'Þeople are noL able Lo Lake Lhe consequences of

Lhelr own curloslLv'
-Anonvmous Callfornla LheaLre owner
Andv Warhol's flve hour movle, 5leep, aLLracLed
several hundred fervenL clnephlles Lo one of lLs flrsL
Callfornlan screenlnas ln 1964. Cnlv flfLv sLaved Lo
Lhe verv end. AL besL, Warhol's soporlflc clnema
verlLe of hls close frlend !ohn Clorno can be LhouahL
of as an examlnaLlon of Lhe Cerman phllosopher
phllosopher frlend, we conLlnue Lo araue LhaL Lhe
fuLure ls perhaps noL veL now. 1he pasL ls cerLalnlv
no lonaer now and Lhe presenL ls slmplv Lhe now
LhaL flows from Lhe pasL Lo Lhe fuLure. ÞuL
dlfferenLlv, we belleve LhaL cenLral banks ln Lhe uk
and Lurope are llkelv Lo keep Lhelr moneLarv
LlahLenlna powder drv for some Llme veL.
Accordlnalv, lL seems llkelv LhaL con[ecLure wlll
remaln our preoccupaLlon aL leasL unLll we recelve
some resoluLlon Lo Lhe areaL speculaLlon of Lhls
vear. 8v Lhls we mean an answer Lo Lhe quesLlon of
wheLher we are ln Lhe mldsL of a vlaorous veL
Lvplcal economlc recoverv, or near Lhe end of an
lnvenLorv-led and raLher shorL buslness cvcle
bearlna LesLlmonv Lo an onaolna debL deflaLlon.
Manaaer CommenLarv, Mav 2010
of as an examlnaLlon of Lhe Cerman phllosopher
Peldeaaer's concepL of Llme, LhaL lL ls slmplv a
medlum ln whlch evenLs Lake place, borlna or
lnvesLmenL leLLers Lvplcallv run rouahshod over Lhls
prlnclple, subsLlLuLlna dramaLlc Llme for real Llme.
1hev compress and someLlmes even replace Llme's
ponderous quallLles wlLh areaL drama, [umplna
relenLlesslv back and forLh from Lhe exclLemenL of
rare momenLs ln Lhe caplLal markeL's pasL Lo
pro[ecLlons of a cllmacLlc and specLacular
resoluLlon, sLuff happens. 8eallLv, of course, ls more
prosalc. lor desplLe Lhe manv monLhs LhaL have
passed slnce l lasL wroLe Lo vou ln anv areaL lenaLh,
back ln CcLober of Lhe prevlous vear, l am
somewhaL relleved Lo reporL LhaL verv llLLle of real
subsLance has chanaed. Accordlnalv, and much Lo
Lhe hedae fund's advanLaae, shorL Lerm lnLeresL
raLe expecLaLlons are unalLered. lor lnsLance, slnce
lasL SepLember Lhe 8rlLlsh one-vear swap raLe has
conLlnued Lo bob around 90 basls polnLs.
Pavlna dellberaLelv poslLloned vour cauLlous lund
Lo exclude Lhe poLenLlallv damaalna arena of equlLv
and commodlLv shorLs, we flnd ourselves somewhaL
aL ease wlLh Lhe credlL markeL's slumber aL a Llme
of ebulllence elsewhere. Llke our Cerman
As much as l svmpaLhlse wlLh Warhol's Lorpld
clnemaLlc Lendencles, l neverLheless accepL LhaL
someLhlna has Lo alve. Allow me Lo suaaesL LhaL
lnsLead of us wlLnesslna noLhlna of lmporLance, Lhe
lasL few monLhs mav have demonsLraLed more
prlce evldence of Lhe uS dollar havlna flnallv formed
a boLLom wlLh Lhe lasL low aL Lhe end of 2009
exceedlna Lhe prevlous low ln March 2008. lf Lrue,
Lhls would conclude a chapLer of hlsLorlc dollar
depreclaLlon LhaL beaan wav back ln 2001. 1hls
could presaae an under-appreclaLed buL poLenLlallv
Lroublesome LlahLenlna of moneLarv pollcv ln Chlna,
LhaL ln Lurn mav be a porLenL of dlfflculLles LhaL lle
ahead. l ask vou Lo heed Lhe warnlna alven bv
Chlna's vlce Commerce MlnlsLer Zhona Shan, as
clLed bv Lhe woll 5tteet Iootool. Worrled LhaL manv
Chlnese exporLs have a proflL maraln of less Lhan
2°, he noLed LhaL, ºwaLer doesn'L boll lf lL ls heaLed
Lo 99 dearees Celslus. 8uL lL wlll boll lf lL ls heaLed
bv one more dearee."· ln oLher words, ºa furLher
rlse ln Lhe vuan bv a verv small maanlLude mlahL
cause fundamenLal chanaes." We should conslder
ourselves forewarned.
'PlsLorv can repeaL lLself wlLh a venaeance'
-Penrv kaufman
As vou mav be aware, l have a keen lnLeresL ln Lhe
economlc parallels of Lodav and Lhe pollcv mlsLakes
of Lhe pasL. Þerhaps llke Lhe lLallan lawver ln ArLhur
Mlller's A vlew ftom tbe 8tlJoe, "l am lncllned Lo
noLlce Lhe rulns ln Lhlnas." So leL us conslder Lhe
perlod 1992 Lo 1997 Lo see Lhe damaae wrouahL bv
a chanae ln Lhe dollar's dlrecLlon. 8ack Lhen, Lhe
dollar succeeded ln flnallv arresLlna anoLher
preclplLous fall Lhls Llme lnlLlaLed bv Lhe 1983 Þlaza
Accord, an aaaresslve Lrade lnLervenLlon almed aL
prevenLlna Lhe loss of more Amerlcan
manufacLurlna [obs Lo Lhe !apanese. Cver Lhese
vears, Lhe dollar losL 13° of lLs value applvlna Lhe
led's broad Lrade-welahLed serles and dropped
43° uslna Lhe ma[or Lrade-welahLed lndex. 1haL ls
Lo sav, Lhe dollar, [usL as lL has been slnce 2001, was
verv weak and Asla's flxed currencv realmes
beneflLed from lnapproprlaLelv low lnLeresL raLes ln
Lhe uS as lnvesLors adopLed a fawnlna admlraLlon
of 1993 and 1997 lL would appreclaLe 12° per
annum vs. Luropean currencles. Scarv Lhlnas were
abouL Lo happen.
8v 1997, as a consequence of Lhe currencv
$ lndex - leb'83 Lo !an'02
$ lndex - !an'02 Lo ÞresenL
TIe EcIecLIcu ¡und: Munuger CommenLurv, Muv zo1o
Source: 8loombera
Lhe uS as lnvesLors adopLed a fawnlna admlraLlon
for Lhe lar LasL. uoes Lhls sound famlllar?
