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Pyongyang: The Kingdom of Kitsch

NEW MONDAY BOOK-REVIEW PAGES: 28-29

EUROPE EDITION VOL. XXX NO. 239 BHR BD 1.50 EGY $1.75(C/V) JOR JD2 KWT KD 1 OMN OR 2 POL ZL 12 QAT QR 14 SAU SR 14 UAE 15 AED £1.70 / €3.20

MONDAY, JANUARY 7, 2013 WSJ.com

Rule Makers
Enter Stage Left: Depardieu Gets Russian Passport

Ease Burden
On Lenders
BASEL, Switzerland—
Global banking regulators wa-
tered down a key element of
their plan for creating a safer
financial system, giving
ground to banks that argued
the rules were unworkable
and financially risky.
By David Enrich,
Geoffrey T. Smith
and Andrew Morse
The Basel Committee on
Banking Supervision, a group
of the world’s top regulators
and central bankers, said Sun-
day that it agreed to relax a
rule designed to ensure that
big banks are able to weather
financial crises without run-
ning short of cash. Bowing to
two years of intense pressure
from the banking industry,
the regulators made it easier
for banks to meet the rule,
known as the “liquidity cover-
age ratio,” and delayed its full
implementation until 2019.
It is the latest instance of
regulators chipping away at
their landmark 2010 response
to the global financial crisis.
The regulators argue that the
changes make banking rules
much stronger than they were
before the crisis.
The so-called Basel III ac-
cord, known for the Swiss city
in which it has historically
been negotiated, required
banks to greatly thicken their
capital cushions and come up
with trillions of dollars of li-
quidity. The banking industry
argued that the changes were
overkill and would prompt
them to dramatically reduce
lending. Regulators ultimately
Financial News
 Spain digs into its
pension fund....................5
 Junk bonds off to
quick 2013 start...........17
 U.S. banks hit stress-
test deadline.................20
 Heard: Beware of new
euro-zone bonds?.......32
accepted some of those argu-
ments, and agreed to delay or
ease key elements of the
rules.
Meanwhile, questions are
mounting in some countries,
including the U.S., over
whether the package will be
implemented at all. It is up to
individual countries to decide
how to apply the rules to
their financial institutions.
Nobody knows for sure
whether the rules will strike
the right balance between
preventing banks from be-
coming dangerously fragile
and providing the industry
the flexibility needed to fi-
nance economies around the
world. Previous iterations of
the Basel rules failed to pre-
vent banking crises, partly be-
cause they didn’t anticipate
the then-obscure corners of
the financial system that
would cause problems.
Regulators argue that the
new regulations, while weaker
than originally envisioned,
nonetheless make banking
rules much stronger than they
were before the crisis
The liquidity rule requires
banks to be holding enough
liquid assets—originally lim-
ited mostly to cash and gov-
ernment bonds—to be able to
withstand an intense 30-day
liquidity crisis similar to what
occurred in fall 2008. Liquid
assets must total 100% of the
funds a bank theoretically
would lose access to in a cri-
Associated Press/Mordovmedia.ru
sis.
At the end of 2011, the Ba- French actor and tax protester Gérard Depardieu posed Sunday with his new Russian passport on
sel Committee estimated that stage at a theater in Saransk, 700 kilometers from Moscow. He turned to Russia after France planned
Please turn to page 20 heavier taxes on the wealthy and was given citizenship by President Vladimir Putin. Article on page 4

Inside
Getting formal: Up is
the new Down for
Friday dress sense
Off the Wall ........... 31
Assad Rejects Peace Efforts, Vows to Fight
BY NOUR MALAS
BEIRUT—Syrian President
Bashar al-Assad, in his first ad-
dress to the nation in six
months, on Sunday issued a de-
fiant call to war to defend the
country and rejected interna-
tional peace efforts, proposing
a political plan that overhauls
the government but keeps him
in power.
International critics re-
peated calls for Mr. Assad,
whose family’s four-decade
rule of Syria sparked an upris-
ing in 2011, to step down after
he told a cheering audience
that the country faced a total
war against foreign interests
and al Qaeda.
The president’s plan for a
cease-fire—then a new consti-
tution, government and Parlia-
ment—falls far short of the op-
position’s demand for the
president to step down. It also
appears to undercut the latest
round of international diplo-
macy, spearheaded by Algerian
diplomat Lakhdar Brahimi, to
bring the regime and opposi-
tion toward a political settle-
ment.
“We don’t want anyone to
come to Syria to tell us what
should be done for a political
operation,” said Mr. Assad, 47
years old, a week after meeting
with Mr. Brahimi. “Everyone
who comes to Syria knows
[that] Syria accepts advice, but
doesn’t take dictation.”
State Department spokes-
woman Victoria Nuland on
Sunday said Mr. Assad’s
speech “is yet another at-
tempt by the regime to cling
to power and does nothing to
advance the Syrian people’s
goal of a political transition,”
adding that the president “has
lost all legitimacy and must
step aside to enable a political
solution and a democratic
transition that meets the aspi-
rations of the Syrian people.”
Syrians said security forces
have sealed off many roads in
the larger district for months,
as rebel fighters have encircled
Damascus from the eastern and
southern suburbs, leaving a
highly fortified island in the
heart of the capital. A main
highway bisecting the area was
temporarily closed on Sunday.
Mr. Assad spoke on Sunday
at the Damascus Opera House,
at the capital’s central Ou-
mayad Square, an unusual loca-
tion for presidential speeches,
which are usually held at the
university auditorium or the
Parliament building.
Many Syrians said any hope
they had for a resolution of the
conflict through a political deal
faded after his comments. The
opposition immediately de-
scribed the speech as arrogant
and disconnected. Many activ-
ists said Mr. Assad’s choice of
forum was ironic, saying the
Please turn to page 3
 2 | Monday, January 7, 2013
Reuters
AN EPIPHANY SWIM: Men attempt to grab a wooden cross thrown into a lake by an Orthodox priest Sunday in the Bulgarian capital Sofia in a ritual believed to bring health and prosperity to its retriever.
i i i companies develop gadgets to
Business & Finance
n Spain has been quietly tapping
its Social Security Reserve Fund
as a buyer of last resort for gov-
ernment bonds, raising questions
about the fund’s role as guarantor
of future pension payouts. 5
n Republicans won’t accept fur-
ther tax increases, the U.S. Sen-
ate’s top Republican said, putting
GOP lawmakers on a new collision
course with Democrats. 6
n Fed insiders say the central
bank’s decision to tie interest-
rate increases to specific unem-
ployment and inflation levels will
likely be only a temporary part of
its tool kit. 7
n The Consumer Electronics
Show will showcase technology
that makes devices smarter as
Most Read in Europe
1. Spain Digs Into Pension Fund
2. The Power of Negative Thinking
3. Have We Lost the War on
Drugs?
4. Who Controls the Digital
Legacy?
5. Don’t Burn Your Book—Print Is
Here to Stay
Most Emailed in Europe
1. Spain Digs Into Pension Fund
2. The Power of Negative Thinking
3. Afghan Request for Spy
Balloons Is Up in the Air
4. Kale, Cabbage and Carrot Salad
5. Opinion: The Kyoto Scorecard
What’s News—
more effectively exchange infor-
mation and track users’ gestures,
voices and even intentions. 17
n A hedge-fund manager claim
that Herbalife is a pyramid
scheme caused many investors to
flee, but some of the company’s
3.1-million distributors were un-
moved. 17
n Vodafone said Indian officials
sent another notice it owes more
than $2 billion in taxes on the
purchase of a stake in an Indian
telecommunications company. 18
n The U.S. ITC decided to investi-
gate whether to grant Ericsson’s
request for an import ban against
Samsung in their continuing
patent battle. 19
n After early hopes for a sweep-
ing antitrust case against Google,
Spanish Economy
europe.wsj.com
‘We just don’t know
who’s going to pay
for the pensions of
those who are
younger now.’
Dolores San Martín, president of a
Spanish pensioners group, on Madrid
draining a fund backing pensions.
PAGE TWO
it became clear to the U.S. Federal
Trade Commission last fall that no
such lawsuit was in the offing. 19
n Citigroup will seek permission
for the bank’s first share buyback
since 2007 as part of the latest
“stress tests” from the Fed. 20
n David Sokol lashed out at his
former mentor Warren Buffett af-
ter the former Berkshire Hatha-
way executive learned he won’t
face U.S. regulatory action. 21
n Finance chiefs at big U.K. firms
plan to further bolster their bal-
ance sheets in 2013 because of
continuing uncertainty about Brit-
ain’s economic prospects, accord-
ing to a new survey. 21
n More futures traders are bet-
ting that prices for Brent crude oil
will rise, but the market is still
poised to be volatile. 23
ONLINE TODAY
Euro Crisis
Stay up-to-date on the
European debt crisis at
wsj.com/eurocrisis
n The FTSE 100 kicked off the
New Year in style, and analysts
expect the index’s early gains to
continue. 24
i i i sales overseas as Washington cuts
World-Wide
n Egypt’s president swore in 10
new cabinet appointees, strength-
ening Islamists’ hold on the gov-
ernment a day before talks with
the IMF over a $4.8 billion loan to
help shore up the country’s weak-
ening currency. 3
n A regional election campaign
in north Germany this month
shows the challenge for Merkel’s
bid for a third term later this year
as her party’s coalition partner’s
support crumbles. 5
n The Pentagon has sketched out
plans for a scaled-back presence
in Afghanistan, after Obama
Question of the Day
Which of these luxury
properties is your
favorite?
Vote online today at europe.wsj.com
Previous Results
Do technology companies
overstep the boundaries
on Internet privacy?
Yes
80%
No
5%
Sometimes
15%
THE WALL STREET JOURNAL.
pressed for options to leave fewer
troops in the country after 2014
than proposed. Separately, U.S.
defense contractors are diversify-
ing, closing plants and seeking
military spending. 8, 18
n Myanmar’s recent political
opening has unleashed deep-
seated ethnic clashes that have
sent waves of refugees on perilous
journeys to seek safer shores. 10
n Seven suspected Islamic mili-
tants killed in central Indonesia in
recent days are linked to a small,
relatively new terrorist group fo-
menting unrest between Muslims
and Christians, police said. 10
n Uncertainty in Venezuela is
running high over who will lead
the country, as the likelihood in-
creases that Chávez won’t be able
to attend his own inauguration. 11
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THE WALL STREET JOURNAL.
Egyptian President Shakes Up Cabinet
Islamist Influence Appears to Gain, as Brotherhood Allies Take Finance Minister and Local-Development Posts
BY MATT BRADLEY
CAIRO—Egypt’s president swore
in 10 new cabinet appointees on Sun-
day, strengthening Islamists’ hold on
the government a day before talks
with the International Monetary
Fund over a $4.8 billion loan to help
shore up the country’s weakening
currency.
The new lineup brings the num-
ber of Islamist allies in the cabinet
to seven of 32 ministerial positions
from four, including the finance min-
ister post, according to opposition
leaders. President Mohammed Morsi,
who has the final say on the cabinet,
is backed by the Muslim Brother-
hood.
The finance minister, a bureau-
crat unaffiliated with a party, was
among those replaced by an Islamist
sympathizer.
El-Morsi Hegazy, Egypt’s fifth fi-
nance minister in two years, will as-
Associated Press
sume what is arguably the most dif-
ficult post in Egyptian politics,
economic analysts said. Policy mak-
ers are struggling to contain a wors-
ening balance-of-payments crisis
that has pushed the Egyptian pound
down against the dollar by 4% over
the past week.
Mr. Hegazy will be partly respon-
sible for securing an IMF loan seen
as Egypt’s last hope for righting its
badly skewed balance of payments
and preventing an abrupt, chaotic
devaluation of the currency.
Representatives from the secular-
leaning opposition and activist lead-
ers said the cabinet shake-up was
further proof that the Muslim Broth-
erhood, which backs Mr. Morsi,
Syria’s Assad Rejects Peace Efforts, Vows to Fight On
Continued from first page
president staged perfect political the-
ater at the opera house, while war
raged around Damascus.
The United Nations last week said
at least 60,000 people have been
killed in the Syrian conflict, one that
has destroyed cities—including
Syria’s largest, Aleppo—and left mil-
lions of Syrians displaced.
The foreign ministers of Turkey,
the U.K. and the European Union dis-
missed the speech as a repeat of old
promises and reiterated calls for Mr.
Assad to step aside.
“His remarks are just repetitions
of what he’s said all along,” Turkish
Foreign Minister Ahmet Davutoglu
said at a conference with European
foreign ministers in Izmir. “It seems
he’s locked himself up in a room and
only reads the intelligence reports
presented to him.”
EU foreign-affairs chief Catherine
Ashton, said the bloc would “look
carefully if there is anything new in
the speech, but we maintain our posi-
tion that Assad has to step aside and
allow for a political transition.”
One Western diplomat character-
ized the speech as a confirmation of
Mr. Assad’s “defiance and delusion.”
People briefed on the president’s lat-
est meeting with Mr. Brahimi said Mr.
Assad insisted only he could steer
Syria out of the crisis, and would do
so until his second term ends in 2014.
He would like to run again.
Mr. Assad on Sunday proposed a
two-phase political process that
would result in an elected Parliament,
Reuters
a new government and a national
conference that would exclude much
of the current opposition leading the
A protester waves an Egyptian flag at an antigovernment demonstration in Tahrir Square, in Cairo, on Friday.
prizes power over much-needed po-
litical changes and economic over-
hauls. Brotherhood critics say the
group has gone back on its pledges
for wider political pluralism, pushing
its allies into high-level jobs over the
complaints of weaker secular politi-
cal forces.
“It’s the same cosmetic changes
that are not tackling the problems
facing the country while at the same
time increasing the powers of the
Brotherhood,” said Khaled Dawoud,
battle against the government. He
said regional and international coun-
tries should, first and foremost, cut
off funds and weapons supplies to the
rebels, who have to put down arms
before a cease-fire can take effect and
a political process started.
The opposition dismisses new par-
liamentary elections, which were held
last May following the approval of a
new constitution, as a superficial
change. They are asking the president
to step down before political change
can begin. And they reject calls for
national dialogue because Mr. Assad
has suggested he will meet only with
a select group that doesn’t represent
the varied opposition.
The plan Mr. Assad outlined on
Sunday sounds, in principle, similar
Syrian refugees watched a television broadcast of Mr. Assad’s speech in Mafraq, Jordan, on Sunday.
NEWS
a spokesman for the National Salva-
tion Front, an opposition umbrella
group led by secular-minded former
presidential candidates and political
parties.
Because local areas will be granted
some autonomy in managing parlia-
mentary elections set for next month,
Mr. Dawoud said the choice of Broth-
erhood ally Mohammed Ali Bashr as
local development minister was aimed
at preparing the ground for a Brother-
hood victory. “It’s very clear that part
to the peace plan Mr. Brahimi was
pursuing to form a coalition govern-
ment and move toward free parlia-
mentary elections. The Geneva Agree-
ment, named after a meeting of world
powers last summer, makes no refer-
ence to what would happen to the
president, a point Mr. Assad appeared
to manipulate and mock on Sunday.
The agreement calls for the for-
mation of a transitional government
with full executive powers. That gov-
ernment, Mr. Brahimi envisioned,
would slowly strip political, military
and legal power from the president,
without having to cajole him into
stepping down or giving up power in
a publicly humiliating way, said peo-
ple briefed on the plan, which ap-
peared on Sunday to have scant
of the reason for the changes is basi-
cally preparing for the upcoming elec-
tions,” Mr. Dawoud said.
In announcing the cabinet
changes, Prime Minister Hisham
Qandil said the new lineup was
mainly impartial technocrats
charged with reversing Egypt’s eco-
nomic decline and restoring security
on the streets.
Since the revolution nearly two
years ago, Egypt has bled through
most of its $36 billion in foreign
chance of adoption.
“Transition from where to where,
or from what to what?” Mr. Assad
asked in the speech. “Are we going to
go from a free, independent country,
to one under occupation? One with a
state to one in chaos?” In a new tone
of defiance against international me-
diation, he said “Syria doesn’t need
external help in political dialogue.”
The president appeared calm and
confident as he delivered the speech.
They were his first lengthy public
comments on the war since a televi-
sion interview in November, and his
first public appearance in many
months.
As in a handful of previous
speeches since the uprising began 22
months ago, the president portrayed
Monday, January 7, 2013 | 3
cash reserves in an effort to prop up
its currency. The country now has
only $15.04 billion in reserves—a
hair above the three months of cover
for imports that the IMF recom-
mends its members retain.
The Egyptian pound was trading
at 6.42 to the dollar on Sunday,
down from a week ago, when it was
trading at 6.18, and when the Central
Bank of Egypt launched a new for-
eign-exchange facility meant to slow
the loss of foreign cash.
Mr. Hegazy assumes his post
largely untested. His mostly aca-
demic résumé boasts expertise in Is-
lamic finance rather than in policy-
making and macroeconomic
management.
“It’s probably the hardest mo-
ment in the job’s history,” said Hany
Genena, a research director at
Pharos Holding, a Cairo-based bro-
kerage firm. “I’m just concerned that
during periods of very aggressive or
very grass-roots structural reforms
you need experience.”
Still, the particulars of the IMF
loan have largely been settled and
Monday’s visit by IMF officials ap-
pears to be more of a final formality,
people close to the negotiations said.
The Muslim Brotherhood asked
its opponents to accept the decisions
on the new cabinet posts. “The eco-
nomic challenges require concerted
efforts, and I call on all political
forces to overcome their differences
and deal with the new government
as the only way to peacefully avoid
an economic crisis,” said Saad Al
Katatni, head of the Brotherhood’s
political wing, the Freedom and Jus-
tice Party.
the conflict as a battle against exter-
nal terrorists, and denied it was a
fight between the government and
opposition. But in this speech, he sin-
gled out al Qaeda for infiltrating the
country, and said Syria faced an ex-
tremely difficult war “more lethal and
dangerous than a traditional war.”
“We are now in a state of war in
every sense of the word,” Mr. Assad
said, accusing rebels and terrorists of
cutting off electricity, communica-
tions, fuel lines and bread supplies
across Syria.
“What is sure is that most of
those we are battling are jihadis hold-
ing the ideology of al Qaeda,” he said.
“The battle, ladies and gentlemen, is
between the nation and its ene-
mies…between the citizen and his
bread, between the security we all
wish for, and fear.”
Hundreds of people in the opera-
house audience greeted his entrance
with cheers and interrupted his
speech to chant: “God, Bashar and
Syria, are enough.”
Dozens of supporters swarmed
the stage after the speech, as the
president shook hands with some of
them and tried to exit, periodically
becoming cornered against a wall as
angry, plainclothes bodyguards
pushed people away.
“The initiative proposed by Presi-
dent Bashar al-Assad takes us back to
point zero,” said Rima Fleihan, a
member of the main National Opposi-
tion Coalition. “There can be no solu-
tion that leaves Bashar al-Assad in
power,” she told an Arabic television
station after the speech.
—Rima Abushakra
contributed to this article.
4 | Monday, January 7, 2013
A Dire Showing From a Dismal Bunch
[ Agenda ]
BY SIMON NIXON
It’s that time of
year when
economists
entertain the
markets with their
forecasts for the
year ahead. But there was nothing
particularly festive about this
year’s offerings, particularly where
the European economy is
concerned. Even the most bullish
forecaster thinks the euro zone
will be lucky to avoid recession
given the degree of fiscal austerity
under way. The European
Commission and the International
Monetary Fund expect the region’s
economy to grow by 0.1% and 0.2%
respectively while uber-bear
Capital Economics expects it to
shrink by 2%.
Nor does the U.K. escape from
the gloomy prognosis. Most
forecasters expect the economy to
grow by little more than 1% with a
significant risk it slides into a
triple-dip recession at the start of
the year; Citigroup now expects
2013 growth of just 0.4%.
But how much attention should
investors pay to any of these
forecasts? Forecasting is by its
nature a hit-and-miss affair;
economics is not—despite the
apparent dogmatic certainty of
some of its practitioners—an
exact science. But the track record
of the profession in recent years—
and last year in particular —is
dire. Few economists spotted the
boom and most hopelessly
underestimated the bust. And it’s
not as if the profession’s troubles
in 2012 were limited to longer-
range forecasts; it was getting it
wrong virtually in real time with
most forecasters forced to slash
their projections every few
months as each quarter turned
out worse than expected.
The IMF started the year
anticipating euro-zone growth in
2012 of 1.1% but cut its forecast
twice during the year so that by
October it expected the economy
to shrink by 0.4%. Similarly, the
Bank of England and U.K. Office
for Budget Responsibility expected
growth of 1% and 0.7%
respectively, whereas the outcome
is likely to be zero growth.
What the dismal science’s
French Minister Says No More Tax Rises Planned
BY INTI LANDAURO
PARIS—French Budget Minister
Jérôme Cahuzac said on Sunday the
government isn’t planning any addi-
tional tax increases for the next few
years as it tries to offer stability to
companies and taxpayers following
the exit of high-profile citizens such
as actor Gérard Depardieu.
“We need a tax stability, because
asking for more would be asking too
much and because individuals or
companies need visibility, they have
to know what taxes will be in a year,
two, three years,” Mr. Cahuzac said
during an interview on French radio
network Europe1.
The administration of President
François Hollande, who was elected
in May, has raised a range of tax
rates in recent months to reduce the
budget deficit to the equivalent of
Off Target
The International Monetary Fund had a poor record in forecasting
how much the euro-zone economy would grow in 2012
Change in annual GDP forecasts
Euro zone
3%
2 September September
2011 2011
Revised in:
April
’12
1 impact of austerity— the so-called
Revised in: October
April October ’12
’12 ’12
0 central banks may be making the
–1
2012 2013
*As of October 2012 Source: International Monetary Fund
dismal record suggests is that
there is something profoundly
wrong with the mainstream
economics profession’s
understanding of how modern
economies work. The models on
which its forecasts are built are
clearly badly flawed.
The scale of this analytical
failure is increasingly worrying
some policy makers at the sharp
end of tackling the crisis: BOE
Chief Economist Spencer Dale and
Director of Financial stability
Andrew Haldane have discussed
the inadequacy of conventional
models that exclude the role of
the financial system in causing
booms and busts; Adair Turner,
chairman of the U.K.’s Financial
Services Authority, acknowledged
that policy makers failed to
anticipate the dynamics of bank
deleveraging and the impact this
would have on the economy.
But the most important
contribution to the debate is an
essay by Claudio Borio, deputy
head of the monetary and
economics department at the
Bank for International
Settlements, published last moth
3% of gross domestic product in
2013. The government has also im-
plemented a series of spending cuts.
A specific initiative, a new 75% in-
come-tax rate for people earning
more than €1 million ($1.31 million)
a year, sparked controversy and
prompted some wealthy French
businessmen, executives and celeb-
rities to leave the country.
Mr. Depardieu left to settle down
in Belgium in late 2012, saying he
wanted to pay lower taxes. He
handed over his French passport af-
ter the country’s prime minister,
Jean-Marc Ayrault, described his
move as “pathetic.”
The actor was last Thursday
granted Russian citizenship, and on
Sunday was presented with a Rus-
sian passport by President Vladimir
Putin. Mr. Putin offered the actor
citizenship in December, after the
EUROPE NEWS
Annual change in GDP, long-range forecasts*
Euro zone
2013 ’14 ’15 ’16 ’17
and titled: “The Financial Cycle
and Macroeconomics: What have
we learned?”
In Mr. Borio’s view, the “New
Keynesian Dynamic Stochastic
General Equilibrium” model used
by most mainstream forecasters is
flawed because it assumes the
financial system is frictionless: Its
role is simply to allocate
resources and therefore can be
ignored. Although many
economists now accept these
assumptions are wrong, efforts to
modify their models amount to
little more than tinkering. What is
needed is a return to out-of-
fashion insights influential before
World War II and kept alive since
by maverick economists such as
Hyman Minsky and Charles
Kindleberger that recognized the
central importance of the financial
cycle.
Mainstream economists have
been so fixated on understanding
ordinary business cycles that they
ignored the role that years of
rising asset prices and financial
sector liberalization can play in
fueling credit booms. They lost
sight of the fact that the financial
French newspaper Le Monde re-
ported that Mr. Depardieu told
friends he was considering moving
to Belgium, Montenegro or Russia to
escape the new wealth tax.
Mr. Cahuzac said between 600
and 800 wealthy French people
leave the country each year, though
he said the figures for 2012 will only
be available in late 2013, after peo-
ple have filed their tax forms.
The new tax was rejected by
France’s constitutional court in late
December. Mr. Cahuzac said his
team is working with the finance
ministry to prepare a bill by this fall
that will keep the principle of a 75%
income tax for the country’s highest
earners. He added the new version
could last longer than the two-year
period originally envisioned.
—Lukas I. Alpert contributed to
this article.
U.K.
2013 ’14 ’15 ’16
The Wall Street Journal
system does more than allocate
resources: It creates money—and
therefore purchasing power—
every time it extends a loan.
“Macroeconomics without the
financial cycle is like Hamlet
without the Prince,” to Mr. Borio.
To many lay-people, it may
seem astonishing after all the
world has been through in the
past five years that mainstream
economic models continues to
play down the financial system.
Yet this analytical failure could be
the source of potentially serious
policy errors. According to Mr.
Borio’s analysis, the challenge in a
balance sheet recession caused by
the end of a financial cycle is to
rapidly reduce the “stock” of debt
that has caused the crisis before it
becomes a “flow” problem as the
economy is dragged into a
downward spiral through lack of
funding for new investment—the
problem that Japan has faced over
the past two decades.
The solution must be radical
action to restructure debts and
write off bad investments. That
requires prudential regulators to
act decisively to encourage banks
Rank-and-Filers
Highest personal-income-tax rates in selected countries in 2012
Sweden
Spain
Belgium
U.K.
France
Germany
Italy
U.S.
Slovakia
Ukraine
Czech Republic
Russia
Note: The French government intends to introduce new tax legislation for France's top wage-earners
in the next budget in 2013; Source: KPMG
THE WALL STREET JOURNAL.
and households to recognize bad
debts and governments to focus
their fiscal efforts on measures
that will speed up this process.
Yet much of the developed
world’s mainstream debate is
preoccupied with policies working
in the opposite direction. Many
economists urge governments to
use scarce fiscal capacity to
promote growth through stimulus
policies—measures likely to be
useless if Mr. Borio is right that
the core problem is an excessive
stock of debt.
Indeed, IMF Chief Economist
Olivier Blanchard last week
blamed his own forecasting errors
on having underestimated the
fiscal multipliers. That’s a
prognosis that will no doubt
appeal to politicians struggling to
cut spending. At the same time,
problem worse with loose
monetary policy that is designed
to ease flow problems but actually
encourages governments, banks
and households to delay loss
’17 recognition and debt
restructuring.
For investors, the sensible
response is surely to disregard all
short-term forecasts based on out-
dated models. They should focus
instead on identifying those
economies most likely to deliver a
medium-term recovery by
aggressively addressing their
stock of debt. In the European
context, it is the euro zone where
the process of debt reduction and
restructuring seems likely to
proceed most rapidly, not least
because the greater independence
of the European Central Bank
means there is less prospect of
loose monetary policy being used
to defer tough decisions. As
Goldman Sachs economist Huw
Pill notes, that may point to
another volatile year for the
currency bloc.
In the U.K., in contrast,
Chancellor George Osborne has
already abandoned his debt target
and is flirting with abandoning
the BOE’s inflation target while
the stock of debt in the economy
across private and public sectors
is forecast to remain alarmingly
high. The conventional wisdom
says the U.K. will far outpace the
euro zone over the medium term.
But given the conventional
wisdom’s record, don’t bet on it.
56.6%
52
50
50
45
45
43
35
19
17
15
13
The Wall Street Journal
 THE WALL STREET JOURNAL. Monday, January 7, 2013 | 5

EUROPE NEWS

Southern Exposure
Spain’s pension fund keeps buying government debt
In 2011, 89.6%
€60 billion of Spain’s
Social
Security
50
Reserve Fund
was tied up in
40
Spanish
government
debt...
30

20

...leaving
10
10.4% in
foreign
0 holdings
Reuters

2005 '06 '07 '08 '09 '10 '11

Note: data as of Dec. 31 each year.
Pensioners attend a protest against further tax hikes and austerity cuts in Malaga, Spain last October. Source: Spain's Social Security Department The Wall Street Journal

Spain Drains Fund Backing Pensions

BY DAVID ROMÁN
MADRID—Spain has been quietly
tapping the country’s richest piggy
bank, the Social Security Reserve
Fund, as a buyer of last resort for
Spanish government bonds, raising
questions about the fund’s role as
guarantor of future pension payouts.
Now the scarcely noticed bor-
rowing spree, carried out amid a
prolonged economic crisis, is about
to end, because there is little left to
take. At least 90% of the €65 billion
($85.7 billion) fund has been in-
vested in increasingly risky Spanish
debt, according to official figures,
and the government has begun
withdrawing cash for emergency
payments.
Although the trend has drawn
little public attention or contro-
versy, it has become a matter of
concern for the relatively few inde-
pendent financial analysts who
study the fund, which is used to
guarantee future payments of pen-
sions.
They say the government will
soon have one less recourse to fi-
nance itself as it faces another year
of recession and austerity measures
to close a big budget deficit.
That pressure, some analysts
said, could force Prime Minister
Mariano Rajoy’s government to seek
a rescue this year from the Euro-
pean Union’s bailout fund, a politi-
cally risky course he seeks to avoid.
In addition, there are worries
that Social Security reserves for
paying future pensioners are run-
ning out much quicker than ex-
pected.
In November, the government
withdrew €4 billion from the re-
serve fund to pay pensions, the sec-
ond time in history it had with-
drawn cash. The first time was in
September, when it took €3 billion
to cover unspecified treasury needs.
Together, the emergency with-
drawals surpassed the legal annual
limit, so the government temporar-
ily raised the cap.
“We are very worried about
this,” says Dolores San Martín, pres-
ident of the largest association of
pensioners in Asturias, a small re-
gion that has one of the highest per-
centages of retirees in Spain. “We
just don’t know who’s going to pay
for the pensions of those who are
younger now.”
In the years before Europe sank
into crisis in 2008, some countries,
including Spain, Finland and France,
accumulated rainy-day pension
funds made up of the surplus left
from social-security payroll deduc-
tions after pensions were paid out.
The reserves were to be tapped in
future years, when payroll deduc-
tions may fall short of payout obli-
gations.
After the crisis began, some of
those countries began using the
pension reserves for other contin-
gencies, such as covering a drop in
foreign demand for their govern-
ment bonds. Since the collapse of
Ireland’s property boom, for exam-
ple, most of its pension fund has
been used to buy shares of national-
ized banks and real estate for which
no foreign buyers could be found.
“Most of the [Spanish] fund is an
accounting trick,” said Javier Díaz-
Giménez, an economics professor in
Spain’s IESE business school. “The
government is lending money to an-
other branch of government.”
Spanish officials defend the
heavy investment of the Social Se-
curity Reserve Fund in their govern-
ment’s high-risk bonds. They say the
practice is sustainable as long as
Spain can continue borrowing in fi-
nancial markets, and they predict
the economy will start to recover
late this year, easing the debt crisis.
But some analysts say Spain will
have trouble finding buyers for the
estimated €207 billion in debt it
plans to issue in 2013, up from €186
billion in 2012, to cover central-gov-
ernment operations, debt maturities
of 17 regional administrations, and
overdue energy bills.
“With foreign investors staying
away from the Spanish debt market,
you’re going to need all the support
you can get from domestic players,”
said Rubén Segura-Cayuela, an
economist with Bank of America-
Merrill Lynch.
And domestic appetite for Span-
ish debt, he added, may not be
enough.
Spain’s commercial banks al-
ready have increased their Spanish
government-bond portfolio by a fac-
tor of six since the start of the crisis
in 2008, and now own one-third of
government bonds in circulation.
The percentage of Spanish gov-
ernment debt held by the Social Se-
curity Reserve Fund stood at 55% in
2008, according to official figures;
by the end of 2011 it had risen to
nearly 90%. Analysts say the per-
centage has continued to rise, even
as international agencies have low-
ered Spain’s credit ratings.
Spain’s continued use of those
reserves to buy its own bonds ap-
pears to violate a rule set by gov-
ernment decree that mandates their
investment only in securities “of
high credit quality and a significant
degree of liquidity.”
Last year Spain’s rating by
Moody’s Investors Service and Stan-
dard & Poor’s Ratings Services fell
to one notch above noninvestment
grade, or junk status.
Tomás Burgos, head of the com-
mittee that runs the fund, said the
ratings drops “are at the very least
something to keep an eye on.” He
added that the fund is solid enough
to ensure future pension payments.
It has more than doubled in value
since 2005, the first year for which
there are detailed data.
But with unemployment now
above 25% and fewer wage earners
paying in, the Social Security Sys-
tem is about €3 billion in deficit, ac-
cording to government estimates.

