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From: June 2010 Newsletter

Greece - Interesting facts

Greece is a basket case when it comes to European economies. Do you think you can spot some of the fundamental problems in the following:

In northern Athens only 324 residents admitted they had a swimming pool in a sworn declaration on their tax forms. A satellite image revealed 16,974 pools.
Tax evasion is estimated to cost US$30 billion each year. Tax collection fails because of "fakelaki" (little envelopes enclosing bribes).
Surveys show 13% of households pay 1,355 Euro on average per month in bribes.
Siemens (a German company) admitted paying slush funds to Greek politicians.
Politicians give jobs as favours, 27,000 public service jobs were created in the month before the election, and these are for life.
Many public servants never go to work. Some get paid a 2 month bonus for turning up to work. Foresters get a bonus for working outside.
Greece contributes less to global GDP than Bangladesh

Why were the Greeks rioting? Some reforms have already taken place:

retirement age of 53 has been increased to 67.
tax hikes
pay freezes
public servants have lost their 2 month bonus package.

Are you surprised countries like Germany and France are not keen on providing finance without seeing some major reforms?

As we have said in previous newsletters, the Greece economy is quite insignificant against the whole EEC economy contributing less than 2% to the EEC GDP. The Club Med countries (Spain, Greece and Portugal) are not big enough to drag Europe back into recession, making up only 16% of the euro economy.

Glass-Steagall Act and the Global Financial Crisis (GFC)

At the end of May the US Senate passed a new bill, "Restoring American Financial Stability Act". The act still has to go through a "conference process" which could lead to the bill being watered down.

Some of the features of this new act are very similar to the Glass-Steagull Act which was introduced after the 1933 great depression and the subsequent failure of many commercial banks. The act was repealed in 1999 after intense lobbying by the banking industry which argued that lifting the restrictions imposed by the Act would allow banks to diversify and therefore lessen the risks of default. Would the GFC have occurred if this Act had not been repealed?

Key features of the "Restoring American Financial Stability Act" is to:

give the Federal Deposit Insurance Corporation the power to wind down failing financial organisations quickly and in a controlled, orderly manner.
create an consumer financial-protection bureau
toughen up oversight of derivatives, requiring most contracts to be channelled through clearing houses and traded exchanges

Share Markets - Update

Key points:

Share markets in the last 4 weeks have fallen sharply by around 10% on the back of European public debt worries, regulatory action against US and European banks and worries about Chinese tightening.
The New Zealand dollar has dropped against the US dollar by around 7% which essentially negated the falls in the international equity markets for New Zealand based investors.
The volatility in share markets has increased again.
Global leading indicators are still pointing to a continuation of the global economic recovery ahead.
Recent profit reporting seasons have been strong in the US, Europe and Asia. In Europe the proportions of results beating expectations is at the highest level in at least five years.
The global monetary policy is easy with near zero interest rates in key countries and short term interest rates running well below long term bond yields. Low interest rates are very positive for share markets and may fuel the next bull market.
Now property prices in China have fallen (Beijing down 25%) and the Chinese share market has dropped 25% its likely Chinese authorities will take their foot off the brake.
Shares look cheap again, forward price to earnings ratio for global shares is 12.3 times (well below the 16.6 average). Asian ex Japan shares are trading on 11.8 times.
Growth predictions are starting to pick up. The UN recently reported that it expects global GDP to grow by 3% this year, 3.2% in 2011. The OECD reported this week that it forecasts growth of 2.7% this year and 2.8% next year for OECD countries with the US growing at 3.2% over the next 2 years.

The case for Asian shares

The table below provides a rough guide to the 5 to 10 year returns to be expected from the world share markets. On the basis of a conservative growth estimate of 8% pa Asian shares offer a return potential well ahead of the other major regions.

projected share market returns