'1he areaL enemv of Lhe LruLh ls ofLen noL Lhe lle -
dellberaLe, conLrlved and dlshonesL - buL Lhe mvLh
- perslsLenL, persuaslve, and unreallsLlc.'
-!ohn l. kennedv, CommencemenL Address, ?ale
unlverslLv, new Paven, ConnecLlcuL, 11Lh !une
WlLh Lhelr currencles peaaed Lo Lhe weak dollar,
SouLh korea, 1alwan, Pona kona and Slnaapore, Lhe
aroup of counLrles dubbed 1he Aslan 1laers bv an
overconfldenL flnanclal communlLv, all wlLnessed a
dramaLlc Lransfer of lncome from Lhe household Lo
Lhe corporaLe secLor. And aaaln sLarLlna ln 1983,
and mlrrorlna ln reverse Lhe dollar's decllne, Lhelr
sLock markeLs all rose nearlv sevenfold.
8uL bv 1993 Lhe dollar was laraelv unchanaed
versus lLs low of Lhree vears earller and proved
ulLra-compeLlLlve aaalnsL Lhe resL of Lhe world's
floaLlna currencles. lrom lLs nadlr ln 1987, Lhe uS
Lrade deflclL conLracLed from $131bn Lo [usL $31bn
four vears laLer as exporLs [umped 63°. WlLh lLs
raLe of prlce descenL havlna abaLed, Lhe dollar
evenLuallv reversed course, beLween Lhe summers
8v 1997, as a consequence of Lhe currencv
appreclaLlon, moneLarv pollcv was LlahLenlna across
Lhe lar LasL. ?eL, accordlna Lo Lhe LhouahL process
responslble for seLLlna Aslan asseL prlces, such a
LhreaL was barelv percepLlble (lL rarelv ls). 8v Lhls
polnL, Lhe 1laers' economlc achlevemenLs had Laken
on almosL mvLhlcal proporLlons. CredlL arowLh,
when allled wlLh Lhe super-compeLlLlve dollar pea,
had proven a furLher powerful economlc sLlmulanL
and hoL monev flowed ln from overseas lnvesLors
eaaer Lo share ln Lhe domesLlc prosperlLv.
1he prlvaLe secLor ln Asla lapped lL up, faLefullv
adopLlna a pro-cvcllcal debL load denomlnaLed
almosL excluslvelv ln dollars. 8eLween 1993 and
1996 ln Lhe four laraesL ASLAn economles, forelan
debL-Lo-CuÞ raLlos rose from 100° Lo 167° (see
8lsmarck's warnlna Lo nlneLeenLh cenLurv !apan,
below). MoneLarv lnflaLlon was ln full effecL and,
uslna SouLh korea as an example, broad monev
supplv (M3) suraed, conslsLenLlv realsLerlna vear-
on-vear arowLh raLes of beLween 20° and 33°
durlna Lhe boom. 1he 1laer economles, ln Lhe words
of Adam SmlLh, were en[ovlna one of Lhose
momenLs when, "Lhe areaLer manv demand caplLal
for foollsh venLures such as properLv speculaLlon
and banks acL as lf honour bound Lo supplv Lhem
wlLh all Lhe caplLal Lhev demand.",
,Þ.!. C'8ourke, Oo tbe weoltb of Notloos (London: ALlanLlc 8ooks, 2007).
As we all found ouL, Lhls wlcked brew had Lo end. 8v
1998 Lhe lMl had been called ln, Aslan currencles
were devalued and forelan debLs resLrucLured. ln
oLher words, drasLlc remedles were souahL Lo
escape Lhe vlce-llke arlp of Lhe now much sLronaer
'...llLLle ls ever reallv new ln Lhe world of flnance.
1he publlc has a euphorlc deslre Lo foraeL...'
-!ohn kenneLh CalbralLh, 1be 1929 lotollel. Atlootlc
ln Lhe splrlL of Lhe nuLcracker revoluLlonarles, l
would llke Lo warn vou LhaL l Lhlnk Lhe Aslan
buslness developmenL model ls flawed. l Lhlnk our
ellLes have lL wrona. lL ls mv conLenLlon LhaL Chlna
produces CuÞ arowLh wlLhouL per caplLa wealLh
creaLlon. lL ls analoaous Lo a cockLall parLv wlLhouL
Lhe cockLalls, whaL ls Lhe polnL?
lurLhermore, l fear LhaL should Chlna suffer an
economlc reversal, lL mlahL have especlallv omlnous
lmpllcaLlons for !apan. l am concerned abouL Lhe
lopslded naLure of !apan's flnances, wlLh lLs
domesLlc llablllLles (penslon and lnsurance schemes)
belna supporLed bv Lhe counLrv's subsLanLlal
overseas dollar hoard. 1o mv mlnd Lhls Lrllllon dollar
reserve of forelan exchanae has parallels wlLh
Amerlca's sub-prlme debL. 1hls mav be conLenLlous
buL l belleve LhaL boLh asseLs are dublous and
danaerous ln naLure. lor Lhe !apanese and oLher
soverelan Aslan currencv reserves are onlv of use so
lona as Lhev are noL deploved domesLlcallv, [usL llke
TIe EcIecLIcu ¡und: Munuger CommenLurv, Muv zo1o
lorLv vears aao, [usL prlor Lo a performance aL
AmsLerdam's renowned ConcerLaebouw, a aroup of
radlcal vouna muslclans beaan maklna nolses wlLh
Lhelr nuLcrackers and blcvcle horns. 1helr
ºnuLcracker acLlon" denounced Lhe orchesLra as a
sLaLus svmbol of Lhe rullna ellLe, clalmlna LhaL lL was
aullLv of ºmalnLalnlna an undemocraLlc arLlsLlc
envlronmenL." Þersuaded bv Lhe lmmedlaLe
danaers of deflaLlon, l feel much Lhe same
anLaaonlsm Lowards mosL lnvesLmenL maLLers
Lodav, especlallv Lhe Aslan buslness model and Lhe
lnvesLmenL communlLv's bulllshness reaardlna
lrom Lhe phenomenon LhaL was !apan ln Lhe
1970s/80s Lo Lhe aforemenLloned Aslan 1laer
movemenL ln Lhe 1990s Lo our presenL obsesslon
wlLh Chlna's economlc mlahL and lLs fuLure
prospecLs, Asla has won Lhe hearLs and mlnds of Lhe
flnanclal world's mosL demandlna lnvesLors.
WlLness lldellLv's leaendarv 8rlLlsh fund manaaer
AnLhonv 8olLon's explanaLlon for hls declslon Lo
come ouL of reLlremenL and launch a new career aL
Lhe helm of a Chlna fund, º...onlv a remarkable
opporLunlLv could have LempLed me...Lhls mav be
Lhe blaaesL economlc and lnvesLmenL sLorv of our
lona as Lhev are noL deploved domesLlcallv, [usL llke
napoleon's bavoneL. LeL me explaln.
