United States have shed large numbers of employees during the downturn and may therefore have to rehire relatively strongly in the upturn.

Appropriate labour market and social policies can do much to promote a jobs-rich recovery. Social protection systems have played an important role as automatic stabilisers to cushion the impact of the recession on employment. Significant additional resources have been allocated to labour market and social programmes in the stimulus packages put in place during the downturn. As the recovery takes hold and countries face the challenge of fiscal consolidation, it is important to continue to make room in budgets for cost-effective labour market programmes that support those workers at greatest risk of becoming long-term unemployed and losing attachment to the labour market. Policies that promote reductions in unemployment through cuts in the effective labour supply, such as early retirement schemes or easing eligibility criteria for disability benefits, would exacerbate labour market imbalances and weaken long-term fiscal positions.

To read the full report: RECOVERY AND RISKS

>The World Cup and Economics 2010

Welcome to our 2010 book on the World Cup and Economics, our fourth since the 1998 finals in Paris. As always, we present this as a fun piece, your companion to the competition, to be perused before, during and after the event. In addition, it might just give you some new ideas on how to benefit from our exciting, changing world.

We hope the book is as popular as past editions. To aid your enjoyment, we have kept some old favourites and added some new features. Once more, in addition to the work of our prodigious economists around the world, we have contributions from some very famous guests.

We include a very exciting contribution from Adrian Lovett of 1GOAL, a campaign designed to raise basic educational standards dramatically in the emerging world through the vehicle of the World Cup. We are happy to add our name to this effort.

Former South African Central Bank Governor Tito Mboweni discusses the host nation’s chances, aided by the football analytical skills of his nephew! Russian Deputy Prime Minister Shuvalov tells us what it is like for Russia not to be in South Africa—and expresses his hopes for a World Cup in Russia in 2018. We also have a very interesting contribution from one of our former partners, Carlos Cordeiro, on why the 2022 competition should be held in the US.

And, to keep it all fair and balanced, Andy Anson, CEO of England’s 2018 World Cup bid, states his case.

We then include a contribution from Kevin Roberts, editorial director of Sports Business Group, who offers his views on the possible hosts in 2018 and 2022. And we have a piece about Euro 2012, to be held in Poland and Ukraine, written by our own Magdalena Polan.

Many of our country pages have been written by guests, including Otmar Issing on Germany, Mayor of Rio Eduardo Paes on Brazil, Edwin van de Sar on the Netherlands, a group of football-loving FX traders on Italy and Tudor’s Angel Ubide on Spain.

In addition to our external contributors, my colleagues from around the world offer their insights into the economies of the participating nations, as well as some football thoughts. And we have a ‘special’ entry on Ireland, which perhaps should be there!

Back by popular demand is a 2010 version of the World Cup Dream Team, selected by you the clients (and GS staff worldwide). We have narrowed down a broad list of 121 players to 11, based on the nearly 3,000 votes submitted, which vastly exceeded the numbers who voted in 2006.
As usual, we also tentatively suggest the likely semi-finalists—always a highly contentious move. We would point out to those annoyed and irritated by our selections that we did name three of the four semi-finalists in 2006 and in 1998 (the least said about 2002, the better)… We complete the book with some interesting World Cup trivia.

We hope you enjoy our World Cup and Economics 2010!

To read the full report: THE WORLD CUP AND ECONOMICS

>A GREEK TRAGEDY AMID DOUBLE-DIP RECESSION FEARS

The ILIAD is one of the greatest classics of Greek civilization. The epic poem is attributed to Homer and is passed on to generations through songs and poems. It is a magnum opus which is unrivalled in the world of literature and is an epitome of Western Civilization. It transports you into a world where you inhale all the smells of war, heroism, lust, compassion and humanity. The story of Iliad revolves around the tragic events of Trojan War, leading to the killing of Hektor by Achilleus, that determines the fate of Troy.

The Iliad is a Greek tragedy and is adored by countless generations of people around the world. Why do we like tragedies? What is in it for us to feel immense pleasure from tragedies? Well, this is a difficult question to answer. These Greek tragedies centre around a hero, who is typically a nobleman of royal blood and is a victim of circumstances and who dies at the end of the tragedy. May be, we find pleasure in the fact that we are in less worse position as compared to our tragic icon in the novel. May be, it is simply a case of us finding solace in others’ suffering.

Now, we are dealing with a different kind of tragedy, an economic one in Greece which has plunged the country into a deeper and deeper mess. It is an insolvency trap for Greece; while the Government has been struggling to pull the country out of the fiscal quagmire that is
caused by its own actions and inactions.


What are the causes of the crisis in Greece?

The country is facing a huge sovereign debt problem, which is forecast at 125 per cent of its GDP for the year 2010. Over a period of several years, Greek economy has become less competitive in relation to other Eurozone countries and this has compounded the problems for the country. Its unemployment rate is hovering around 10 per cent. Greece joined the Euro in 2001 and has benefited immensely from it. However, it went on a spending spree and as a result the government debt has mounted. Simply put, it is a case of living beyond one’s means. What has angered the most is the fact that Greece has hidden its debt woes with doctored figures.

Greece's budget deficit is at 12.7%, which is more than four times higher than Euro area rules allow. Eurozone rules stipulate that member countries shall restrict their budget deficit to three per cent of their GDP.

To read the full report: GREEK TRAGEDY

>PEAK OIL & CLIMATE CHANGE

Washington“We are all extraordinary skepticalof the "peak oil" stuff. We know of no reliable information that suggests that we're going to be running significantly short of any fossil fuel in this century…It certainly won't happen with any significant price on carbon.”

“We've done a few 300-year scenarios that have some shortages in them, but even that may not be realistic. This is especially so with coal!”

“The Chinese say they have enough coal for centuries…”

The price of oil has increased almost continuously since 1999.

If oil gets too high the economy becomes unstuck
If oil gets too low new investment is halted

To read the full report: PEAK OIL AND CLIMATE CHANGE

>INFLATION REPORT MAY 2010

Chart 1 GDP projection based on market interest rate expectations and £200 billion asset purchases

Chart 2 Projection of the level of GDP based on market interest rate expectations and £200 billion asset purchases

Chart 3 CPI inflation projection based on market interest rate expectations and £200 billion asset purchases

Chart 4 Assessed probability inflation will be above target

To read the full report: INFLATION

>GMO 7-Year Asset Class Return Forecasts

To read the full report: RETURN FORECASTS