Keynes stole your ship

Despite mounting evidence of the dysfunction being caused by Keynesian policies, rhetoric in Europe and the United States is overwhelmingly turned against austerity. Over three articles, the author will examine specific examples of the dysfunction that has been caused by such government intervention, and the very real economic pain being caused as a result with the objective of dispelling the dangerous notion that higher government spending is a victimless crime.

Here is a quick quiz: name a global industry that is as old as antiquity, employs millions of people, withstood and indeed thrived with technological change but perhaps most importantly of all with diverse supply and demand dynamics is an industry that has never been cornered by any particular group for very long in history.

If you thought the reference above was about shipping, well done. In contrast if you thought it was about prostitution, well then, time for a cold shower.

The typical cycle of shipping is as old as history and has always been about two contrasting and virtually uncorrelated forces: firstly the interaction of operations with risk, and secondly the boom-bust cycle. Western readers will remember learning about the exploits of sea-faring Greeks and other Mediterranean peoples as merchants far and wide seeking to profit from trade with other countries. This continued into the times of Shakespeare (examples include the Merchant of Venice and settled into modern times as shipping became the moving force of global economies post World War II. The advent of standardized containers during the Korean War and thereafter proved a boon for global trade, and with it, improved the economic fortunes of all countries involved.

For these 70 years or so of modern shipping, at least five boom-bust cycles were visible as the effects of the cold war, the oil crisis, the emerging-market crisis in the 80s, Scandinavias sovereign debt crisis in the 90s, and the decline in the industry in the first few years of this millennium.

Every one of these cycles has been driven by a function of overconfidence leading to an excess ordering of ships, and when a debt crisis that disallowed loans to be refinanced or an economic downturn came, demand was cut too quickly for the industry. More than once, a debt crisis came along with an economic downturn but the global nature of the industry and continued technology evolution always helped to pull the industry up.

The same occurred with risk management issues, whether it was destruction of ships due to natural causes like typhoons or man-made disasters ranging from accidents, sabotage, piracy and war. The origins of modern risk management had much to with the first attempts to insure seafaring businesses; the industry itself absorbed the additional financing costs when required but kept moving on with new sources of capital and diversifying the demand pace.

In every downturn, the sheer breadth of ownership in shipping combined with diverse pools of capital available globally helped to resolve the industrys issues. The same held true for shipbuilding, which moved from China, Egypt and Greece in ancient times to a range of countries across the Indian Ocean before moving to Northern Europe and the US. After the Second World War, the biggest ship yards were no longer in the US or the United Kingdom but went instead to Germany, Japan and then on to Korea before going straight back to China.

Through the years, the fortunes of shipbuilders mirrored those of the shipping industry, with years of plenty followed almost inevitably by years of abject poverty in orders and employment. For example, the industry kept itself busy by having a side business of repairing ships and thus kept its workers handy for the next big orders.

Technological changes were few and far between - but almost always executed globally rather rapidly. As an example, consider the industrys response to the Exxon Valdez disaster, which was to introduce double-hulled ships that have since become the norm for tankers globally: not bad considering the tonnage involved over a trivial period of just over 20 years. In contrast, look at the nuclear power industry, which 20 years after Chernobyl still couldnt get its risk management right as seen in Japan later.

Along came Keynes
Shipping thus is one industry where one could draw a line through history identifying elements of perfect competition, booms and bust, diverse pools of capital and, overall, significant benefits to the global economy. All of that changed in 2007.

Firstly, in the post-Lehman phase of Keynesian intervention, with the US Federal Reserve loosening the purse strings and the Chinese government announcing massive stimulus efforts, the rise in the prices of commodities helped to boost demand for ships. Instead of hunkering down for a long slowdown in the global economy, which is what the hard data would have demanded, the industry did the unthinkable and went on a buying binge.