Merkel’s Challenge Seen in Regional Vote A Struggling Alliance

BY HARRIET TORRY
AND WILLIAM BOSTON
WILHELMSHAVEN, Germany—A
regional election campaign in north-
ern Germany this month shows the
challenge for Chancellor Angela
Merkel’s bid for a third term later
this year: Her conservatives are
riding high in the opinion polls, but
her coalition partner is crumbling.
Ms. Merkel and other political
heavyweights have begun campaign-
ing in the northern state of Lower
Saxony, where voters will elect a
new state legislature on Jan. 20. The
contest is being seen as a bell-
wether for Germany’s national elec-
tions, due in September or October.
Ms. Merkel’s center-right Chris-
tian Democratic Union is polling at
about 40% both in Lower Saxony and
nationwide, making it the strongest
party in Germany. But its junior part-
ner in government, the pro-business
Free Democratic Party, is struggling
at both the state and federal levels to
reach the 5% threshold needed for
winning parliamentary seats.
The Free Democrats’ weakness is
giving hope to the center-left oppo-
sition Social Democrats and Greens,
who together have a chance of beat-
ing the CDU. They are hoping to
prove in Lower Saxony that they can
take power in Berlin too.
Ms. Merkel’s defeat in the fall
would be a major upset, however,
given her high personal popularity—
even her opponents grudgingly con-
cede she enjoys widespread trust in
the country. Even if she can no lon-
ger govern Germany with the Free
Democrats, many analysts expect
the center-left to fall short of a ma-
jority. In that case, Ms. Merkel is
likely to lead a bipartisan coalition
with her archrivals the Social Demo-
crats, known as the SPD.
Lower Saxony’s Christian Demo-
crat state premier, David McAllister,
faces Ms. Merkel’s problem in micro-
cosm. Unless his Free Democrat allies
perform better than polls suggest, he
will have to look elsewhere for a co-
alition partner. A CDU-SPD coalition
is possible, as is a center-left win,
and even a CDU-Green coalition.
The outcome will be seen as a
pointer to the national contest because
the balance of the parties’ power is so
similar. The issues at state and federal
level are different, however.
When all of Germany votes, the
main issue will be who should steer
the country, and Europe, out of the
euro-zone debt crisis and ensure the
economic stability that Germans
value. Ms. Merkel is fiercely criti-
cized in Greece and other struggling
Southern European countries for her
insistence on austerity and tough re-
forms, but in Germany she is seen as
the safest pair of hands around.
The chancellor underscored her
leadership role in Europe in a speech
in the port town of Wilhelmshaven
Friday, suggesting that her left-leaning
rivals would relax the pressure for fis-
cal discipline in the euro zone. “We
must stop living on credit,” Ms. Merkel
told a packed auditorium. “We have
seen in Europe where that leads us.”
“People have the impression that
Merkel knows what she’s doing,” says
Holger Ansmann, an SPD candidate
in the Lower Saxony election. But, he
says, “Greece plays a small role” in
the regional campaign, where the
anemic local economy and a lack of
jobs are more important.
Unemployment in Wilhelmsha-
ven, at 12%, is well above the Ger-
Germany’s CDU party is leading in
man average. Small businesses com- national polls but support for its
plain banks won’t lend to them, and current coalition partner, FDP, is
the government supports only big below the 5% threshold needed to
corporations. The young are moving win a seat in parliament
away for lack of opportunities.
“It’s dead around here—it’s a 4% Free Democrats
pensioners’ city,” said Hubert Stolz, (unchanged from
Dec. 21 poll)
a retired brewery worker, as he
helped distribute fliers for the SPD Christian
Right of
on Wilhelmshaven’s market square. center 41% Democrats/
“Jobs for young people? There Christian Social
aren’t any,” he said. Union
If the center-left parties beat the (+1 pct. point)
odds and Ms. Merkel in the fall, the
impact would mainly be felt domes- 4% Other
tically. The SPD and Greens have
pledged to raise taxes and introduce
Social
a minimum wage, measures that Ms. 29%
Democrats
Merkel’s current coalition opposes. (–1)
A pact between Christian Demo- Left of
crats and the SPD would repeat the center
“grand coalition” government that Ms. 12% Green (–1)
Merkel led from 2005 to 2009. Its pol-
icies were only slightly different from 6% Left (–1)
her current center-right coalition. 4% Pirates (+1)
Whoever wins, Germany’s stance
in the euro-zone crisis is unlikely to Source: ARD poll conducted by Infratest
dimap based on a survey of 1,000 German
change much. Analysts say the na- voters between Jan. 2-3; margin of error:
tional interest, rather than party +/-1.4 to 3.1 percentage points
ideology, will continue to drive its The Wall Street Journal
effort to stabilize the euro zone.
6 | Monday, January 7, 2013
Republicans Shift Focus to Spending Cuts
BY SIOBHAN GORMAN
Republicans won’t accept further
tax increases in coming budget and
debt negotiations, the Senate’s top
Republican said, putting GOP law-
makers on a new collision course
with Democrats in advance of a vote
early this year on raising the gov-
ernment’s debt limit.
“The tax issue is finished,
over.…That’s behind us,” Senate Mi-
nority Leader Mitch McConnell (R.,
Ky.) said on ABC on Sunday. “Now
it’s time to pivot and turn to the
real issue, which is our spending ad-
diction.”
He said spending cuts should tar-
get entitlements such as Social Se-
curity, Medicare and Medicaid,
which Democrats have been reluc-
tant to cut.
By contrast, Sen. Dick Durbin of
Reuters
Illinois, the Democrats’ No. 2 leader
in the Senate, said Congress should
look to changes in the tax code to
raise additional revenue.
“There are still deductions, cred-
its, special treatments under the tax
code that ought to be looked at very
carefully,’’ Mr. Durbin said on CNN.
He cited, among other things, the
ability of taxpayers to “park their
money” offshore to avoid U.S. taxes.
Legislation signed this past week
U.S. Tries to Get Handle on Investments From China Inc.
[ The Outlook ]
BY BOB DAVIS
BEIJING—The political furor
that accompanies many overseas
investments by China Inc. is easy
to understand. What to do about
the investments is a lot more
complicated.
Unlike private firms, China’s
state-owned enterprises serve two
masters: the Communist Party
and private shareholders. And the
Party holds the trump card,
because it, not the board,
appoints CEOs. Western policy
makers suspect such investments
may be a “potential Trojan horse,”
as the U.S.-China Economic and
Security Review Commission put
it last fall.
According to the U.S.
congressional commission, state-
owned firms accounted for 90% of
the value of Chinese investments
in the U.S. industrial-machinery,
aerospace, automobile and logistic
industries between 2007 and the
third quarter of 2011. Some deals
by state-owned firms in 2012
were especially controversial. A
bid by a Chinese firm with links
to Beijing’s municipal government
to buy the bulk of U.S. aerospace
company Hawker Beechcraft Inc.
fell apart because of the U.S.
government’s national-security
objections.
Canada approved a bid by
state-owned Cnooc Ltd. to buy
Canadian energy firm Nexen Inc.,
but warned that further purchases
by Chinese state-owned
companies of Canadian oil-sands
assets would be approved under
only “exceptional” circumstances.
Even figuring out which
Chinese firms qualify as state
controlled can be tough. U.S.
government officials suspect that
China’s military has significant
influence over a number of big
Senate Minority Leader Mitch McConnell, center, with reporters on the opening day of the 113th Congress Thursday.
to avoid the “fiscal cliff’’ series of
tax increases and spending cuts in-
cluded an increase in income-tax
rates on high incomes. Mr. Durbin’s
comments suggested that Democrats
would look to raise revenue by clos-
ing what they call loopholes, rather
than push for another increase in
privately owned Chinese firms.
Barring investments from such
firms would be a loser
economically, cutting off wobbly
economies from a rich source of
funding. Instead, the U.S. is trying
to use negotiations over a Pacific
free-trade pact, called the Trans-
Pacific Partnership, to formulate
rules governing the behavior of
state-owned firms.
China isn’t a party to the talks,
but the U.S. hopes Beijing would
ultimately agree to whatever
limitations the pact imposes on
state-owned firms so Beijing could
become a TPP member and
benefit from tariff cuts and other
deals the parties strike.
But that may be a pipe dream.
With China on a trajectory to
become the world’s largest
economy in a decade or two,
Washington’s leverage is seeping
away like a bike tire with a slow
leak. While the abbreviation
“TPP” would produce a “huh?”
reaction even from the wonkiest
of Washingtonians, it has become
a bête noir in Beijing. Chinese
officials see the TPP as one more
example of Washington’s trying to
encircle it with unfriendly
neighbors.
A commentary by state news
agency Xinhua described TPP as
“a blunt instrument to block India
and China from equal access to
key Pacific Rim markets.” Huang
Huaguang, who heads the Chinese
Communist Party’s international
development research office, said
flatly in an interview that “the
objective of the TPP is to exclude
China.”
Robert Kimmitt, a longtime
Washington lawyer who served as
deputy Treasury secretary in the
Bush administration, is quietly
talking up an alternative: create a
round of negotiations to deal
specifically with the issues raised
by state-owned firms. The talks
would be patterned after the 2008
U.S. NEWS
tax rates.
President Barack Obama has said
he isn’t going to allow the coming
congressional vote on raising the
nation’s statutory borrowing limit,
or debt ceiling, to be tied up in a
partisan tussle over taxes and
spending.
negotiations involving sovereign-
wealth funds—huge government-
owned investment funds—which
were then seen as stalking horses
for foreign governments looking
to further their agendas,
especially Russia, China and
countries in the Middle East.
The sovereign-wealth-fund
talks were held under the
auspices of the International
Monetary Fund and produced
what are known as the Santiago
principles, for the Chilean city
where the agreement was struck.
The funds committed to invest for
commercial, not political,
purposes; disclose more about
their operations and investments;
and abjure “inappropriate
influence” by government owners.
Outside analysts rank the funds’
compliance with the principles.
The effort tamped down
criticism of the funds in Western
countries, which were eager for
sovereign-fund investments after
the global financial crisis.
Christopher Balding, a sovereign-
funds expert at Peking
Shopping Spree
China's investments, by private companies and state-owned enterprises,
have climbed in the past decade.
China investment in the U.S.*,
in billions
$6
5 state-controlled
4 Private
3 reflection, to some degree, of a
2 But as China’s state-owned
1
0 $51.3
’06 ’07 ’08 ’09 ’10
*By private and state-owned firms
Sources: Rhodium Group; U.S.-China Economic and Security Review Commission
But Republican lawmakers have
said they would require spending
cuts to be paired with any increase
in the nation’s borrowing limit. One
GOP lawmaker, Sen. John Cornyn of
Texas, said recently that Republi-
cans should allow the government
to “partially shut down” if the
University’s HSBC business
school, said these funds now are
more willing to release annual
reports and other information.
The Santiago principles were part
of the funds’ efforts to adopt
“best international practices,” he
said.
A negotiating round involving
state-owned companies would be
far more complicated. About two
dozen sovereign-wealth funds
negotiated the Santiago
principles. There are so many
state-owned firms that
governments from around the
world would have to be at the
conference table, making a deal
tougher to reach. The U.S., Europe
and Japan have their own state-
owned companies—the Tennessee
Valley Authority in the U.S., for
example—not just China, Russia
and other nations that have a
heavy state presence in the
economy. The advantage: The
negotiations would be tougher to
characterize as the U.S. and its
allies ganging up on China.
Given the importance of state-
Average annual value of foreign
direct investment deals, in millions
State-owned and
$774.7
enterprises
$2,048.3
$580.8
’11 ’12 2003-2006 2007-3Q 2011
The Wall Street Journal
THE WALL STREET JOURNAL.
White House won’t agree to suffi-
cient spending cuts.
Mr. McConnell, the Senate mi-
nority leader, sidestepped questions
of whether he would be willing to
allow the government to shut down
as part of the negotiations over the
debt limit, saying the Senate could
pass a bill to cut spending by Febru-
ary.
“It’s not even necessary to get to
that point,” he said. “Why aren’t we
trying to do something to reduce
spending? We don’t need to use the
deadline.”
Mr. McConnell said the “only
reason” there is a stalemate on fis-
cal matters is that the president and
Democrats on Capitol Hill “don’t
want to cut anything of conse-
quence.”
The Treasury Department has
said it will run out of maneuvering
room by late February to avoid hit-
ting the debt ceiling, though the
date could change.
Lawmakers must also contend
with other impending deadlines: Au-
tomatic spending cuts known as se-
questers are due to take effect in
March, as a result of the fiscal-cliff
deal that Congress approved last
week. Many lawmakers say those
cuts are too steep and would hit the
Pentagon too hard.
owned firms to global trade, the
World Trade Organization—an
organization more or less trusted
by all parties—would probably
make more sense than the IMF as
a venue for such talks.
Mr. Balding said such talks
should try to create rules to limit
government subsidies, especially
for financing, and to commit
state-owned firms to invest for
“market principles,” not political
concerns.
Mr. Kimmitt said the
governments should “open up
sectors from which state-owned
entities emanate,” so those
sectors don’t give firms a
domestic monopoly. In China,
state-owned companies dominate
the energy, banking,
transportation, communications,
electricity and tobacco markets,
among others.
“The more open to outside
firms those sectors are in China,
the more opportunities Chinese
firms will find for successful
acquisitions in those sectors
abroad,” Mr. Kimmitt said.
Neither China nor the U.S. is
ready to move ahead yet. U.S.
Undersecretary of State Robert
Hormats said that while “broad
guidelines as to how state-owned
enterprises can develop their
operations on a commercial basis
might be worth pursuing,” he
wouldn’t commit to talks. Mr.
Huang, of the Chinese Communist
Party’s international development
research office, was more wary.
He said he thought such talks
would be “discriminatory and a
fear of competition” from China.
giants continue to face resistance
overseas, China may warm to
negotiations, especially if Beijing’s
new leaders keep their word and
try to open the state-owned
sectors to competition to
strengthen China’s economy.
THE WALL STREET JOURNAL.
Don’t Let Math Pull the Wool Over Your Eyes
[ The Numbers Guy ]
BY CARL BIALIK
This column
will make the case
that many people,
including holders
of graduate
degrees,
professional researchers and
even editors of scientific
journals, can be too easily
impressed by math. A
mathematical model (Tpp = T0 -
ƒT0d2f - ƒTpdf) is developed to
describe sequential effects.
Did that second sentence
make the first more persuasive?
It did for most participants in a
recent intriguing experiment
whose result suggests people
often interact with math in a way
that isn’t very logical. Other
research has shown that even
those who should be especially
clear-sighted about numbers—
scientific researchers, for
example, and those who review
their work for publication—are
often uncomfortable with, and
credulous about, mathematical
material. As a result, some
research that finds its way into
respected journals—and ends up
being reported in the popular
press—is flawed.
In the latest study, Kimmo
Eriksson, a mathematician and
researcher of social psychology
at Sweden’s Mälardalen
University, chose two abstracts
from papers published in
research journals, one in
evolutionary anthropology and
one in sociology. He gave them to
200 people to rate for quality—
with one twist. At random, one of
the two abstracts received an
additional sentence, the one
above with the math equation,
which he pulled from an
Economists Debate Fed’s Tack on Rates
BY MICHAEL S. DERBY
AND KRISTINA PETERSON
SAN DIEGO—The Federal Re-
serve’s decision to tie interest-rate
increases to specific unemployment
and inflation levels will likely be
only a temporary part of its tool
kit, central-bank insiders say.
Those levels are “mostly tai-
lored to the specific situation we
are in,” Federal Reserve Bank of St.
Louis President James Bullard said
in an interview at the American
Economic Association’s annual
meeting here.
Fed officials said in December
that they expect to keep short-term
interest rates near zero until the
unemployment rate, now 7.8%, falls
to 6.5% or lower, so long as ex-
pected inflation stays around the
Fed’s 2% target.
Previously, Fed officials had said
they expected rates to be low at
least until mid-2015.
The shift to using economic
thresholds instead of dates was a
“step in the right direction,” Phila-
delphia Fed President Charles
Plosser said at the AEA meeting.
Still, Messrs. Plosser and Bull-
ard are worried that the new ap-
proach doesn’t clarify the Fed’s re-
sponse once one of those levels has
been reached. Mr. Plosser said
what the threshold system “doesn’t
Blinded by Science
A study asked 200 people with graduate degrees in various fields to judge
the quality of two research-paper abstracts, one of which included an
irrelevant math equation taken from an unrelated paper. Most participants
with a preference found the bogus abstract to be more persuasive.
Percentage of participants who gave a higher rating to the abstract with
added math, by area of expertise:
Degree held by participant
Math, science, technology
Humanities, social sciences
Other, e.g., education
Source: Kimmo Eriksson, Society for Judgment and Decision Making
unrelated paper in psychology.
The study’s 200 participants all
had master’s or doctoral degrees.
Those with degrees in math,
science or technology rated the
abstract with the tacked-on
sentence as slightly lower-quality
than the other. But participants
with degrees in humanities,
social science or other fields
preferred the one with the bogus
math, with some rating it much
more highly on a scale of 0 to
100.
“Math makes a research paper
look solid, but the real science
lies not in math but in trying
one’s utmost to understand the
real workings of the world,” Prof.
Eriksson said.
Several of the authors of the
three papers whose material Prof.
Eriksson harvested said they
generally agreed with that
conclusion. “Disciplines with less
math emphasis could benefit
from more exposure to
mathematical logic so that when
it is used it is accepted for its
tell you is how we are going to re-
act.”
Uncertainty over the Fed’s latest
communications strategy figured as
part of a broader debate at the
economists’ gathering over
whether the Fed is doing enough—
or too much—to boost the eco-
nomic recovery and over the poten-
tial risks of the Fed’s unusual and
unprecedented policies.
Tying interest-rate increases to unemployment and
inflation levels will likely be only a temporary tactic.
On the 100th anniversary of the
central bank’s creation, economists
remain divided over whether the
Fed’s decisions to slash interest
rates to nearly zero and buy trillions
of dollars in bonds will fuel inflation
or fall short of reigniting growth.
For much of its history, the Fed
has acted too timidly when faced
with difficult circumstances, Uni-
versity of California at Berkeley
economists Christina Romer and
David Romer argued in a paper
presented at the conference.
They argued that the Fed didn’t
do all that it could have done to
foster growth until the fall of 2012.
But they praised for Fed for its re-
cent moves.
U.S. NEWS
Below, the sentence of math attached
to one of the research papers
The findi dinng
re
rev
much unde
mechanism of strati -
ation. A criminal record
46%
62%
73%
The Wall Street Journal
rigor rather than because it awes
the reader,” said Geoff Kushnick,
co-author of the evolutionary
anthropology paper, published in
2002.
Prof. Eriksson’s finding,
published in November in the
journal Judgment and Decision
Making under the title “The
Nonsense Math Effect,” is
preliminary but unfortunately not
surprising, other researchers
said. It documents a familiar
effect, said Daniel Kahneman,
professor emeritus of psychology
and public affairs at Princeton
University. “People who know
math understand what other
mortals understand, but other
mortals do not understand them.
This asymmetry gives them a
presumption of superior ability.”
Prof. Kahneman and other
scholars have documented how
numbers can warp rather than
enhance logical thinking. For
example, German researchers
asked 52 lawyers to propose
sentences for hypothetical repeat
During the Great Depression, of-
ficials doubted monetary policy’s
ability to overcome the forces that
had wrecked the economy.
Later, in the 1970s, officials
thought high inflation could not be
surmounted at a reasonable public
cost.
“An unduly pessimistic view of
what monetary policy can accom-
plish has been a more important
source of policy errors and poor
outcomes over the history of the
Federal Reserve” than overconfi-
dence, the Romers said.
For others, the Fed has already
done too much. Carnegie Mellon
economist Allan Meltzer warned
that the Fed’s bond-buying pro-
grams, often called quantitative
easing, may be fueling a farmland
price bubble.
He worried that the actions also
risk driving up inflation, and they
have left the central bank as essen-
tially the only significant player in
the mortgage market.
And when long-term rates even-
tually start to rise, the government
will face an explosion in currently
hiss st
hi
gss of tthi
g stuud y
dy
d
al a
al
veeeal an impo
n im p rt nt,
an
tan
rta t,
t, an
a d
nd
i
niz d,
ed
rre cog
fic
presents a major barrier
to employment, with
important implications
for racial disparities. A
mathematical model
(TPP=T0–ƒT0d ƒ–ƒTP dƒ )
2
is developed to describe
sequential effects.
shoplifters after having rolled
dice to determine the
hypothetical sentencing demand
by prosecutors. Lawyers who
rolled dice that showed a higher
requested sentence tended to
hand out longer sentences
themselves, even with identical
facts in the case and the
knowledge that the demanded
sentence was entirely random.
Tying decisions to a proposed
number, even when it is random
or misguided, is known by
psychologists as anchoring and
helps explain why a “50% off”
sale can seem so compelling even
when the original price was
vastly inflated.
Prof. Eriksson’s study shows
how people can stumble when
exposed to math outside their
field of expertise. Articles in
scientific journals, however,
typically are reviewed by experts
who read the whole paper, not
just abstracts. Yet even here,
there is evidence that
professional researchers often
low borrowing costs that will fur-
ther complicate efforts to rein in
deficits, he warned.
“It is impossible to minimize
the size of the economic problem
that faces us in the future,” the
chronicler of central-bank history
said at a panel.
Former Fed Vice Chairman Don-
ald Kohn, now a Brookings Institu-
tion scholar, cautioned that ahead
of the financial crisis, “not only
didn’t we see it coming,” but once
the trouble started, central bank-
ers “had trouble” understanding
what was happening, he said in a
panel.
The Fed has “only limited guid-
ance” from history about how to
navigate the economy with radi-
cally new tools of monetary policy.
More than five years after the
onset of the financial crisis, schol-
ars inside and outside government
are struggling to rewrite textbook
understandings of how the econ-
omy works and how unconventional
monetary policies have affected
markets and the economy.
“The whole policy evaluation in-
evitably is difficult,” said Michael
Joyce, an adviser at the Bank of
England, “given the unknown coun-
terfactuals, uncertain transmission
mechanisms and [the fact that] we
don’t have many historical exam-
ples.”
Monday, January 7, 2013 | 7
botch statistics in their work, but
are allowed to publish
problematic data. Writing in
Nature last month, cell biologist
David L. Vaux decried the
continuing publication, including
in Nature, of papers with
problems such as miscalculated
margins of error. “The fact that
these scientifically sloppy papers
continue to be published means
that the authors, reviewers and
editors cannot comprehend the
statistics, that they have not read
the paper carefully, or both,” said
Prof. Vaux, of the University of
Melbourne in Australia.
Martin T. Wells, a
biostatistician at Cornell
University, has another
explanation, chalking up
occasional sloppiness in statistics
to the pressure to publish early
and often. “It’s a bit frustrating,”
he said. “As a biostatistician you
want to do things right, and some
researchers just want to get off
on the cheap analyzing data.”
Alan Sokal, the physicist who
in 1996 hoaxed a journal of
cultural studies with an article he
wrote as a jest that the journal
published, called Prof. Eriksson’s
study “very interesting.” He
would like it replicated with a
more credentialed group, such as
university professors, who are
more likely to review articles for
publication.
Prof. Eriksson said he “would
love to conduct a follow-up study
with other samples,” adding his
paper didn’t itself contain any
deliberately faulty statistics to
test whether readers would
notice. “I wasn’t clever enough to
think of putting in some
nonsense math of my own,” he
said.
Learn more about this topic at
WSJ.com/NumbersGuy. Email
numbersguy@wsj.com.
Employers Slow
To Add Space,
As Well as Jobs
BY ELIOT BROWN
U.S. businesses took on new office
space at a sluggish pace in the fourth
quarter as employers remained cau-
tious about adding jobs.
The amount of occupied office
space grew by just 3.7 million
square feet in the quarter, nudging
down the vacancy rate 0.1 percent-
age points to end the year at 17.1%,
according to real-estate research
firm Reis Inc. Asking rents rose to
an average $28.46 per square foot,
up 0.8% for the quarter and 1.8% for
the year, said Reis, which surveys 79
metropolitan areas.
The office market has been grow-
ing slowly ever since the start of
2011, when employers ended three
years of shedding space and started
to add more of it. But the pace of ex-
pansion has been tepid compared
with what the office sector typically
sees in a healthy economy.
The office market has generally
tracked growth in the labor force,
which added 155,000 jobs in Decem-
ber, the Labor Department reported
Friday. “Until that starts to escalate
a little more, we’re probably going
to see more of the same,” says Ryan
Severino, an economist at Reis.
8 | Monday, January 7, 2013 THE WALL STREET JOURNAL.

WORLD NEWS

Deeper U.S. Troop Cutback Is Weighed

BY ADAM ENTOUS
AND JULIAN E. BARNES

WASHINGTON—The Pentagon
has sketched out plans for a scaled-
back presence in Afghanistan, after
the Obama administration pressed
for options that would leave fewer
troops in the country after 2014 than
defense officials have proposed.
New Pentagon options would
leave roughly 3,000, 6,000 or 9,000
U.S. troops, laying the groundwork
for a more bare-bones international
coalition in the country. Gen. John
Allen, the commander of U.S. and
North Atlantic Treaty Organization
forces in Afghanistan, had earlier
suggested 6,000 to 15,000 U.S.
troops would be needed.
The new deployment options
come as Afghan President Hamid
Karzai prepares to visit Washington
this week to discuss the U.S. secu-
rity presence after 2014, when most
foreign forces in the country are
slated to have departed.
A smaller U.S. commitment
would result in a corresponding
drop in forces from other interna-
tional coalition partners. The U.S.
Agence France-Presse/Getty Images

and its allies are negotiating future

troop commitments on the basis of
a formula that calls for U.S. troops
to make up two-thirds of any follow-
on force.
With a smaller U.S. troop pres-
ence, the State Department would
also be forced to cut plans for large-
scale diplomatic outposts across Af-
ghanistan, and it would heighten the US soldiers stand guard at the site of twin suicide attacks in Kandahar,
U.S.’s reliance on drones to monitor Afghanistan on Sunday. At least five people were killed in the attacks. Shifting Plans
and target militants after most
manned aircraft and their pilots pull decide against keeping any troops in Within the administration and Total U.S. troops in Afghanistan, by month
out. the country after 2014, the officials the Pentagon, defenders of the 100,000 Jan. 2013 66,000 40,000 Officials'
In late 2010, some senior admin- said. It is unclear when an an- 6,000 and 9,000 troop options said expectations,
istration and defense officials told nouncement will be made. it makes sense to go with a smaller winter 2010
NATO allies that the U.S. may need Spokesmen for the White House number because the mission of any 20,000 Officials'
80,000
to keep at least 40,000 troops in Af- and Gen. Allen declined to comment follow-on force would be narrowly expectations,
ghanistan after 2014, when the cur- on any of the recommendations. defined: keeping al Qaeda from summer 2011
rent NATO mission concludes. A In its recommendation to the making a comeback and providing 6,000-15,000
year later, officials suggested troop White House, the military said keep- limited, high-end training to elite 60,000 Range proposed
levels could be closer to 20,000. As ing 3,000 or fewer troops in Afghan- Afghan units. by Gen. Allen, fall
recently as November, Gen. Allen istan after 2014 would pose serious A senior Obama administration 2012
spoke privately with Pentagon chiefs risks. Such a small force could do official said the goal in Afghanistan 40,000 3,000-9,000
about the need for 15,000 troops little to protect the Afghan govern- is to deny al Qaeda a haven and to Range of
from the U.S. alone. ment or prevent the possible return ensure Afghan forces can prevent Pentagon
Gen. Allen previously laid out of al Qaeda-linked militants, officials the government from falling to the 20,000 options, Jan 2013
plans that envisioned 15,000 inter- and experts said. Taliban. “Those are the determina-
national troops in Afghanistan after The Pentagon prefers the tions that will drive a resource deci-
2014, about two-thirds of them from roughly 9,000 troop option, officials sion,” the official said.
0
the U.S. said, which would allow the U.S. to These officials say Afghan secu-
2009 '10 '11 '12 '13 '14
A final decision on troop levels position a counterterrorism force on rity forces have made important
Sources: Brookings Institution (through 2011);
has yet to be made by President Ba- at least two bases in Afghanistan— gains in recent years, bolstering U.S. Department of Defense (2012-2013); senior U.S. officials (forecast) The Wall Street Journal
rack Obama, officials stressed. The most likely Bagram north of Kabul confidence.
president will discuss that subject and Kandahar in the south, as well Afghan forces “have made more
and other issues when he meets with as to conduct limited training mis- progress than virtually anyone ex- nity to U.S. troops in Afghanistan if Defense officials said they ex-
Mr. Karzai. Afghan officials said they sions with Afghan forces. pected,” a senior U.S. official said. Mr. Obama provides him with guar- pected the White House to ask com-
are taking a wait-and-see approach. But many at the White House “That’s why we may not need as antees that Washington will build manders to cut the force to about
Some NATO officials said the prefer a troop level of roughly many troops as we might have up the Afghan military and take 30,000 troops by the end of 2013—a
lower numbers could be a tactic to 6,000, officials said. Some NATO of- thought we needed at one point.” other steps to respect Afghan sover- level not seen since Mr. Obama
put pressure on Mr. Karzai to quickly ficials and experts say a U.S. force Jeff Dressler, a researcher at the eignty, defense officials said. came to office in 2009. Mr. Obama
cut a deal for a security presence. of that size would be too small to Institute for the Study of War, Afghanistan on Friday released more than doubled troop levels be-
But U.S. officials say the lower num- effectively train Afghan forces to strongly disagreed with what he and 80 prisoners formerly held by the fore deciding to wind down the war.
bers reflect the political reality in fight the Taliban and wouldn’t be other experts see as overly optimis- U.S., the Associated Press reported, Gen. Allen has privately signaled
the U.S., amid wariness of costly large enough to mount a country- tic assessments of Afghan capabili- part of a 400-detainee release that to policy makers a willingness to be-
long-term commitments overseas at wide special-operations campaign ties. “If you were to pull that assis- an Afghan defense official described gin removing troops in the spring
a time of a budget crisis at home. against militants or bail out Afghan tance away, their capabilities shrink as a peace overture—though such and summer—earlier than he once
U.S. officials played down pros- units if they get into trouble. drastically,” he said. moves could aggravate U.S. fears thought advisable, officials say.
pects for a final deal during Mr. Kar- “I think you may assume way too The new options represent a sig- that Kabul is giving freedom to dan- The final military footprint in Af-
zai’s visit, citing the complications much risk if you go below that 6,000 nificant change in White House gerous militants. ghanistan will influence the calcula-
of negotiating a long-term agree- figure,” said Mark Jacobson, who thinking, said NATO officials and Pentagon spokesman George Lit- tions of the Central Intelligence
ment and the difficulty of reaching served as NATO’s deputy senior ci- other experts. tle declined to comment on the Agency and other intelligence agen-
an agreement with other potential vilian representative until Septem- The Pentagon hasn’t proposed an troop-level recommendations. “The cies. Fewer troops could result in
contributors to a new international ber 2011. option for keeping zero troops in options are being discussed in confi- fewer intelligence operatives, be-
mission. Likewise, American and NATO Afghanistan at the end of 2014 and dential discussions,” Mr. Little said. cause of the reduction in available
To partially offset the cuts and officials predicted a U.S. commit- doesn’t expect Mr. Obama to choose “This is obviously the president’s security.
set a positive tone for the talks, the ment of 6,000 troops or less would that path. But zero is a real option decision…and his to make.” The State Department still plans
Pentagon told Congress on Friday it result in a large drop in troop com- for the president, some officials Once a decision is made on to maintain an embassy in Kabul
would provide the Afghans with mitments from NATO and non-NATO said, pointing to the course he took post-2014 troop levels, the Pentagon and four consulates—in Herat, Jalal-
about $700 million in equipment, partners. in Iraq in 2011 after negotiations will recommend how quickly to abad, Kandahar and Mazer-e-Sharif.
including up to 30 Russian-made “The message will be clear-cut,” with Prime Minister Nouri al-Maliki draw down the 66,000 U.S. troops But staffing levels may be dramati-
Mi-17 helicopters and small un- a senior NATO official said of any broke down over U.S. demands for currently in Afghanistan. Gen. Allen cally reduced as a result of the
armed tactical drones, with addi- U.S. decision to slash its projected immunity for any U.S. troops that favors a gradual withdrawal of scaled-back troop presence.
tional installments to come. force below 9,000 troops. “Serious would remain in that country. troops tied to security benchmarks —Dion Nissenbaum
Mr. Obama still could reject all nations can’t afford to leave Afghan- Mr. Karzai has signaled that he and other events, including the Af- and Siobhan Gorman
three of the Pentagon’s options and istan like this.” would be willing to provide immu- ghan presidential election in 2014. contributed to this article.
THE WALL STREET JOURNAL. Monday, January 7, 2013 | 9