!apan ls effecLlvelv shorL lLs own currencv and, Lo
aaaravaLe maLLers furLher, so ls Lhe lnLernaLlonal
hedae fund communlLv. 1hlnk abouL lL, do vou know
of anv wealLhv acqualnLance LhaL has ven-
denomlnaLed cash deposlLs? uollars, euros, pounds,
Swlss francs, even Slnaapore dollars, ves, buL no
one holds Lhe currencv of Lhe world's second laraesL
economv. 1hls arranaemenL ls noL vlable ln Lhe
lonaer Lerm. 1o quoLe CalbralLh once more, º1he
enemv of Lhe convenLlonal wlsdom ls noL ldeas buL
Lhe march of evenLs." Sure, Lhe ven ls noL cheap on
a purchaslna power parlLv basls and lLs domesLlc
exporLers sLruaale Lo remaln compeLlLlve wlLh a
ven-denomlnaLed cosL base. 8uL an unforeseen
evenL, such as a slump ln Chlnese economlc arowLh,
has Lhe poLenLlal for Lorschlusspanlk ln Lhe currencv
markeLs, whlch could ln Lurn preclplLaLe a much
hlaher value of Lhe ven.
lL's comlna up
lL's comlna up
lL's comlna up
lL's comlna up
lL's comlna up
lL's comlna up
lL's comlna up
lL's uA8L
-Corlllaz, uAk£. 2003
We worked Lhls ouL when Lehman falled. ln a world
domlnaLed bv huaelv leveraaed flnanclal
lnsLlLuLlons' porLfollos, lf a ven asseL, sav a
corporaLe loan noLe flnanced ln ven, falls
subsLanLlallv (20° or more) lL adds Lo Lhe demand
for Lhe ven as Lhe borrower now has Lo borrow
even more ven (or sell more of lLs forelan
denomlnaLed asseLs Lo buv ven) Lo cover Lhe loss. l
am wllllna Lo waaer Lhls acLlon would lnvoke a
vlclous cvcle as Lhe counLrv's exporL base would be
[eopardlsed furLher bv Lhe appreclaLlna currencv.
headllnes recall Lhe [ournallsL ChrlsLopher Morlev's
observaLlon LhaL, ºsomeLlmes Lhere ls so much
wrlLlna on Lhe wall LhaL Lhe wall falls down." ?ou
wlll noL flnd us shorL Lhe ven anvLlme soon!
1he 8llnd Leadlna Lhe 8llnd?
l llke Lo Lhlnk LhaL modern Chlna's economlc
LransformaLlon has a shared herlLaae wlLh LhaL of
!apan, cemenLed bv uena xlaoplna's vlslL ln 1978.
1hls was Lhe flrsL ever bv Lhe head of a Chlnese
TIe EcIecLIcu ¡und: Munuger CommenLurv, Muv zo1o
[eopardlsed furLher bv Lhe appreclaLlna currencv.
Alreadv [lLLerv sLock markeLs would unravel,
lnlLlaLlna even more selllna of dollar asseLs Lo buv
more ven Lo make aood Lhe losses or shorLfall vls-a-
vls domesLlc lnsLlLuLlons' ven llablllLles.
lL ls perhaps lnLeresLlna LhaL when l vlslLed 1okvo ln
March Lhe local buslnessmen pronounced Lhe
noLlon of neaaLlve Chlnese CuÞ arowLh as a near
lmposslblllLv. Mavbe such confldence explalns Lhelr
asseL-llablllLv mlsmaLch. l reallv do llke Lhelr use of
Lhe world lmposslble. l remember how lL was used
so ofLen bv Wall SLreeL banklna analvsLs Lo descrlbe
Lhe plauslblllLv of a naLlonwlde houslna slump ln
Amerlca, ves, lmposslble lndeed!
As LlaquaL Ahamed's excellenL sLudv of Lhe pollcv
follles of Lhe 1920s reveals, momenLs of hlsLorlcal
chanae are marked bv a clusLerlna of deblllLaLlna
evenLs and "parL of Lhe reason for Lhe exLenL of Lhe
world economlc collapse of 1929 Lo 1933 was LhaL lL
was noL [usL one crlsls buL a sequence of crlses,
rlcocheLlna from one slde of Lhe ALlanLlc Lo Lhe
oLher..."- !usL look around Lhe world aL all Lhe
reveallna headllnes: Amerlcan sub-prlme losses, Lhe
Creek bond panlc, ÞorLuaal and Spaln's splrallna
aovernmenL bond vlelds, Lhe lMl ln Lurope and
prophecles of a Chlnese properLv crash. Such
1hls was Lhe flrsL ever bv Lhe head of a Chlnese
aovernmenL. l am sure LhaL Lhe Lhen Þrlme
MlnlsLer, lukuda 1akeo, warned Chlna's ºllLLle
boLLle". of 8lsmarck's precauLlonarv advlce Lo hls
nlneLeenLh cenLurv predecessor lwakura LhaL
naLlonal lndependence can be compromlsed bv an
excesslve rellance on forelan credlLors. Superlor
lnvesLmenL prospecLs are one Lhlna, buL noL when
Lhev enLall perslsLenL currenL accounL deflclLs and a
dependencv on Lhe flckleness of forelan caplLal. ?ou
beLLer belleve 8lsmarck's lesson was rudelv brouahL
home Lo Lhe Aslan 1laers one hundred vears laLer.
Þower noL ÞroflL
!apan, however, heeded Lhe lnsLrucLlon. lrom Lhen
on lL chose Lo subordlnaLe evervLhlna else ln lLs
domesLlc economv Lo Lhe success of lLs exporL
secLor. Cnlv bv such sacrlflces, lL belleved, could lL
hope Lo lndependenLlv acqulre Lhe necessarv
forelan exchanae requlred Lo pav for lmporLed
caplLal equlpmenL and Lhe lndusLrlallsaLlon of lLs
economv. 1hls was when Lhe 'Þ' for soverelan
power came Lo supplanL Lhe domlnance of Lhe
Analo-Saxon demand LhaL caplLal be allocaLed
accordlna Lo Lhe 'Þ' for proflL.
-LlaquaL Ahamed, lotJs of lloooce. 1929. tbe Cteot ueptessloo. ooJ tbe 8ookets wbo 8toke tbe wotlJ (London: Wlndmlll 8ooks).