A closer look at the numbers shows that a bulk of the orders was funded by the shipbuilding industry itself - and looking closer still, the hands of the Chinese and European governments become easily discernible. Specifically, funding was provided to buyers for various classes of ships - dry bulkers in the case of the Chinese and specialist tankers in the case of the Europeans - at rates that made the "upgrade" process simply too attractive for the would-be buyers. Rising prices of commodities which specifically meant scrap metal had higher value also encouraged ship owners to purchase new ships - whenever the new ships were delivered, they could sell their old ships for scrap and make a decent bargain.

The expected surge in the real economies from 2009 though never came. Instead, what the world saw was a gradual deleveraging of the private sector debts that had been piled up before 2007 even as the additional government spending - increased welfare in Europe for example - proved too unfocused to have any discernible impact on commodity volumes.

As the newly ordered ships from late 2008-2009 started getting delivered in late 2010 onwards (remember some of these ships had been partially completed and left unfinished after the bust out in early 2008 so werent really "new" builds), the industry particularly in dry bulk saw supply of ships exceeding demand pretty quickly.

Other parts of the shipping business - tankers and containers - were already seeing this. As new super-tankers (the so-called Ultra Large Crude Carriers, or ULCCs, for example) were delivered along with the "super" container ships each of which could carry over 12,000 20-foot equivalent units (the standard industry measure) - some three times the volumes carried by an average container ship before 2007 - the glut became deadly over the course of 2011. By the second half of 2012, the glut of supply had become a virtual flood as the daily rates started slipping below the basic operating costs of ships.

Think about that for a second - why would any shipowner rent out his ship for less than what it cost him to pay for operating expenses? Simply put, because some of those contracts involve ships that need to be continually employed to be relevant - for example capesize bulk carriers. In other cases, its because the shipping company has a budget to lose money, thanks to his friendly banks (more about that later). Usually though, its because shipping companies are trying to play the working capital game - keep enough money coming in to pay this months expenses, and lets worry about next months expenses, well, next month.

Historically, when shipping went into oversupply due to technology changes, older ships were simply scrapped: think of what happened to sail ships when the first turbine powered ships came into being, and you get the picture.

This time around though, that wasnt going to happen - the new ships were not a new technology, just an old technology that had been improved upon. Governments wary of hardships to consumers had also rolled back certain environmental directives (for example. a mandated reduction in fuel consumption) even as they increased incentives for businesses to invest more in capital formation and equipment.

With low scrap rates and no specific regulatory standards, the glut in supply that had become a flood caused many shipping companies to go belly up. This is where the next aspect of Keynesian intervention showed up - governments simply did not allow any of these companies to cease operations and effect panic sales of their assets. Instead, banks were asked to extend financing for these companies, roll over their debts and basically disallow people being put out of their jobs. So these companies survived - and well, so did their ships.

It might shock capitalists to see that such companies actually have a "burn allowance" from the banks - money to burn through for salaries and maintenance expenses whilst everyone sits around waiting for a global economic recovery to increase demand higher than what supply currently stands at. Banks are too scared of governments now to reject such entreaties, and simply go through the motions that would minimize their credit losses.

To be sure, there are specific factors at work too that have cost the industry dear. For example, increased production of oil and gas from shale sources in the US - a private sector enterprise if there ever was one - has reduced demand for crude carriers ferrying products to North America. That excess crude has been consumed onshore in the Middle East as domestic demand has risen thanks to the Arab Spring and the government munificence that followed: Saudi Arabias significant domestic investments and welfare payments for example have vastly increased domestic consumption of oil.

The point is that in days before government intervention, such adjustments would have been quick - a few crude carriers would have been retired and sold for scrap while other specialist ships, such as LNG (liquefied natural gas) carriers - would have been ordered to reflect changed industry dynamics. Now, only one leg of the trade - ordering of new LNG tankers - is taking place while the other side, namely scrapping useless capacity, has been put on hold.