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10 | Monday, January 7, 2013
Myanmar’s Muslims Seek Safe Havens
Ethnic Clashes Send Refugees in Search of New Homes, Forcing Neighboring Countries, Agencies Into Action
BY JAMES HOOKWAY
Myanmar’s recent political open-
ing has unleashed deep-seated and
violent ethnic clashes that have sent
waves of refugees on perilous boat
journeys to seek safer shores, while
forcing its neighbors and interna-
tional entities to scramble to come
up with a cohesive response to the
crisis.
On New Year’s Day, authorities in
Thailand intercepted 73 ethnic Roh-
ingyas refugees fleeing their country.
Thailand’s government says it has a
policy of intercepting Rohingyas
while still at sea and making sure
they have enough fuel and supplies
to sail to another country. But this
time authorities repatriated the Roh-
ingyas across the border to an uncer-
tain future back in Myanmar despite
the appeals from the United Nations
High Commission for Refugees.
Elsewhere, Singapore’s Ministry
of Home Affairs said Thursday the
city-state doesn’t have the resources
to absorb refugees. It recently re-
fused permission for 49 ship-
wrecked people from Myanmar to
come ashore there. “Opening our
doors to refugees and asylum seek-
ers would eventually pose serious
social, economic and security prob-
lems for our small island state,” the
ministry said.
Malaysia took in 40 survivors,
while Indonesia took the other nine
after appeals from the U.N. refugee
agency and the ship’s Vietnamese
owners.
On Friday, Indonesia’s Foreign
Minister Marty Natalegawa said he
would travel to Myanmar next week
to examine conditions in Rakhine
state at the invitation of the Myan-
mar government. He told journalists
he would formally announce a
pledge for $1 million in humanitar-
ian aid to the region during his stay.
The bulk of these modern-day
boat people are ethnic Rohingya
Muslims. In Myanmar, they are de-
nied citizenship in the Buddhist-
dominated country, dismissed as be-
ing illegal migrants from
Bangladesh despite many tracing
their local roots back centuries.
More than 100,000 are estimated to
have fled their homes in the state,
where they make up about a quarter
of the population.
Indonesian Authorities Battle New Terror Front
JAKARTA—Indonesian police
have made what they say is their
largest effort yet in a battle against
a “new front” of terrorism.
By I Made Sentana,
Joko Hariyanto
and Ben Otto
Seven suspected Islamic mili-
tants killed in central Indonesia in
recent days are all linked to a
small, relatively new terrorist
group fomenting unrest between
Muslims and Christians, police said.
The militants operate out of Poso,
Central Sulawesi, which police say
has emerged in recent months as
the new front in the country’s fight
to suppress violent Islamist groups.
A hunt is under way for a sus-
pected militant who escaped one of
the raids, police added Sunday.
Two suspected militants were
shot and killed Friday evening by
Indonesia’s Detachment 88 antiter-
Malaysia, which is predomi-
nantly Muslim, has done more than
most countries to bring the Rohing-
yas’ plight to international atten-
tion. About 25,000 Rohingyas are
registered as refugees there, accord-
ing to the United Nations, while oth-
ers live there illegally.
A spokesman at Malaysia’s Min-
istry of Foreign Affairs says it co-
operates with the UNHCR and
other international organizations
to handle refugees and asylum
seekers on a case-by-case basis,
and, like Indonesia, is urging Myan-
mar authorities to eradicate the
root cases of the violence in west-
ern Myanmar and prevent a greater
exodus.
Even so, Malaysia also appears
nervous about the growing numbers
of refugees trying to make their way
to the country. The illegal refugees
risk whipping, among other punish-
ments, if they are caught by immi-
gration authorities.
Recently, many Rohingya Mus-
lims in Myanmar have been forced
into refugee camps following
clashes with local Buddhists that re-
sulted in more than 170 deaths last
year in Rakhine state. Once in the
camps, aid agencies complain about
local Buddhist militias making it dif-
ficult to deliver food and medicine
to the more than 100,000 people
crammed into tents and dilapidated
dormitories.
Conflict analysts estimate that
thousands are paying up to $300
each to board creaking trawlers and
tug-pulled barges to make the voy-
age south. Few countries, however,
are prepared to absorb them.
“We’re trying to urge all the gov-
ernments in the region to allow the
migrants to land so that we can de-
termine their status and see
whether they need international
protection,” said Babar Baloch, a
spokesman for the UNHCR, in Ge-
neva, which is attempting to forge a
coordinated response to the migra-
tions.
Regional leaders at the Associa-
tion of Southeast Asian Nations
have tried to address the problem,
realizing the extent to which the
controversy could hurt the trade
bloc’s image, especially in the Mus-
lim world.
Cracks in Asean between Bud-
rorism squad while resisting arrest
at a hideaway in Dompu, Sumbawa
Island, in the central part of the
country, said Mochamad Iriawan,
chief of the West Nusa Tenggara
police. Sumbawa Island is part of
West Nusa Tenggara province,
south of the island of Sulawesi.
Three more were killed Saturday
morning at another safe house in
the same town, Mr. Iriawan said.
They fired on police officers and
were attempting to detonate explo-
sive jackets they were wearing, he
added.
Police discovered three primed
bombs and bomb-making materials
in the Saturday raid, he said.
Those killed and arrested were
planning terrorist acts in Dompu
and Bimu, another town on Sum-
bawa Island, Detachment 88 said,
according to Mr. Iriawan.
The Sumbawa raids followed the
killings of two more suspected mili-
tants Friday as they were about to
WORLD NEWS
INDIA
R a k h in e M YA N M A R
sta te
Sittwe
Bay
of
B e n ga l
Yangon
Escape
routes*
An d a ma n
Se a
Phuket
*Not an exact representation
of the routes
Source: staff reports
The Wall Street Journal
dhist-majority countries such as
Thailand, Myanmar and Cambodia,
and predominantly Muslim nations
such as Indonesia and Malaysia,
could widen, making a coherent
strategy harder to reach, said Yang
Razali Kassim, of the S. Rajaratnam
School of International Studies at
Singapore’s Nanyang Technological
University. “There are growing signs
of agitation, especially within the
Muslim communities of Southeast
enter a mosque in Makassar, the
capital of South Sulawesi. Four oth-
ers were arrested in the province
Saturday, police said.
The group is trying to
destabilize Indonesia and
promote its ultimate goal
of creating an Islamic
nation, police say.
Police said the men in both
Sumbawa and Makassar are part of
a group conducting terrorism train-
ing in Poso that is responsible for
killing six officers in the area in De-
cember.
Police have said the group is
trying to destabilize the country
and promote its ultimate goal of
Dangerous Waters
Thousands of Rohingya
Muslims have fled
violence in Myanmar
CHINA
VI E T N A M
Naypyidaw
LAOS
THAILAND
Bangkok
CAMBODIA
G ul f
of
T ha i l a nd
200 miles
200 km
Langkawi
St ra it o f MALAYSIA
M a l a cca
Kuala
Lumpur
SINGAPORE
Batam Island
INDONESIA
Asia, at the seeming lack of peace
efforts.”
The group generally steers clear
of interfering in its member states’
internal affairs, but Asean officials
have urged Myanmar and Bangla-
desh to recognize Rohingyas as citi-
zens and to provide more incentives
for them to stay in Myanmar.
Thailand’s foreign ministry also
said Myanmar is responsible for
stemming the outflow of refugees.
creating an Islamic nation. Police
forces, seen by terrorist groups as
the major impediment to their op-
erations, have long been the main
target of terrorists in Indonesia.
Indonesia’s counterterrorism
chief, Ansyaad Mbai, told The Wall
Street Journal in November that
Poso is the new terror front in In-
donesia. The region, which borders
Christian-dominated areas to the
north and Muslim-dominated areas
to the south, has been racked by
episodes of communal violence for
years.
Terrorism peaked in the 2000s
when Indonesia suffered its worst
bombings—in Bali in 2002—blamed
on the al Qaeda-linked Jemaah Is-
lamiyah group. In the years since, a
revamped security force has ar-
rested or killed scores of militant
leaders—especially in the former
terrorist stronghold of Central
Java. Their networks have been
largely depleted by antiterrorism
THE WALL STREET JOURNAL.
Indonesian presidential spokesman
Teuku Faizasyah said Indonesia
viewed a resolution to the commu-
nal conflict in Rakhine state an es-
sential component tackling the root
causes of the Rohingya refugee
problem.
The Myanmar government has
set up an inquiry into the causes of
the violence.
Malaysia remains a preferred
destination. Many Rohingyas in
Myanmar who are mulling the voy-
age, such as Aung Soe from the riot-
torn town of Kyauk-Phyu, say they
have relatives who have made the
voyage there, helping to provide a
support network for new immi-
grants.“Malaysia is the best place
for us to go, if we can get there,”
Mr. Aung Soe, 27 years old, said
shortly after the recent violence in
Rakhine state, looking out at a small
flotilla of battered fishing boats an-
chored a few miles south of Sittwe,
the area’s main port. “I already have
two cousins working there.”
Those who do make it provide a
valuable financial lifeline for their
families left behind. “Without my
son in Malaysia, I don’t know how I
would be able to survive,” said Kyaw
Hla Aung in a recent interview in
Takebi, Myanmar, one of the fetid
refugee camps in the baking-hot
delta of the Kaladan River.
The risks don’t end when the
voyagers enter Malaysian waters,
however. On Dec. 30, around 450
Rohingyas, including women and
children, leaped into the sea off the
coast of the island of Langkawi from
a rickety fishing boat and swam
their way to shore where they were
detained by waiting immigration of-
ficials. One person died, killed by
the boat’s propeller. Malaysian offi-
cials didn’t respond to requests to
comment.
More Rohingyas appear set to
risk their lives to make the voyage.
“We’re seeing more and more boats
leaving, especially after Bangladesh
tightened its border controls. Now
people are willing to go further to
escape the conditions in the refugee
camps in Rakhine State,” said Mr.
Baloch at the UNHCR.
—Celine Fernandez
in Kuala Lumpur
and Ben Otto in Jakarta
contributed to this article.
forces, limiting their ability to con-
duct large-scale attacks, security
analysts say.
Police have now turned their at-
tention to the proliferation of small
groups across the country, even
though they haven’t carried out any
large attacks. There have been sev-
eral arrests of alleged members of
these smaller groups.
More than 85% of Indonesia’s
population of close to 250 million
is Muslim. While an overwhelming
majority of the country’s citizens
are moderate and support the secu-
lar government, some analysts
warn the country is becoming in-
creasingly intolerant of minority
religious groups.
Analysts have said police suc-
cess in rooting out large terrorist
groups may have pushed some mili-
tants above ground and into reli-
gious groups where they have
helped fuel antitolerance move-
ments.
 THE WALL STREET JOURNAL.
Reuters
President Hugo Chávez, right, in 2010 with Nicolas Maduro, who the Venezuelan leader has tapped as his successor.
Chávez’s Absence Before
Swearing-In Fuels Woes
BY DAN MOLINSKI
CARACAS—Venezuelans have
gone nearly a month without hear-
ing or seeing from their president,
Hugo Chávez, who had another can-
cer surgery in early December and is
in “delicate” but stable condition un-
der tight security at a medical cen-
ter in Cuba.
Now, with the increasing likeli-
hood that Mr. Chávez won’t be able
to attend his own inauguration cere-
mony Thursday for another six-year
term in office, uncertainty is run-
ning high as to what happens next
and who may step up and lead this
major oil-producing nation over the
coming weeks, months or years.
For the Chávez-led socialist gov-
ernment, which has held power
since 1999, the answers to those
questions are easy: Mr. Chávez won
the October elections handily, they
say, so he will continue his duties as
president without a formal swear-
ing-in ceremony Thursday. That is
despite the president’s delicate con-
dition in Havana with a post-opera-
tion “severe pulmonary infection.”
Vice President Nicolas Maduro, a
Chávez loyalist who was tapped by
the president to succeed him if he
cannot continue his duties, said on
live television over the weekend that
Mr. Chávez on Thursday shall “con-
tinue his functions and the formality
of being sworn in can be resolved
later by the Supreme Court.”
The opposition, though, is crying
foul, saying the court is stacked with
pro-Chávez loyalists. They also point
to the Venezuelan constitution,
which specifies Jan. 10 as the inau-
guration date. The constitution fur-
ther says that if the elected leader
can’t take office for some reason,
then new elections must be called
within 30 days.
If that were to happen, Congress
President Diosdado Cabello, another
Chávez loyalist—who was re-elected
to a new term on Saturday—would
temporarily assume the presidency
until the elections decide a winner.
The election would likely see Mr.
Maduro running against the opposi-
tion’s leader, Henrique Capriles.
Still, opposition forces have
made no indication yet that they will
WORLD NEWS
try to stand in the way of allowing
Mr. Chávez to remain as president,
in sickness or in health.
“The most-asked question is
‘What will happen Jan. 10?’ ” said
Luis Vicente León, an analyst who
heads the respected polling firm Da-
tanalisis. “The answer: Probably
nothing. The status quo will con-
tinue.”
A reason for this, analysts say, is
that opposition leaders don’t want
to appear as if they are trying to
take advantage of Mr. Chávez’s
health problems to unseat him on a
technicality. That could work against
them if new elections are held over
the coming weeks or months.
Mr. Maduro has already sought
to use the opposition’s position
against it. “They’re trying to desta-
bilize the country,” he said recently.
“They want to create an institutional
coup.”
‘The most-asked
question is ‘What will
happen Jan. 10?’ ’ said
an analyst, referring to
the president’s
planned inauguration.
An electoral contest would bring
the first serious challenge to Mr.
Maduro’s leadership skills. Despite a
public career that stretches back 15
years, many in Venezuela feel the
tall and mustachioed Mr. Maduro is
still an unknown—cited more for his
loyalty to Mr. Chávez than for his
own ideology or talents.
Born to a lower-class family in
Caracas, Mr. Maduro went to a pub-
lic high school, joined a socialist
youth club and played bass in a rock
band called Enigma. He later drove a
bus linked to the Caracas subway
system, and became union leader of
the subway workers. He eventually
won a seat in congress.
Analysts say he owes much of his
rapid rise to his longtime compan-
ion, Cilia Flores, a lawyer and early
Chávez follower who defended Mr.
Chávez after his failed coup attempt
in 1992, and helped negotiate his re-
lease from prison two years later.
“They are a power couple, when
one rose, so did the other one,” said
Juan Carlos Zapata, a Venezuelan
journalist who has chronicled the
Chávez years.
The vice president and Ms.
Flores are devout followers of
Sathya Sai Baba, a late Hindu mys-
tic, who in his early teens had pro-
claimed himself the reincarnation
of another deceased Indian holy
man. As foreign minister, Mr. Ma-
duro made at least three pilgrim-
ages to the South Indian town of
Puttaparthi, the guru’s residence. A
photo of Mr. Maduro and Ms. Flores
seated on the floor next to the mys-
tic dressed in a saffron-colored tu-
nic has been widely circulated on
Venezuelan news sites.
“Maduro’s main characteristic is
his close relationship to Chávez,”
said Aníbal Romero, a retired politi-
cal-science professor from Universi-
dad Central de Venezuela in Caracas.
“He’s always trying to be close to
him, be seen with him.”
What is creating the most ten-
sion between Chávez backers and
the opposition is the veil of secrecy
that remains regarding Mr. Chávez’s
health. After being diagnosed with
cancer more than a year and half
ago and having four surgeries, che-
motherapy and radiation treatment,
Mr. Chávez has still not revealed
what kind of cancer he has, except
to say it is in the “pelvic area.”
The lack of information has be-
come acute in the weeks following
his Dec. 11 surgery. His medical team
hasn’t spoken, and the updates given
on Mr. Chávez’s health have been
vague: A few days ago the govern-
ment said the situation was “compli-
cated,” while on another day it said
the president is “calm and stable,”
without providing more details.
Ramón Guillermo Aveledo, a top
official in the opposition coalition,
has demanded the government “tell
the truth.” A rising chorus of Vene-
zuelans on Twitter and other social
media is calling for the government
to offer “proof-of-life” for Mr.
Chávez, such as a photograph.
—Kejal Vyas
contributed to this article.
WORLD WATCH
 MIDDLE EAST
Palestinian Authority
Changes Name After U.N. Bid
The Palestinian president has
ordered his government to officially
change the name of the Palestinian
Authority to “State of Palestine.”
The move follows the November
decision by the United Nations to
upgrade the Palestinians’ status to
that of a “nonmember observer state.”
President Mahmoud Abbas said
Sunday that all official Palestinian
stamps, stationery and documents will
now bear the new name.
A statement from his office said
the move was aimed at enhancing
Palestinian “sovereignty on the
ground” and was a step on the way to
“real independence.”
Israel still controls most of the
West Bank.
Israel objected to the Palestinian
statehood bid at the U.N., calling it a
unilateral step aimed at bypassing
direct peace negotiations. Mr. Abbas
denied that.
Israel had no comment about the
name change on Sunday.
Associated Press
 ETHIOPIA
Sudan, South Sudan Agree
To Implement Oil Deal
The presidents of Sudan and South
Sudan agreed Saturday to the
unconditional and speedy
implementation of deals reached in
September to demilitarize their shared
borders and allow oil exports to flow
from South Sudan’s oil fields north
through Sudan’s pipelines, an African
Union official said.
Sudan President Omar al-Bashir
and South Sudan President Salva Kiir
met on Friday and Saturday in
Ethiopia’s capital to revive a stalled oil-
exportation deal that has been delayed
for months over disputes on the setup
of security arrangements in the border
regions.
African Union mediator Thabo
Mbeki told reporters late Saturday
that the two presidents agreed to the
“speedy, unconditional and
coordinated” implementation of the
agreements.
“We are very, very pleased indeed
with the outcome of this because it
has indeed opened the way for the
implementation of all of these various
agreements,” Mr. Mbeki said. “They
have also agreed that action should be
taken immediately, as soon as
possible, to implement all the existing
agreements unconditionally.”
AU mediators will present officials of
the two sides with a timetable for oil
exports and the withdrawal of military
forces from border areas. The schedule
will be ready by Jan. 13, Mr. Mbeki said.
“The presidents agreed that steps
should be taken without any further
delay to demarcate those parts of the
border which have been agreed,” he said.
Associated Press
Ethiopian Prime Minister Hailemariam Desalegn, left, greets South Sudan
President Salva Kiir in Addis Ababa Saturday.
Monday, January 7, 2013 | 11
 VENEZUELA
Search for Plane Carrying
Fashion CEO Vittorio Missoni
The search for a missing plane
carrying Italian fashion executive
Vittorio Missoni and five other people
entered its third day on Sunday with
no signs of the aircraft.
Venezuela’s National Civil Aviation
Institute said search teams were using
a plane and a helicopter and the
Venezuelan coast guard to find the
small plane, which disappeared off the
country’s coast.
The twin-engine plane was reported
missing hours after taking off Friday
from Los Roques, a string of islands
and islets popular among tourists for
their white beaches and coral reefs.
The plane was carrying the CEO of
Italy’s iconic Missoni fashion house, his
wife, two Italian friends and two
Venezuelan crew members.
Officials from Venezuela’s civil
aviation agency have said authorities
declared an alert after the plane didn’t
make contact with the control tower
at the Caracas airport or with the
tower in Los Roques. Officials said the
twin-engine craft took off at 11:39 a.m.
Friday and had been expected to arrive
in Caracas 42 minutes later.
Associated Press
 AFRICA
South Africa Sends Troops
To Central African Republic
The South African presidency
announced Sunday that is sending 400
army troops to Central African Republic
to help the country’s army as it faces a
threat from a coalition of rebel groups.
Sending soldiers to Central African
Republic is part of South Africa’s efforts
“to bring about peace and stability in
the region,” said the announcement by
President Jacob Zuma’s office.
Central African Republic’s
neighboring countries Cameroon,
Gabon and Republic of Congo already
have sent about 120 troops each to
help stabilize the country confronted
by the rebellion. Chad, a longtime ally
of President Francois Bozize’s
government, also has provided
hundreds of forces who are fortifying
the road to the capital, Bangui, to
prevent rebels from reaching the seat
of power, a city of 700,000.
The rebels had pledged to halt their
advance pending peace talks in Gabon
that are due to start Tuesday.
However, residents say rebels seized
two more towns over the weekend,
though they are not en route to the
capital. A dozen towns have come
under rebel control since the rebel
alliance calling itself Seleka began its
offensive on Dec. 10.
Associated Press
Online>>
For more breaking news, go to
WSJ.com/World and follow
@wsjworld on Twitter.
Agence France-Presse/Getty Images
12 | Monday, January 7, 2013
Iranian workers protested in August in front of a Tehran government building because they hadn’t been paid. Workers also sent a petition to the government to call attention to the fallout from sanctions.
In Iran’s Factories, Shops,
Tighter Sanctions Take Toll
Western Sanctions, Combined With Mismanagement Have Hurt the Nation’s Currency and Economy
BY FARNAZ FASSIHI AND JAY SOLOMON
A
manager of Bam Shargh Isogam, an
Iranian manufacturer of insulation
sheets for rooftops, saw trouble
ahead when a government official offered
advice for surviving the crippling interna-
tional sanctions: Reduce quality and cut
back production.
The manufacturer in Delijan, three hours
south of Tehran, replaced the high-quality
material imported from Europe with domes-
tic material, dismissed more than half of its
350 employees, and didn’t pay the remain-
ing workers for four months, managers
said.
“From the owner to the line worker, no
one is safe,” said Bijan, a manager, who
asked that his last name not be used. “Our
country is facing an economic disaster.”
Company officials didn’t return calls asking
for comment.
Western sanctions against Iran, com-
bined with years of economic mismanage-
ment by the country’s government, have
hammered Iran’s currency and its economy.
The economy was predicted to contract by
nearly 1% in 2012, according to the Interna-
tional Monetary Fund, after registering an-
nual growth above 6% for much of the past
decade. The IMF said Iran’s economy could
IN DEPTH
grow again in 2013, but stressed that the
collapse of the currency, inflation and re-
duced oil sales were working against a re-
bound.
Washington has sanctioned Iranian insti-
tutions going back to the months following
the 1979 Islamic Revolution. But it was 2010
legislation that markedly changed the finan-
cial war against the regime, according to
U.S. and European officials.
Previously, U.S. sanctions targeted only
American companies doing business with
blacklisted Iranian entities. The 2010 law
required the White House and U.S. Treasury
to sanction any company, American or for-
eign, conducting proscribed Iranian trade,
placing at risk their access to the U.S. finan-
cial system. The West intensified the sanc-
tions campaign because of the belief that
Iran is secretly developing atomic weapons,
a charge Tehran denies.
Congress passed new sanctions last
week, signed by President Barack Obama,
that lawmakers said move closer to a nearly
complete trade embargo on Iran. The law
seeks to block Tehran’s ability to barter its
oil for gold and precious metals, and signifi-
cantly widens the number of Iranian energy,
shipping and financial entities on the U.S.
blacklist, and bars foreign firms from doing
business with them.
“The sanctions so far have inflicted far
greater damage on Iran’s economy than
anyone expected, but the economic pressure
is still moving too slowly given the pace of
Iran’s nuclear development,” said Mark
Dubowitz of the Foundation for Defense of
Democracies, a conservative Washington
think tank that advised Congress on imple-
menting the latest sanctions.
White House officials on Thursday de-
clined to comment on how they are specifi-
cally going to implement the new sanctions,
but said that the Obama administration has
dramatically increased financial pressure on
Tehran over the past four years.
The squeeze on Iran has been tightening
for months. In July, the European Union
placed a ban on purchases of Iranian oil.
This deprived Tehran of one of its main en-
ergy markets. In September, Iran’s currency
dropped nearly 30% in one week. In re-
sponse, Iran stopped subsidizing currency
rates for travelers and students; it also
halted subsidies for merchants importing
anything but essential food and medical
items.
Iran analysts are skeptical that the sanc-
tions will bankrupt Iran’s government in the
short term. Tehran was believed to have
more than $100 billion in foreign-exchange
reserves at the beginning of last year,
THE WALL STREET JOURNAL.
Associated Prress
thanks to windfall oil revenues in recent
years. Until September, it had used these
reserves successfully to support the Iranian
currency, the rial. These analysts believe
the sharp decline in Iran’s energy exports
has cut into reserves, but probably not
enough to drain Tehran of its hard currency.
The situation already is a crisis for many
Iranians. For middle-class families even
buying books and magazines has become a
luxury. Poor families now go months with-
out eating meat or poultry, which have seen
some of the biggest price increases.
“We’ve slowly scratched off milk, yogurt
cheese and butter from our table. Prices are
going up almost daily, and we can’t afford
them,” said Ameneh, 45-year-old mother of
two young children in Tehran, who asked
her last name not be used.
Sanctions are reverberating beyond
Iran’s borders. Iranian business investments
in Dubai have decreased as many merchants
close shop. The Turkish tourism ministry
said that visitors from Iran dropped 35% in
the first nine months of the year.
Iranian officials, usually defiant in the
face of Western pressure, now openly ac-
knowledge that sanctions are taking a toll.
Gholamreza Mesbahi Moghadam, head of
the parliament’s planning and budget com-
mittee, said recently that Iran’s oil sales
 THE WALL STREET JOURNAL.
have fallen to little more than a million barrels
per day, compared with the 2.5 million barrels
per day last year. Mr. Moghadam said the gov-
ernment faced a $60 billion deficit in 2012.
Iran’s nuclear program remains a top for-
eign policy issue for President Obama in his
second term, according to senior U.S. officials.
Washington’s strategy includes the threat of
even more economic sanctions in hopes of
pressuring Iran into a compromise. But admin-
istration officials also are banking on the Ira-
nian government’s own failures to create pres-
sure on the regime. They say that President
Mahmoud Ahmadinejad’s heavy spending and
price increases have led to surging inflation in
the country.
“We are seeing tremendous impact on the
economy, not just because of sanctions, but
because of horrific mismanagement,” a senior
U.S. official said.
U.S. officials hope nuclear negotiations,
which have been stalled for months, will re-
sume soon. The Iranian regime is divided.
Some pragmatic officials hope to end the
standoff with the West to help revive the
economy. But Supreme Leader Ayatollah Ali
Khamenei holds the final decision, and some
key supporters close to him have said the Is-
lamic Republic must stand firm and compro-
mise only if an agreement can be reached with
the West that ensures the regime’s stability.
One result of the economic blockade
around Iran: Its modern economy is increas-
ingly dependent on old-fashioned barter. In ex-
change for oil, Iran receives not dollars as be-
fore, but wheat and tea from India, rice from
Uruguay, meat and fruit from Pakistan, and ev-
erything from zippers to bricks from China.
“It’s definitely one way of circumventing
sanctions, but in the long while the economy
will deteriorate,” said Dariush Zahedi, a pro-
fessor of political science at the University of
California, Berkeley, who has researched the
impact of sanctions on Iranian society.
Tehran’s bazaar merchants, a major force
in the economy, staged a strike in September.
Protests erupted, ending only after security
and intelligence forces pressured merchant
unions by threatening to arrest leaders and re-
voke members’ licenses.
Factory workers and families of students
who have lost their access to special subsi-
dized dollar exchange rates for tuition have
staged sit-ins outside the parliament to pro-
test the Central Bank’s new currency policies.
In October, unions of truckers that transport
fuel and gasoline in the city of Isfahan went
on a two-day strike, cutting off fuel delivery to
one of Iran’s largest cities. Their costs of living
and of maintaining their trucks have skyrock-
eted while their salaries remain the same.
Bam Shargh Isogam, the insulation manu-
facturer, is among 160 factories located in the
industrial city of Delijan. The city, home to
50,000 Iranians, was once a model of eco-
Agence France-Presse/Getty Images (left); Associated Press
The Iranian currency, the rial, has fallen sharply in recent months. Right, a butcher cuts meat in a supermarket in Tehran. The government has halted most import subsidies for merchants.
Monday, January 7, 2013 | 13
IN DEPTH
business has stopped.
A Tightening Squeeze Across Iran, industries are facing similar
Western sanctions, combined with years of internal mismanagement, are hammering the problems. At the Alborz industrial complex
Iranian economy. near the city of Qazvin, many factories are
searching for cost-saving measures. Some are
GDP, percentage change Inflation, percentage change closing an extra day each week, cutting paid
holidays and reducing the number of free
6% 24% meals and snacks provided to workers.
The five major factories that produce the
bulk of Iran’s dairy products wrote a joint let-
ter to Mr. Khamenei, the country’s supreme
4 18
leader, in October complaining that if the
economy doesn’t turn around they would be
out of business in months.
2 12 Iran’s car industry, the region’s largest with
manufacturing plants from Africa to Ukraine,
posted 60% to 80% production declines last
year, leading to hundreds of thousands losing
0 6 their jobs, according to Iranian media reports.
Many manufacturers of automobile spare parts
are working at 40% capacity because of a
–2 0 shortage of cash and a lack of raw materials,
2009 ’10 ’11* ’12* ’13* 2009 ’10 ’11 ’12* ’13*
according to a statement by one of the indus-
try’s union leaders.
*Estimate Source: IMF The Wall Street Journal The financial crunch has also imperiled one
of Iran’s biggest exports: its students. Some
90,000 Iranian college students abroad are in
limbo after the government cut the subsidized
The financial crunch has also imperiled one of Iran’s biggest exchange rate it allowed for students’ tuition
abroad. Many say they are abandoning studies
exports: its students. Some 90,000 Iranian college students abroad and returning to Iran because their expenses
are in limbo after the government cut the subsidized exchange rate have quadrupled in the face of the rial devalu-
ation. Yet they have few prospects back home.
it allowed for students’ tuition abroad. “It’s demoralizing. I’ve invested two years
to get a graduate degree, and I can’t afford to
graduate now,” said Ali, a student in Asia in
his last semester of M.B.A. studies.
nomic growth. Located on a remote plain for- would reallocate 30% of the money it saved on The effectiveness of the sanction campaign
merly devoid of industry, Delijan saw the con- subsidies—about $100 billion a year—to pri- has surprised some of Washington’s biggest
struction of hundreds of factories ranging vate-sector industries to compensate for these skeptics. Just two years ago, Tehran’s finances
from construction material to paint and indus- rising costs. Those allocations never arrived. were bolstered by high international energy
trial textile during the past decade. Meanwhile, the government gave billions of prices and a flourishing trade with Europe and
There were jobs for most of the city’s resi- dollars to consumers to compensate them for East Asia.
dents and then some. Housing and construc- the higher prices. And the Central Bank kept U.S. and European officials said a big rea-
tion boomed. A university outpost opened, of- the currency rate artificially low. Tens of bil- son for the success in recent months of the
fering courses and advanced vocational lions of dollars in foreign exchange were frit- sanctions campaign has been the sharp in-
training workshops for workers and ambitious tered away importing cheap consumer goods. crease over the past year in oil production by
youth. When sanctions hit in 2012, factory owners Iraq, Libya and the U.S., as well as Saudi Ara-
Dozens of service businesses, such as ca- in Delijan couldn’t take the additional blow. bia’s willingness to make up for any shortages
tering and cargo transportation, flourished Simple maintenance routines, such as purchas- in oil supply on international markets.
alongside the factories. Local industry even ing new parts for aging machinery, became an Iranian officials could respond with war-
exported goods to neighboring countries like unaffordable, time-consuming ordeal. time measures such as rationing gasoline and
Iraq, Afghanistan and Turkmenistan. Many smaller factories have closed. Dozens basic goods and heavily controlling exports
Signs of serious problems for industrial ar- of the bigger ones are battling to avoid bank- and imports. Iran’s ministry of trade recently
eas such as Delijan started emerging in 2011. ruptcy, according to interviews with owners, issued an import ban on 75 luxury goods,
At first, they had nothing to do with sanc- managers and workers. The economic down- ranging from cars to chocolate, plus a ban on
tions. The regime implemented an ambitious turn is spreading to other sectors in the city exports of basic food items such as wheat.
scheme to cut energy subsidies, which cost the as businesses downsize to meet weak demand. The Central Bank also issued a new man-
government billions each year. The plan was The owner of Nader Ghazapazi, a local res- date to generate foreign-currency cash flow,
lauded by international monetary officials. But taurant that serves factory workers, said or- demanding that all exporters return revenues
economists inside and outside Iran say the im- ders have decreased to 320 meals each day from sales abroad to Iran. “The merchants and
plementation was botched, especially when it from 1,250 five months ago. A representative business people are caught between the clerics
came to industry and businesses. of a local trucking company said it now has 15 fight with the West, said one prominent mer-
Prices for gasoline, electricity and water trucks driving cargo to Tehran daily, compared chant with offices in Iran and Dubai. “We
spiked. The government had promised that it with 40 before. All of the company’s export won’t be able to survive.”
14 | Monday, January 7, 2013 THE WALL STREET JOURNAL.