.Aklo Mlkunl and 8. 1aaaarL Murphv, Iopoo´s lollcv 1top (8rooklnas lnsLlLuLlonÞress, 2002). 4
Lverv credlLor naLlon needs a LransformaLlonal
evenL. lor !apan lL was Lhe llrsL World War, whlch
dlsplaced Lhe warrlna Luropean naLlons as
compeLlLors durlna a Llme of huae Allled mlllLarv
demand. 1he opporLunlLv produced a boom for
!apanese producLs. lrom 1913 Lo 1918, !apan wenL
on Lo accumulaLe a currenL accounL surplus LhaL
evenLuallv represenLed over half of lLs CuÞ aL Lhe
onseL of war. 8uoved bv such flnanclal success, lL
was able Lo compleLe a rapld uparadlna of lLs
manufacLurlna base wlLhouL Lhe need for overseas
Chlna's LransformaLlonal evenL arauablv came wlLh
lLs admlLLance Lo Lhe World 1rade CraanlsaLlon
(W1C) ln 2001 and Lhe colncldence of veL anoLher
overseas confllcL, Lhe lederal 8eserve's moneLarv
baLLle Lo sLem Lhe economlc fallouL from Lhe 1M1
crash. 1he spur Lo Chlnese demand from low
Amerlcan lnLeresL raLes and Lhe wllllnaness of
WesLern socleLv Lo Lake on more flnanclal leveraae
was even more sLarLllna Lhan Lhe absence of
Luropean compeLlLlon ln Lhe Þaclflc ln Lhe earlv parL
noL onlv was !apan operaLlonallv leveraaed Lo
alobal arowLh, lL was slmulLaneouslv becomlna
flnanclallv leveraaed as well, as lLs banks flnanced
Lhe posL-war expanslon. 1he naLlon had also
become lnLernaLlonallv conLenLlous, Lhe lndusLrlal
capaclLv bullL durlna Lhe run up Lo Lhe war was far
areaLer Lhan Lhe sum of Lhe domesLlc and forelan
markeLs' ablllLv Lo absorb lL. As would happen aaaln
slxLv vears laLer, !apan was deemed Lo be predaLorv
ln sLeallna [obs from Lhe WesL as Lrade Lenslon was
fanned bv hlah unemplovmenL ln Lhe ausLerlLv
bedraaaled economles of Lurope. 8uL ulLlmaLelv lL
was lLs domesLlc flnanclal vulnerablllLv LhaL led Lo
!apan's undolna. 1he excess capaclLles never
produced Lhe cash flows necessarv Lo servlce or
reLlre Lhe debL, and wlLh unsold lnvenLorv plllna up,
companles beaan Lo defaulL on Lhelr loans. A bank
run ensued ln 1920 and Lhe resL of Lhe decade was
mlred ln low and dlsappolnLlna economlc arowLh.
Wlse Man noL lnvesL ln CvercapaclLv
TIe EcIecLIcu ¡und: Munuger CommenLurv, Muv zo1o
Luropean compeLlLlon ln Lhe Þaclflc ln Lhe earlv parL
of Lhe LwenLleLh cenLurv. lrom 2001 Lo lLs peak ln
2007, Chlna accumulaLed a currenL accounL surplus
of $1.7 Lrn, a sum equlvalenL Lo one and a quarLer
Llmes Lhe slze of lLs economv back when lL enLered
Lhe W1C.
Cne musL wonder wheLher Chlnese pollcv makers
have consldered whaL happened Lo !apan afLer
World War l. We all know LhaL world demand
saaaed afLer Lhe confllcL. Lurope bounced back and
beaan produclna compeLlLlve, non-mlllLarv producLs
once more. Laaer Lo earn preclous forelan currencv
Lo repav war debLs, Luropean manufacLurers
proved surprlslnalv prlce compeLlLlve ln an aLLempL
Lo recapLure Lhelr losL markeL share. 1he
envlronmenL should have prompLed cauLlon.
Powever, perhaps lmbued bv Lhe hubrls of Lhelr
sLarLllna and unprecedenLed expanslon, Lhe
!apanese bureaucraLs saw Lhlnas dlfferenLlv. 1hev
could noL accepL Lhe obvlous and lmmedlaLe
danaers arlslna from Lhe fall-off ln demand. nelLher
were Lhev afrald of Lhe commerclal lmpllcaLlons
from a resumpLlon of lnLernaLlonal compeLlLlon.
lnsLead Lhev pressed on, ralslna Lhe sLakes furLher,
bv dlrecLlna Lhe prlvaLe secLor Lo borrow and lnvesL
ln veL more excess producLlon capaclLv and Lo bulld
and sLore more lnvenLorles.
'When a counLrv has an lnvesLmenL raLe over 30
percenL of CuÞ and rlslna, vou sav Lhls counLrv ls
noL sufferlna from over-capaclLv...are vou serlous!?'
-?u ?ondlna, lnsLlLuLe of World Lconomlc and
ÞollLlcs, Chlnese Academv of Soclal Sclences
Cf course LhaL was a lona Llme aao, buL have Lhlnas
reallv chanaed? As l wroLe ln a plece ln 1be 5ooJov
1eleotopb, Lhe anclenL eLhlcal svsLem of Confuclus
has noLhlna Lo sav on Lhe sub[ecL of modernlsaLlon.-
1here ls no aphorlsm counsellna wlse men noL Lo
lnvesL ln overcapaclLv, buL perhaps one dav Lhere
wlll be slnce Lhe Chlnese seem hell-benL on a slmllar
course of acLlon. lnvesLmenL spendlna has Lrlpled
slnce 2001 and Lhe consequences are sLaaaerlna.
-hLLp://www.Lelearaph.co.uk/flnance/personalflnance/7219178/Chlna-Puah-Pendrv-warns-lnvesLors-lnfaLuLlon-ls-mlsaulded.hLml 5
A counLrv LhaL represenLs [usL 7° of alobal CuÞ ls
now responslble for 30° of alobal alumlnum
consumpLlon, 47° of alobal sLeel consumpLlon and
40° of alobal copper consumpLlon. Slmllar Lo whaL
happened durlna Lhe !apanese capaclLv bulld, l
doubL Lhe ablllLv of forelan markeLs Lo absorb such
slack wlLhouL some hosLlllLv arlslna.
AL one level of absLracLlon l accepL LhaL Chlna
should be conaraLulaLed on lLs efforLs Lo repel Lhe
1920s-sLvle deflaLlonarv Lrap ln whlch surplus
counLrles relan ln Lhelr moneLarv and flscal pollcles,
Lherebv exacerbaLlna Lhe dlfflculLles of Lhe weaker
debLor counLrles. lL ls [usL LhaL l suspecL Lhe
ÞollLburo mav have aone Loo far bv embarklna on a
pollcv Lo maLch Lhe uS flscal surae nearlv dollar-for-
dollar desplLe havlna an economv one-Lhlrd LhaL of
lLs Amerlcan counLerparL. Surelv, Chlnese offlclals
musL reareL Lhe expllclL sLaLe blesslna for a frenzled
doubllna ln domesLlc bank lendlna lasL vear.
