Eldon-Online

What, Me Worry? - Yes, Me Worry!

The well known figure of Alfred E Neuman that has graced MAD Magazine for decades, and his catch phrase "What, Me Worry?" was only changed to a "negative" - "Yes, Me Worry" in 1979 at the time of the Three Mile Island nuclear meltdown in the USA.
I have long been considered a "conservative Scottish banker", (or some such similar terminology), with a reputation for urging caution in credit, property and stock markets. Advice that I tended to aim at the general public rather than the big investment houses and banks. Why? - Because all too often I have seen unsophisticated and under-informed investors getting into these markets, at the time the big players were leaving. Okay, so I worked for one of the big players, but that doesn't mean you cannot have a conscience.

Despite my reputation, and as I said in a speech some five years ago, "I am neither a raving pessimist, nor a naive optimist. Rather, I'm a realist." Well, I think I am. And I have been asked a number of times in the last week for my views on the current situation, which led me to think about what I should say.

So, what am I worried about? Sub-prime debt? - not anymore really; we've been there and now we seem to be getting all optimistic about financial industry figures that will finally disclose the extent of the damage - albeit some municipalities that bought the paper will go bankrupt - and some banks will have a tough time explaining to their shareholders just what they thought they were doing. (And it’s about time the rating agencies did the same, if only to clear their names!). And if you read the same papers as me, we believe that the package of financial measures being discussed in the USA will be the panacea for the remaining ills of sub-prime. Oh, and according to one US newspaper I read last week, it is really only Florida and California in the USA that will be affected by on-going sub-prime problems!

No, actually, I am worried about much more than sub-prime. The fallout from sub-prime woes may not, at the end of the day, be overly significant in terms of, say, US GDP - painful, but not life-threatening. My "Yes, Me Worry" is much more directed at the impact from credit card defaults than we saw in the sub-prime market, and as there is going to be a global impact on trade as a result of all this bad news, I am worried about Asia.

On the financial side first, I see the chain of events as having securitised commercial property loans being the next to fall. Perhaps not with the same impact as the sub-prime residential mortgages, and perhaps with more value in the underlying properties - on average. But then will come the credit cards. Receivables have been bundled up and sold, just like the sub-prime mortgages, but delinquencies are rising as American Express has already announced. People who have been using their credit cards to pay off their mortgages are now "running out of room" in their limits. Receivables have been securitised and sold on to anyone who was looking for yield pick-up - but unlike sub-prime loans - with not a whisper of security in most cases. Sorry, but watch this space because I think that potentially there is real trouble brewing.

If I am near enough to the mark - and I am not an economist, so someone will be able to produce all sorts of figures to prove me wrong (statistically), let's then think about the impact on Asia with the US economy in (or near to) recession.

China is going to come under pressure, but I don't think it is likely to be a disaster scenario. A reduction in orders from the USA will have an impact on China, for sure. But it will help the country to focus on a much-needed growth in domestic consumption. It may also still have orders from a Western economy that is weathering the storm so far, and an intra-Asian market that looks interesting. It is certainly big.

What will China do? It will continue to produce goods, in greater quantities for the local market, but it will switch to much more import substitution. Those goods they currently import (as much as 60% content, in some cases) before they add value and then export as finished products, will in future be made in China. This will see a decline in number and value of goods imported into China, which is unlikely to be good news for other Asian producers.

China will also, according to an economist friend of mine, boost spending. This will take place in the rural areas as well as in other geographical regions of China, and will be for a number of reasons. One is to create jobs for at least some of the factory workers who will inevitably lose jobs. Failure to do so could lead to unrest in, for example, Southern China where there are many migrant workers who will otherwise be reluctant to return to their homes. Another will be to boost agricultural production that seems to have been slipping.

I could go on, but this is long enough already. It is, for those who ask, a brief picture of what I see coming - and by the way, I think we have the potential to survive it.

The wife of a friend of mine used to say she preferred the thought of earthquakes to typhoons. While we would of course rather have neither, most other people I know prefer the fact that you can make preparations for a typhoon that you cannot do for an earthquake. I think we need to consider those preparations now, to stand a chance of weathering whatever storm might come.

Reading Between the Lines - Judging the Cost

It has never been my intention, deliberately or unwittingly, to end up as a participant in a court room in session. If I do, however, I think that I might quite like to be in front of Mr Justice William Waung Sik-yin.

I presume at some cost to the taxpayer, (so that's where my $1 goes?), the Honourable Judge found himself on the receiving end of a claim in the Small Claims Tribunal. According to the claim, the Judge had read a newspaper regularly for a number of years without paying for it, but the vendor had committed that most heinous of crimes - his records had not been transferred correctly, so bills had not been sent to the Judge. Nevertheless, after the case had been heard, His Honour still coughed up the princely sum of HK$5,010, for which he wrote a cheque there and then.

The Judge had closed his Court for the day for a medical appointment (fair enough), and to attend the Small Claims Tribunal. When asked why he had not sent a representative to the Tribunal (he should actually have been asked why he was wasting everyone's time and had not just paid what was due, given the amount), he said;

"This is my first experience of its kind, really. I did not do anything wrong, so why shouldn't I attend court myself?" It was the vendor who failed to send me the bills for five years."

So, Your Honour, if I should ever appear before you please accept my plea of not guilty on the grounds that I didn't do anything wrong; it was the bank that lent me the money in the first place - I used it, but I didn't know they wanted to be paid back.

(And surely the prize for a quick piece of opportunistic advertising to start the year came from Hong Kong's "Standard", a free newspaper which opined "Picking up a copy of this free newspaper, the city's biggest circulation English publication, from now on can help avoid another date at the tribunal." Nice one guys!)

Chamber of Horrors

As a former Chairman of the The Hong Kong General Chamber of Commerce, the news of the arrest by the ICAC of the current Chairperson on fraud charges highlights once again that no matter how hard you want to believe in the integrity of people in high places, you always run the risk of disappointment.

Lily Chiang has served the Chamber diligently for many years. She was always willing to attend Chamber functions, lead Missions and make her voice heard at meetings as a champion of the SME sector. She was not universally popular, but nobody could fault her commitment.

Attempts were made by some unseen hands, it seems, even before I reached the Chairman's Committee and for reasons that were neither entirely clear nor explained, to try and ensure that Lily was never given the ultimate office she sought. But as each attempt failed she gathered more support (or fewer objections perhaps) until her election to the Chair became inevitable. Some have said that her entry into the Liberal Party was helpful to her cause.

Ms. Chiang's case will be opened for a hearing on 4 March and, until that time, she must be considered innocent until and unless found to be guilty.

My concern, though, is more for the Chamber.

ICAC investigations are carried out in secret, and certainly while I was at the Chamber I was never aware of any investigation being carried out into the alleged wrongdoings of Ms. Chiang. As the investigations did not involve the Chamber, perhaps that was particularly understandable. Nevertheless, I am sure that she herself must have been aware, or at least questioned by the ICAC investigators. If this were the case, and if she was under ICAC investigation before she reached the Chair, her proclaimed innocence notwithstanding, I believe it would have been sensible and ethically mature for her to seek a "deferment" of her election. An appropriate reason would have been easy to create.

This is a "horror" scenario for the Chamber. They are not involved in any way with what is a personal matter for Ms. Chiang. But, through the amount of negative publicity surrounding the case, the Chamber has become "tainted by association" and needs to be allowed to get back to its "daily life".

Ms Chiang should seriously consider stepping-down from her Chamber position on a "leave of absence" basis until the matter has been concluded.