OPINION: REVIEW & OUTLOOK

Boehner’s Second Chance

J
ohn Boehner was re-elected as
Speaker of the U.S. House of Repre-
sentatives last week, avoiding a sec-
ond vote after 12 GOP Members voted for
others or not at all. The question we’d ask
is why in the world does he want the job?
We don’t mean that like the snarky lib-
eral crack that Republicans are ungovern-
able, but in the sense of what Mr. Boehner
hopes to accomplish and what he’ll do dif-
ferently so the 113th Congress turns out
better than the 112th. By any political or
policy standard, including their own, the
Speaker and Senate Minority Leader Mitch
McConnell have accomplished little in two
years beyond checking liberal ambitions.
This doesn’t mean we agree with those
on the right who are constantly crying
“sellout,” including over last week’s bill
raising taxes. Mr. Boehner tried to cut the
best deal he could, but it’s impossible to
negotiate with a President who refuses to
compromise in any meaningful way.
A tax increase was going to happen
anyway, and the best Republicans could do
was mitigate the damage. The bill is awful
but was probably fated to be so unless Re-
publicans were willing to go over the cliff
and fight into this year, which they
weren’t. In any event, a GOP civil war over
the bill now would only serve liberal ends.
Yet it is fair to ask how the GOP keeps
getting maneuvered into these box can-
yons where the only way out is to give
President Obama 90% of what he wants in
return for very little. Mr. Boehner in par-
ticular has tried twice to negotiate a bud-
get deal with Mr. Obama, only to have the
President both times increase his de- start this fight only to cave in the end. You be had. Find some programs and special
mands midstream and then ambush him can’t take a hostage you aren’t prepared to interests to showcase and defund, in the
publicly. shoot. Do the two GOP leaders have a bet- manner of the Bridge to Nowhere. Take on
Mr. Obama’s political strategy over the ter strategy today than they did in 2011, corporate welfare. And unleash other
next two years will be what it was on the and do they have the backbench support Members in the House and Senate—the
tax cliff: Peel off five or more Republicans to execute it? Toomeys, Hensarlings and Johnsons—to
to pass liberal priorities in the Senate, We’ve known Mr. Boehner for years, make the GOP’s growth and reform case to
then corner House Republicans with a me- and there’s no doubt he views the speak- the public. Mr. Boehner can’t be the main
dia barrage until they surrender. This puts ership as a privileged obligation, not a po- party spokesman.
a premium on Mr. McConnell maintaining litical sinecure. He really would like to Push smaller reforms that are good
GOP unity in the Senate, but such disci- reach bipartisan deals to solve problems, policy but might also have a chance of
pline often ends with the especially on entitlements. picking up Democratic support. Focus on
first call from a Sunday How his speakership But he needs a partner, and promoting economic growth and raising
news show to the usual
suspects.
can be better than it by now it’s clear that Mr.
Obama will offer only to-
middle-class incomes. Use the House’s
oversight power to illuminate big prob-
The next challenge will was the last two years. ken reforms that won’t lems like ObamaCare and government fail-
be the debt-limit deadline change the fundamental in- ures, not small beer like “Fast and Furi-
arriving in early March. centives in government ous.”
Mr. Boehner says he wants a dollar in health care. His idea of tax reform is fewer Two models here are liberal Democrats.
spending cuts (over 10 years) for every deductions in return for higher rates, and During the Reagan years when the GOP
dollar increase in the debt limit. But Mr. perhaps a new energy tax on everyone. held the Senate, John Dingell used the En-
Obama says he won’t even deign to nego- It would be better for the country if Mr. ergy and Commerce Committee to high-
tiate over the debt limit, and in any case Obama focused his second term on im- light executive branch sins (real and imag-
any spending cuts must come with more proving the economy and reforming gov- ined), while Henry Waxman used every
tax increases. ernment. But our conclusion after four lever of power to expand entitlement ben-
That may be a debt-limit bluff, but even years, and especially since the election, is efits. Republicans should do a reverse
if it is the GOP will have to show hereto- that his overriding goal is to spend the Waxman, reforming the likes of Medicaid
fore unseen determination to call that next two years trying to divide and con- quietly and at the margin until they can
bluff. Mr. Obama will say Republicans are quer Republicans until he can get Nancy do it wholesale.
risking national default and recession, Pelosi back in the speakership in 2015. The larger challenge is to rank-and-file
most of Wall Street will echo him, and the Then he can resume, unbridled, his pro- Republicans as much as it is to Messrs.
Treasury will maneuver to apply maxi- gressive legacy-building. Boehner and McConnell. They face a de-
mum political pressure—for example, by i i i termined President—backed by a pliant
claiming it can’t pay Social Security bene- Mr. Boehner needs a plausible counter- media—who wants to break the GOP. Re-
fits. strategy. Recognize that he can’t govern publicans will help him do that unless they
We’ll support efforts to cut spending from the House, but use the leverage of stay united and use their limited but still
and reform entitlements, but the political the spending sequester and power of the considerable power to pick fights they can
result will be far worse if Republicans purse to see what few policy victories can win.

Google Escapes the Feds

I
n the major miracles department, the
U.S. Federal Trade Commission has
ended its long antitrust investigation
of Google with a display of regulatory re-
straint.
Google competitors such as Microsoft
and Expedia began whining in 2009 that
Google’s specialized search results for
items like maps, flights and shopping si-
phoned off business from their sites. The
claim was always a legal turkey: To prove
monopoly behavior, the FTC would have
to show there was a definable market for
free search results and that Google is a
sort of public utility that owes traffic to
other websites.
FTC Chairman Jon Liebowitz said last
Thursday that while Google may have been
trying to beat competitors, regulating the
company’s search algorithm was inappro-
priate. “Google’s primary reason for chang-
ing the look and feel of its search results to
highlight its own products was to improve
the user experience.” Commissioner J.
Thomas Rosch added that “Google does
not have monopoly or near-monopoly
power in any conceivable relevant market
related to the challenged practice.”
Google did agree to let websites opt
out of being featured in Google’s special-
ized search results, and to make it easier
for companies to advertise on Google and
Microsoft’s Bing search engine simultane-
ously. It also agreed to do more to license
its patents on “fair and reasonable”
terms. These concessions may help the
FTC justify its 18-month probe, but they
amount to the antitrust version of a park-
ing ticket. As wastes of taxpayer money
go, this is one of the better outcomes.

Jobs and Money

O
nce upon a time, the U.S. monthly
jobs report would move markets as
an indicator of the health of Amer-
ica’s private economy. These days, the em-
ployment news moves markets mainly
based on how quickly it might cause the
Federal Reserve to change its ultraloose
monetary policy. These days in markets,
money trumps jobs.
That’s one lesson from the post-fiscal
cliff economic news. Last Thursday, the
Fed released the minutes of its December
Open Market Committee meeting, which
disclosed that there was more dissent
over the Fed’s open-ended bond buying
than previously believed.
The FOMC’s December announcement
had suggested that it was ready to buy
$85 billion in Treasury and mortgage se-
curities each month through the end of
2013. But this week’s minutes said that
“several” committee members “thought
that it would probably be appropriate to
slow or to stop purchases well before the
end of 2013” due to concerns about finan-
cial stability and the Fed’s rapidly growing
balance sheet. Previously only Jeffrey
Lacker, president of the Richmond Fed,
had been known to be a dissenter from the
bond-buying party.
This isn’t what some investors wanted
to hear. Stock and commodity prices
around the world promptly fell on the
news about the Fed minutes, underscoring
the degree to which asset prices are float-
ing on expectations of continued Fed eas-
ing.
But never worry. On Friday came an-
other mediocre U.S. jobs report—and
stocks and the rest of the riskier-asset
plays rebounded despite this sign of still
not-so-great economic growth. Why? Be-
cause investors believe that the weaker the
jobs report, the more likely the Fed will
keep buying bonds as far as the eye can
see. So weakness equals strength, at least
in stocks. So goes a financial world domi-
nated by the decisions of central bankers.
Meanwhile, back in the real U.S. econ-
omy, slow growth continues to define the
job market. The American economy cre-
ated 155,000 net new jobs, essentially the
same as the 153,000 average monthly pace
for all of 2012, which was the same as the
average monthly gain in 2011. The jobless
rate stayed at 7.8%, after the November
rate had been adjusted up a tic from 7.7%
due to the Labor Department’s annual re-
visions.
For the year the economy created
about 1.84 million new jobs, which is con-
sistent with the plodding expansion and is
barely keeping up with new entrants into
the job market. In previous and healthier
expansions, the U.S. economy created 2.5
million or more net new jobs a year.
The overall labor participation rate ac-
tually fell during 2012—to 63.6% of the ci-
vilian population from 64% in December
2011. The rate is now down to where it last
was in 1981. That suggests more Ameri-
cans have given up looking for work, gone
on disability or retired prematurely be-
cause they couldn’t find work.
The December jobs survey is the last
one before the tax and spending increases
of the fiscal-cliff deal kick in. That legisla-
tion contains a two-percentage-point in-
crease in the payroll tax rate, which means
a higher cost for working. The bill also in-
cludes another one-year extension in job-
less benefits of up to 99 weeks, which is
an incentive not to work. Neither policy
will help job creation in 2013.
The Keynesians who run the U.S. econ-
omy these days are predicting better days
ahead now that the worst of the fiscal cliff
has been dodged and the housing market
is coming back. We’ll see if they’re right,
but meanwhile markets are likely to keep
their eyes mainly on the masters of the
economic universe at the Fed.
THE WALL STREET JOURNAL.
[ Declarations ]
BY PEGGY NOONAN
We’re all talk-
ing about Republi-
cans on the Hill
and their manifold
failures. So here
are some things
U.S. President Barack Obama
didn’t do during the fiscal cliff im-
passe and some conjecture as to
why.
He won but he did not tri-
umph. His victory didn’t resolve
or ease anything, and it heralds
nothing but more congressional
war to come.
He did not unveil, argue for or
put on the table the outlines of a
grand bargain. That is, he put no
force behind solutions to the ac-
tual crisis facing our country,
which is the hemorrhagic spend-
ing that threatens our future.
Progress there—even just a lit-
tle—would have heartened almost
everyone. The president won on
tax hikes, but that was an emo-
tional, symbolic and ideological
victory, not a substantive one. The
higher rates will do almost noth-
ing to ease the debt or deficits.
He didn’t try to exercise domi-
nance over his party. This is a
largely forgotten part of past
presidential negotiations: You not
only have to bring in the idiots on
the other side, you have to corral
and control your own idiots.
He didn’t deepen any relation-
ships or begin any potential alli-
ances with Republicans, who still,
actually, hold the House. The old
animosity was aggravated. Some
Republicans were mildly hopeful a
second term might moderate
those presidential attitudes that
didn’t quite work the first time,
such as holding himself aloof from
the position and predicaments of
those who oppose him, while be-
traying an air of disdain for their
arguments. He is not quick to as-
sume good faith. Some thought
The Case Against Google Was Always Weak
BY JAMES C. MILLER III
Now that the U.S. Federal
Trade Commission has completed
a settlement with Google, the
search company’s competitors
who precipitated the FTC’s inves-
tigation are crying foul that their
shameless attempt at rent-seeking
fell short.
Unable to out-innovate and
out-compete, rivals of Google such
as Microsoft formed FairSearch, a
lobbying group that first de-
manded the FTC look into Google
and then tried to influence the
agency throughout its nearly two-
year-long investigation. Now that
a settlement has been
announced—which preserves com-
petition and protects consumers
but is short of the “death penalty”
that Google’s detractors had de-
manded—FairSearch is threaten-
ing to take its case to the U.S. Jus-
tice Department for a second
round.
As a former FTC chairman, I
don’t believe that we should give
any credence to these complaints.
There’s No ‘I’ in ‘Kumbaya’
his election victory might liberate
him, make his approach more ex-
pansive. That didn’t happen.
The president didn’t allow his
victory to go unsullied. Right up
to the end he taunted the
Republicans in Congress: They
have a problem saying yes to him,
normal folks try to sit down and
work it out, not everyone gets ev-
erything they want. But he got
what he wanted, as surely he
knew he would, and Republicans
got almost nothing they wanted,
which was also in the cards. At
Mr. Obama’s campfire, he gets to
sing “Kumbaya” solo while others
nod to the beat.
Obama doesn’t seem to have
it in him to make a deal.
Serious men don’t taunt. And
they don’t farm the job of negoti-
ating out to the vice president be-
cause no one can get anything
done with the president. Some Re-
publican said, “He couldn’t negoti-
ate his way out of a paper bag.”
But—isn’t this clear by now?—not
negotiating is his way of negotiat-
ing. And it kind of worked. So ex-
pect more.
Mr. Obama’s supporters always
give him an out by saying, “But
the president can’t work with
them, they made it clear from the
beginning their agenda was to do
him in.” That’s true enough. But
it’s true with every American
president now—the other side is
always trying to do him in, or at
least the other side’s big mouths
are always braying they’ll take
him down. They tried to capsize
Clinton, they tried to do in
Reagan, calling him an amiable
dunce and vowing to defeat his
wicked ideology.
We live in a polarized age. We
have for a while. One of the odd
things about the Obama White
House is that they are trauma-
tized by the normal.
The agency spent countless hours
and resources prying into every
aspect of Google’s business, with
the company’s competitors urging
them on every step of the way. I
know that if the FTC had found a
sustainable antitrust violation, the
commission would absolutely have
pursued it after investing so much
effort. But the FTC is not going to
bring a case it cannot win and in
the process squander resources it
might have used to protect com-
petition and consumers—and all
the while risk eroding its enforce-
ment power for years to come.
The legal case against Google
was always weak. Despite the
rhetoric of Google’s antagonists,
they failed to convince the FTC
that the company’s policies
harmed consumers. Since
consumers can change search en-
gines with the simple click of a
mouse, it’s a stretch to say that
Google has monopoly power. Con-
sumers can search the Web a vari-
ety of ways, such as through Mi-
crosoft’s Bing, Yahoo!, dedicated
apps or even Apple’s Siri.
OPINION
A lot of the president’s staffers
were new to national politics
when they came in, and they seem
to have concluded that the parti-
san bitterness they faced was
unique to him, and uniquely sinis-
ter. It’s just politics, or the ugly
way we do politics now.
After the past week it seems
clear Mr. Obama doesn’t really
want to work well with the other
side. He doesn’t want big biparti-
san victories that let everyone
crow a little and move forward
and make progress. He wants his
opponents in disarray, fighting
Associated Press
without and within. He wants
them incapable. He wants them
confused.
I worried the other day that
amid all the rancor the president
would poison his future relations
with Congress, which in turn
would poison the chances of prog-
ress in, say, immigration reform.
But I doubt now he has any inten-
tion of working with them on big
reforms, of battling out a
compromise at a conference table,
of having long walks and long
talks and making offers that are
serious, that won’t be changed
overnight to something else. The
president intends to consistently
beat his opponents and leave
them looking bad, or, failing that,
to lose to them sometimes and
then make them look bad. That’s
how he does politics.
Why?
Here’s my conjecture: In part
it’s because he seems to like the
tension. He likes cliffs, which is
why it’s always a cliff with him
and never a deal. He likes the
high-stakes, tottering air of crisis.
Maybe it makes him feel his mas-
tery and reminds him how cool he
is, unrattled while he rattles oth-
ers. He can take it. Can they?
He is a uniquely polarizing fig-
ure. A moderate U.S. senator said
the other day: “One thing not said
enough is he is the most divisive
president in modern history. He
doesn’t just divide the Congress,
he divides the country.” The sena-
The FairSearch lobbyists
couldn’t overcome the simple fact
that consumers use Google’s serv-
ices more because they think the
services are the best. Moreover,
Google competitors didn’t get any
traction with the notion that the
Antitrust laws exist not to
protect competitors but to
uphold competition—and
thereby protect consumers.
FTC should punish or even regu-
late one of America’s most suc-
cessful companies simply for be-
ing successful.
Second, Google’s antagonists
mistakenly believed that the anti-
trust laws were enacted to protect
competitors. They were not. As
the Supreme Court ruled some
time ago, U.S. antitrust laws exist
not to protect competitors but to
uphold competition and thereby
protect consumers. The FTC knew
President Obama speaking at the White House on Dec. 31 regarding budget
negotiations with Congress.
tor thinks Mr. Obama has “two
whisperers in his head.” “The po-
litical whisperer says ‘Don’t com-
promise a bit, make Republicans
look weak and bad.’ Another whis-
perer is not political, it’s, ‘Let’s do
the right thing, work together and
begin to right the ship.’ ” The
president doesn’t listen much to
the second whisperer.
Maybe he thinks bipartisan
progress raises the Republicans
almost to his level, and he doesn’t
want to do that. They’re partisan
hacks, they’re not big like him. Let
them flail.
This, however, is true: The
great presidents are always in the
end uniters, not dividers. They
keep it together and keep it going.
And people remember them
fondly for that.
In the short term, Mr. Obama
has won. The Republicans look
bad. John Boehner looks bad,
though to many in Washington
he’s a sympathetic figure because
they know how much he wanted a
historic agreement on the great
issue of his time. Some say he
would have been happy to crown
his career with it, and if that
meant losing a job, well, a short-
term loss is worth a long-term
the law; FairSearch didn’t.
Despite the scant evidence and
inapplicability of antitrust law to
this matter, the FTC still managed
to exact enforceable concessions
from Google—more than many
would have expected. Not only did
it obtain a consent decree on
patent-licensing issues stemming
from Google’s acquisition of Mo-
torola Mobility, the FTC also re-
ceived enforceable commitments
related to Google’s use of snippets
from other sites in Google’s local-
review pages as well as in
removing some technical limita-
tions for their AdWords custom-
ers.
Yet FairSearch now claims that
the FTC will not act if Google fails
to live up to its promises to the
agency. Perhaps they don’t know
that in the past the FTC has
brought major actions against
other technology companies that
made such promises and, in the
FTC’s opinion, failed to honor
them. These include Twitter, Face-
book, Microsoft and, yes, Google.
In its investigation of Google
Monday, January 7, 2013 | 15
crown. Mr. Obama couldn’t even
make a deal with a man like that,
even when it would have made the
president look good.
i i i
We take political pleasure
where we can these days, so we’ll
end with the fact that 20 women
were sworn into the U.S. Senate
Thursday, up from the previous
record of 17. In an interview with
ABC’s Diane Sawyer, they spoke of
the difference they feel they make.
Susan Collins (R., Maine) said that
“with all due deference to our
male colleagues . . . women’s
styles tend to be more collabora-
tive.” Claire McCaskill (D., Mo.)
said women in politics are “less
confrontational.” Amy Klobuchar
(D., Minn.) said they are more
supportive of each other. Lisa
Murkowski (R., Alaska) suggested
women have less “ego.” Dianne
Feinstein (D., Calif.) said they’re
effective because “we’re less on
testosterone.”
It was refreshing to see so
much agreement. It was clear they
saw their presence as to some de-
gree an antidote to the roughness
and pointless ego of the Senate.
To me they seemed an antidote to
the current White House.
the FTC was thorough. Yet ulti-
mately the evidence and legal ba-
sis alleged in FairSearch’s com-
plaints were simply not there. If
Google’s competitors disagree
with the outcome, they can always
file a lawsuit on their own—
though they clearly would prefer
to lobby regulatory agencies in
the hope that one will carry their
water.
Perhaps the protests from
Google’s competitors are a sign
that the FTC has made the right
decision: preventing the agency
from becoming a tool for compa-
nies to stack the deck in their fa-
vor when they fail to compete in
the open market. The FTC knew
that a legal case was too weak to
bring, and reaching a robust and
meaningful settlement with
Google is a win for the commis-
sion itself as well as for
competition in the marketplace.
Mr. Miller served as chairman of
the U.S. Federal Trade Commis-
sion from 1981-85. He has done
consulting for Google.
16 | Monday, January 7, 2013
[ Houses Of Worship ]
BY DORIS DONNELLY
Fans of “Les Misérables” on
film or stage may be surprised to
know that not everyone in France
was of good cheer when Victor
Hugo published the book in 1862.
The anticlerical set was especially
offended by the pivotal role of the
Bishop of Digne, who helped de-
termine the course of the novel
by resuscitating the soul of Jean
Valjean.
Author Victor Hugo was
anticlerical, yet his tale’s
hero is set on course
by a Catholic bishop.
As Hugo worked on the novel,
his son Charles, then in his 20s,
objected to the reverential treat-
ment of the bishop. He argued to
his father that the portrayal gave
undeserved respect to a corrupt
clergy, bestowing credibility on a
Roman Catholic Church opposed
to the democratic ideals that he
and his father held. Charles in-
stead proposed that the catalyst
for Jean Valjean’s transformation
be a lawyer or doctor or anyone
else from a secular profession.
The pushback didn’t work. Not
only did Hugo hold his ground,
but he amplified the importance
A Dangerous Escalation in the East China Sea
BY STEPHANIE KLEINE-AHLBRANDT
The territorial dispute in the
East China Sea between the
world’s second- and third-largest
economies entered a disturbing
new phase last month with the
first direct involvement of military
forces. On Dec. 13, Japan sent
eight F-15 fighter jets after a small
Chinese propeller plane that flew
over the disputed Senkaku Islands,
called Diaoyu in China. According
to Japan, this was the first Chi-
nese intrusion into its airspace
since 1958.
There is far more at stake here
than a small cluster of islands.
Crisis mitigation mechanisms
need to be urgently reinstated and
communication increased between
Beijing and Tokyo to reduce the
risks of an accidental clash or es-
calation. China’s continuous test-
EUROPE
Tracy Corrigan, Editor in Chief, Europe
Neil McIntosh, Deputy Editor, Europe
Terence Roth, Managing Editor, Europe
Brian M. Carney, Editorial Page Editor
Lauren Berkemeyer, Advertising
Kate Dobbin, Communications
Florence LeFevre, Institutional Sales Europe
Paul Little, Consumer Sales
Michael Lloyd, Institutional Sales U.K.
Kelly Leach, Publisher
Published since 1889 by
Dow Jones and Company
© 2013 Dow Jones & Company. All Rights Reserved
The Cleric Behind ‘Les Mis’
of Charles-François Bienvenue
Myriel, affectionately known in
the novel as Monseigneur Bienve-
nue (Bishop Welcome). The book’s
first hundred pages or so are a
detailed chronicle of Myriel’s ex-
emplary life, showing that his in-
tervention on behalf of Jean
Valjean was part of a long track
record and not a singular aberra-
tion. Apparently Hugo recognized
no contradiction between his anti-
clericalism and the possibility—or
Universal Pictures
certainty—that grace could be
mediated by a just priest who was
transparent to the divine and
never betrayed the human.
Thirty years earlier, Hugo had
solidified his anticlerical creden-
tials by crafting the repulsive,
licentious Archdeacon Claude
Frollo in “Notre Dame de Paris.”
It was time to try a new approach
in “Les Misérables,” so he ren-
dered an ideal priest against
whom clergy could measure their
fidelity to tenderness and mercy.
His expectation—as we know from
the contemporaneous diary of his
wife, Adele—was that corrupt
priests would be shamed and in-
dicted by comparison with a good
one.
With Bienvenue, Hugo created
a no-frills bishop who lived in a
modest cottage, having surren-
dered his episcopal palace to the
hospital next door. There were no
locks on the doors; a simple push
of the latch allowed entry.
The bishop subsisted on less
than one-tenth of his state enti-
tlements, with the remaining
ing of Japan’s bottom line is a
dangerous game, and one that
could have consequences for the
U.S.-Japan security treaty.
Beijing is bolstering maritime
patrols of the disputed waters in a
challenge to Japan’s de facto ad-
ministration. First annexed by Ja-
pan in 1895, the small cluster of
islands and barren rocks came un-
der U.S. control after World War II
but reverted back to Japan with
the 1971 U.S.-Japan Okinawa Re-
version Treaty. They became more
desirable a few years earlier when
it was discovered that undersea
oil reserves might exist nearby.
Taiwan also claims the islands,
but has enjoyed more amicable
overall relations with Japan, and
Japan does not officially recognize
Taiwan as a sovereign state.
The dispute between China and
Japan reignited in September
when the Japanese government
announced it was finalizing the
purchase of three of the contested
islands from a private Japanese
owner. The government did this
mainly to keep the islands out of
the hands of former Tokyo Mayor
Shintaro Ishihara, a flamboyant
nationalist who had announced
that the Tokyo Metropolitan Gov-
ernment would bid on them.
Reacting with a series of what
it called “combination punches,”
Beijing threatened economic retal-
iation, launched joint combat
drills by its navy, air force and
strategic missile corps, and re-
fused to attend the annual meet-
ings of the International Monetary
Fund and the World Bank Group
OPINION
Jean Valjean (Hugh Jackman) in the ‘Les Misérables’ scene in which a bishop
‘buys’ the accused thief’s soul for God with a pair of candlesticks.
funds dispensed to provide for
the release of fathers in debtors’
prisons, meat for the soup of peo-
ple in the hospital, and other un-
popular charities. He had a sliding
scale to officiate at marriages and
preside at funerals. From the rich
he exacted more, from the poor
nothing at all.
Fearless, Bienvenue rode into
territories overrun by bandits to
visit his people. Without com-
plaint, he assumed responsibilities
that lazy curates chose not to. He
agonized over the guillotine, and
having accompanied a prisoner to
his execution he was certain—as
was Hugo himself—that anyone
witnessing the death penalty
would declare it a barbaric act
unworthy of a civilized society.
The cleric in Hugo’s novel was
without the entourage nurtured
hosted by Tokyo in October. At the
same time, violent anti-Japanese
protests—the biggest since 2005—
broke out across China.
China’s most significant move
was designed to end four decades
of Japan’s de facto control of the
islands. Beijing announced base
lines to formally demarcate its
territorial waters and sent law en-
forcement ships into disputed wa-
ters. This new strategy is a stark
China and Japan must act
now to prevent a worsening
territorial dispute from
ending in armed conflict.
departure from China’s policy
under Deng Xiaoping (Beijing’s
supremo from 1978 to 1992),
which aimed to defer the dispute
and seek joint exploitation of re-
sources with Japan.
Deng’s decision to put aside
this fundamental disagreement re-
flected the deep challenges to re-
solving the issue of island owner-
ship. Because the dispute is seen
in China as related to Japan’s im-
perial aggression, it awakens his-
torical enmities and inflames Chi-
nese nationalism. The Communist
Party has long used past invasions
and nationalism to bolster its le-
gitimacy, making any negotiations
over sovereignty extremely com-
plex.
At the root of this new flare-up
is a changing economic and power
by other bishops. There were no
opportunistic seminarians eager
to latch onto his coattails and
ride into the corridors of power.
It was clear to everyone that his
star wasn’t in ascendance. Bienve-
nue mused about seminaries that
bred sycophants, where ambition
was mistaken for vocation and
upward mobility—from a modest
biretta to a bishop’s mitre to a
pope’s tiara—was the prized tra-
jectory.
The greatest fear of young
priest recruits, Hugo explains, was
that merely associating with the
virtuous Bienvenue could unwit-
tingly cause one to convert to his
lifestyle. It was widely known that
virtue was contagious and no in-
oculation against it existed.
The trade-off for Bienvenue
was that he was loved by his peo-
balance in East Asia. Seeing Japan
on a downward slide while its own
star is rising, China feels the time
is right to stake its ground in the
dispute. International law favors
the country that has occupied or
taken measures to exercise sover-
eignty. These include submitting
claims to the United Nations, nam-
ing islands, making maps, con-
ducting law-enforcement patrols,
and eventually building structures
and inhabiting islands. China be-
lieves that it has lost out while Ja-
pan administered the islands for
decades.
Since Japan’s purchase an-
nouncement, Beijing has taken le-
gal and operational measures to
strengthen its own hand. It is tak-
ing similar steps to bolster addi-
tional sovereignty claims in the
South China Sea, as it clearly de-
sires to become a greater mari-
time power.
Neither side has a solid legal
case. Japan’s claim to sovereignty
on the basis of “discovery-occupa-
tion” centers on the assertion that
it found no trace of habitation or
control when it formally incorpo-
rated the islands in 1895. China
claims that historical and legal ev-
idence shows the islands were dis-
covered, named and used during
the Ming Dynasty (1368-1644),
controlled by the Qing Dynasty in
1895, and seized in the context of
Japanese wartime expansion. This,
Beijing argues, means they must
be handed over based on the post-
World War II peace treaty that
binds Japan to return Chinese ter-
ritory.
THE WALL STREET JOURNAL.
ple. They had a bishop whose
center of gravity was a compas-
sionate God attuned to the sound
of suffering, never repelled by
deformities of body or soul, who
occupied himself by dispensing
balm and dressing wounds
wherever he found them.
He found them in a town
called Digne, a name conveniently
derived from the Latin dignus, the
root of the word we know in
English as “dignity.” Bishop Bienv-
enue conferred dignity with
abandon on those whose dignity
was robbed by others. He had an
endless supply of his own to share
and a lot of practice when Jean
Valjean knocked on his door.
During the night he spent at
the bishop’s home, mere days
after his release from serving 19
years as galley prisoner 24601,
Jean Valjean stole six silver place
settings, was apprehended, and
returned the next morning under
police guard to face the conse-
quences of his crime. Unruffled,
the bishop brushed off the police,
added valuable silver candlesticks
to the bundle, “bought” Jean
Valjean’s soul from evil and
claimed it for God. He redirected
the life of a man chained to
hatred, mistrust and anger, and
he enabled Jean Valjean to
emerge as one of the noblest
characters in literature.
Ms. Donnelly is professor of the-
ology and director of the
Cardinal Suenens Center at John
Carroll University in Cleveland.
Continued peace in the region
hinges upon the two countries
managing their differences. Coop-
eration on joint resource manage-
ment in the East China Sea while
setting aside—but not
renouncing—maritime claims
could be a practical way to build
mutual trust and reap tangible
benefits. In 2008, the two govern-
ments came close to such a deal
but ultimately failed to overcome
domestic nationalist opposition.
Before tensions flared, both
sides had realized the danger of
maritime accidents and were com-
mitted to setting up communica-
tions systems between their de-
fense and law-enforcement bodies.
But emotion prevailed over reason
and those talks were abandoned.
Both China and Japan have
stated that a military conflict is in
no one’s interest. That offers
hope. Still, preserving peace re-
quires urgent cooperation to avoid
misfires and prevent an accident
from escalating into a skirmish. A
joint resource-development agree-
ment would take time to negoti-
ate, particularly given the steps
needed to calm nationalist anger.
But if the two sides are serious
about avoiding armed conflict,
common ground can still be found.
Both Beijing and Tokyo have new
leaders who have an opportunity
to reduce tensions at sea. They
should seize it.
Ms. Kleine-Ahlbrandt is China
and Northeast Asia project direc-
tor for the International Crisis
Group.
Pound/Euro 0.8137 À 0.23% Yen/$ ¥88.16 À 1.41% Global Dow 2051.22 À 0.39% Gold 1648.10 g 1.53% Oil 93.09 À 0.18% 3-month Libor 0.30500 10-year Treasury g 5/32 yield 1.915%