LxuberanL credlL creaLlon and lLs assoclaLed,
alLhouah offlclallv unrecoanlsed parLner, hoL
monev, have sLrenaLhened Lhe Lwln problems of
household secLor aL a Llme when Lhere ls much
lnLernaLlonal enLhuslasm for auLonomous and
consumpLlon-led Aslan arowLh. 1he fashlon of our
lnvesLmenL aae ls Lo upbrald economles llke
Amerlca's LhaL have hlah levels of consumpLlon and
Lo lnsLead look approvlnalv aL Lhe hlah savlna
conLemporarles, Lhe Aslans. l Lhlnk, Lhouah, we
have lL Lhe wrona wav round, one new hoL doa
vendor mav be beLLer for a naLlon Lhan anv number
of sLaLe flnanced pro[ecLs LhaL fall Lo pav Lhelr
economlc renL.- LeL me explaln.
1he aoal of economlc pollcv should be Lo maxlmlse
Lhe household secLor's well-belna wlLh a hlah re-
occurrlna level of household lncome evldenced bv
hlah levels of consumpLlon Lo CuÞ. As someone
accuraLelv noLed, "we're noL produclna [usL for Lhe
fun of lL." ConsumpLlon ls Lhe prlze and lLs
dlslocaLlon ln Asla ls Lhe prlnclple cause of mv
concern. Accordlna Lo 1he LconomlsL,
consumpLlon's share of CuÞ ln emeralna Aslan
economles has fallen from 63° ln 1980 Lo 47° bv
2008. ln Chlna lL ls [usL 33°, someLhlna ls broken ln
TIe EcIecLIcu ¡und: Munuger CommenLurv, Muv zo1o
monev, have sLrenaLhened Lhe Lwln problems of
commodlLv hoardlna and properLv speculaLlon. 1hls
flscal surae has manv AusLrallan and 8razlllan
commodlLv producers, as well as !apanese
manufacLurers, brlmmlna wlLh flnanclal araLlLude,
buL lL wlll have Lhe hapless Chlnese household
pavlna Lhe blll should Lhe resL of Lhe world fall Lo
susLaln a vlaorous economlc recoverv.
Where ls Lhe value ln shuLLllna Chlnese peasanLs,
Lvplcallv earnlna less Lhan $1,000 per annum, back
and forLh aL over 200 km/hour from Lhe counLrv's
poverLv-sLrlcken lnLerlor Lo lLs prosperous coasLal
realons? Wlll Lhe expecLed producLlvlLv
enhancemenLs succeed ln aeneraLlna sufflclenL
proflLs Lo servlce Lhe sLaLe's aaraanLuan lnvesLmenL
spendlna? 1hls ls noL Lo menLlon Lhe rallwav
mlnlsLrv's proposed hlah-speed rall llnk beLween
Shanahal and London, penclled ln for no laLer Lhan
2023 (see 1be £cooomlst Aprll 10Lh edlLlon)!, lL ls
behavlour of Lhls klnd LhaL brlnas Lo mlnd 8uffeLL's
wlLLv dlcLum LhaL, "Lo a man wlLh a hammer
evervLhlna looks llke a nall."
Manv opLlmlsLlc lnvesLors wlll assall mv araumenL
and ask where Lhe harm ls ln Lhese pollcles. 1he
harm ls LhaL such spendlna probablv auaranLees Lhe
conLlnued lmpoverlshmenL of Lhe Chlnese
2008. ln Chlna lL ls [usL 33°, someLhlna ls broken ln
Lhelr wealLh creaLlon process. l know Lhls sLands ln
rude conLrasL Lo Chlna's boomlna reLall sales lasL
vear. Chlna's unlL car sales of 13.6m even dwarfed
Lhe 10.4m unlLs sold ln Amerlca. Powever, one
swallow does noL make a summer. LeL us conslder
Lhe lona Lerm record of Lhls LransformaLlve perlod
of Chlnese arowLh. 1he Len vear CAC8 unLll 2008 ls
13.3° for CuÞ and 10.7° for household
consumpLlon. 1he share of consumpLlon fell from
43° Lo 33° over Lhls perlod. We awalL Lhe flaure
for 2009 wlLh much lnLeresL.
lL ls popular Lo araue LhaL Chlna and lLs saLelllLes
reaularlv redlsLrlbuLe lncome from Lhe SLaLe Cwned
LnLerprlses Lo households vla Lhelr awe-lnsplrlna
bulldlna pro[ecLs and Lhe assoclaLed [ob creaLlon.
unforLunaLelv, lL Loo can be araued LhaL Lhe reverse
ls Lhe real LruLh, as much of Lhe monev ls acLuallv
capLured bv Lhe bank accounLs of pollLlcal flxers,
locallv connecLed consLrucLlon execuLlves and Lhe
properLv speculaLors whose land ls exproprlaLed. A
reveallna !apanese aovernmenL sLudv found LhaL
consLrucLlon cosLs ln 1990 !apan were rouahlv
?200,000 per square meLer for boLh publlc and
prlvaLe secLor pro[ecLs. 8uL wlLhln a decade Lhe
prlvaLe secLor cosL had fallen Lo ?130,000 whereas
Lhe publlc secLor saw cosL lnflaLlon Lo ?220,000.
- Þ.!. C'8ourke, Oo tbe weoltb of Notloos (London: ALlanLlc 8ooks, 2007). 6
So l would noL be surprlsed lf Lhe Chlnese
aovernmenL (read Lhe people) flnd ln due course
LhaL ln order for Lhelr naLlon Lo conLlnue Lo servlce
Lhe lnLeresL cosLs noL covered bv Lhelr Lrophv
asseLs, Lhev mav have Lo borrow more monev, ralse
Laxes, and of course be sub[ecLed Lo Lhe penurv LhaL
comes wlLh a cheap currencv and mlnlscule savlnas
lf ln uoubL, 8lame Lhe 8anks?
So whv has Lhe raLlo of consumpLlon Lo CuÞ fallen
so preclplLouslv? Cne reason ls LhaL Chlna dld noL
escape Lhe 1998 Aslan crlsls unharmed, lL suffered a
LraumaLlc recesslon LhaL exposed Lhe follv of
prevlous bad bank lendlna. CLhers wlll dlsaaree, buL
as klndelberaer noLed, flnanclal crlses are llke preLLv
alrls: Lhev are dlfflculL Lo descrlbe ln absLracLlon buL
are lnsLanLlv recoanlsable when seen. 1he problem
wlLh Chlna's conLemporarv economlc hlsLorv ls LhaL
so much of lL has been concealed bv subsldles, or
whaL l call subLerfuae, LhaL one commenLaLor's
preLLv alrl can [usL as llkelv be consLrued as
and caplLal cosLs. lL ls a Pobson's cholce.
lf l promlsed Lo make vou rlch buL lnslsLed on [usL
one condlLlon, LhaL vou had Lo spend Lhe resL of
vour llfe ln new ?ork, could vou accepL lL? 1hls, l
Lhlnk, ls Lhe essence of Chlnese munlflcence. A
wealLhv household can onlv own sLocks, bonds, real
esLaLe and commodlLles lf Lhev are denomlnaLed ln
renmlnbl. now, new ?ork ls mv favorlLe clLv ln Lhe
world, buL would l wanL Lo be lmprlsoned Lhere?