The decline in demand for crude carriers though should have been offset by increased demand for dry bulkers (for commodities like iron ore) and containers (for manufactured goods). That hasnt happened because in places as diverse as the US and Saudi Arabia government excesses are being mitigated by belt-tightening efforts (or deleveraging efforts) of individuals.

None of which is helping the shipping industry of course. To make matters worse - if that is indeed possible - the Chinese government has noticed the sharp increase in order cancellations from the end of 2012, as well as the increasing unemployment at its shipyards. To that end, the government has ordered various state controlled enterprises to expand their order book for ships.

I am told by an industry insider that there are some very comical orders going through - wholly unnecessary upgrades for perfectly normal ships as each state-owned enterprise head tries to outdo his competing party members for the boasting rights of biggest ship orders.

Not to be left far behind, we are told now that the Japanese governments efforts on money printing and supporting asset prices will soon extend to capital investments; specifically, various Japanese trading companies have been asked to "consider" ordering new ships from local shipyards.

Companies in the business of shipping have to focus on these threats when they evaluate what to do with orders and prices for the next few years. Competing on a global scale on the basis of pure pricing and efficiency is one thing; competing with pseudo-state companies kept on life support on government orders is a whole different matter.

Meanwhile, as employment figures, retail sales and factory orders show, there is very little macroeconomic cheer out there to help boost the case for the demand side; heck, there is very little out there to boost the case for slightly higher scrap metal value that could help the shipping industry overall.

So there you have it - one of the worlds historically most dynamic industries is now turned into a playground for governments, thereby becoming a warehouse for zombies. No one would imagine the turnaround process for shipping is going to be easy, or quick; nor that those millions of jobs are anywhere near safe.

Bernanke stole your pension

A core aspect of the logic of folk who support stimulus programs in the name of John Maynard Keynes is that government spending to offset private sector contraction remains a victimless crime. This is completely untrue, and understanding the actual costs of Keynesian machinations by studying real-world examples of dysfunction is important to unravel this pernicious logic.

In the first part of this series, we considered the impact of random intervention in the shipping sector, in particular the role it has played to crush profits and imperil employment in the sector globally.

In the second part of this series, we will look at conditions in the area of retirement planning and returns. The notion of stealthy wealth transfers is part of a longer debate that goes into the core aspects of the financial crisis; to a large extent many of the issues have been raised previously in these pages but perhaps more in passing than as the core focus.

The core function of financial markets is to connect pools of savings with the people who need money for their immediate future. In demographic terms, this can be expressed as markets being the intermediary between older people with savings and young people who need to borrow to set up house, buy cars and other utilitarian requirements.

Construct of pensions - a quick primer
This a quick primer, and not all the nuances are or even can be covered in such a short summary. First lets quickly recap the theory here, even if parts of it will appear unrealistic to many readers who have been hardened with real-world experiences over the past few years.

The rate of return for these old people is meant to take into account two primary factors: the cost of money and the risks entailed. The cost of money is measured by one of two factors - either as the minimum rate of return on money that keeps its purchasing power constant; or as a cumulative measure of opportunity lost by renting it out without risk.

Typically these two rates are close to the same, or in other words, returns on local government bonds are meant to offset the loss of purchasing power while preserving the principal. Instead of local government bonds, one could consider bank deposits as a suitable alternative.

Real world impact: if you consider the historical depreciation in the value of money - purchasing power - across the Group of Seven nations, and the needs of a comfortable existence in future, then a realistic return rate on pension portfolios would range between 5% and 10%. Remember also that this rate needs to account for capital withdrawal once people actually retire. Once we remove the periods of overly high inflation as well as stagnation or deflation (that would be you, Japan) the base (minimum) rate works out to 6%. This is the realistic minimum rate that needs to be achieved on pension portfolios, but one could also consider it a weighted average of returns before people actually retire.