Faced With Defense Cuts, Should Investors Fear

Suppliers Diversify Euro-Zone Bond Clauses?
BUSINESS & FINANCE 18 HEARD ON THE STREET 32

Monday, January 7, 2013 THE WALL STREET JOURNAL. europe.WSJ.com

How Much Higher

Can Junk Debt Go?
BY MATT WIRZ
AND PATRICK MCGEE
Junk bonds started 2013 much
like they finished 2012—on fire.
In just three trading days this
year, bonds of low-rated companies
delivered returns of almost three-
quarters of a percent, even as most
other types of bonds lost value.
And junk bonds
ABREAST OF continued to clock
THE MARKET new milestones: Av-
erage prices soared
to their highest since 2004 and av-
erage yields, which decline as prices
rise, dropped below 6% for the first
time ever, according to Barclays
PLC.
But the rapid march is making
fund managers and analysts wary.
Charles Schwab Corp.
That is creating a dilemma for
many fund managers. Most say they
still want to own junk bonds, in
large part because they yield some
five percentage points more than
U.S. Treasury bonds. As well, com-
panies will likely benefit as the
economy improves, they argue.
But with so few bargains left,
many fund managers are rethinking
what and when they buy.
Tom O’Reilly, who co-manages
$22 billion of high-yield investments
at Neuberger Berman Group, says
he has been selling lower-rated
companies and buying higher-qual-
ity ones, raising the average credit
rating of his investments above that
of the index he tracks.
“We do upgrade the quality of

Prices are now so high—averaging
more than 105 cents on the dollar—
that there is little room for them to
climb much further, some investors
say. These are lofty prices for bonds
that usually trade below 100 cents,
Bloomberg News
the portfolio as yields tighten,” Mr.
O’Reilly says.
Ms. Jones is also recommending
investors move out of the most
risky of high-yield debt into bonds A bet against Herbalife by hedge-fund manager William Ackman, above in December, caused many investors to flee.
that are more highly rated.

reflecting the higher default risk for
such companies.
At the very least, returns will
pale in comparison with the 15%
achieved in 2012, analysts and in-
Herbalife’s Proponents
Others are looking further off
the beaten path for bargains in debt
of smaller companies that are less-
often traded but often have high
yields.

Stand by the Company

vestors say. “We continue to pick up extra
“It’s probably the tail-end of this yield by focusing on smaller deal
run,” said Kathy Jones, a fixed-in- size,” said David Breazzano, who
come strategist at retail broker Please turn to page 21

BY DANA MATTIOLI ents, not her cut of her recruits’ prising weight loss courtesy of
New Lows AND EMILY GLAZER take. Herbalife. Many of the people con-
As prices soared, yields on junk bonds last Mr. Ackman’s declaration that he tacted for this article said they had
week fell below 6% for the first time on record. When hedge-fund manager Wil- had bet $1 billion against Herbalife doubts about the company’s busi-
6.4% liam Ackman unveiled his 334-slide caused many investors to flee, send- ness model before signing up, but
25% Friday: 5.9% show alleging that Herbalife Ltd. is ing the stock down 38% in four days became believers thanks to the
6.2 a pyramid scheme, it did nothing to in late December. But some of the products.
Barclays U.S.
Corporate High
shake Joanne Clare. company’s 3.1-million-strong army The core of Mr. Ackman’s argu-
20 6.0 The 38-year-old Staten Island of distributors were unmoved. ment is that Herbalife makes its
Yield index
mother of three has been selling the Direct-sales networks have long money by selling products into its
5.8 company’s weight-loss products and worked in a similar fashion, with network of distributors rather than
15 Dec. 2012 Jan. supplements since 2004, when she fervent members spreading the unaffiliated consumers. The busi-
says they helped her drop from 95 to word to new converts. People sign ness, he said, depends on its ability
10 72 kilograms in four months. She up hoping to supplement their in- to pull in new recruits, because ex-
now sells as much as $3,500 a comes or strike it rich outside the isting distributors drop out at high
month of Herbalife products to her constraints of traditional work. rates.
5 30 clients and the two distributors The result at Herbalife is a cheer- Herbalife has called the allega-
in her “down line. leading sales culture that has weath- tion malicious, saying it is based on
“People have always said it’s a ered a string of assaults from Wall distorted information, and has ac-
0 pyramid scheme, but it’s not,” Ms. Street and naysayers. Among sales- cused Mr. Ackman of trying to ma-
2007 '08 '09 '10 '11 '12 '13 Clare said, adding that the bulk of people in the field and executives at nipulate its stock, a charge the
Source: Barclays The Wall Street Journal
her earnings come from sales to cli- the company, tales abound of sur- Please turn to page 22

At Electronics Show, Gadgets Display a Sixth Sense

BY DON CLARK
LAS VEGAS—Entirely new prod-
uct categories seem scarce as Amer-
ica’s largest gadget show convenes
here this week. But there is plenty
of action in making today’s products
smarter.
The push exploits more-sophisti-
cated computer chips and software
that are rapidly arriving in televi-
sions, smartphones, videogame con-
soles, home appliances and other
devices. Technology companies vow
to help gadgets more effectively ex-
change information and track users’
movements, gestures, voices and
even intentions.
In some cases, the benefit might
be replacing a complicated TV re-
mote control or the act of swiping
fingers across a display screen. But
a hot buzz phrase at this year’s
Consumer Electronics Show is “con-
text awareness”—enabling products
like smartphones or set-top boxes
to pick up clues to users’ desires
and respond without the need for
commands.
“We are at the inflection point
where we are starting to see the be-
ginnings of these possibilities,” says
Mark Papermaster, senior vice pres-
ident and chief technology officer of
chip maker Advanced Micro De-
vices Inc.
Semiconductor makers expect to
play a central role in developing
such capabilities. They are among
the most active participants at the
big trade show, which kicked off
with press events Sunday and is ex-
pected to draw some 150,000 indus-
try professionals Tuesday through
Friday.
The first CES keynote, for exam-
ple, will be hosted Monday night by
Paul Jacobs, chief executive of Qual-
comm Inc., the largest supplier of
chips for smartphones. He assumes
a slot that for years was held by Mi-
crosoft Corp., first by co-founder
Bill Gates and more recently by
Steve Ballmer, the software com-
pany’s chief executive.
Mr. Jacobs used the 2012 CES
show to announce a Qualcomm-
funded $10 million prize to spur de-
velopment of a mobile medical com-
puting device, styled after the
tricorders on “Star Trek.” This year
he has promised to bring an array of
inventors and inventions to the
stage, many pointing to the possibil-
ities enabled when mobile devices
exchange data with devices such as
sensors in the home, on a user’s
body or in cars.
Qualcomm describes the smarter
Please turn to page 22
18 | Monday, January 7, 2013 THE WALL STREET JOURNAL.

BUSINESS & FINANCE

U.S. Defense Firms Feel Pinch

BY DION NISSENBAUM
IndiaSends
Vodafone
Dawne Hickton has seen the fu-
ture—and it is old people.
ANewNotice
After building a business largely
on selling titanium to the U.S. de-
fense industry, Ms. Hickton is turn-
ForTaxBill
ing her sights to health care. BY RUMMAN AHMED
RTI International Metals Inc., AND DHANYA ANN THOPPIL
of which Ms. Hickton is chief execu-
tive, last year paid $182 million to BANGALORE—Indian officials
buy a medical-device business, gain- sent Vodafone Group PLC another
ing access to the market for spinal notice that it owes more than $2
implants and other products for the billion in taxes on its purchase of a
nation’s growing numbers of senior stake in a domestic telecommunica-
citizens. “That’s a future for us—the tions company in 2007, Vodafone
elderly population,” Ms. Hickton said Saturday.
says. “That’s a growing market. We The U.K.-based company said the
don’t know what the defense market notice didn’t mention a deadline,
is going to do.” and that it replied to the govern-
Over the past three years, she ment that “it continues to believe
says, Pittsburgh-based RTI’s defense that no tax is payable on this trans-
work has been cut in half, falling to action.”
20% of the company’s revenue from A senior tax official confirmed a
40%. notice was sent.
Faced with more defense cuts on The Vodafone tax case has
the horizon, RTI is part of a broader stoked concerns among foreign in-
shift by defense companies, large vestors, especially after the Indian
and small, looking for ways to con- government last year amended a
Reuters

tend with lost business. Some of law to permit retroactive taxation of

them are diversifying. Others are
shedding unprofitable segments,
closing plants or laying off workers.
Many are looking to increase sales
on the international market.
“What we’re about to go through
happens once every 20 to 30 years
in the industry, and it requires dif-
ferent thinking and behavior to suc-
ceed,” says Erich Fischer, a partner
at consulting firm Booz & Co.
The challenge stems from the
Obama administration’s attempts to
move from a post-Sept. 11, 2001,
“war on terrorism” mind-set to a
post-Afghanistan-war period. That
shifting worldview has led to an
agreement with Congress to cut
$487 billion from the defense bud-
get over the next 10 years.
Even if U.S. lawmakers avert
$500 billion in additional cuts over
the next decade that were put on
hold by this week’s fiscal-cliff agree-
ment, the Pentagon is expected to
face additional reductions in any
deal to cope with a fragile economy
and massive debt. Meanwhile, the
U.S. is preparing to end major com-
bat operations in Afghanistan and
more than a decade of ground oper-
ations in the Mideast.
Those factors are generating
anxiety among defense companies.
“Nothing changes table manners
faster than a smaller pie,” a top in-
dustry executive says. “And we are
all competing for less.”
The last big decline in military
spending came at the end of the
Cold War in the 1990s, when the
U.S. closed 350 military installa-
The U.S. has sold Lockheed Martin’s F-35 Joint Strike Fighter, above, to allies including Turkey, Italy, Denmark and the U.K.
tions. Defense companies responded
with a series of mergers that shrank
the number of major contractors
working with the Pentagon.
In 2011 the top five U.S. defense
contractors secured more than a
quarter of all military spending. The
Obama administration is opposed to
moves that would decrease competi-
tion further, so analysts don’t ex-
pect any consolidation at the top of
the food chain.
But European Aeronautic De-
fence & Space Co.’s unsuccessful at-
tempt last year to purchase Britain’s
BAE Systems PLC suggests that at
least one merger among the next tier
of Pentagon contractors could be on
deck within a few years. BAE, in par-
ticular, holds an especially coveted
New Hampshire unit that makes
equipment for military surveillance.
As U.S. military dollars shrink,
large defense contractors are laying
off workers, closing plants and con-
solidating operations.
Boeing Co., the country’s No. 2
defense contractor, is closing opera-
tions in Kansas and California. Boe-
ing said in November that it would
cut 30% of its management jobs and
consolidate units in its defense,
space and security business. The
Chicago-based company has cut $2
billion in costs since 2010 and plans
to slice another $1.6 billion through
the consolidation, says spokesman
Todd Blecher.
Smaller defense contractors also
are looking to streamline and to fo- Navy submarines.
cus on new areas, such as cyberse- L-3 Chief Executive Michael Stri-
curity or unmanned vehicles. L-3 anese says defense companies have
Communications Holdings Inc., a to be careful as they move into new
top-10 U.S. defense contractor, spun ventures. “I don’t think it’s a good
off its consulting and government- strategy for defense companies to
services work in July as it moved to wander too far outside their core
reinvent itself. areas,” he says. “We’ve all done that
The New York company paid at some point in our lives, and it
$130 million in August to buy a Brit- usually doesn’t end well.”
ish aircraft training-and-simulation “There’s not a silver bullet out
business. In February L-3 paid $210 there that will solve everybody’s
million for a unit of Washington- problem,” Mr. Strianese says.
based Danaher Corp. that makes so- To make up for dwindling oppor-
phisticated electrical units for U.S. tunities in the U.S., companies also
are looking to increase sales over-
seas, with emerging markets in Brazil
Big Shift and India appearing especially fruit-
ful. As the U.S. shifts more strategic
U.S. arms sales to resources to Asia, arms sales to U.S.
developing nations allies in the region are also expected
$60 billion to rise. To help facilitate that effort,
the Obama administration has moved
to ease export controls to help com-
45 panies sell arms abroad. In November
L-3 secured a $23 million deal to help
train some Iraqi military pilots.
American companies have been
30
lobbying Washington to ease export
controls further. They recently se-
cured support from Congress to ex-
15 pand satellite sales abroad, some-
thing that could give a boost to
Boeing, among others.
0 Meanwhile, though, U.S. defense
2004 '05 '06 '07 '08 '09 '10 '11 contractors are facing new competi-
Source: U.S. Congressional Research Service tion in the U.S. market from foreign
The Wall Street Journal companies, including EADS and
Switzerland’s Pilatus Aircraft Ltd.
deals in which foreign companies
take over domestic assets. The cash-
strapped government is keen to
raise revenue as the nation’s econ-
omy slows.
The tax case has stoked
concerns among foreign
investors of fresh tax
demands on past deals.
The tax claim against Vodafone
stems from its $11.2 billion purchase
of 67% of the Indian operations of
Hutchison Whampoa Ltd. The mo-
bile-phone company, now named
Vodafone India Ltd., is the country’s
third-largest by customer volume.
India had sought to penalize
Vodafone for not paying taxes on
the deal. Tax officials had previously
said it was liable for about $3.75 bil-
lion in taxes, interest and penalties.
Vodafone scored a victory in
January 2012, when India’s Supreme
Court ruled that it didn’t have to
pay tax on the transaction because
it was between two foreign compa-
nies—the Dutch unit of Vodafone
and a Cayman Islands-registered
unit of Hutchison.
The new tax law was intended to
override the Supreme Court’s ruling.
It drew criticism from foreign in-
vestors who said they feared it
would lead the authorities to make
fresh tax demands on already con-
cluded deals.

Businesses Advanced Micro
This index of businesses Devices.......................17
mentioned in today’s Akzo Nobel ................... 32
issue of The Wall Street Atmel ............................ 22
Journal is intended to BAE Systems................18
include all significant
Banco Bilbao Vizcaya
reference to companies. Argentaria S.A. ......... 24
First reference to the
Bank of America......20,21
companies appears in
bold face type in all Barclays...............17,20,32
articles except those Berkshire Hathaway.....21
on page one and the BHP Billiton..................32
editorial pages. Boeing...........................18
Broadcom......................22
Charles Schwab............17
Chrysler Group..............18
Citigroup ....................... 20
Clearwire.......................21
Cnooc...............................6
Danaher.........................18
DDJ Capital
Management..............21
European Aeronautic
Defence & Space.......18
Federal Reserve............20
Fiat................................18
Fifth Third Bancorp......20
Fortescue Metals
Group..........................32
France Telecom.............22
Goldman Sachs Group..32
Google...........................19
Greenlight Capital........22
Hawker Beechcraft.........6
Herbalife.......................17
INDEX TO BUSINESSES
Hutchison Whampoa....18
Intel...............................22
J.P. Morgan Chase...20,21
L-3 Communications
Holdings.....................18
Lubrizol ......................... 21
Medifast........................22
Microsoft..................17,19
Morgan Stanley............20
Morningstar..................21
Neuberger Berman
Group..........................17
Nexen..............................6
Nutrisystem..................22
Omek Interactive..........22
Pershing Square Capital
Management..............22
Pilatus Aircraft.............18
Qualcomm.....................17 Corrections  Amplifications
Reis ................................. 7
Fiat SpA says that it wants to increase its stake in Chrysler
Rio Tinto.......................32
Group LLC to facilitate a merger of the auto makers. A Business
RTI International & Finance article in the Friday-Sunday edition said it wanted to
Metals........................18
gain more control because Chrysler’s cash would ease the strain
Samsung Electronics....19
on Fiat’s finances.
Sirius XM Radio ........... 21
Sony Kapoor, head of economic-policy consultant firm Re-Define,
Telefon L.M. Ericsson
Series B ..................... 19 said that the main question in Germany’s election will be what
wins votes, “rather than what is the best way of reducing public
Tupperware Brands ...... 22
indebtedness…and restoring growth” to Europe. A Europe News
UBS ............................... 32
article Wednesday incorrectly quoted Mr. Kapoor as saying
U.S. International Trade “rather than what is the best way of not reducing public indebt-
Commission...............19 edness.”
Vodafone.......................18
Readers can alert the London newsroom of The Wall Street Journal to any errors
Weight Watchers in news articles by emailing wsjcontact@wsj.com or by calling +44 (0)20 7842 9901.
International..............22
THE WALL STREET JOURNAL. Monday, January 7, 2013 | 19

BUSINESS & FINANCE

How Google Escaped a U.S. Case U.S. to Probe

Ericsson’s
After early hopes for a sweeping
antitrust case against Google Inc., it
became clear to the U.S. Federal
Trade Commission last fall that no
Samsung
such lawsuit was in the offing.

By Brent Kendall,
Complaint
Amir Efrati, Thomas Catan BY SVEN GRUNDBERG
and Shira Ovide
STOCKHOLM—The U.S. Interna-
A clinching moment came in No- tional Trade Commission has de-
vember when FTC staff, who had ex- cided to investigate whether to
haustively investigated the Internet grant Ericsson’s request for an im-
search giant for 18 months, told the port ban against Samsung Elec-
five FTC commissioners that they tronics Co., putting further pressure
shouldn’t bring a broad antitrust on the South Korean consumer-elec-
case, rebutting the theory that tronics giant in a continuing patent
Google abused its dominant market battle.
position in Internet search to favor The Swedish mobile-network
its own products and services. maker last month asked the ITC to
Instead, in a series of packed ban imports of Samsung products
meetings at room 432 of FTC head- into the U.S., saying Samsung had
quarters on Pennsylvania Avenue in continued to sell its products before
Washington, D.C., they recommended reaching a new patent-licensing
pursuing smaller issues. That culmi- agreement with the Swedish com-
nated Thursday in an announcement pany. Samsung says it has tried to
Andrew Harrer/Bloomberg News