Some esLlmaLe LhaL Lhe overall soclallsaLlon of Lhe
credlL process mav have lnvolved a Lransfer of as
much as 3° of CuÞ from Lhe household Lo Lhe
corporaLe secLor each vear.. Mavbe Lhls was
feaslble when we had an unprecedenLed
svnchronlsed perlod of alobal arowLh, buL ln more
sLralLened Llmes lL mlahL noL feel llke Lhe heaven l
Lhlnk of.
Conc|us|on and Investment kev|ew
'All vou do wlLh vour LalenL ls
TIe EcIecLIcu ¡und: Munuger CommenLurv, Muv zo1o
preLLv alrl can [usL as llkelv be consLrued as
anoLher's haaaardlv wench.
'Peaven ls a place where noLhlna ever happens'
-1alklna Peads, neoveo
Chlna's economlc reversal was noL remedled bv a
vlolenL currencv upheaval or corporaLe and bank
fallure. lnsLead, Lhe recoverv happened afLer an
enormous and sLlll onaolna subsldv from Lhe
household secLor Lo boLh Lhe banks and Lhe
manufacLurlna secLor. lL ls as lf noLhlna reallv bad
happens ln a Chlnese recesslon: problemaLlc debLs
are rolled over and resLrucLured (LhaL ls Lo sav,
foralven), and Lhe banklna secLor accepLs low credlL
'All vou do wlLh vour LalenL ls
wear dresslna aowns and
make wlLLv remarks when
vou mlahL be reallv helplna
people, maklna Lhem Lhlnk!'
-noel Coward, lteseot
lL ls now commonlv accepLed LhaL Lhe maanlLude of
Lhe flnanclal problems confronLlna Lhe world
economv are so areaL LhaL ln all llkellhood we wlll
be confronLed bv a hvperlnflaLlon allowlna
soverelan debLs Lo be pald off ln worLhless flaL
currencv. !usL llke Lhe 8olshevlks ln 1918 and 1919,
Lhe machlne-aun of Lhe CommlssarlaL of llnance
wlll pour flre lnLo Lhe rear of Lhe bouraeols svsLem.,
We do noL dlspuLe Lhls ouLcome.
Powever, lL remalns our conLenLlon LhaL pollcv
makers can onlv aaln Lhe pollLlcal lealLlmacv for
such exLreme behavlour lf Lhe world ls once more
confronLed bv a profound and deblllLaLlna
deflaLlonarv evenL. We Lherefore flnd lL a more
proflLable exerclse Lo envlsaae whaL such a
caLasLrophlc evenL mlahL look llke.

Above, we have ouLllned Lwo aame chanaers: a
slump ln Chlna's raLe of economlc arowLh and a
sudden and dramaLlc appreclaLlon ln Lhe ven LhaL
would bankrupL lLs domesLlc exporL base.
8uL oplnlons are cheap and plenLlful. l belleve lL ls
more lnsLrucLlve Lo conslder whaL people do wlLh
Lhelr oplnlons. So leL me Lell vou whaL l have done
wlLh mlne. 1he lnvesLmenL Leam and l have
carefullv consLrucLed a shorL credlL porLfollo made
up of over LwenLv slnale-name lndusLrlal, cvcllcal
buslnesses whlch have Lhe dublous dlsLlncLlon of
sufferlna from alaanLlc flnanclal leveraae and
Aslan/commodlLv overdependence. WlLhouL a
doubL, some of Lhese buslnesses wlll noL survlve,
oLhers wlll have Lo be radlcallv overhauled and
resLrucLured and we wlll make monev.
1he Skv uoesn'L Pave Lo lall uown for us Lo Make
l suspecL we wlll succeed wlLh or wlLhouL an
economlc slow down ln malnland Chlna. lor lf lL
conLlnues wlLh lLs llnear CuÞ arowLh of 8 Lo 10°
We have provlded wlLh Mlkunl's CredlL 8aLlnas on
!apanese banks and companles slnce !ulv 1983.
When we sLarLed Lhls servlce, lL was wldelv
recoanlsed LhaL banks and larae companles baslcallv
had never falled ln !apan and credlL raLlnas had noL
been necessarv for Lhe lnvesLors.
Powever, ln !ulv 1984, 8lccar's converLlble bonds
were defaulLed and Lhe flnal lnvesLors losL monev
for Lhe flrsL Llme slnce Lhe World War ll. 1hereafLer,
we have experlenced 46 cases of fallures of bond
lssuers. Amona Lhem were larae bank fallures. We
undersLand LhaL credlL rlsks on !apanese larae
corporaLlons have been less "soclallzed" ln recenL
vears and are llkelv Lo be "prlvaLlzed" more
compleLelv ln near fuLure.
1hank vou aaaln for vour supporL and ask for vour
Mlkunl & Co., LLd
TIe EcIecLIcu ¡und: Munuger CommenLurv, Muv zo1o
conLlnues wlLh lLs llnear CuÞ arowLh of 8 Lo 10°
per annum, we can be assured LhaL lL wlll have
made furLher lnvesLmenLs ln addlna Lo lLs
conslderable lndusLrlal capaclLv. Much llke Lhe
!apanese aL Lhe end of WW1, Chlna flnds lLself on a
colllslon course wlLh Lhe resL of Lhe world. lLs fuLure
economlc success could lead Lo lncreaslna
skepLlclsm as Lo Lhe vlablllLv of manv lndusLrlal
buslnesses locaLed boLh ln !apan, Lurope and Lhe
uS as aolna concerns.
Mlkunl's Þasslna
8emarkablv, alven Lhe sLakes are so hlah, lnvesLors
seem acqulescenL ln Lhls area. LasL uecember saw
Lhe closure of !apan's onlv Lrulv lndependenL and
raLlonal (aL leasL Lo me) credlL raLlna aaencv. 1he
followlna ls an excerpL from an acLual e-mall l
ke: 1erm|nat|on of M|kun|'s Cred|t kat|ngs serv|ces
Þlease be noLed LhaL we wlll LermlnaLe Mlkunl's
CredlL 8aLlnas servlces on uecember 31, 2009.