The second aspect, namely risk, is merely a function of (a) the probability of losing principal and (b) the severity of such losses, should they occur. Consider as an example the difference between investing in the share market and investing in a farm. Investments in share markets typically are more volatile, but because of the investments liquidity the severity of losses is relatively small (that is, people can exit pretty quickly or hedge their losses). In the case of farm investments though, the likelihood of losses is small - because crop yields and animal product prices tend to be fairly similar from year to year; but when there is volatility (for example, because of a natural disaster like a tornado or a hurricane) the extent of losses is usually quite severe.

Arguably therefore, the compound term risk as an explanatory variable for the above two investments would be quite similar - for stocks a high probability multiplied by a low severity and for farmland a low probability multiplied by a high severity. We could thus say that the expected return of both these investments would be similar.

(Of course, similar doesnt mean people will be neutral in choosing between the two investments as heuristics would play an important part; a man who saw his brethren suffer significant losses on a farm would be more partial to stock investing, and vice versa).

This ladder of choices that makes up ones risk preferences contains one more factor of choice, namely the type of returns. While some investors are perfectly happy churning in and out of stocks, selling a part of their portfolio whenever they need to paint the house of example, others would prefer to secure regular returns - that is, coupon payments from the likes of bonds.

Typically, older people would prefer steady returns as it helps them plan their costs and thus lifestyle, while younger folk could / would withstand greater volatility in their choice of investments as the requirement for immediate income is less (contrast these younger people though with young people - those who dont have net savings, and who need net borrowings to get along).

Real world impact: To make choices easier for fund managers, various countries around the world have set minimum standards for pension investments in terms of appropriateness, liquidity, maturity or duration matching and so on. Some even prescribe the ideal mix of income generating assets such as bonds and capital growth assets such as stocks.

The most famous example of such regulations is Employee Retirement Income Security Act in the United States; there are a host of similar initiatives in other countries. Whilst some offer broad guidelines, others get rather specific - for example Dutch pensions arent allowed direct exposure to physical commodities.

Performance
Given the various restrictions on pensions, overall performance in terms of returns has been mediocre to say the least. When you look at 30-year data streams, it is easy to see that mutual funds barely track the performance of broader indices such as the S&P500; this is primarily due to overheads such as management fees and of course, paying for regulatory oversight. For pensions, in addition to the underperformance of mutual funds, one has to add the impact of enforced asset mixes - certain investments in bonds for example as required diversification - and the underperformance becomes even more pronounced.

This is a core point to consider: asset allocation should not be set in stone, but in the case of pensions the flexibility afforded to managers is perilously low. Consider a situation where the economy is at rock bottom - such as now - and then think of what happens if pension funds are required to continually purchase government bonds even at yields below the rate of inflation (negative real yields). The effect is twofold: firstly to lose money hand over fist for their pensioners and secondly that whenever rates rebound higher, the portfolios also nurse massive mark-to-market losses.

Real world impact: As some countries require pension managers to exit loss-making assets past a particular threshold, in effect managers end up both buying and selling financial assets at the worst possible times. It is not that these folk are stupid, but rather that their jobs have fairly ill-considered portfolio conditions in place that engender stupidity. And of course, when that kind of scenario prevails, that is, managers simply do not have the ability to apply their skills, the industry gets dumbed down.

Another factor affecting performance is the construct itself. Underlying assumptions for constructing pension portfolios are driven by actuarial calculations that focus on how long people live and what that means for the mix of income and growth in portfolios.

If a chap had a life expectancy of 70 and retired at the age of 60, the pension portfolio only needs to be sufficient for 10 years of capital withdrawals. No one wants to save too much and leave a large balance in the pension portfolios for heirs to squabble over, particularly not in countries where estates are taxed on death at punitive rates. So the idea is to match the initial size of the pension pot and target returns with the requirements for capital withdrawals or income generation over a fixed timeframe.

Real world impact: Typically, pension portfolios assume life expectancies that are lower than those being observed currently. In many countries, pension plans, particularly those from the private sector, state explicitly that payments will be over a fixed term only with a lump sum amount available on maturity - say on a persons 85th birthday.