by the FTC that it wouldn’t bring negotiate with Ericsson on a new

sweeping charges against Google. deal but has failed due to the “ex-
The Mountain View, Calif., com- treme demands” put forward by Er-
pany agreed to make voluntary and icsson.
nonbinding changes to some aspects The ITC complaint stems from a
of its search business, in what has lawsuit that Ericsson filed in No-
been widely hailed as a victory for vember against Samsung in a U.S.
the Internet behemoth. federal court in Texas for allegedly
People familiar with the FTC’s FTC Chairman Jon Leibowitz, seen above last week, was encouraged by Sen. Mark Udall to proceed ‘cautiously’ in the infringing a number of its mobile-
probe said both staff and several agency’s probe of Internet companies, which ‘have some of the highest consumer satisfaction rates in the country.’ technology patents.
commissioners felt that Google en- The decision by the ITC to inves-
gaged in questionable behavior, but investigation was being leaked to re- John Sampson, a director of Micro- clusion, particularly on the agency’s tigate Ericsson’s request for an im-
they struggled to come up with a porters. soft’s federal politics operations, last acceptance of Google’s voluntary port ban was made on Thursday, a
convincing theory of how consumers, One of them was U.S. Senator year urged at least one member of changes. spokesman for Ericsson said Friday.
and not just competitors, were John Kerry, a democrat from Congress from Washington state not Mr. Leibowitz defended the com- Ericsson estimates that the ITC in-
harmed. Massachusetts, who spoke with Mr. to support a Google event in Seattle mitments the FTC extracted from vestigation could take more than a
Even if some in the commission Schmidt by phone in November, said last year called “Get Your Business Google, saying they would benefit year.
didn’t like what Google was doing, a person familiar with the matter. Online” that catered to small busi- American consumers in a timely way. In a statement, the ITC said it
they concluded the tactics weren’t It is unclear what the men spoke nesses. “It is good for consumers, it is good would assign the case to one of its
necessarily violating antitrust law, about, but during a December Senate In an email to a congressional of- for competition, it is good for inno- six administrative law judges, who
people familiar with the process hearing involving nominees to posts fice in March 2012, Mr. Sampson said vation, and it is the right thing to then will schedule and hold an evi-
said. At the same time, Google had at the FTC and other agencies, Mr. such events were partly aimed at so- do,” he said. dentiary hearing on the case. Within
also undertaken extensive efforts to Kerry stated that FTC investigations liciting small businesses to support But one commissioner, J. Thomas 45 days after starting the investiga-
set an escape hatch from U.S. anti- and settlement negotiations had be- Google. Rosch, who in November had offered tion, the trade agency is due to set
trust efforts. come “poorly kept secrets” and sug- “Although these programs have up a new, alternate theory on how a target date for completing it.
The Internet company spent gested that the agency’s delibera- an air of goodness,” he wrote in the the agency could proceed with a Samsung didn’t respond immedi-
years on lobbying and other efforts tions were being leaked for email reviewed by The Wall Street broad case against Google that found ately to a request for comment.
to build up goodwill in Washington, “strategic advantage.” Journal, “Google is in fact using this no support among the other four The telecom industry has seen a
becoming the fifth-highest spender An FTC spokeswoman declined to program to develop a grass-tops net- commissioners, in a dissent ex- rash of patent disputes over the
on lobbying in 2012, shelling out comment. work” of small businesses they can pressed worry that the FTC had set past years. Several of the continuing
more than $14 million related to the “activate to their defense” if the FTC a bad precedent for future negotia- suits relate to so-called standard es-
antitrust probe and other issues, ac- tries to bring a case. tions with other companies. sential patents, which protect inven-
cording to the nonpartisan Center Even if some in the Google spent millions of dollars Since Google wasn’t held to a tions that are incorporated into
for Responsive Politics and lobbying on Get Your Business Online, a na- binding legal commitment in its broader technologies used through-
disclosure statements. commission didn’t like tionwide campaign that included search business, “going forward, par- out the industry.
Google also dispatched executive what Google was doing, multiday workshops in states such as ties under investigation are likely to According to the Texas court fil-
chairman Eric Schmidt and other Iowa and Texas in which Google demand similar treatment,” Mr. Ro- ings, Ericsson says Samsung is seek-
employees to garner support from they concluded the tactics helped local businesses set up web- sch said. “Failure to do so would im- ing to drastically reduce the fee it
lawmakers, adding political pressure weren’t necessarily sites and an online business listing ply that Google has received prefer- pays Ericsson to license these kinds
to the landscape. In November, for tied to its search engine, free of ential treatment in this of patents. Ericsson has said all lic-
instance, staff members of U.S. Sena- violating antitrust law. charge. investigation.” ensees should pay fees for its stan-
tor Mark Udall, a Democrat from Col- Some Washington lobbyists, in- Meanwhile, Google’s rivals con- dard essential patents on the same
orado, spoke with Google representa- cluding those who have done work tinue to hold out hope that regula- terms. Samsung, on the other hand,
tives. People close to the FTC’s probe for Google, said that the Get Your tors elsewhere—such as in Europe has said Ericsson’s licensing fees are
Afterward, Mr. Udall sent a letter said the agency decided not to pur- Business Online effort has perhaps and among U.S. state attorneys gen- too high.
to FTC Chairman Jon Leibowitz, en- sue charges against Google because had more impact on federal lawmak- eral—will trip up the Web giant. Ericsson said in the lawsuit that
couraging the agency to proceed they couldn’t make a case, not be- ers than any lobbying done on Capi- A spokesman for the European Samsung has sold “hundreds of mil-
“cautiously” in its probes of Internet cause they were being pressured po- tol Hill. Commission’s antitrust watchdog lions of unlicensed cellular hand-
companies, which “have some of the litically. A Google spokesman declined to told several news outlets on Friday it sets, smartphones, tablet comput-
highest consumer satisfaction rates The FTC’s decision also shows comment. A Microsoft spokesman had “taken note” of the FTC decision ers, and televisions” since its
in the country” and have created how anti-Google lobbying from rivals declined to comment on Mr. Samp- but it had no “direct implications for agreement with Ericsson expired in
millions of jobs. like Microsoft Corp. had little effect. son’s outreach efforts. our investigation.” 2011. These include the flagship Gal-
Mr. Udall later spoke by phone Microsoft had pressed regulators Within the FTC, Mr. Leibowitz The Texas state attorney gen- axy S III smartphone, which has
with Google’s Mr. Schmidt about the to bring an antitrust case against over the fall told several parties that eral’s office said its parallel probe of sold more than 30 million units
letter and other matters, said Mr. Google. the Web-search case against Google Google’s search-engine practices, since it was introduced in May.
Udall’s communications director, The Redmond, Wash., software would be hard to win, according to which includes other states such as Samsung previously signed two
Mike Saccone. company had 73 registered lobbyists the people familiar with the probe. Ohio, would continue. Texas, which large cross-licensing agreements
He added that the senator “has a on its payroll in 2012 to work with The agency increasingly turned declined further comment, has bat- with Ericsson, the first in 2001 and
great working relationship with com- Congress, the FTC and other its attention to other issues, includ- tled with Google to obtain certain later in 2007.
panies that do business in Colo- government agencies, according to ing whether Google misused certain company documents that Google said The latest of the licensing agree-
rado…such as Google. the Center for Responsive Politics. key patents it acquired when it were privileged and shouldn’t be ments expired in 2011, and two
Mr. Udall’s letter to Mr. Leibow- Microsoft has also helped bank- bought handset maker Motorola Mo- part of the probe. years of negotiations have failed to
itz, which was reviewed by The Wall roll FairSearch.org, a coalition of bility. Google settled that charge “I would call [the FTC decision] reach a new deal.
Street Journal and earlier reported technology companies opposed to Thursday. The company gave adver- maybe the conclusion of one battle, As part of the November suit, Er-
by Politico, was one of many such Google. tisers more flexibility to use rival and the war rages on,” said Patrick icsson has called for the Texas court
letters that the FTC received from “We engage lobbyists in D.C. to search-engine ad systems and said it Lynch, a former Rhode Island attor- to impose an injunction against all
Congress. help on many diverse topics, as would allow rivals to opt out of hav- ney general who says he has lobbied Samsung products that allegedly in-
Some lawmakers publicly ex- reflected in our lobbying disclosures- ing their content appear on some officials in virtually every state on fringe Ericsson’s patents, potentially
pressed concerns that were shared ,” a Microsoft spokesman said. Google websites. behalf of FairSearch, the group push- pulling Samsung products from U.S.
by Google—namely, that too much In a sign no Google effort was too The FTC ultimately ended up ing for antitrust action against store shelves if Ericsson wins the
inside information about the FTC’s small to go unnoticed by Microsoft, badly splintered on the probe’s con- Google. case.
20 | Monday, January 7, 2013
U.S. Banks Readying New Payout Plans
BY SUZANNE KAPNER
AND DAN FITZPATRICK
Citigroup Inc. will seek permis-
sion for its first share buyback since
2007 as part of the latest Federal
Reserve “stress tests,” according to
people familiar with the company’s
plans.
The request by the New York
company, a year after the Fed re-
jected another plan, is expected to
be “minimal,” according to those
people. But it is the latest sign that
giant lenders are ready to flex their
financial muscle amid rising inves-
tor expectations for bank shares.
The 19 largest U.S. banks must
submit by Monday their plans to re-
turn capital to shareholders as part
of an annual Fed-supervised exer-
cise that tests whether they have
enough capital to keep lending dur-
ing a severe economic downturn.
“These banks are strong and
have too much capital now,” said
RBC Capital Markets analyst Gerard
Cassidy, who predicts all major
banks that ask for dividends and
buybacks in 2013 will be approved.
J.P. Morgan Chase & Co., the
largest U.S. bank by assets, is ex-
pected to submit a plan that calls
for both a dividend rise and a share
repurchase despite more than $6
billion in trading losses during 2012,
said a person familiar with the com-
pany’s plans.
Big Drop
Dividend payments by 19 large U.S.
financial firms subject to Federal
Reserve ‘stress test’
$50 billion
40
30 $15.9
BILLION
20
10
0 At the same time, financial pres-
'07 '08 '09 '10 '11 '12*
*Through Sept. 30 Source: SNL Financial
The Wall Street Journal
Basel Rule Makers Ease Burden on the World’s Lenders
Continued from first page
fewer than half of the world’s top
200 banks were set to comply with
the rule and that they would need to
come up with a total of about €1.8
trillion ($2.35 trillion) in highly liq-
uid assets to satisfy the ratio when
it took effect in 2015.
Sunday’s announcement dramati-
cally eases that burden. Mervyn
King, the Bank of England governor
who has led the negotiations, said at
a news conference Sunday that “the
vast majority” of those 200 banks
already comply with the relaxed
standards, although that is partly
because of the extraordinary efforts
to make funds available many cen-
tral banks have made to ease the
lingering financial crisis.
Mr. King disputed that the revi-
sions to the liquidity rule amounted
to it being watered down. “It’s in
the eye of the beholder as to
whether these [changes] are mate-
rial or not,” he said. “Clearly one of
the aims of this was to listen to the
comments that people had made.”
He added: “Nobody set out to make
THE WALL STREET JOURNAL.
BUSINESS & FINANCE
Citigroup and Ohio’s Fifth Third
Bancorp, both of which had capital
requests rejected by the Fed last
year, are among the institutions that
intend to ask for dividend increases
or buybacks. Morgan Stanley isn’t
expected to ask for a dividend or
buyback, focusing instead on win-
ning Fed approval to complete this
year a plan to take full ownership of
a wealth-management unit.
The deadline for the stress tests
comes as investors are flooding into
bank stocks in the expectation that
dividends and share repurchases are
on the verge of taking off after the
lean years that followed the finan-
cial crisis.
The KBW index of commercial
bank stocks is up 4.8% this year af-
ter posting a 30% rise in 2012. Bank
of America Corp., the biggest stock-
market gainer last year among large
U.S. financial firms with a 109%
jump, this week surpassed $12 a
share for the first time since May
2011.
The rally is based partly on the
Reuters
expectation that “more banks will
be buying back more stock,” said Ja-
son Goldberg, an analyst at Bar- Bank of America CEO Brian Moynihan is shown speaking at the Washington Ideas forum in October 2011.
clays.
Payouts are still low compared to ica Chief Executive Brian Moynihan Michael Corbat, the new CEO, have J.P. Morgan became more opti-
several years ago. The stress test said at an investor conference last told executives that under no cir- mistic about how regulators might
banks’ dividend yield, measuring the month that the company faces a “re- cumstances will Citigroup repeat react to future requests after the
annual dividend payout as a propor- curring earnings question.” last year’s stress-test failure. Bank Fed in November cleared a resump-
tion of a company’s stock price, av- Net income at the Charlotte, officials will submit a minimal buy- tion in its buyback program for the
eraged 1.71% through the first nine N.C., company dropped to $340 mil- back request, said the people famil- first quarter of 2013. The bank
months of 2012, according to data lion in the third quarter from $6.23 iar with the plans. halted all buybacks after trading
tracker SNL Financial. That com- billion a year earlier, thanks in part No dividend-increase request is losses in its Chief Investment Office
pares with 4.88% in 2008 and 3.86% to $1.6 billion in legal costs. expected from the current penny a came to light in May 2012, and the
in 2007, before the crisis began. The company’s return on tangi- quarter, reflecting the company’s re- Fed examined the company’s capital
Started in 2009, the annual ble shareholder equity, a measure of luctance to risk rejection, they position before allowing the pro-
stress-test process has emerged as a investment performance, was 2.9% added. gram to continue, said the person
central feature of how the Fed su- in the first nine months of 2012. A Citigroup spokesman declined familiar with the company’s plans.
pervises the nation’s largest banks. A Bank of America spokesman to comment. Fifth Third CEO Kevin Kabat told
Potentially helping banks in their declined to comment on whether it Morgan Stanley is likely to focus investors at a December conference
quest to return capital is a revision will request a dividend or to buy its stress-test request on plans to that the bank was “aiming” for a
to this year’s rules that gives banks back stock. purchase the rest of a wealth-man- dividend payout equivalent to
a chance to reduce dividend or Citigroup is expected to substan- agement joint venture it has with roughly 30% of earnings and a share
share-buyback proposals before the tially scale back from last year’s lev- Citigroup, people familiar with the repurchase “aimed to manage capi-
central bank broadly discloses els its request to buy back stock, ac- securities firm’s strategy said. Offi- tal at relatively stable levels.”
stress-test results. The clause could cording to the people familiar with cials are expected to argue that Fifth Third last year failed ini-
give banks leeway to make higher the company’s plans. 100% ownership of the business, tially to win approval for a plan to
requests by reducing the fear that Regulators last year rejected its called Morgan Stanley Wealth Man- return cash to shareholders but re-
they will face a humbling public re- plan to repurchase as much as $8 agement, would boost growth with- submitted a plan that the Fed ac-
jection. billion worth of shares over two out adding risk. Taking full control cepted, allowing the company to in-
years, in a black eye for the bank would cost Morgan about $4.7 bil- crease its dividend by 25% in
sures continue to bear down on that helped lead to the departure in lion. September and repurchase shares.
banks amid profit-sapping low inter- October of former CEO Vikram Pan- The company currently owns —Aaron Lucchetti
est rates, uneven economic growth dit. 65% of the brokerage and Citigroup and Shayndi Raice
and tough new rules. Bank of Amer- Chairman Michael O’Neill and 35%. contributed to this article.
it stronger or weaker, but to make it tial mortgage-backed securities, a to have on hand.
more realistic.” priority for the U.S. banking indus- In addition, whereas the original
Stefan Ingves, the Swedish cen- try. U.S. lenders are sitting on tril- rule was supposed to kick in on Jan.
tral banker who chairs the Basel lions of dollars of such assets, which 1, 2015, banks now will only have to
group, described the liquidity rule played a central role in the 2008 be partly in compliance by then.
as “quite an achievement and some- U.S. banking crisis. The value of From that point, the requirement
thing that will be very, very helpful those securities will be discounted will be gradually phased in over the
when it comes to ensuring global fi- by 25% when their contribution to next four years.
nancial stability.” banks’ liquidity totals is calculated. A key question is the fate of an-
The biggest changes to the rule In another concession to the in- other liquidity rule, known as the
involve what banks are allowed to dustry, the Basel negotiators “net stable funding ratio,” that was
count as “high-quality liquid as- changed their assumptions regard- part of the original Basel III pro-
sets.” The Basel Committee in 2010 ing the severity of the crises banks posal but has since been in a state
European Pressphoto Agency
drafted the rule narrowly, including realistically might face, and will of limbo. The banking industry
government bonds, cash parked at have to be able to withstand under views that rule, intended to keep
central banks, and little else. The the new rule. banks from relying too heavily on
banking industry campaigned for a For example, the original rule short-term borrowing to fund long-
more diverse array of assets to stated that banks needed to assume term loans, as more onerous and ill-
count—everything from blue-chip that, in a theoretical 30-day crisis, conceived than the liquidity cover-
stocks to mortgage-backed bonds to they would see 5% of their retail de- age ratio. Some executives say they
stashes of gold. Bank of England chief Mervyn King posits vanish. The banking industry think it ultimately will be left on the
Regulators initially scoffed at the argued that was unrealistically cutting-room floor.
industry’s arguments as reflecting to people involved in the negotia- harsh. Sunday’s rule lowers the level But Mr. King on Sunday shot
banks’ eagerness to return to their tions. to 3%. And instead of assuming that down that notion. He said the Basel
reckless precrisis ways. But the Eu- Ultimately, the negotiators corporate clients would draw down Committee plans to soon turn its at-
ropean debt crisis, which has seen agreed to let banks use less-tradi- their credit lines by 100% in a crisis, tention to the net stable funding ra-
some governments’ bonds become tional assets to satisfy up to 15% of the figure has been changed to 30%, tio, describing it as an “absolutely
junk-rated and illiquid, helped their requirements under the rule. a shift that significantly lowers the crucial” part of ensuring financial
prompt a reassessment, according Those include highly-rated residen- amount of liquid assets banks need stability.
THE WALL STREET JOURNAL.
Ex-Protégé Criticizes
Buffett Over Comments
BY SERENA NG
AND JEAN EAGLESHAM
Former Berkshire Hathaway
Inc. executive David Sokol had
harsh words for his onetime men-
tor, billionaire investor Warren
Buffett, the day after Mr. Sokol was
notified he wouldn’t face regula-
tory action for his trading activi-
ties.
Mr. Sokol was once seen as a
potential successor to Mr. Buffett,
but his shot at running the Omaha,
Neb., conglomerate ended with his
resignation in March 2011 amid dis-
closures he had personally pur-
chased stock in a chemicals com-
pany not long before
recommending that Mr. Buffett buy
it.
Mr. Buffett had praised Mr.
Sokol’s contributions to Berkshire
upon the executive’s departure and
said he didn’t feel the trades were
“in any way unlawful.” But weeks
after the resignation, the Berkshire
Hathaway CEO made scathing re-
marks about Mr. Sokol’s actions,
calling them “inexcusable” and “in-
explicable” and saying they vio-
lated the company’s code of ethics.
Mr. Sokol’s lawyer said Thurs-
day that he was informed that the
Securities and Exchange Commis-
sion wouldn’t take action against
his client.
In a sign that the rift is unlikely
to heal soon, Mr. Sokol on Friday
lashed out at the 82-year-old Mr.
Buffett.
“I will never understand why
Mr. Buffett chose to hurt my family
in such a way, but given that he is
rapidly approaching his judgement
How Much Can Junk Bonds Rise?
Continued from page 17
runs $5 billion of high-yield invest-
ments for institutional clients at
DDJ Capital Management LLC.
While the debt can be more diffi-
cult to trade, and is often lower-
rated, it can yield an average of 10%,
Mr. Breazzano says. That creates an
opportunity for investors willing to
analyze smaller companies and buy
for the long term, he says. Such in-
vestments can suffer sharp price
drops when markets turn volatile.
DDJ offers the strategy to investors
who are willing to buy and hold.
Most fund managers are predict-
ing returns of 6% to 9% this year,
roughly in line with the interest
rates, or coupons, junk bonds pay.
That compares with forecasts for re-
turns below 2% for investment-
grade corporate bonds.
But coupon-like returns have
been rare for junk bonds histori-
cally. Junk bonds are typically vola-
tile—often swinging wildly from one
year to the next. Only once in the
last 33 years have junk bonds deliv-
ered a total return within one per-
centage point of the coupon value at
the start of the year, according to
research by Bank of America.
“Things often go either very well
or badly for this market, making a
‘coupon-clipping’ experience a rare
luxury indeed,” the bank’s analysts
wrote in a Dec. 26 report.
The Bank of America analysts
anticipate junk bonds will return
about 7% this year, compared with a
10% annualized average of the past
[sic] day I will leave his verdict to
a higher power,” Mr. Sokol wrote in
an emailed response to The Wall
Street Journal.
The remarks were his first pub-
lic comments about the matter
since being criticized by Mr. Buffett
at Berkshire Hathaway’s 2011 an-
nual meeting. Mr. Buffett declined
to comment on Friday.
Executive-suite disputes are
standard fare among big corpora-
tions. But they are unusual at Berk-
shire, where Mr. Buffett typically
picks executives he admires and
gives them lots of room to manage
their companies.
Mr. Sokol, now 56 years old, fit
that mold. Like Mr. Buffett, he is a
native of Omaha. He joined Berk-
shire when the company bought
MidAmerican Energy more than a
decade ago. At Berkshire, he ran
the utility and helped turn around
NetJets, the conglomerate’s frac-
tional-jet-ownership business.
The relationship soured follow-
ing Berkshire’s announcement that
it would acquire Lubrizol Corp. in
March 2011. At issue was Mr.
Sokol’s purchase of about $10 mil-
lion worth of shares in the chemi-
cals company, a stake that rose in
value by about $3 million when
Berkshire agreed to buy it several
months later.
The SEC began investigating the
investment shortly after Mr. Sokol
resigned from Berkshire. Mr. Buf-
fett said Berkshire had turned over
“very damning evidence” about the
purchases to the SEC.
This week, the SEC formally no-
tified Mr. Sokol’s lawyer that it had
closed the case. SEC investigators
five years. That would still make
high-yield debt an “interesting
proposition” for many investors, so
long as they had tempered their ex-
pectations, the analysts said.
The biggest headwind facing in-
vestors is that 45% of their bonds
now trade at prices above the level
at which companies are permitted
to buy, or “call,” them back. Clear-
wire Corp.’s 12% bond due 2015, for
example, traded at 108 cents on the
dollar Friday but can be called at
106 cents on the dollar as of Feb. 3,
Only once in the last 33
years have junk bonds
delivered a total return
within one percentage
point of the coupon value
at the start of the year.
according to S&P Capital IQ. That
would impose a 1.9% loss on buyers
of the bond last week.
With borrowing rates at record
lows, companies are raising new
debt to call outstanding bonds. They
bought back some $101 billion of
bonds in 2012, a 16-year high and a
38% increase over 2011, according to
research by J.P. Morgan Chase.
“It is the reason there’s very lim-
ited capacity for bond prices to
push significantly higher,” said Oleg
Melentyev, credit strategist at Bank
BUSINESS & FINANCE
couldn’t prove Mr. Sokol had suffi-
cient advance knowledge of the Lu-
brizol deal when he bought the
shares to make his trading illegal,
according to a person close to the
probe.
A successful case under insider-
trading laws would need to show
that at the time Mr. Sokol bought
stock in Lubrizol, he held informa-
tion about the prospect of a Berk-
shire deal that was nonpublic, ma-
terial and misappropriated. The
SEC decided it couldn’t prove that
Mr. Sokol’s inside information
about Lubrizol was material, in
broad terms, something an average
investor in the company would con-
sider important, the person said.
A spokeswoman for the SEC de-
clined to comment Friday.
Mr. Sokol told the Journal on
Friday that he was pleased with the
SEC’s decision and felt it was anti-
Bloomberg News
climactic given that he has always
maintained he did nothing wrong.
Berkshire followers said Friday
the SEC’s decision is unlikely to
sway Mr. Buffett, who has long held
his top executives to high ethical
standards.
“It vindicated him to some de-
gree that [Mr. Sokol] didn’t cross
the legal line, but in Mr. Buffett’s
eyes he probably breached his
trust,” said Max Olson, a Berkshire
shareholder who runs private in-
vestment firm Max Capital Corp. in
Salt Lake City.
Mr. Buffett’s criticisms of Mr.
Sokol echoed the findings of a re-
port from a committee of Berkshire
board members that looked into
the matter.
The report, released in April
of America.
For some, the best way to play
high-yield debt right now is to bet
against it. Peter Tchir, founder of TF
Market Advisors, placed a bet
against a high-yield exchange-traded
fund in mid-December. He took off
the trade on Dec. 27 as his firm de-
cided that a budget standoff in
Washington would be resolved,
sending prices higher. But, with the
rise in bond prices last week, Mr.
Tchir says he has put his short
trades back on.
Dennis McCafferty takes an un-
orthodox approach to the two high-
yield funds he manages for John
Hancock Financial, doing deep re-
search into struggling companies
and making bets on bonds he con-
siders undervalued. His funds were
the two best-performing of almost
600 high-yield funds monitored by
Morningstar Inc. in 2012, delivering
returns of 27.3% and 24.6%. Though
he acknowledges returns this year
will be lower, Mr. McCafferty says
“we still hope to outpace our peers
by 2% or more.”
Mr. McCafferty says he is making
large bets on higher-yielding bonds
of companies he knows particularly
well, such as Sirius XM Radio. The
fund’s 10 largest holdings comprise
about 30% of its portfolio, he says.
About 40% of the John Hancock
High Yield Fund is invested in low-
rated high-yield bonds, convertible
bonds and stocks.
—Katy Burne contributed
to this article.
David Sokol, shown speaking during a news conference in October 2010.
2011, said Mr. Sokol misled Mr. Buf-
fett about the details of his stock
trades and violated the company’s
insider-trading policies and stan-
dards of business ethics.
Mr. Sokol has a home in Jackson
Hole, Wyo., and said he has been
“getting plenty of time out in the
mountains” of late.
The executive is worth several
hundred million dollars, people fa-
miliar with the matter said, and
now runs a private investment
company, Teton Capital LLC. He
told the Journal he has been in-
U.K. CFOs Plan to Hoard
Cash Amid Uncertainty
BY JASON DOUGLAS
LONDON—Finance chiefs at big
U.K. firms plan to further bolster
their balance sheets in 2013 because
of continuing uncertainty about
Britain’s economic prospects, ac-
cording to a survey published Mon-
day, damping hopes for an invest-
ment boost to drive economic
growth.
A quarterly survey of chief finan-
cial officers at 112 of the U.K.’s big-
gest companies by business services
firm Deloitte LLP found executives
rate cash flow and controlling costs
as their top priorities for the year
ahead.
That is despite receding fears of
a euro-zone breakup and increasing
optimism about their own prospects
in 2013 after a torrid 2012. Finance
chiefs expect the U.K. economy to
improve only modestly this year, the
survey found.
“Despite expectations of a weak
recovery in 2013, large companies
enter the new year with a greater
focus on cost control and cash flow
than at any time in the last two
years,” said Ian Stewart, chief U.K.
economist at Deloitte.
Companies’ greater defensive-
ness reflects “a scarcity of opportu-
nity” and not a shortage of finance,
he added. Just 4% of CFOs surveyed
named access to capital as a major
worry.
The survey findings will disap-
Monday, January 7, 2013 | 21
vesting his family’s money and
spending time on various interests
outside of business. His private
holding company has investments
in energy, manufacturing, con-
sumer products and banking.
Mr. Sokol also is a major share-
holder in Middleburg Financial
Corp., a Virginia community bank,
and filed last year to increase his
stake in the company to up to 30%
from around 26% currently.
—Joann S. Lublin
and Erik Holm
contributed to this article.
point policy makers hoping large
firms in Britain will loosen their
purse strings in 2013 and aid recov-
ery by hiring more and lifting in-
vestment.
The economy is tipped to grow
just 1.1% this year, according to an
average of 26 independent forecasts
compiled by the U.K. treasury in De-
cember.
Eight in 10 CFOs surveyed said
they thought the Bank of England is
doing a good job.
The BOE has kept its benchmark
interest rate at 0.5% and pumped
£375 billion ($607 billion) of new
money into the economy through a
bond-buying stimulus program
known as quantitative easing.
It has also teamed up with the
U.K. treasury to offer cheap funding
to banks that dish out more loans to
companies and households.
Government policies gained less
support. Common CFO bugbears in-
cluded red tape, energy policy and
immigration restrictions, Deloitte
said.
“By and large big corporates do
have the firepower to hire and in-
vest. However, five years on from
the onset of the financial crisis the
missing ingredient, and the one
which holds the key to corporate be-
havior, is confidence about future
growth,” said Mr. Stewart.
Those surveyed included 36
FTSE 100 CFOs and 38 FTSE 250 fi-
nance chiefs.
22 | Monday, January 7, 2013
At CES, New Gadgets Display a Sixth Sense
Continued from page 17
devices as offering a “digital sixth
sense.” AMD’s Mr. Papermaster calls
the trend “surround” computing,
while Intel Corp. describes tech-
niques like interpreting facial ges-
tures with PCs as “perceptual com-
puting.”
Whatever the trend is called,
there is evidence consumers want
devices to do more. A survey in Sep-
tember by the consulting firm Ac-
centure found that consumer inten-
tions to buy single-function devices
like Blu-ray players in the next year
have declined or remained flat. But
interest in multifunction devices in-
creased sharply; the percentage of
users planning to buy smartphones
in the next year, for example, rose
to 41% from 27% in the prior year,
Accenture says.
Building blocks for many im-
provements have already arrived.
Smartphones now contain as many
as 18 specialized sensors, including
accelerometers that help detect
Reuters
movement; magnetometers, which
help determine the direction a de-
vice is facing; and gyroscopes,
which help determine a phone’s ori-
entation in space.
Most of these devices currently
aren’t activated unless a user does
something, like calling up a particu-
lar app. The context-awareness con-
cept, by contrast, assumes such sen-
sors switch on automatically and
exchange data with other devices in
a handset—such as cameras, micro-
phones and chips for finding loca-
tion using GPS managing cellular
and Wi-Fi communications.
The interactions are becoming so
complex that companies have devel-
Herbalife’s Proponents Speak Up
Continued from page 17
hedge-fund manager denies. The
company has promised a compre-
hensive response when it meets with
investors on Thursday.
Meanwhile, the company’s dis-
tributors are caught in the middle.
Herbalife’s own filings depict a sales
force that is vastly bigger at the bot-
tom than the top, with those on
higher rungs collecting a cut of ev-
erything sold below and many of
those lower down keeping every-
thing they buy from the company.
Across those levels, distributors
regularly affirm their faith in the
company.
James Bodman, who became an
Herbalife distributor in September,
hadn’t heard about Mr. Ackman’s al-
legations. “Somebody who has
bashed it obviously hasn’t tried it,”
said the 47-year-old who lives in
Tamaqua, Pa.
Mr. Bodman works 60-hour
weeks as a factory process operator
and hopes to make about $400 a
week on Herbalife so he can cut back
his overtime and spend more time
with his family. He said he paid
$400 for a starter packet, which in-
cludes about $100 of products, and
an additional $80 a month for mar-
keting tools including selling scripts
and training videos sold by a third
party. He’s also spent about $150 for
advertising, but has had trouble
finding customers.
“It’s starting out slow for me,” he
said.
Herbalife was founded in 1980
and is incorporated in the Cayman
Islands. It sells protein shakes,
energy drinks, vitamins and a bath
and body-care line through
independent distributors in more
Workers prepare the Samsung booth for the Consumer Electronics Show at the Las Vegas Convention Center on Sunday.
oped special chips called sensor
hubs to coordinate them. Atmel
Corp., for example, provides one for
Microsoft’s new Surface tablet. “It’s
been a real hit,” says Steven Laub,
Atmel’s chief executive.
Movea, a company based in Gre-
noble, France, says it has developed
algorithms that rely on multiple sen-
sors to make judgments such as
whether a smartphone is on a table or
in a user’s purse; whether the user is
riding a bike or dancing; and whether
users are in a car or an elevator.
than 80 countries.
It competes in the cutthroat
weight-loss industry, going up
against Weight Watchers Interna-
tional Inc., Nestlé SA’s Jenny Craig
Inc. and home-delivery meal pro-
grams such as Medifast Inc. and Nu-
trisystem Inc.
Distributors make money on
sales to consumers and on the sales
of other distributors they sponsor
and bring into the business, a sys-
tem known as multilevel marketing.
Herbalife said in a 2005 securi-
ties filing that more than 90% of its
rank and file distributors dropped
out in 2004. It has since stopped
giving out that figure, but a person
familiar with the matter said 80% of
the company’s distributors likely
sign up only to get discounts on
products, a category the company
says tends to turn over frequently.
Chad Hacker has been an Herbal-
ife distributor since 2000. The 35-
year-old said he first started selling
the product in college by holding
Herbalife parties. In 2008, he went
retail and opened a storefront called
HealthNutz in Owatonna, Minn.
He gets 35 to 40 visitors a day at
the store, which sells a daily pass for
$6.50 that gives buyers access to
Wi-Fi, a workout room and three
free Herbalife products, like the
company’s Formula One meal-re-
placement shake, an energy tea or
an aloe drink. He also uses the store
to convince dabblers to start order-
ing Herbalife products more regu-
larly and to recruit people into his
network of sellers.
Mr. Hacker’s “down line” is now
1,000 people deep and accounts for
about half of his $10,000- to
$13,000-a-month in profit, he said.
BUSINESS & FINANCE
David Rothenberg, Movea’s direc-
tor of marketing and partner alli-
ances, describes the potential bene-
fits for a visitor to a foreign city. The
traveler, finished with a meeting,
looks into the camera of a smart-
phone, which recognizes him. Using
a stored itinerary, the phone sug-
gests directions to the train station.
Instead of showing a map, Mr.
Rothenberg says, a smarter smart-
phone annotates the actual scene
the user views through the display,
pointing which way to turn at each
He acknowledges most of his re-
cruits make no sales of their own.
“Of the people with distributor-
ships, only a small fraction of them
sell the product,” he said. But echo-
ing a common Herbalife assertion,
he said 80% of the people in his
down line became distributors only
to get discounts on the products
they consume themselves.
Mr. Hacker said he glanced
through the slides in Mr. Ackman’s
presentation, but doesn’t think they
reflect the reality at the company.
“When companies are growing
and having success, people try and
take them down,” he said.
As the hedge-fund manager was
formally laying out his accusations
just before Christmas, Herbalife
Chief Executive Michael Johnson
held a town-hall meeting at the Los
Angeles headquarters to reiterate
that the company’s customers were
real and urge employees to keep
working hard, said a person who at-
tended the meeting.
This attendee got together with
some colleagues and went through
Mr. Ackman’s slides. In the end, they
concluded it was just more bullying
from Wall Street, the person said.
Some distributors are upset
about Mr. Ackman’s allegations,
Herbalife President Des Walsh said
in a statement emailed by a spokes-
man. But he said they are focused on
building their businesses. “They see
the positive impact of the good work
they do every day,” he said.
Herbalife’s earnings have risen
on a year-on-year basis for 12
straight quarters, climbing 9% to
$117.8 million in the three months
through October, as sales grew 14%
to $1 billion. Its shares are up nearly
intersection. Once inside the station,
the on-display commands point to
the right train track, when the
user’s train is leaving and—if he
misses it—which track to catch the
next one, he says.
France Télécom’s Orange unit
recently said it would deploy TV
set-top boxes that use Movea’s tech-
nology that can be controlled by
hand gestures. Omek Interactive
Ltd., a company based in Israel, also
has developed algorithms for ges-
ture recognition that exploit new
Herbalife’s Sales Network
Herbalife has been expanding its sales network despite high
turnover. Sales leaders are distributors that reach certain volumes
of product sales or royalties from other distributors.
INDEPENDENT SALES
DISTRIBUTORS LEADERS
3 million
2
1
TURNOVER
RATE FOR
SALES
LEADERS
41.5% 41% 40.3%
0
2006 '07 '08
*As of September
Source: the company
25% since an initial public offering
at the end of 2004, but the rise has
been punctuated by sharp drops
triggered by investors betting
against the stock.
In 2008, San Diego-based short
seller Barry Minkow found that
Herbalife’s president at the time,
Gregory Probert, had falsely claimed
an M.B.A. degree. Mr. Probert later
resigned, after acknowledging the
inaccuracy. Last May, Greenlight
Capital hedge-fund manager David
Einhorn, another short seller, ques-
tioned the company’s business
model during an earnings call and
sent the stock plummeting 20%. The
company responded that its funda-
mentals are “very strong” and said it
is confident in its financials, disclo-
sures and network-marketing model.
Assertions by Pershing Square
Capital Management LP’s Mr. Ack-
man led to another steep drop after
they were disclosed Dec. 19.
THE WALL STREET JOURNAL.
3-D cameras arriving in some de-
vices, such as the Kinect accessory
that comes with Microsoft’s Xbox
360 game console.
Janine Kutliroff, Omek’s chief ex-
ecutive, says its technology could al-
low an engineer designing a product
to use hand motions rather than a
mouse to rotate on-screen 3-D mod-
els. “It’s taking you to a much more
natural experience,” Ms. Kutliroff
says.
Qualcomm and Broadcom Corp.,
meanwhile, are using CES to pro-
mote technologies for exchanging
data between devices like tablets
and HDTVs, and determining loca-
tion at malls and other indoor loca-
tions where GPS signals don’t help.
One reason is to give stores a
new way to attract passersby. “If
I’m near a meat counter, my smart-
phone might receive a message
showing what’s on special,” says
Michael Hurlston, a Broadcom se-
nior vice president.
Tom Rogers, chief executive of
TiVo Inc., sees technologies like
voice and gesture recognition as
mainly novelties—less important
than the ability of set-top boxes like
TiVo’s to help users navigate through
myriad new content options. “CES
for the last couple of years was into
a lot of flash and sizzle and not
enough focus on the core video con-
sumption experience,” he says.
And others point out that many
scenarios involving exchanging data
between devices and with Internet
services won’t become popular with-
out strict security precautions that
protect users’ privacy. “None of this
works if you don’t feel your data is
safe,” AMD’s Mr. Papermaster says.
3.1
MILLION
567
THOUSAND
43% 49% 52% N/A
'09 '10 '11 '12*
The Wall Street Journal
Herbalife’s stock has recovered
some of the lost ground since Mr.
Ackman’s slide show. The shares
closed Friday at $37, up 65 cents, af-
ter hitting a low of $26.04 last
month. However, the shares started
December at $46.19.
In an interview, Mr. Ackman said
he wasn’t surprised that sellers at
the top of the distribution chain,
who make a lot of money off Herbal-
ife, don’t think the company is a pyr-
amid scheme, or that people at the
bottom hadn’t heard his arguments.
The business, he alleged, relies on
finding unwary recruits.
Mark Gruell, who lives in Eaton
Rapids, Mich., and has roughly 3,000
distributors in his network, was un-
fazed.
“We just know he’s full of hot air
and it’s not going to affect us one
bit,” said Mr. Gruell, a 49-year-old
who said he brings in six figures a
year. “We help people every day.”
THE WALL STREET JOURNAL. Monday, January 7, 2013 | 23

MARKETS

Brent Futures Betting on Higher Prices

BY CASSIE WERBER fourth straight annual gain. of geopolitical events, according to
But with the oil market increas- Another Volatile Year in 2013? Ole Hansen, head of commodity
As 2013 gets underway, the ma- ingly influenced by outside forces strategy at Saxo Bank in Copenha-
jority of the money in the Brent oil such as macroeconomic indicators, Net weekly speculative bets on higher Brent futures prices, gen. An increase in spare capacity—
futures market is predicting an in- geopolitical fears and speculators number of contracts oil still in the ground but readily
crease in the price of the benchmark rather than traditional supply and 150,000 125,397 available—is possible, Mr. Hansen
crude. demand factors, volatile prices are said:
But there is plenty to suggest the likely to be as much of an issue in “If we do start to see spare ca-
commodity will be as volatile as it 2013 as they were in 2012. 120,000 pacity rebuild, any renewed worry
was last year, and prices could The price of Brent has been un- about supplies from geopolitical
plummet as easily as rise. derpinned by high Asian demand, 90,000 events would potentially not drive
Traders raised their net long po- and by fears that the ability of sup- the market as they have done.”
sitions in Brent futures and op- ply to keep pace with demand could Mr. Hansen predicted Brent
tions—betting on higher prices—by easily be derailed—particularly by 60,000 would remain in a tight trading
18.1% to 125,397 contacts in the any escalation of tensions with Iran. range in 2013, ending the year at
Many see this state of affairs $112 a barrel.
30,000
continuing into 2013. A significant event in the Middle
Traders raised their net Analysts at Commerzbank said in East could see Brent spike as high
a recent note that the market is be- 0 as $140, Hansen said, but other than
long positions in Brent ing too optimistic on supply and too May June July Aug. Sept. Oct. Nov. Dec. that didn’t see the market affected
futures and options— pessimistic on demand. As such 2012 by “fireworks.”
they think geopolitical tensions and Source: IntercontinentalExchange The Wall Street Journal The U.S. fiscal cliff, which drove
betting on higher prices— falling emerging-market consump- the oil markets lower at the end of
by 18.1% in the week to tion will mean Brent closes 2013 at 2012, has been averted, but only by
about $125 a barrel. that China won’t make up the short- oil producers, prices are too high to a half-measure. Worry about stabil-
Christmas Eve. But there are also some who fall in demand. protect demand in the longer term,” ity in the euro zone is ongoing.
think a correction is overdue. On the supply side, Mr. Jessop he added. Spikes, slides and price hikes all re-
Julian Jessop, chief global econ- believes rising U.S. production—one Paul Horsnell, an oil and com- main in the mix.
week to Christmas Eve, according to omist at Capital Economics, believes of the big themes of 2012—will con- modities expert at Barclays, pre- Investors might be perturbed by
a report from the Intercontinen- concerns about tension in the Mid- tinue. dicted little change on the supply or the $40 gap between Commerz-
talExchange. Long positions in- dle East could fade, with Iran poten- Overall he sees Brent at just $85 demand side in the coming year. But bank’s forecast and that of Capital
creased in most weeks since mid- tially backing down on its nuclear a barrel by year end. he thinks the potential for tension Economics. But if such divergent
November. program, leading to lower oil prices. “My perspective isn’t so much a in the Middle East will see Brent opinions cause concern, Mr. Jessop
ICE Brent settled at $111.11 a bar- Mr. Jessop also thinks the euro gloomy one, it is more about oil ending 2013 at $125 a barrel. has a salve for the lack of coher-
rel on New Year’s Eve, the highest zone will continue to experience a prices falling back to more sustain- But falling consumption, which ence: “Perhaps the only near cer-
year-end close on record, after gain- “prolonged recession,” meaning that able levels,” Mr. Jessop said. would drive prices lower, could tainty is that the consensus will be
ing 3.5% through 2012, to register a demand there will remain low and “Even from the point of view of lessen the price-heightening impact wrong,” he wrote.