1hank vou verv much for vour supporL Lo our
1he closure of course colnclded wlLh !apan's flrsL
lSuA recoanlsed credlL defaulL evenL, Lhe
resLrucLurlna of Lhe consumer flnance companv
Alful, and preceded bv a mere monLh Lhe
bankrupLcv of !AL. lL ls as Lhouah Lhe LruLh ls so
unpalaLable LhaL lnvesLors would raLher noL hear lL,
cerLalnlv noL pav Mlkunl $3,000 per quarLer Lo
conflrm Lhe near cerLalnLv LhaL Lhev own over-
valued corporaLe credlLs. A counLrv wlLh a debL
burden LhaL ls unprecedenLed ln Lhe modern aae
and whose companles Lvplcallv pav less Lhan 2° per
annum for Len vear monev has declded LhaL lL has
no need for Lales of posslble woe. 1o quoLe Plllarv
CllnLon, lL's, ºunf***lnabellevable!"·-
·-!ohn Pellemannand Mark Palperln, Come cboooe. Obomo ooJ tbe cllotoos. Mccolo ooJ lollo. ooJ tbe koce of o llfetlme.
1he lund has been buoved bv Lhe performance of
our SLerllna, AusLrallan and klwl lnLeresL raLe
swapLlons Lhls vear as well as aalns from Luropean
soverelan CuS and successful speculaLlons ln
currencv and corporaLe debL. 1hese proflLs have
allowed us Lo lean lnLo Lhe sell off ln rlsk-averse
markeLs ln lebruarv/March. We have Lherefore
been able Lo double noLlonal exposure Lo our Aslan
bear porLfollo. 1odav we are 3.3x shorL Lhe lund's
nAv. We have a maxlmum loss of 8.3° and a
maxlmum poLenLlal aaln of 230° should our names
ao bankrupL and credlLors recover 23° of Lhelr
asseLs. We are readv.
Powever, so dramaLlc are Lhe prlclna anomalles
prevalllna ln Lodav's markeL LhaL we lnLend Lo
launch a slnale sLraLeav verslon of Lhls Lrade ln !une
2010. As a slnale sLraLeav producL, we anLlclpaLe
Lhe new lund wlll offer lnvesLors much more
aearlna Lo Lhe upslde poLenLlal lnherenL ln Lhls
asvmmeLrlc Lrade. More deLalled lnformaLlon
abouL Lhe lnvesLmenL parameLers and sLrucLure of
Lhls lund ls avallable upon requesL.
affllcLed all communlsL aovernmenLs over Lhe vears.
kev economlc lndlcaLors, wheLher Lhev are ln CuÞ,
credlL arowLh or araln producLlon, sLlpulaLe a
deslred (and noL alwavs reallsLlc) level of ouLpuL,
raLher Lhan Lhe sum of lndlvldual achlevemenL.
When Lhlnas ao wrona, local offlclals prefer Lo
secure Lhelr [obs bv presenLlna resulLs ln-llne wlLh
Lhe sLaLe LaraeL raLher Lhan Lelllna Lhe LruLh. 1hls
means Lhe cenLrallv-complled daLa can ofLen end up
wlldlv mlsrepresenLlna Lhe real slLuaLlon,
parLlcularlv when evenLs on Lhe around devlaLe
subsLanLlallv from Lhe offlclal LaraeL.
TIe EcIecLIcu ¡und: Munuger CommenLurv, Muv zo1o
uS Corn Þrlce
Chlnese Corn Þrlce
Lhls lund ls avallable upon requesL.
Chalrman Mao's CreaL Leap lorward
Chlna accounLs for one-flfLh of world corn
producLlon, and a slmllar proporLlon of demand. lLs
neL exporLs over Lhe lasL flve vears have been
neallalble. And, accordlna Lo Lhe sLaLlsLlcs, Chlna
holds 34° of alobal lnvenLorles, well above Lhe
world averaae. ln facL, lLs sLocks-Lo-use raLlo ls 31°,
whlch compares wlLh a alobal averaae of 18° and
an averaae ex-Chlna of a raLher palLrv 14°. ln shorL,
Chlna ls lona. So can someone please explaln Lo me
whv Lhe prlce of corn ln uallan, a porL clLv Lo Lhe
easL of 8el[lna, Lrades for $7.30 per bushel, more
Lhan double Lhe Chlcaao prlce?
1he lssue wlLh Chlnese daLa ls LhaL whlch has
1here ls some hlsLorv Lo Lhls. uurlna Lhe perlod of
Chalrman Mao's CreaL Leap lorward, aovernmenL
pollcv relled upon absurdlv hlah pro[ecLlons of araln
ouLpuL ln order Lo fund Lhe rapld lndusLrlallsaLlon of
Lhe counLrv.
Source: 8loombera
Chlna was selllna araln Lo 8ussla ln exchanae for
mlllLarv and lndusLrlal hardware. 8uL lL could onlv
afford lLs 8usslan arsenal owlna Lo lLs fourfold
lncrease ln araln conflscaLlons from a populaLlon
whlch had alreadv been sLruaallna Lo feed lLself
slnce Lhe forced collecLlvlsaLlon of Lhe mld 1930s.
1he ÞollLburo announced LhaL farmers could meeL
Lhls demand bv masslvelv lncreaslna ouLpuL, and seL
lmprobable LaraeLs for araln producLlon. ln order Lo
'prove' LhaL Lhese LaraeLs were posslble, Mao
arranaed for farmers ln so-called 'SpuLnlk Co-
operaLlves' Lo LransplanL rlpe crops from a number
of flelds lnLo a slnale arLlflclal ploL ln order Lo
lmpress local sLooaes, who dulv reporLed Lhelr
flndlnas back Lo Lhe masses. And Lhe Þeople's uallv
newspaper dulv reporLed Lhe hlahlv lmprobable
vlelds of over 20 Lons of wheaL per hecLare (abouL
Lwlce whaL Lhe besL land aloballv could hope Lo
achleve Lodav) and even, ln one case, 400 Lons of
rlce per acre (whlch was dlvorced from reallLv bv a
facLor of abouL a hundred).
are [usL more unpleasanL.
8eLurnlna Lo Lhe presenL, Lhe aarlculLural daLa (llke
Lhe economlc daLa) suaaesL LhaL 2009 was anoLher
successful vear for Chlnese farmers and Lhe ouLlook
for 2010 ls slmllar. 8uL Lhe sham of Lhe 'SpuLnlk Co-
operaLlves' cauLlons us Lo be careful wlLh all
sLaLlsLlcs emeralna from LoLallLarlan sLaLes. lnsLead
mv Leam looks for anomalles ln real economlc
acLlvlLv, wheLher ln Lerms of prlce acLlon or Lrade
flows. And Lhe uallan corn prlce hlahllahLed above
consLlLuLes a sLrlklna anomalv.
WhaL MlahL Pave Pappened ln Lhe LasL ?ear Lo
Cause Such a Þrlce AberraLlon?