The second real world impact, particularly in European countries and now increasingly in the case of the US, is to shift the burden of pension under-payments (due to poor performance for example) and longevity issues to government budgets.

Indeed, in many countries such as Germany and France, employers pay their pension contributions directly to the government-designated accounts, which then have the responsibility for managing the pension pots. While this spares companies from pension-related risks (remember the famous case of General Motors 10 years ago when the company needed billions of dollars to top up its pensions pot for employees), it also exposes pensioners to worse investment performance as well as residual systemic risk on their sovereign budgets. As a recent real world example, when the Greek government went bust, pensioners in the country suffered the most.

Analyze the vectors
So if one chooses to analyze the vectors, we end up looking at the following: mediocre returns, inappropriate asset mixes and incorrect actuarial assumptions. The shift of risk away from private-sector funding to the public sector entails greater urgency in assessing systemic risk of sovereigns, particularly given the mandated asset mix in investment portfolios.

Real world impact: In the markets, the sum total of all risk calculations is expressed by a single variable, namely price. However, that signal can be easily clouded by government actions. For example, consider what happened when France was downgraded by the rating agencies. Whilst a widening of bond yields against say Germany would have been the correct response, the exact opposite happened because pension plans - thanks to the automatic sell-off requirements that were triggered on French stocks - ended up purchasing more "safe" securities, that is, French government bonds, thereby helping to tighten spreads against better quality sovereigns. Pretty much the same thing happened after the United Kingdom was downgraded a few weeks ago.

In this dangerous territory of invalid price signals clouding the actual calculations of risk entailed in pension portfolios, we also have had to contend with the actions of central banks, particularly over the past 18 months.

Uninterrupted purchases of low-risk assets such as government bonds have been pushed through in the name of quantitative easing, intended as it were for investment funds to flow towards more risky assets and eventually, credit creation that could help to regenerate growth.

But this theory has a fatal flaw that is partly driven by demographics. When a large number of old people expect to receive certain amounts from their pension portfolios, reductions in running yields end up reducing their monthly income. This in turn causes them to cut spending even more as they try to add savings to their overall pot, in effect more than mitigating the positive actions of the central banks.

There is also the effect of systemic risk in that rising sovereign risk is obvious to pensioners; and as they fear “haircuts� on their pension plans in future, the motivation to save becomes larger. This is also true for people close to pension age (say folks in their 50s) and then slowly extends to those in their 40s and so on. That is precisely what happened in Japan from the mid-90s to 2012 and now threatens to happen across Europe.

There is also a pernicious moral perfidy here: going back to the initial definition of financial markets function, it is obvious that the key intention is to shift money from the hands of savers (generally old people) to those of borrowers (generally younger people).

In some countries such as the US and the UK, this debate has been framed around race and even immigration. With demographic narrowing in these countries, new entrants are usually the target market for lending by banks; and such folks tend to be immigrants or members of minority communities that have better demographic profiles than the majority.

Real world impact: It is actually now impossible to construct a pension portfolio with an expected return for 6% whilst meeting investment restrictions set by the authorities. The best that people manage to eke out in general pensions is 2% to 3%; anything higher requires inordinate principal risks. Add in the liability calculation (future payments at the current low discount rates) and effectively every G-7 sovereign is bankrupt many times over when pension deficits are taken into account.

With all the best intentions, the facts are clear on the ground that Keynesian strategies have been counterproductive, especially for retirees. The larger battle for peoples minds though has swung in favor of the Keynesian orthodoxy with the "anything necessary" mantra of European Central Bank president Mario Draghi being taken up with a vengeance by other central bankers from Haruhiko Kuroda in Japan to Ben Bernanke in the US.

By pushing even more quantitative easing down the throats of their economies, these central bankers are doubling down, but at the cost of pensioners security in coming decades.