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LuxTopic-Aktien Europa EU EQ LUX 01/04 EUR 19.69 1.6 14.1 4.3 MP-BALKAN.SI EE EQ SVN 08/12 EUR 19.29 -1.9 -8.4 -10.9 Global Technology OT EQ IRL 01/03 USD 17.58 1.8 11.3 -0.8
LuxTopic-Pacific OT OT LUX 01/04 EUR 21.84 2.8 26.2 0.1 MP-TURKEY.SI OT OT SVN 01/03 EUR 49.67 1.9 57.8 3.2 Japan Fund USD JP EQ IRL 12/28 USD 17.84 4.4 7.1 -1.4 n OTHER FUNDS
Polar Healthcare Class I USD OT EQ IRL 01/03 USD 18.56 2.0 26.2 17.6 For information about these funds, please contact us on Tel: +44 (0) 207 842 9694/9633
n HERMITAGE CAPITAL MANAGEMENT LTD. Polar Healthcare Class R USD OT EQ IRL 01/03 USD 18.28 2.0 25.7 17.1 Medinvest Plc Dublin OT EQ IRL 09/30 USD NS.00 NS 1.3 -4.4
Tel: +7501 258 3160 www.hermitagefund.com
The Hermitage Fund GL EQ JEY 03/12 USD 963.12 4.5 105.6 -23.2 n Hemisphere Management (Ireland) Limited n WINTON CAPITAL MANAGEMENT LTD
Discovery USD A GL OT CYM 12/31 USD 101.35 NS NS NS Tel: +44 (0)20 7610 5350 Fax: +44 (0)20 7610 5301
n HORSEMAN CAPITAL MANAGEMENT LTD. Elbrus USD A OT OT CYM 10/31 USD 10.48 NS NS NS Winton Evolution EUR Cls H GL OT CYM 11/30 EUR NS.00 -9.6 -7.2 -1.5
T: +44(0)20 7838 7580, F: +44(0) 20 7838 7590, www.horsemancapital.com Europn Conviction USD B EU EQ CYM 12/07 USD 155.30 6.6 5.6 6.7 Winton Evolution GBP Cls G GL OT CYM 11/30 GBP NS.00 -9.3 -6.8 -1.5
Horseman EurSelLtd EUR EU EQ GBR 11/30 EUR 252.32 26.7 23.8 8.2 Europn Forager USD B EU EQ CYM 11/30 USD 278.27 10.6 10.4 7.4
GBR
n MERIDEN GROUP Winton Evolution USD Cls F GL OT CYM 11/30 USD NS.00 -9.5 -7.1 -1.6
Horseman EurSelLtd USD EU EQ 11/30 USD 252.32 17.5 15.0 5.0 Latin America USD A GL EQ CYM 06/30 USD NS.00 NS NS NS VGB
Tel: + 376 741 175 Fax: + 376 741 183 Email: meriden@meriden-ipm.com Winton Futures EUR Cls C GL OT 11/30 EUR 228.05 -4.9 -3.3 2.6
Horseman Glbl Ltd EUR GL EQ CYM 11/30 USD 440.47 16.1 16.9 4.9 Paragon Limited USD A EU EQ CYM 12/31 USD NS.00 12.7 12.7 14.2
Antanta Combined Fund EE EQ AND 12/28 USD 262.59 -14.5 -13.8 -22.3 Winton Futures GBP Cls D GL OT VGB 11/30 GBP 247.25 -4.6 -3.0 2.6
Horseman Glbl Ltd USD GL EQ CYM 11/30 USD 440.47 16.1 16.9 4.9 UK Fund USD A OT OT CYM 04/13 USD 157.94 1.8 NS NS VGB
Antanta MidCap Fund EE EQ AND 12/28 USD 398.87 -18.5 -15.6 -32.6 Winton Futures JPY Cls E GL OT 11/30 JPY 15834.65 -5.4 -4.0 1.7
n HSBC ALTERNATIVE INVESTMENTS LIMITED Meriden Opps Fund GL OT AND 12/26 EUR 25.35 -11.3 -11.4 -24.4 Winton Futures USD Cls B GL OT VGB 11/30 USD 809.62 -4.8 -3.3 2.4
n PT CIPTADANA ASSET MANAGEMENT
T +44 20 7860 3074 F + 44 20 7860 3174 www.hail.hsbc.com Meriden Protective Div GL EQ AND 11/24 EUR NS.00 -2.8 NS NS
Tel: +6221 25574 883 Fax: +6221 25574 893 Website: www.ciptadana-asset.com

INDICES
HSBC ALTERNATIVE STRATEGY FUND Indonesian Grth Fund GL EQ BMU 01/02 USD 180.22 0.6 0.2 -0.5
Special Opp EUR OT OT GGY 12/14 EUR NS.00 16.5 17.5 6.2
Special Opp Inst EUR OT OT GGY 03/31 EUR 88.51 0.7 -0.3 13.3
Special Opp Inst USD OT OT GGY 12/14 USD NS.00 17.8 19.0 7.2
Special Opp USD OT OT GGY 12/14 USD NS.00 17.0 18.1 6.5 NAV ——————%RETURN ——————
FUND NAME GF DATE CR NAV 1-WK 1-MO 1-Q 1-YR 2-YR
n HSBC Portfolio Selection Fund
GH Fund CHF Hdg OT OT GGY 12/14 CHF NS.00 3.7 4.1 0.0 n Pictet Funds (Europe) SA, ROUTE DES ACACIAS 60, CH-1211 GENEVA 73
GH Fund EUR Hdg (Non-V) OT OT GGY 12/14 EUR 127.83 4.1 4.5 NS n THE NATIONAL INVESTOR n ARIX ABSOLUTE RETURN INVESTABLE INDEX
Tel: + 41 (58) 323 3000 Web: www.pictetfunds.com Feri Institutional Advisors, www.feri.de
GH Fund GBP Hdg OT OT GGY 12/14 GBP NS.00 4.6 5.1 1.1 Pictet-Agriculture-P EUR OT OT LUX 01/03 EUR 151.65 3.1 14.8 -1.0 PO Box 47435, Abu Dhabi, UAE Web:www.tni.ae
GGY Pictet-Asian Eq ExJpn-I USD OT OT LUX 01/04 USD 194.71 2.3 17.5 -1.8 MENA Special Sits Fund OT OT BMU 11/29 USD 1035.69 5.0 5.8 -3.8 ARIX Composite Gross USD OT OT GBR 12/31.00 USD1474.27 4.8 4.8 0.0
GH Fund Inst USD OT OT 12/14 USD NS.00 5.1 5.7 1.7
Data as shown is for information purposes only. No offer is being made by Morningstar, Ltd. or this publication. Funds shown aren’t registered with the U.S. Securities and Exchange Commission and aren’t available for sale to United States citizens and/or residents
except as noted. Prices are in local currencies. All performance figures are calculated using the most recent prices available. 12-month and 2-year returns may be calculated over 11- and 23-month periods pending receipt and publication of the last month end price.

For information about listing your funds, please contact: Lauren Berkemeyer tel: +44 20 7572 2102; email: lauren.berkemeyer@dowjones.com
24 | Monday, January 7, 2013
How Huge Returns Can
Mess With Your Mind
[ The Intelligent Investor ]
BY JASON ZWEIG
Happy New
Year, investors.
Enjoy those
gains that your
portfolios earned
last week. Just
don’t extrapolate them.
This past Wednesday, the first
trading day of 2013, the Standard
& Poor’s 500-stock index jumped
2.5% after the White House and
Congress agreed on a new tax-
and-spending package. That was
its biggest daily return in nearly
13 months. Even after a tepid
employment report on Friday, the
S&P 500 ended the week up
another 0.5%.
But investors’ euphoria
extends beyond U.S. blue-chip
stocks. The Russell 2000 index of
small stocks surpassed its all-time
high this past week. On
Wednesday, the yield on the
Barclays U.S. Corporate High
Yield Index fell below 6% for the
first time ever, as investors
pushed high-yield, or “junk,”
bonds to their highest prices on
record.
And the giddiness is global.
Stock markets in Argentina,
China, Egypt and Finland all shot
up by at least 4% in the first two
trading days of 2013, largely in
response to the news out of
Washington. On Thursday, Banco
Bilbao Vizcaya Argentaria, a big
Spanish bank, sold $2 billion in
debt at a yield of just 3.8%,
another sign that bond investors
are willing to pay high prices in
hopes of getting even a smidgen
of extra return.
Starved for good news after a
dozen years of bear markets and
wrenching volatility, investors
need to keep their expectations in
check and to avoid taking
unacceptable risks in the pursuit
of yield.
It is especially important to
recognize two related flaws of the
human mind: People tend to
underestimate how hard it is to
earn high rates of return and how
much wealth those growth rates
would achieve.
A 2.5% return doesn’t sound
particularly hard to sustain, but if
the market went up at that same
daily pace each of the other 20
trading days in January, investors
would earn a 65% return. A full
year’s worth of 2.5% daily returns
would yield a return of more than
50,000%.
Because the human mind isn’t
very good at appreciating the
power of exponential growth,
thinking realistically about high
returns is hard.
Consider the oft-told myth
about the inventor of chess:
Granted any wish by a grateful
king, the inventor asked to be
paid with one grain of rice on the
first square of the chessboard,
with the amount to be doubled on
each successive square. The king
casually agreed, expecting to pay
out a few handfuls of rice, only to
discover that by the 64th square
he would owe the inventor
quintillions of grains—enough to
carpet the entire planet with rice
pilaf.
According to recent research
by economists Joshua Tasoff of
Claremont Graduate University
and Matthew Levy of the London
School of Economics, many
people believe that a one-
percentage-point increase in
compounding is equally valuable
at all growth rates.
That probably is because
compound growth—in which the
original amount and all additions
to it grow at the same rate—is
rare outside the financial world.
Roughly one in three people,
estimate Messrs. Tasoff and Levy,
are completely flummoxed by
compounding—and the more
severely they misunderstand it,
the more confident they are that
they have it right.
People with this “exponential
growth bias” believe that a boost
in the compound rate of return
MARKETS
Christophe Vorlet
from 2% to 3% will make as big a
difference in their final wealth as
an increase from 12% to 13%
would.
No wonder so many investors
are tempted to reach for yield at
today’s low interest rates, when
little gains feel as if they mean a
lot. But the math doesn’t work in
the real world the way it does in
investors’ minds.
Over 10 years, $10,000
compounded at 2% amounts to
$12,190; at 3%, it rises to $13,439,
or $1,249 more. But the same
$10,000 compounded at 12% for a
decade yields $31,058; at 13%,
$33,946, or $2887 more.
In short, a little bit of extra
return isn’t nearly as valuable in
a low-rate world as people
intuitively believe it to be.
Some investors—foremost
among them Warren Buffett—feel
the power of exponential growth
in their very bones. Even as a
young man, according to his
biographer, Alice Schroeder, Mr.
Buffett developed the habit of
regarding any money that he
didn’t invest as a reduction in the
rate at which his future wealth
could expand: “Do I really want to
spend $300,000 for this haircut?”
But most other investors
underestimate the power of
compounding, according to
Messrs. Tasoff and Levy. Since
these people don’t fully
appreciate the accelerating rate at
which money builds in the future,
they set less money aside in the
present—saving about 40% less
than those who are accurate in
estimating compound growth.
In short, considering that just
about all financial assets are at or
near record highs in today’s
markets, the sensible thing for
investors to do isn’t to ratchet up
their risk, trade faster or try
squeezing out every last drop of
yield.
Instead, save more, stretch out
your horizons as long as you can
and let the power of
compounding—even at low
rates—do its quiet work.
THE WALL STREET JOURNAL.
Hopes Run High
For FTSE in 2013
BY MICHELE MAATOUK The U.S. government still has to
wrestle with the country’s deficit
The FTSE 100 kicked off the New and its looming debt ceiling.
Year in style, breaking through 6000 The health of the euro-zone
points on the first trading day of economy could also still worry in-
2013 and finishing the week at its vestors, although fears that Greece
highest level since Feb. 8, 2011. could leave the bloc have dimin-
And analysts expect the index’s ished over the past year.
early year gains to continue. The country was recently given
The analysts cite actions by cen- its second tranche of its interna-
tral banks, improving economic con- tional aid following a successful
ditions in the U.S. and China, and debt buyback.
rising company profits for their Against this backdrop, Charles
bullish forecasts for the year. Stanley technical analyst Bill
“In our view we need to get used McNamara expects the FTSE to end
to a FTSE above 6000 again and tar- 2013 at around 6375.
get 6575 for the end of 2013,” ana- He is less optimistic about the
lysts at Deutsche Bank wrote in a outlook for the first quarter, when
note to clients last week, saying that he expects investors to react to
the index’s 6.3% gain in 2012 wasn’t overbought conditions by taking
as strong as other European and some profits.
global stock markets last year.
Credit Suisse also expects a big
rise, forecasting a year-end close of The index ended the week
6600 for the FTSE.
The index finished last week at at 6089.84, a 3.3% gain
6089.84, a 3.3% gain over the first over the first three
three trading days of 2013. It is still
trading days of 2013. It is
down 12% from its record closing
high of 6930.20, set on Dec. 30, still down 12% from its
1999.
“While the acceleration of record close of 6930.20.
growth will be modest,” the expan-
sion of central-bank balance sheets
in developed markets “is likely to Mr. McNamara also believes a
accelerate, especially in Japan and deal on the U.S. debt ceiling is un-
the euro area,” Credit Suisse analyst likely to materialize quickly, result-
Richard Kersley said. ing in more uncertainty and little
“As a consequence, we believe prospect for a market rally in the
that while headline inflation will be near term.
muted, inflation expectations will “Nevertheless, the outlook for
rise, which should benefit equities the year as a whole is positive and
relative to bonds.” it is our expectation that improving
However, while on the whole an- conditions in the U.S. and China will
alysts expect the FTSE to rise in ensure the FTSE makes decent
2013, they also expect another vola- headway,” he said.
tile year. Guy Foster, a strategist at
Gains in the first week of 2013 Brewin Dolphin, is a bit more mod-
came after U.S. lawmakers struck a est in his outlook, given the uncer-
last-minute deal to prevent the im- tainty over what might happen in
plementation of spending cuts and Washington.
tax increases that posed a threat to He cited a year-end forecast of
the U.S. economy. 6350 for the FTSE.
But the issue, which had weighed “We still expect markets to re-
on the FTSE and other markets to- flect earnings growth of around 9%
ward the end of 2012, isn’t entirely with no re-rating, while these politi-
resolved. cal uncertainties weigh,” he said.
Fund Scorecard
Europe Large-Cap Blend Equity
Funds that invest in equities of European (including UK) large-cap companies. These
funds tend to invest across the spectrum of European industries. Ranked on % total
return (dividends reinvested) in Euros for one year ending January 04, 2013
Leading 10 Performers
FUND FUND LEGAL % Return in $US **
RATING * NAME FUND MGM'T CO. CURR. BASE YTD 1-YR 2-YR 5-YR
NS Oyster Sicav Oyster Asset CHFLUX 2.92 34.12 NS NS
European Selection I CHF Management S.A.
NS Wellington Wellington EURIRL 1.79 30.84 NS NS
StrategicEurpEqA€UnhdgAcc Management Company, LLP
NS Danske Danske Invest EURLUX 2.28 29.37 8.48 3.07
Invest Europe Focus A Management Company S.A.
NS Fidelity Fidelity (FIL EURLUX 2.52 29.25 7.18 NS
EuropeanSpSitsA-Acc-EUR (Luxembourg) S.A.)
NS Sextant Amiral Gestion EURFRA 2.51 29.22 NS NS
Europe A
NS Danske Danske Invest DKKDNK 1.96 28.96 8.67 -2.63
Invest Europa Fokus
NS F&C European RBS (Luxembourg) EURLUX 2.26 28.89 12.29 -4.02
Equity A S.A.
NS Danske Danske Capital AB SEKSWE 1.88 28.88 8.96 3.36
Invest Utland
NS Danske Danske Invest DKKDNK 2.12 28.60 8.83 NS
InvestEuropaFokus-AkkKL
NS Danske Danske Invest DKKDNK 1.98 28.56 8.84 2.53
InvestEngrosEuropeFocus Select
NOTE: Changes in currency rates will affect performance and rankings. Source: Morningstar, Ltd
KEY: ** 2YR and 5YR performance is annualized 1 Oliver’s Yard, 55-71 City Road
NA-not available due to incomplete data; London EC1Y 1HQ United Kingdom
NS-fund not in existence for entire period www.morningstar.co.uk; Email: mediaservice@morningstar.com
Phone: +44 (0)203 107 0038; Fax: +44 (0)203 107 0001
THE WALL STREET JOURNAL. Monday, January 7, 2013 | 25

GLOBAL MARKETS LINEUP

Major stock market indexes Stock indexes from around the world, grouped by region. Shown in local-currency terms.
PREVIOUS SESSION PERFORMANCE PREVIOUS SESSION PERFORMANCE
Region/Country Index Close Net change Percentage change Yr.-to-date 52-wk. Region/Country Index Close Net change Percentage change Yr.-to-date 52-wk.
EUROPE Stoxx Europe 600 287.83 1.00 0.35% 2.9% 16.3% Russia RTSI 1526.98 Closed 10.5 11.9
Stoxx Europe 50 2653.02 12.65 0.48 2.9 10.5 Spain IBEX 35 8435.8 32.40 0.39% 3.3 1.8
Euro Zone Euro Stoxx 267.97 0.78 0.29 2.7 18.9 Sweden OMX Stockholm 353.48 1.73 0.49 2.8 12.9
Euro Stoxx 50 2709.35 8.13 0.30 2.8 17.9 Switzerland SMI 7058.92 38.46 0.55 3.5 17.4
Austria ATX 2483.05 -3.83 -0.15% 3.4 31.3 Turkey ISE National 100 79563.95 -469.38 -0.59% 1.7 58.5
Belgium Bel-20 2516.32 -0.53 -0.02 1.6 20.2 U.K. FTSE 100 6089.84 42.50 0.70 3.3 7.8
Czech Republic PX 1062.5 -0.57 -0.05 2.3 18.8 ASIA-PACIFIC DJ Asia-Pacific 135.84 0.57 0.42 2.0 14.7
Denmark OMX Copenhagen 467.83 4.00 0.86 3.4 28.2 Australia SPX/ASX 200 4723.80 -16.90 -0.36 1.6 15.0
Finland OMX Helsinki 6092.72 43.07 0.71 5.0 10.5 China CBN 600 20786.77 -7.30 -0.04 ... 10.1
France CAC-40 3730.02 8.85 0.24 2.4 18.9 Hong Kong Hang Seng 23331.09 -67.51 -0.29 3.0 25.5
Germany DAX 7776.37 19.93 0.26 2.2 28.4 India Sensex 19784.08 19.30 0.10 1.8 24.7
Hungary BUX 18660.29 33.51 0.18 2.7 15.8 Japan Nikkei Stock Average 10688.11 292.93 2.82 2.8 27.4
Ireland ISEQ 3497.43 19.02 0.55 3.0 21.0 Singapore Straits Times 3225.22 0.42 0.01 1.8 18.8
Italy FTSE MIB 16959.78 49.95 0.30 4.2 15.8 South Korea Kospi 2011.94 -7.47 -0.37 0.7 9.2
Netherlands AEX 351.73 0.99 0.28 2.6 13.1 AMERICAS DJ Americas 381.76 1.90 0.50 2.9 14.1
Norway All-Shares 504.39 2.03 0.40 2.8 12.1 Brazil Bovespa 62523.06 -789.40 -1.25 2.6 6.7
Poland WIG 47888.16 -334.56 -0.69 0.9 26.9 Mexico IPC 44562.33 191.69 0.43 2.0 21.1
Portugal PSI 20 5878.78 10.91 0.19 4.0 5.0 Note: Americas index data are as of 5:00 p.m. ET. Sources: SIX Financial Information; WSJ Market Data Group

Dow Jones Indexes MSCI indexes

Price-to- Price-to-
Dividend earnings PERFORMANCE (euros) PERFORMANCE (U.S.dollars) Dividend earnings PERFORMANCE (euros) PERFORMANCE (U.S.dollars) Developed and emerging-market regional and country indexes
yield* ratio* Dows Jones Index Last Daily 52-wk. Last Daily 52-wk. yield* ratio* Dows Jones Index Last Daily 52-wk. Last Daily 52-wk. from MSCI Barra as of January 04, 2013
2.48% 17 Global TSM 2729.28 0.34% 15.5% Turkey Titans 20 -c 742.60 -0.32% 66.0% 992.86 -0.50% 61.8% Price-to- LOCAL-CURRENCY
2.43 21 Global Dow 1480.60 0.77% 10.3% 2051.22 0.39 13.2 5.97% 14 Global Select Div -d 200.00 0.27 9.2 223.24 -0.12 12.0 Dividend earnings PERFORMANCE
yield ratio Morgan Stanley Index Last Daily YTD 52-wk.
2.41 15 Global Titans 50 204.80 0.58 10.5 199.51 0.19 13.3 5.70 14 Asia/Pacific Select Div -d 328.92 -0.56 18.1
2.80% 14 ALL COUNTRY (AC) WORLD* 346.62 0.14% 2.0% 15.7%
2.94 18 Europe TSM 2786.19 -0.03 19.6 4.27 14 U.S. Select Dividend -d 423.03 0.53 9.7
2.80 14 World (Developed Markets) 1,364.39 0.22 1.9 15.4
2.49 18 Developed Markets TSM 2677.52 0.41 15.5 1.96 16 Islamic Market 2348.54 0.11 11.9
2.60 15 World ex-EMU 166.74 0.07 2.0 14.9
2.49 12 Emerging Markets TSM 4353.31 -0.28 15.1 2.06 15 Islamic Market 100 2254.30 0.42 8.8 2516.64 0.04 11.6
2.70 15 World ex-UK 1,364.99 0.20 1.9 15.6
3.03 14 Africa 50 923.40 -0.01 17.3 764.56 -0.40 20.4 Islamic Turkey -c 1893.40 0.06 43.1 4346.29 -0.13 39.5
3.40 14 EAFE 1,628.10 0.22 1.5 15.3
3.35 9 BRIC 50 441.90 -0.26 4.8 549.54 -0.65 7.6 2.67 17 Sustainability 983.20 0.45 11.7 1082.90 0.06 14.6
2.70 12 Emerging Markets (EM) 1,082.68 -0.42 2.6 18.1
3.41 12 GCC 40 591.50 0.27 2.7 489.71 -0.12 5.4 3.09 22 Brookfield Infrastructure 2274.50 0.63 10.8 2828.73 0.25 13.7
3.70 13 EUROPE 98.76 0.55 2.5 16.3
2.15 17 U.S. TSM 15276.01 0.55 15.5 1.29 18 Luxury 1585.30 0.51 25.6 1753.22 0.13 28.8
3.90 13 EMU 159.88 1.30 1.7 19.2
Kuwait Titans 30 -c 194.17 4.6 UAE Select Index
3.70 14 Europe ex-UK 103.45 0.49 2.5 18.7
RusIndex Titans 10 -c 4019.20 0.25 14.9 6604.95 0.39 12.2 DJ-UBS Commodity 145.40 -0.30 -5.8 137.73 -0.68 -3.4
4.80 10 Europe Value 99.72 0.48 2.8 14.7
*Fundamentals are based on data in U.S. dollar. Footnotes: a-in US dollar. b-dividends reinvested. c-in local currency. Note:All data as of 2 p.m.ET. Source: DowJones Indexes 2.60 17 Europe Growth 94.26 0.62 2.3 17.5
2.90 224 Europe Small Cap 205.10 0.66 2.6 27.0
Cross rates U.S.-dollar and euro foreign-exchange rates in global trading 3.70 6 EM Europe 317.69 0.76 2.3 20.7
3.80 11 UK 1,791.85 0.34 2.6 8.6
USD GBP CHF SEK RUB NOK JPY ILS EUR DKK CDN AUD 3.60 14 Nordic Countries 178.08 0.41 3.0 20.4
Australia 0.9566 1.5341 1.0328 0.1460 0.0315 0.1704 0.0109 0.2531 1.2482 0.1673 0.9706 ... 3.60 5 Russia 771.75 0.03 0.6 5.8
Canada 0.9857 1.5806 1.0641 0.1504 0.0324 0.1756 0.0112 0.2608 1.2861 0.1724 ... 1.0303 3.20 15 South Africa 1,029.10 0.61 1.8 22.8
Denmark 5.7167 9.1672 6.1719 0.8723 0.1881 1.0185 0.0648 1.5127 7.4590 ... 5.7999 5.9757 3.00 13 AC ASIA PACIFIC EX-JAPAN 478.46 -0.46 2.7 21.8
Euro 0.7664 1.2290 0.8275 0.1169 0.0252 0.1365 0.0087 0.2028 ... 0.1341 0.7776 0.8011 2.20 24 Japan 530.30 0.00 0.0 18.9
Israel 3.7791 6.0601 4.0801 0.5766 0.1244 0.6733 0.0429 ... 4.9309 0.6611 3.8341 3.9504
2.90 11 China 65.45 0.86 4.2 23.7
Japan 88.1564 141.3660 95.1765 13.4510 2.9014 15.7055 ... 23.3273 115.0238 15.4209 89.4392 92.1513
1.30 16 India 778.99 0.38 1.9 30.3
Norway 5.6131 9.0011 6.0601 0.8565 0.1847 ... 0.0637 1.4853 7.3238 0.9819 5.6948 5.8675
1.10 10 Korea 587.11 -0.76 1.2 13.0
Russia 30.3846 48.7242 32.8042 4.6361 ... 5.4131 0.3447 8.0401 39.6449 5.3151 30.8267 31.7615
3.50 21 Taiwan 282.00 0.77 1.9 10.9
Sweden 6.5539 10.5097 7.0758 ... 0.2157 1.1676 0.0743 1.7342 8.5513 1.1465 6.6493 6.8509
Switzerland 0.9262 1.4853 ... 0.1413 0.0305 0.1650 0.0105 0.2451 1.2085 0.1620 0.9397 0.9682
2.20 15 US BROAD MARKET 1,646.34 0.15 2.4 16.7
U.K. 0.6236 ... 0.6733 0.0952 0.0205 0.1111 0.0071 0.1650 0.8137 0.1091 0.6327 0.6519 1.60 23 US Small Cap 2,418.07 -0.03 2.7 19.5
U.S. ... 1.6036 1.0796 0.1526 0.0329 0.1782 0.0113 0.2646 1.3048 0.1749 1.0146 1.0453 3.20 16 EM LATIN AMERICA 3,933.20 -1.06 3.6 9.2
Source: ICAP Plc. *Twenty-three developed and 26 emerging markets Source: MSCI Barra

Commodities Prices of futures contracts with the most open interest Currencies London close on Jan. 4
EXCHANGE LEGEND: CBOT: Chicago Board of Trade; CME: Chicago Mercantile Exchange; ICE-US: ICE Futures U.S.MDEX: Bursa Malaysia Per In Per In
Derivatives Berhad; LIFFE: London International Financial Futures Exchange; COMEX: Commodity Exchange; LME: London Metals Exchange; AMERICAS Per euro In euros U.S. dollar U.S. dollars EUROPE Per euro In euros U.S. dollar U.S. dollars
NYMEX: New York Mercantile Exchange;ICE-EU: ICE Futures Europe Argentina peso-a 6.4287 0.1556 4.9271 0.2030
Year Year
Euro zone euro 1 1 0.7664 1.3048
ONE-DAY CHANGE
Commodity Exchange Last price Net Percentage high low Brazil real 2.6547 0.3767 2.0347 0.4915 1-mo. forward 0.9997 1.0003 0.7662 1.3051
Corn (cents/bu.) CBOT 680.00 -9.25 707.25 679.50 Canada dollar 1.2861 0.7776 0.9857 1.0146 3-mos. forward 0.9992 1.0008 0.7658 1.3058
-1.34%
Chile peso 616.89 0.001621 472.80 0.002115 6-mos. forward 0.9985 1.0015 0.7652 1.3068
Soybeans (cents/bu.) CBOT 1365.50 -21.00 -1.51 1,435.00 1,356.00
Colombia peso 2307.42 0.0004334 1768.45 0.0005655 Czech Rep. koruna-b 25.367 0.0394 19.441 0.0514
Wheat (cents/bu.) CBOT 748.75 -6.75 -0.89 788.00 739.75
Ecuador US dollar-f 1.3048 0.7664 1 1
Live cattle (cents/lb.) CME 133.150 -0.700 -0.52 134.200 131.950 Denmark krone 7.4590 0.1341 5.7167 0.1749
Mexico peso-a 16.6384 0.0601 12.7520 0.0784
Cocoa ($/ton) ICE-US 2,224 -32 -1.42 2,280 2,210 Hungary forint 290.52 0.003442 222.66 0.004491
Peru sol 3.3272 0.3006 2.5501 0.3921
Coffee (cents/lb.) ICE-US 146.85 0.35 0.24% 151.95 144.30 Norway krone 7.3238 0.1365 5.6131 0.1782
Uruguay peso-e 25.149 0.0398 19.275 0.0519
Sugar (cents/lb.) ICE-US 18.86 -0.24 -1.26 19.75 18.77 Poland zloty 4.1120 0.2432 3.1515 0.3173
U.S. dollar 1.3048 0.7664 1 1
Cotton (cents/lb.) ICE-US 74.91 -0.48 -0.64 75.82 73.72 Venezuela bolivar 5.68 0.176188 4.35 0.229885 Russia ruble-d 39.645 0.02522 30.385 0.03291
Rapeseed (euro/ton) LIFFE 446.75 -0.75 -0.17 466 444 ASIA-PACIFIC Sweden krona 8.5513 0.1169 6.5539 0.1526
Cocoa (pounds/ton) LIFFE 1,422 -11 -0.77 1,446 1,417 Australia dollar 1.2482 0.8011 0.9566 1.0453 Switzerland franc 1.2085 0.8275 0.9262 1.0796
Robusta coffee ($/ton) LIFFE 1,949 4 0.21 1,969 1,908 1-mo. forward 1.2511 0.7993 0.9589 1.0429 1-mo. forward 1.2080 0.8278 0.9258 1.0801
Copper ($/lb.) COMEX 3.6995 -0.0175 -0.47 3.76 3.64 3-mos. forward 1.2566 0.7958 0.9631 1.0383 3-mos. forward 1.2068 0.8286 0.9249 1.0811
Gold ($/troy oz.) COMEX 1657.20 -17.40 -1.04 1,695.40 1,626.00 6-mos. forward 1.2649 0.7905 0.9695 1.0315 6-mos. forward 1.2050 0.8299 0.9235 1.0828
Silver ($/troy oz.) COMEX 30.210 -0.510 -1.66 31.54 29.24 China yuan 8.1307 0.1230 6.2316 0.1605 Turkey lira 2.3276 0.4296 1.7839 0.5606
Aluminum ($/ton) LME 2,089.00 -56.50 -2.63 2,145.50 2,089.00 Hong Kong dollar 10.1129 0.0989 7.7507 0.1290 U.K. pound 0.8137 1.2290 0.6236 1.6036
Tin ($/ton) LME 23,950.00 -200.00 -0.83 24,345.00 23,950.00 India rupee 71.6846 0.0139 54.9405 0.0182 1-mo. forward 0.8138 1.2289 0.6237 1.6034
Copper ($/ton) LME 8,060.00 -106.00 8,166.00 8,060.00 Indonesia rupiah 12605 0.0000793 9661 0.0001035 3-mos. forward 0.8139 1.2286 0.6238 1.6030
-1.30
Japan yen 115.02 0.008694 88.16 0.011343 6-mos. forward 0.8143 1.2281 0.6241 1.6023
Lead ($/ton) LME 2,355.00 -64.50 -2.67 2,419.50 2,355.00
1-mo. forward 115.00 0.008696 88.13 0.011346
Zinc ($/ton) LME 2,054.00 -73.00 -3.43 2,127.00 2,054.00 MIDDLE EAST/AFRICA
3-mos. forward 114.95 0.008700 88.10 0.011351
Nickel ($/ton) LME 17,405 -190 -1.08 17,595 17,405 Bahrain dinar 0.4919 2.0329 0.3770 2.6525
6-mos. forward 114.86 0.008706 88.03 0.011359
Crude oil ($/bbl.) NYMEX 92.96 0.04 0.04 93.87 91.52 Egypt pound-a 8.3847 0.1193 6.4262 0.1556
Malaysia ringgit-c 3.9775 0.2514 3.0485 0.3280
Heating oil ($/gal.) NYMEX 3.0150 -0.0101 -0.33 3.0702 2.9809 Israel shekel 4.9309 0.2028 3.7791 0.2646
New Zealand dollar 1.5749 0.6350 1.2070 0.8285
RBOB gasoline ($/gal.) NYMEX 2.7578 -0.0399 -1.43 2.8150 2.7447 Jordan dinar 0.9259 1.0800 0.7097 1.4091
Pakistan rupee 127.209 0.0079 97.495 0.0103
Natural gas ($/mmBtu) NYMEX 3.294 0.080 2.49 3.3710 3.0630 Philippines peso 53.303 0.0188 40.853 0.0245 Kuwait dinar 0.3672 2.7231 0.2815 3.5530
Brent crude ($/bbl.) ICE-EU 109.97 -0.94 -0.85 111.60 109.14 Singapore dollar 1.6031 0.6238 1.2286 0.8139 Lebanon pound 1964.59 0.0005090 1505.70 0.0006641
Gas oil ($/ton) ICE-EU 933.25 -4.00 -0.43 949.00 922.25 South Korea won 1386.25 0.0007214 1062.45 0.0009412 Saudi Arabia riyal 4.8928 0.2044 3.7500 0.2667
Taiwan dollar 37.903 0.02638 29.050 0.03442 South Africa rand 11.2120 0.0892 8.5931 0.1164
Sources: SIX Financial Information; WSJ Market Data Group
Thailand baht 39.774 0.02514 30.484 0.03280 United Arab dirham 4.7924 0.2087 3.6730 0.2723

WSJ.com Follow the markets throughout the day with updated stock quotes, news and
>> a-floating rate b-financial c-government rate c-commercial rate d-Russian Central Bank rate.
commentary at WSJ.com. Also, receive email alerts that summarize the day’s trading in Europe Source: ICAP Plc.
and Asia. To sign up, go to WSJ.com/email.
26 | Monday, January 7, 2013 THE WALL STREET JOURNAL.

