Futuríveis

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What elements of today’s markets might look ridiculous with the benefit of hindsight? Not fundamentals: the economic cycle is now mature but growth, inflation and corporate earnings look sound. And equity valuations are reasonable. Yet not everything passes the sanity test.

First, a mispricing of credit risk is certainly occurring. In five years investors may blush when they recall this week’s $45bn private equity buy-out, reportedly using gearing of more than 80 per cent, of TXU, a historically volatile power generator; or the fact Ecuadorian bonds yield 11 per cent in spite of a government openly threatening default. Second, the big economic question remains of when America will control its borrowing – or its creditors stop lending. Finally, the explosion of alternative investment vehicles and credit derivatives suggests huge hidden leverage in the system, partly funded by the yen carry trade.

In terms of corporate defaults, today’s “Goldilocks II” economy can probably weather a rise in credit spreads. A gradual slowdown in the US (as suggested by Wednesday’s revisions to fourth quarter growth) could even allow an orderly easing of global imbalances. But the great unknown is whether, given the unprecedented degree of leverage within the financial system, even a modest and necessary adjustment of interest and exchange rates could seriously destabilise asset prices.

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The decision came after months of study by a presidential working group of top officials and regulators. They looked at both the hedge fund industry, which has more than $1 trillion in assets, and the management of private equity firms, which take direct control and ownership of companies rather than relying on large numbers of outside stockholders.

The group’s conclusions reflected both the strong antiregulatory ideology of the administration and the formidable influence of Wall Street and the increasingly wealthy hedge fund industry among both Democrats and Republicans in Washington.

Three of the administration’s most senior economic policy makers — Treasury Secretary Henry M. Paulson Jr., his top deputy, Robert K. Steel, and White House chief of staff Joshua Bolten — are alumni of Goldman Sachs, which in the last decade has evolved into one of the most important players in the private equity market.

As hedge funds have grown both in the United States and globally, and as periodic collapses have shaken the markets and caused investors to lose money, pressures have increased to impose greater regulation on them. But supporters say that the hedge fund industry had grown more sophisticated in recent years, is well equipped to manage risks, and that none of the failures have harmed the nation’s financial system.

The explosive growth in recent years of private equity investment and hedge funds has made their managers symbols of new wealth, a huge source of philanthropy to the nation’s museums, hospitals and orchestras, and a major new force in political campaigns.

Millions of Americans do not qualify to make investments in hedge funds, which are pools of largely unregulated assets, but they are exposed to the risks associated with hedge funds through their pensions and personal retirement accounts.

The decision to avoid demanding more openness from private funds represents a starkly different approach to that undertaken by Washington for publicly traded companies, which in the last five years have faced a battery of new governance, auditing and disclosure rules following the scandals at Enron and other large companies.

The working group rejected any proposal that would give the government the ability to inspect the books and records of hedge funds or force the funds to make regular reports about their activities. Both banks and brokerage firms must adhere to stringent rules that give regulators great leeway in supervising them.

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Officials Reject More Oversight of Hedge Funds - New York Times

The battle for brainpower | Economist.com:

"All the same, structural changes are making talent ever more important. The deepest such change is the rise of intangible but talent-intensive assets. Baruch Lev, a professor of accounting at New York University, argues that “intangible assets”—ranging from a skilled workforce to patents to know-how—account for more than half of the market capitalisation of America's public companies. Accenture, a management consultancy, calculates that intangible assets have shot up from 20% of the value of companies in the S&P 500 in 1980 to around 70% today.

McKinsey makes a similar point in a different way. The consultancy has divided American jobs into three categories: “transformational” (extracting raw materials or converting them into finished goods), “transactional” (interactions that can easily be scripted or automated) and “tacit” (complex interactions requiring a high level of judgment). The company argues that over the past six years the number of American jobs that emphasise “tacit interactions” has grown two and a half times as fast as the number of transactional jobs and three times as fast as employment in general. These jobs now make up some 40% of the American labour market and account for 70% of the jobs created since 1998. And the same sort of thing is bound to happen in developing countries as they get richer."

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Perhaps the most striking finding of the poll is the extent to which Spain has emerged as an inwardly confident and outwardly attractive country, 21 years after joining the EU.

It found that 17 per cent of those polled put Spain as the country in which they would most like to work, ahead of Britain on 15 per cent and France on 11 per cent. French and Italian citizens were the most likely to want to emigrate there.

Spain had the lowest number of people who considered life was getting worse (50 per cent) and its citizens were by far the most positive about the economic benefits of inward migration.

A total of 42 per cent of Spaniards believed immigration was good for the economy, compared with only 19 per cent in Britain and France. However, a large majority of Spanish respondents (71 per cent) still wanted tighter border controls, a reflection of the problem of illegal immigration from Africa.

Last Friday Joaquín Almunia, the EU monetary affairs commissioner, up-graded his growth forecasts for Spain in 2007 from 3.4 per cent to 3.7 per cent, making it one of the bloc's most dynamic economies.
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FT.com / Home UK / UK - Europeans most want to work in Spain, FT/Harris survey reveals

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The amount of electricity consumed by computer servers has doubled in five years and will increase another 75 per cent by 2010, according to a report published on Thursday by an energy efficiency expert.

Jonathan Koomey, a consulting professor at Stanford University and scientist at America’s Lawrence Berkeley National Laboratory, says the world’s servers and their cooling infrastructure consumed as much power as that put out by 14 1,000-mega­watt power stations in 2005.

The total server electricity bill was about $7.3bn, of which the US made up $2.7bn.

Prof Koomey said servers and associated equipment represented about 1.2 per cent of US electricity consumption in 2005, comparable to the amount consumed by televisions.

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FT.com / Companies / Energy Utilities Mining - IT-related energy consumption doubles