Have you ever imagined standing in the middle of the road and watching helplessly as a 60-tonne truck barrels down at you at 100 kilometers an hour? That feeling is not dissimilar to what the average retiree now faces.

The phase that launched a thousand bubbles

Bubbles last just as long as it takes for technical to become fundamentals.

Helen of Troy had the face that launched a thousand ships while Federal Reserve chairman Ben Bernanke and his compatriots have presided since 2007 over the economic phase that launched a thousand bubbles.

In the previous two parts of this trilogy, the focus was on real-world businesses and pension planning that have been adversely affected by monetary policies over the past few years and particularly since 2009.

Have these efforts at quantitative easing produced any tangible (positive) economic results at all - not that anyone would notice really. Key figures such as retail sales and capital investments still vastly lag levels seen before the crisis; and even the figures that look like improvements dont quite stack up when you look closer.

For example, US non-farm payrolls for April showed an increase of 165,000 jobs against market expectations of 150,000 jobs for the period. However, once the average work hours were taken into account, payrolls were actually down - the quantum has been estimated from 300,000 to 500,000 based on the measure.

What about the other major focus of Keynesian measures namely to propel inflation in Group of Seven economies with a view to increasing consumption and investment while cutting real debt burdens? Well, that hasnt panned out yet either.

There is no inflation - at least in the way that it is popularly measured, nor have yields on Treasury Inflation-Protected Securities (TIPS) moved in any fashion that would suggest sticky, higher prices. This is because the fear of lower real returns and increased government debt (as suggested in the previous two articles) have pushed people to cut consumption even further and instead attempt to save money even if that means going for speculative investments. This is covered in the next section.

Bubbles galore
So if the intended consequences of the Keynesian stimuli havent panned out as per plan, what about the unintended consequences? Typically, when central banks fail in their policies, one would expect to see the following: i) Asset bubbles
ii) Rising systemic risk
iii) Random correlations


On the subject of asset bubbles, we dont have much to complain about with, at a minimum, stocks and real estate around the world moving sharply higher without any basic support from fundamentals. In the rest of the article, some details about the asset bubbles will follow.

The issue of systemic risk is germane to any consideration of how central bank policies have panned out. With organic growth proving elusive even as intervention helped to obviate the need for taking significant balance sheet hits, banks as well as the shadow banking sector have plunged headlong into funding of highly risky transactions, be it US sub-prime mortgages (remember those? Apparently caused some crisis in our history) or highly leveraged investment mechanisms such as collateralized debt obligations and collateralized loan obligations (remember those?).

Banks are once again at the forefront of risky investment strategies. Capital levels havent risen to the extent required for the scale of assets in the pipeline, while falling margins have disallowed banks from recuperating their reserves.

A key highlight of financial crises tends to be the emergence of random correlations - random in this case referring not so much to financial history but overall investment logic; but this also goes into the heart of rising systemic risk being mentioned above.

For example, all the investment talk now is of the Japanese yen levels against those of dollar-denominated assets such as US stocks and real estate. Granted that as the low-yielding currency of choice, increased positions in the yen are normal, but this time around, the explicit weakening strategies of the Bank of Japan have meant that more investors have piled into this trade, usually by borrowing in yen from their local banks and then purchasing US dollars and other hard-currency assets.

In effect, while banks today show the risks to be low thanks to this random correlation, the fact of the matter remains that this correlation can go the other way too - a quick reversal in the yen back towards 90 for example will create massive investment losses and in turn create hedging losses for banks, while the yen movements may not match the credit quality characteristics of their borrowers (seeing as we know hedge funds go bust all the time).

To consider an example closer to home of how asset bubbles end up creating massive problems for banks, lets go back to the point about ships as previously discussed in the article "Keynes stole your ship". Rising ship prices since 2008 were seen as “fundamental” by the sector and therefore soon enough by the banks; typically a number of new ship purchases were funded to the extent of 70% or above by the banks.