Larlv 2009 saw a drouahL ln norLhern Chlna so bad
LhaL 8el[lna ordered rockeLs Lo be flred lnLo Lhe
skles Lo make lL raln, and senL ouL dlvlslons of Lhe
Þeople's LlberaLlon Armv Lo waLer Lhe flelds bv
hand, armed wlLh llLLle more Lhan buckeLs and
spades. AaaravaLlna maLLers furLher, Lhe sLarL of
2010 has revealed a verv severe drouahL ln Lhe
souLh-wesL of Lhe counLrv, bad enouah Lo curLall
Lncouraaed bv Lhls apparenL areaL leap forward ln
producLlvlLv, Lhe aovernmenL lncreased lLs araln
requlslLlons Lo secure and pav Lhelr forelan
exchanae commlLmenLs, and Lhe populaLlon,
hlndered bv havlna Lo face Lhe harsh reallLv of vlelds
whlch weren'L lmprovlna aL all, relucLanLlv handed
over Lhelr food Lo Lhe 8usslans and prompLlv
sLarved. Pousehold subsldles wlLhouL alobal arowLh
souLh-wesL of Lhe counLrv, bad enouah Lo curLall
lndusLrlal producLlon ln a realon heavllv rellanL on
hvdroelecLrlc power. lurLhermore, ferLlllser
consumpLlon ln Chlna was down sharplv compared
wlLh prevlous vears, and Lhe lmpacL of lower
ferLlllser usaae on vleld Lends Lo be maanlfled bv
poor weaLher. 1hls con[uncLlon of evenLs ls
normallv consldered pre[udlclal Lo aood araln
lf Lhere has been a problem wlLh Lhe domesLlc
harvesL, Lhe aovernmenL wlll have Lo lnLervene.
ÞollLlcs ln Chlna have moved on somewhaL slnce Lhe
hearLless pollcles of Chalrman Mao, and Lhe lasL
Lhlna Lhe currenL realme needs ls an ouLbreak of
clvll unresL caused bv hunaer or, worse, sLarvaLlon.
Anv domesLlc shorLfall musL be made up ln Lhe
world markeL. We now have relaLlvelv aood daLa
reaardlna alobal Lrade ln aralns. And Lhls ls Lhe
cruclal facL: Chlna has re-appeared ln Lhe alobal
araln markeLs, buvlna wheaL from AusLralla and,
mosL slanlflcanLlv, buvlna caraoes of corn from Lhe
uS for Lhe flrsL Llme ln a decade.
Pow slanlflcanL could Lhls prove Lo be? 1he example
of oLher commodlLles suaaesLs LhaL Chlna could
have a ma[or lmpacL.

lor example, Lhev formerlv plaved a verv
lnslanlflcanL role ln Lhe alobal sovbean markeL, buL
wlLhln Lhe lasL flfLeen vears Lhev have moved Lo a
slLuaLlon where Lhev lmporL over 70° of Lhelr
sovbean requlremenL and accounL for over half of
world Lrade. Sovbean prlces have doubled slnce
Chlna beaan Lo be a ma[or world plaver ln Lhe laLe
lL ls perhaps Loo earlv Lo Lell wheLher Lhese
purchases are a response Lo one bad harvesL or Lhe
sLarL of a sLrucLural Lrend where Chlna bealns Lo
lmporL corn. neverLheless, Lradlna aL $3.60 per
bushel, Lhe alobal corn prlce looks far Loo cheap as
Chlna moves lnLo Lhe markeL, and we have recenLlv
beaun bulldlna a small poslLlon for Lhe lund.
1hls documenL ls belna lssued bv LclecLlca AsseL ManaaemenL LLÞ ("LAM"), whlch ls auLhorlsed and reaulaLed bv Lhe llnanclal Servlces AuLhorlLv. 1he lnformaLlon conLalned ln Lhls
documenL relaLes Lo Lhe promoLlon of shares ln one or more unrecoanlsed collecLlve lnvesLmenL schemes manaaed bv LAM (Lhe "lunds"). 1he promoLlon of Lhe lunds and Lhe
dlsLrlbuLlon of Lhls documenL ln Lhe unlLed klnadom ls resLrlcLed bv law. 1hls documenL ls belna lssued bv LAM Lo and/or ls dlrecLed aL persons who are boLh (a) professlonal cllenLs
or ellalble counLerparLles for Lhe purposes of Lhe llnanclal Servlces AuLhorlLv's ConducL of 8uslness Sourcebook ("CC8S") and (b) of a klnd Lo whom Lhe lunds mav lawfullv be
promoLed bv a person auLhorlsed under Lhe AcL (an "auLhorlsed person") bv vlrLue of SecLlon 238(3) of Lhe llnanclal Servlces and MarkeLs AcL 2000 (Lhe "AcL") ChapLer 4.12 of
CC8S. no reclplenL of Lhls documenL mav dlsLrlbuLe lL Lo anv oLher person. no represenLaLlon, warranLv or underLaklna, express or lmplled, ls alven as Lo Lhe accuracv or
compleLeness of, and no llablllLv ls accepLed for, Lhe lnformaLlon or oplnlons conLalned ln Lhls documenL bv anv of LAM, anv of Lhe funds manaaed bv LAM or Lhelr respecLlve
dlrecLors. 1hls does noL exclude or resLrlcL anv duLv or llablllLv LhaL LAM has Lo lLs cusLomers under Lhe uk reaulaLorv svsLem. 1hls documenL does noL consLlLuLe or form parL of
anv offer Lo lssue or sell, or anv sollclLaLlon of anv offer Lo subscrlbe or purchase, anv securlLles menLloned hereln nor shall lL or Lhe facL of lLs dlsLrlbuLlon form Lhe basls of, or be
relled on ln connecLlon wlLh, anv conLracL Lherefor. 8eclplenLs of Lhls documenL who lnLend Lo applv for securlLles are remlnded LhaL anv such appllcaLlon mav be made solelv on
Lhe basls of Lhe lnformaLlon and oplnlons conLalned ln Lhe relevanL prospecLus whlch mav be dlfferenL from Lhe lnformaLlon and oplnlons conLalned ln Lhls documenL. 1he value of
all lnvesLmenLs and Lhe lncome derlved Lherefrom can decrease as well as lncrease. 1hls mav be parLlv due Lo exchanae raLe flucLuaLlons ln lnvesLmenLs LhaL have an exposure Lo
currencles oLher Lhan Lhe base currencv of Lhe relevanL fund. PlsLorlc performance ls noL a aulde Lo fuLure performance. All charLs are sourced from LclecLlca AsseL ManaaemenL
LLÞ. Slde leLLers: Some hedae fund lnvesLors wlLh slanlflcanL lnLeresLs ln Lhe fund recelve perlodlc updaLes on Lhe porLfollo holdlnas. © 2003-10 LclecLlca AsseL ManaaemenL LLÞ,
8ealsLraLlon no. CC312442, realsLered offlce aL 6 Salem 8oad, London, W2 48u.
www.ec|ect|ca-am.com / |nfo@ec|ect|ca-am.com / +44 (0)20 7792 6400

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