Today, with that bubble bursting spectacularly, both banks and the sector are left praying for time. Large tankers - VLCCs - that commanded prices of over US$150-175 million barely four years back, can now be purchased for under $50 million.

So even if you were the smart banker who lent "only" $100 million against this ship back then, there is still a potential loss of $50 million staring you in the face now. No wonder the European banks that focus on shipping have all been under pressure - at sea, so to speak - despite the broader recovery in other asset prices over the past few quarters.

Even worse than these European shipping banks are the Asian banks - Chinese, South Korean and Japanese - who are being asked by their governments to support the shipping sector at current levels, both in terms of rolling over existing maturities of loans and funding new loans for buying ships.

Already a number of Japanese and Korean shipping companies are bankrupt; add to the list a host of unknown Chinese companies that are suffering the same fate; and in all cases the banks are being told to continue lending money to the sector to avoid a "bigger" blow up that could imperil trade terms for these exporting countries.

The anatomy of asset bubbles
Bubbles last just as long as it takes for technical to become fundamentals.


A key element of asset bubbles is that the primary impetus of irrational money chasing too few assets is always recognized; what follows is that thanks to the index-weighting focus of various investors - mutual funds and pension asset allocators to name a few - pretty soon real measures of value are assigned as reasons for increased asset prices - say for example in the Internet bubble era: folk started going for top-line revenues as the key measure on the logic that while these companies were losing money initially they would eventually turn around as long as the top line grew.

Then any improvement in the top line whether by organic means or acquisition was hailed as evidence of the investment thesis and so on.

Similarly for the US sub-prime lending bubble, there was the commonly held fundamental that house prices in the US “never” fell; this meant that all the testing mechanisms for CDOs and other investments tied to mortgages were never tested for falling asset prices. Thus, when the inevitable happened, investors ended up being exposed to more losses than would otherwise be the case.

The reason for delving into that drab history lesson is that today we are back in the same paradigm. Almost all of the worlds asset bubbles are underpinned by a single variable, namely interest rates, and particularly that of the US dollar. Take that up a few notches for whatever reason and suddenly the complex of not just bonds but also equities, real estate and consumer spending all fall off a cliff rather quickly.

From US indices that are at record levels to real estate markets in places as varied as Monte Carlo and Hong Kong, the existence of asset bubbles is obvious. Stocks are trading at price earnings ratios that are simply unsustainable - ask anyone who held Apple stocks this time last year and theyll tell you a lot of stories about the number of opportunities that were given to them to exit the position before the collapse.

One reason why most folk havent sold these under-growing stocks is that, compared to interest rates, dividend yields are still superior whilst allowing capital appreciation from time to time. When people want to reduce risks, they go for real estate, as seen in the cases of Hong Kong, Singapore, Monte Carlo and of course, Australia for the past few years.

It is easy to see the fundamental drivers of such moves, whether its from Chinese mainlanders cutting risks of asset seizures by purchasing apartments in Hong Kong or Australians unemployed due to the high currency rate turning around and punting on their domestic housing asset to make a living from speculation.

Ironically such rising asset prices also make it more difficult for engendering a real economic recovery. This has been the case in Australia, where even the strategies that could offset high currency values have been pushed away by the rising cost of real estate in the country.

Another example is in Britain, where nascent reinvestment in the financial sector has been cut short by the strength in London home prices that has in turn fed into commercial rents, acting as a serious disincentive for firms looking to increase their operations from the city.

Perhaps the worst of all the bubbles though is in the former tier 2 and tier 3 cities in the US where house flipping is back on - the practice before the crisis where people bought then sold houses on high leverage and high frequency. The treatment of housing stock as a trading good has potentially serious consequences for longer-term investments, as well as the systemic risk of US banks.

This then is the worst of all the unintended effects of central bank involvement in the markets; instead of ushering in investors who could help turn around economies across the Group of Seven countries, the central banks have created a class of traders who roil asset prices, maximize leverage, but produce no lasting benefits for the underlying economies.