BLUE CHIPS & BONDS

Below, a look at the Dow Jones Stoxx Dow Jones Industrial Average P/E: 15
Major players & benchmarks 50, the biggest and best known
companies in Europe, including the U.K. LAST: 13435.21
YEAR TO DATE:
s 43.85, or 0.33%
s 331.07, or 2.5%
Stoxx Europe 50: Friday's best and worst... OVER 52 WEEKS s 1,075.29, or 8.7%

Previous
close, in STOCK PERFORMANCE
Company Country Industry Volume local currency Previous session YTD 52-week
14000
BP PLC United Kingdom Integrated Oil & Gas 36,095,210 453.50 2.67% 6.8% -4.3%
Vodafone Group United Kingdom Mobile Telecommunications 79,449,842 160.05 1.68 3.6 -9.7 50–day
Anheuser-Busch InBev Belgium Brewers 1,343,025 67.62 1.62 2.9 45.7 moving average 13500
British American Tobacco United Kingdom Tobacco 2,301,357 3,175 1.62 1.7 4.7 t
Deutsche Telekom Germany Mobile Telecommunications 11,524,611 8.88 1.42 3.3 0.2
13000

Rio Tinto United Kingdom General Mining 3,640,454 3,613 -1.24% 2.9 8.8
High
UBS Switzerland Banks 7,757,864 14.72 -0.88 3.2 31.5 12500
SAP Germany Software 2,846,437 61.47 -0.85 1.3 45.7 Close
BHP Billiton United Kingdom General Mining 4,462,625 2,183 -0.77 2.5 11.9 Low
12000
Financiere Richemont Switzerland Clothing & Accessories 1,244,214 75.00 -0.66 5.0 52.7

...And the rest of Europe's blue chips 11500

5 12 19 26 2 9 16 23 30 7 14 21 28 4
Latest, Latest, Oct. Nov. Dec.
in local STOCK PERFORMANCE in local STOCK PERFORMANCE
Company/Country (Industry) Volume currency Latest YTD 52-week Company/Country (Industry) Volume currency Latest YTD 52-week Note: Price-to-earnings ratios are for trailing 12 months
GlaxoSmithKline 5,097,249 1,382 1.32% 3.5% -6.8% Reckitt Benckiser Grp 706,367 3,958 0.48% 2.0% 20.9%
United Kingdom (Pharmaceuticals) United Kingdom (Nondurable Household Products) DJIA component stocks
Imperial Tobacco Grp 2,018,925 2,443 1.29 2.9 0.8 Daimler 3,238,283 42.63 0.41 3.2 16.9
United Kingdom (Tobacco) Germany (Automobiles) Volume, CHANGE
Stock Symbol in millions Latest Points Percentage
ING Groep 12,032,064 7.39 1.23 4.7 35.5 H&M Hennes & Mauritz B 1,782,741 227.00 0.40 1.1 4.5
Netherlands (Life Insurance) Sweden (Apparel Retailers) AT&T T 20.9 $35.23 0.21 0.60%
Novartis AG 3,361,896 59.40 1.19 3.4 9.2 ENI 9,300,502 19.01 0.37 3.7 16.3 Alcoa AA 18.0 9.26 0.19 2.09
Switzerland (Pharmaceuticals) Italy (Integrated Oil & Gas) AmExpress AXP 3.9 59.61 0.61 1.03
Sanofi SA 1,692,994 73.67 1.18 3.2 31.0 Roche Holding Part. Cert. 846,723 190.20 0.37 3.4 16.8 BankAm BAC 130.6 12.11 0.15 1.25
France (Pharmaceuticals) Switzerland (Pharmaceuticals)
Boeing BA 3.3 77.69 0.22 0.28
Bayer 1,557,209 72.80 1.17 1.3 40.6 Banco Santander S.A. 34,720,192 6.33 0.36 3.8 18.5
Germany (Specialty Chemicals) Spain (Banks) Caterpillar CAT 5.6 94.92 0.52 0.55
Telefon L.M. Ericsson B 5,163,000 68.05 1.11 4.5 0.1 ABB 4,307,926 19.43 0.36 3.6 4.4 Chevron CVX 4.4 110.50 0.58 0.53
Sweden (Telecommunications Equipment) Switzerland (Industrial Machinery) CiscoSys CSCO 36.2 20.48 0.03 0.16
Banco Bilbao Vizcaya Argn 18,083,301 7.32 1.01 5.1 18.7 Diageo 3,729,301 1,825 0.36 2.1 28.9 CocaCola KO 14.8 37.66 0.06 0.16
Spain (Banks) United Kingdom (Distillers & Vintners)
Disney DIS 8.7 52.19 0.98 1.91
Standard Chartered 3,061,646 1,634 0.93 3.8 13.8 GDF Suez 3,574,065 16.00 0.35 2.7 -22.6
United Kingdom (Banks) France (Multiutilities) DuPont DD 5.2 45.73 0.44 0.97
BG Grp 5,829,547 1,038 0.78 2.5 -27.4 Barclays 31,307,173 276.70 0.25 5.4 50.7 ExxonMobil XOM 11.4 88.96 0.41 0.46
United Kingdom (Integrated Oil & Gas) United Kingdom (Banks) GenElec GE 29.6 21.20 0.10 0.47
HSBC Hldgs 16,019,794 667.60 0.77 3.2 34.2 Telefonica S.A. 11,574,904 10.48 0.24 2.8 -19.7 HewlettPk HPQ 22.0 15.14 ... ...
United Kingdom (Banks) Spain (Fixed Line Telecommunications)
HomeDpt HD 4.7 63.18 –0.12 –0.19
E.ON SE 7,339,496 14.51 0.76 2.9 -14.7 Zurich Insurance Group 302,016 248.90 0.20 2.3 16.3
Germany (Multiutilities) Switzerland (Full Line Insurance) Intel INTC 30.1 21.16 –0.16 –0.75
Deutsche Bank 3,713,415 34.79 0.74 5.6 28.9 Allianz SE 895,029 108.20 0.19 3.2 46.5 IBM IBM 3.3 193.99 –1.28 –0.66
Germany (Banks) Germany (Full Line Insurance) JPMorgChas JPM 23.9 45.36 0.79 1.77
Royal Dutch Shell A 2,220,037 2,155 0.72 1.5 -8.3 BASF 1,871,591 72.47 0.17 1.9 29.6 JohnsJohns JNJ 11.6 71.55 0.81 1.15
United Kingdom (Integrated Oil & Gas) Germany (Commodity Chemicals) McDonalds MCD 5.3 89.85 –0.78 –0.86
AstraZeneca 2,041,101 3,000 0.67 3.1 -0.3 L'Air Liquide 394,416 95.45 0.10 0.4 0.6 Merck MRK 15.4 41.97 –0.36 –0.85
United Kingdom (Pharmaceuticals) France (Commodity Chemicals)
Unilever 2,240,134 2,415 0.67 2.1 11.1 Siemens 1,505,477 83.93 0.08 2.1 10.3 Microsoft MSFT 51.8 26.74 –0.51 –1.87
United Kingdom (Food Products) Germany (Diversified Industrials) Pfizer PFE 28.5 25.96 0.11 0.43
National Grid 7,674,730 711.00 0.64 1.1 16.0 Total 3,278,734 39.82 -0.09 2.1 -0.4 ProctGamb PG 5.8 69.09 0.14 0.20
United Kingdom (Multiutilities) France (Integrated Oil & Gas) 3M MMM 2.6 95.37 0.70 0.74
Nestle 2,720,621 61.00 0.58 2.3 12.0 Tesco 14,787,692 349.45 -0.16 4.0 -11.3 TravelersCos TRV 1.9 74.06 0.64 0.87
Switzerland (Food Products) United Kingdom (Food Retailers & Wholesalers)
UnitedTech UTX 3.8 84.98 0.67 0.79
Unilever CVA 2,261,996 29.40 0.51 1.9 11.7 BNP Paribas 1,969,483 44.39 -0.17 4.2 56.0
Netherlands (Food Products) France (Banks) UtdHlthGp UNH 10.4 52.09 0.10 0.19
Moet Hennessy Louis Vuitt 522,115 141.85 0.50 2.2 30.3 Anglo American PLC 2,568,677 2,002 -0.62 5.7 -18.5 Verizon VZ 13.8 44.30 0.24 0.54
France (Clothing & Accessories) United Kingdom (General Mining) WalMart WMT 6.3 69.06 0.26 0.38
Sources: SIX Financial Information Source: WSJ Market Data Group

Credit derivatives
Tracking Spreads on credit derivatives are one way the market rates
creditworthiness. Regions that are treading in rough waters
Credit-default swaps: European companies
At its most basic, the pricing of credit-default swaps measures how much a buyer has to pay to purchase-and

credit can see spreads swing toward the maximum—and vice versa.
Indexes below are for five-year swaps.
how much a seller demands to sell-protection from default on an issuer's debt. The snapshot below gives a
sense which way the market was moving yesterday.

markets & Markit iTraxx Indexes

Index: series/version
Europe: 18/1
Mid-spread,
in pct. pts.
1.03
Mid-price
99.88%
Coupon
0.01%
SPREAD RANGE, in pct. pts.
since most recent roll
Maximum Minimum
1.41 1.03
Average
1.24
Showing the biggest improvement...
CHANGE, in basis points
Yesterday Yesterday Five-day 28-day
And the most deterioration
CHANGE, in basis points
Yesterday Yesterday Five-day 28-day

dealmakers Eur. High Volatility: 18/1

Europe Crossover: 18/1
Asia ex-Japan IG: 18/1
1.55
4.19
1.04
97.44
103.41
99.83
0.01
0.05
0.01
2.11
5.81
1.43
1.55
4.19
1.04
1.90
5.10
1.20
ALPHA Bk
SCANIA
Hellenic Telecom
1311
68
834
–78
–4
–43
–120
–4
–53
–214
–6
–177
AGBAR
Danske Bk
JTI UK Fin
117
130
34
3
2
...
4
–1
1
1
–4
–1
Japan: 18/1 1.56 97.36 0.01 2.27 1.56 1.93 ACE 48 –2 –5 –11 HBOS 74 1 –6 –6
Note: Data as of January 3 EDP Energias de Portugal 294 –15 –28 –41 BOC GROUP 28 ... ... ...
In percentage points UPM Kymmene 252 –12 –16 –19 Cr Agricole 150 1 –4 –9
Spreads
Index roll HSBC Hldgs 73 –4 –8 –15 Munich Re 53 ... –4 –9
Spreads on five- 5.00
Iberdrola 175 –8 –19 –19 Smurfit Kappa Fdg 59 ... 1 ...
year swaps for Europe Sub Financials 3.75 Royal Bk of Scotland 145 –7 –15 –24 mmO2 60 ... 1 1
corporate debt; t
Bco de Sabadell 384 –19 –61 –78 Deutsche Bahn 51 ... –1 –2
based on Markit 2.50
Europe Source: Markit Group
iTraxx indexes. t 1.25

0
July Aug. Sept. Oct. Nov. Dec. Jan.
Behind Europe's deals: Bank revenue rankings, UK
2012 2013 Behind every IPO, bond offering, merger deal or syndicated loan is one or more investment banks. Here are
Source: Markit Group investment banks ranked by year-to-date revenues from recent deals.
PERCENTAGE OF TOTAL REVENUE
Revenue, Equity Debt Mergers &
in millions share capital markets capital markets acquisitions Loans
Barclays $313 9.5% 21% 47% 18% 14%
JPMorgan 208 6.3 25 31 36 8
Goldman Sachs 194 5.9 8 35 48 8
HSBC 182 5.5 11 43 21 25
Morgan Stanley 178 5.4 20 29 47 4
WSJ.com>> Bank of America Merrill Lynch 166 5.1 9 27 50 15
Follow the markets throughout the day, with updated
RBS 157 4.8 5 54 10 30
stock quotes, news and commentary at WSJ.com.
UBS 154 4.7 12 21 52 15
Deutsche Bank 143 4.4 9 46 26 19
Also, receive emails that summarize the day’s trading in
Europe and Asia. To sign up, go to WSJ.com/Email. Source: Dealogic
THE WALL STREET JOURNAL. Monday, January 7, 2013 | 27

PERSONAL JOURNAL

This Year’s Must-Have Travel Apps

BY SCOTT MCCARTNEY and things often go wrong. Being
the first to know of a cancellation or
Updating your travel apps on long delay can put you first on the
your smartphone or tablet at the phone or in line to rebook.
New Year is a good habit to have— My new favorite: FlightTrack
like changing smoke-detector batter- Pro. It costs $9.99, but is well worth
ies. A number of new and established it. FlightTrack Pro pushes alerts to
apps offer more sophisticated tools your phone or tablet, shows a map
and information this year to make of your flight with weather and lets
your travels more enjoyable, easier you tap into a host of features, such
and safer. as terminal maps, SeatGuru evalua-
In my own New Year’s updating, I tions and a search function for al-
tried nearly 50 apps ternative flights. You can email your
THE MIDDLE to find the best of flight’s status to someone. Flight-
SEAT breed. Here’s a list Track will sync with Tripit and find
of my favorites. (All trips to track on calendars.
apps are free of charge except where FlightBoard ($3.99), made by
noted.) Mobiata, the same company that
produced FlightTrack, is an app
For Travel Shopping showing airport-like information
There’s no single perfect app for displays. You can sort the arrivals
shopping for airfare, but Kayak’s and departures by city or time,
app sails through the ocean of which could be helpful in finding
choices with a lot of power and another flight after you miss one.
grace. Kayak searches many data For those long hours waiting or
sources seeking the best price infor- harried races to connecting flights,
mation, including checking airline there are several useful airport apps
websites and other online reserva- worth considering. Travel Nerd gives
tion sites. It then sends you to the information about public transporta-
site you select for booking. tion, phone numbers for shuttle and
Airfare can be sorted by price, taxi companies, terminal maps show-
time, duration, airline, number of ing airport lounge locations and
Mobiata; Kayak (right)

stops and preferred layover airport.
With hotels, there’s a quick search
for deals for tonight near you, or
you can sort traditional results by
star-rating, price, brand, name or
distance from a location. Kayak of-
fers a flight tracker, a price alert no-
tification service, an airline direc-
tory, baggage-fee directory and
airport information. Kayak also of-
fers a packing list feature—basic
lists categorized as general, busi-
ness, romantic and family—and a
currency converter as well.
One of the best features is fare
“buzz.’’ Take a route and pick a
month: Buzz shows the “absolute
best” fares and the average fares
found in other users’ previous
searches, and tells you which airline
had that price and how old the
search was. Fare history is hard to
find and extremely valuable. Know-
ing what other shoppers were of-
fered can let you know whether the
fare you’re offered is a good deal or
not.
A Flier’s Favorite
FlightTrack Pro, a $9.99 app, offers a host of flight
information, including delay history and real-time status.
TripAdvisor’s app has a built-in
baggage fee estimator: Tell the app
how many bags you plan to check
and whether you have elite status on
any airlines that would waive bag
fees and it builds the fee charges into
fare quotes you get. The app also has
information on whether Wi-Fi is
available on a flight and what the
aircraft type is. It also shows the
cost of options such as upgrading to
a premium economy seat.
Hipmunk’s app has an easy-to-
read calendar display of fares by
date, and trips are shown with a time
bar and connections labeled in the
middle making it easy to see dura-
Navigating a Sea of Choices
Among other sources, Kayak’s free app shows fare data
from airlines, including the number of flights at that price.
tion and routing. You can sort by its app can be set to look for any win-
“agony’’ rating: The site looks at con- dow seat or any aisle seat, or for
nections, history of delays and other specific seats.
factors that make some flights less Once you have email confirma-
desirable. tions of your bookings, you can or-
One other shopping app of note: ganize them into one useful itiner-
Skyscanner has an easy to use “ex- ary with the Tripit app. Just set up
plore” function that shows the price an account and forward the confir-
to go many different places. mations to plans@tripit.com. Tripit
does a usually accurate job of iden-
For Pre-Departure Planning tifying your airline, hotel and car
Use SeatGuru to find recommen- reservations.
dations for the best seats to reserve
on flights. And an app called Seat For Flying
Alerts can notify you when a seat Flight tracking is important be-
you want opens up, instead of cause travelers need to act fast
checking seat maps constantly. The when things go wrong at airlines—
other amenities. It even has parking
rates at airports and nearby hotels,
which can be considerably cheaper.
GateGuru has star ratings on air-
port restaurants as well as dis-
counts offered. It can tell you the
closest restaurants depending on
where you are in an airport and get
you a free pretzel at Auntie Anne’s
with a special offer on your mobile-
phone screen.
For Destinations
Once you get to where you want
to go, you’ll want to have a good
mapping program. Google Maps can
be invaluable when you’re in an unfa-
miliar city or want to make sure the
cabdriver isn’t taking the long way.
Travel App Box ($1.99) is a useful
tool that includes functions to help
convert currency and clothing sizes,
use public transportation and look
up country codes for phone calls.
For dining, Yelp has long been a
good source of restaurant ratings
and information.

Startup Mentors Say Trust Your Instinct messy, incomplete data because
[ The Accelerators ] that’s mostly what you’re stuck
with.
Building a company from Don’t get me wrong—you need
scratch doesn’t always go data. You should be gathering all
according to plan. Founders may the data you can from the very
need to make a substantial change beginning. But you also need to
to their business models along the know that your data isn’t
way in order to avoid failure. absolute. It is incomplete, and
The Wall Street Journal blog you simply don’t have enough of
The Accelerators—an online forum it to base your decisions fully on
where successful entrepreneurs, data. You gather all the input you
angel investors and venture can, but your decision really boils
capitalists share their insights— down to both using your head
asked a group of startup mentors AND trusting your gut.
when founders should pivot or When you’re starting a new
persevere. company that’s doing a new
Edited excerpts: thing, possibly in a newly created
market, it isn’t always so easy to
Trust Your Gut measure your results. You should
The startup life measure every aspect of your
is quantitative business, gathering as much data
and qualitative at as you can. But at the same time,
the same time. It you should be suspicious of this
is both an art and data, regarding all of it as
a science. You anecdotal for the time being.
have to be comfortable with What appears to be a pattern
early on might turn out to be
something very different in the
long term.
Based on your confusing and
uncertain data, you’ll get plenty
of conflicting input from various
people. Again, that’s something
you have to accept and become
comfortable with. You have to
You’ll get plenty of
conflicting input....That’s
something you have to
become comfortable with.
learn how to make decisions in
the midst of data and input that
is confusing and conflicting. And
you can only do this by learning
to trust both your head and your
gut.
—David Cohen, founder
and CEO of TechStars
Experiment Often
A long time ago,
I realized that
every successful
business was a
continuous process
of small
experiments that operated in the
context of a long-term vision.
When an experiment worked, you
did more of it. When it didn’t, you
ended it and moved on.
The magnitude of these
experiments is dependent on the
stage and resources of the
company. If you are a three-person
startup with very little money in
the bank, your experiments are
tiny ones. As you get bigger and
have more success, your
experiments can get larger.
Make sure you measure your
experiments. Create a hypothesis
about what a successful outcome
would be. Try to control as many
variables as you can while you are
testing something new, so you
understand what is actually going
on. If you find yourself devolving
into a qualitative discussion about
all elements of the experiment,
you won’t learn much.
If your successful experiments
are pushing you in a direction that
is different from your long-term
vision, or from the existing core
business you are running, step
back and think hard about what
you are learning. Do they reveal
surface problems in your existing
business or strong suggestions
about better approaches?
If your successful experiments
are doing this, then consider a
serious shift in your business. But
in the absence of this data, be very
careful about defaulting into a
mode of constantly and
aggressively yanking on the
steering wheel of your business.
Instead, do small experiments,
often.
—Brad Feld,
co-founder of the Foundry Group
28 | Monday, January 7, 2013 THE WALL STREET JOURNAL.

BOOKS

Architectural and Cultural Guide:
Pyongyang
Edited by Philipp Meuser
DOM, 368 pages, $49.95
BY ERIC GIBSON
Browse the travel section of any
bookstore and along with old reli-
ables such as Michelin you’ll find a
plethora of other titles and brands
covering just about every destina-
tion and taste. Surely the strangest
addition to this genre is the two-
volume “Architectural and Cultural
Guide: Pyongyang,” edited by
Philipp Meuser, a German architect
and architectural historian. Strange
because Pyongnang is unlikely to be
on anyone’s “see before you die” list
and because, even if it were, it’s not
an easy place to see. The capital of
the Hermit Kingdom receives only a
few hundred visitors a year, the
bulk of them officially sanctioned
and accompanied every step of the
way by government minders.
Kingdom of Kitsch
a traffic cop on duty at an
intersection, without a single car in
sight.
But the city’s air of unreality de-
rives in the main from the fact that
Pyongyang is a suffocating propa-
ganda hothouse where everything—
the layout, buildings, monuments,
billboards, signage—is designed to
express the ideology of “Juche,” or
national self-reliance. As such, ev-
erything is geared to glorifying the
state and its leader and reminding
all the citizens that their primary
raison d’être is to continue the rev-
olutionary struggle. Mr. Meuser
tries to understand all this by tak-
ing us through Pyongyang’s streets
“as though exploring this city were
no different from rambling through
Tokyo, Copenhagen or Berlin.”
The book is not so much a Bae-
deker—there are no transportation
tips, no business hours, no walking
tours or other standard guidebook
information—as an attempt to
parse a city that Mr. Meuser de-
scribes as “an architectural cabinet
of curiosities. . . . arguably the
world’s best preserved open-air mu-
showcase of totalitarian kitsch—
that perverse byway of genuine art.
The animating principle of totalitar-
ian kitsch is the glorification of the
state and its leader. The style bor-
rows its vocabulary from the forms
of legitimate art—the figure, the
equestrian statue, the landscape—
but it empties them of all but the
most cloying, shallow emotion, rely-
ing on an inflated sense of scale
and an off-the-shelf, formulaic real-
ism.
Indeed, totalitarian kitsch uses
scale as an autonomous aesthetic
element. This quality is abundantly
on display in Pyongyang, in its 60-
foot statues of Kim Il-sung, the
country’s founding leader, and in
the official buildings, with their
floor areas running to hundreds of
thousands of square feet. The idea
here is that size is the message. By
dwarfing the populace, such gigan-
tism conveys the subservience of
the individual to the state. Still,
when it comes to size, Kim Il-sung
and Kim Jong-il were pikers. Pyong-
yang’s Arch of Triumph (1982) is
about equal to Paris’s Arc de Tri-
DOM (2)

seum of socialist architecture.” omphe. The triumphal arch that Al-

A guidebook that warns
that some of its contents
may get you arrested at
your destination.
“Architectural and Cultural
Guide: Pyongyang” must also count
as the only travel guide that comes
with a warning to leave it behind.
“It is possible that some of the in-
formation published is classified
under North Korean law,” reads an
advisory note. “The publisher can-
not accept liability for any prob-
lems with local authorities that may
arise from taking this publication
into North Korean territory.”
Why write a guide to such a
place? Mr. Meuser’s stated aim is to
“lend normalcy to the abnormal.”
He writes of the “pervasive feeling
. . . of bemusement and perplexity
in the face of the totalitarian re-
gime” when you visit North Korea.
Some of this feeling stems from the
near-ghost-town character of
Pyongyang. A city of some 1,200
square miles (about double Lon-
don’s geographical size), it has a
population of about three million.
Although the book’s photographs
show vast residential areas popu-
lated by thick clusters of high-rise
apartment buildings, the streets are
virtually empty. One of the most
memorable images in the book is of
The first volume of the book
consists primarily of photographs
and is divided into sections such as
“Urban Planning,” “Residential
Buildings” and “Monuments.” The
second is a collection of essays,
three by Mr. Meuser and the rest by
two other architectural historians,
one South Korean and the other,
like Mr. Meuser, German. As a bo-
nus of sorts, “Architectural and Cul-
tural Guide: Pyongyang” includes a
10,000-word excerpt from a mani-
festo titled “On Architecture”
(1991). It was written—or so we are
asked to believe—by Kim Jong-il,
North Korea’s leader from 1994 un-
til his death in 2011. “It is more im-
portant that architectural struc-
tures reflect revolutionary ideals,”
reads a typical sentence.
For all its mix of elements, Mr.
Meuser has produced a book that is
at once unique and invaluable, the
most in-depth study of totalitarian
art and aesthetics since the Russian
art historian Igor Golomstock pub-
lished his sweeping history of the
subject 12 years ago. Only this book
has the advantage of being focused
on work that is still standing and
visible, unlike the material from the
Nazi and Soviet eras discussed by
Mr. Golomstock.
Pyongyang was 90% destroyed
during the Korean War. So its later,
ground-up rebuilding as a commu-
nist capital makes it a textbook
bert Speer designed for Hitler—part
of a redesign of Berlin that was
carefully planned but never built—
was so vast that Paris’s would have
fit snugly into its aperture.
In Pyongyang, sometimes strain-
ing for the Big Statement has back-
fired, as in the case of the Ryu-
gyong Hotel. Under construction
since 1987, this 105-story, 6,000-bed
pyramid is still unfinished, partly
because its source of funding dried
up with the collapse of the Soviet
Union. “Looming over the city like a
portent of doom, it is a daily re-
minder of the biblical Tower of Ba-
bel,’” writes Mr. Meuser. Or of a
Potemkin village. Unusually for a
building of that kind, the hotel is
made entirely out of concrete. But
“while a steel construction would
have made better structural sense,”
writes Mr. Meuser, “it would have
cost three times as much.”
If North Korea could be said to
have made any “contribution” to
the totalitarian-kitsch aesthetic, it
is in Pyongyang’s two giant memo-
rial complexes, the Grand Monu-
ment on Mansu Hill (1972) and the
Victorious Fatherland Liberation
War Memorial (1993). Both consist
of enormous plazas, some 450,000
square feet in area, dominated by a
statue and subordinate sculptural
groups. The Mansu Hill monument
features, at its center, a 60-foot-
high statue of Kim Il-sung; flanking
NOT TO SCALE The Grand Monument on Mansu Hill features a 60-foot statue of
Kim Il-sung; a sculpture celebrating the founding of the Communist Party (above).
him are two 150-foot-long sculp-
tural groups, each with more than
100 figures parading ecstatically
alongside a stylized, 75-foot-long
flag. The war memorial is similarly
designed but even more elaborate.
These memorial complexes allow
us to speak of something totally
new: the theater of totalitarian
commemorative art. They are a hy-
brid form, a fusion of the tradi-
tional, stand-alone, single-figure
monument and the Party rally.
Think Nuremberg, only with dicta-
tor and martial attendants frozen in
a perpetual act of exhortation. Visi-
tors to these monuments become
participants in a display of coercive
propaganda as much as if they were
attending a live outdoor assembly.
It’s easy to make fun of Pyong-
yang’s Ozymandias statuary, its
comical anachronisms (such as the
monument, unveiled in April, show-
ing the late Kim Jong-il astride a
rearing charger) and its government
buildings dolled up with Vegas lev-
els of glitz. But this book takes us
beyond the laughter to see the cost
to the Korean people of this preen-
ing ideological environment. Public
monuments and buildings in Pyong-
yang are illuminated at night, but
private residences are largely dark.
Artists aren’t independent creators
but cogs working in teams with
hundreds of others to crank out
propaganda images of the Kims. Of-
ficial buildings may be constructed
of lavish materials—quarried stone
and solid-gold door pulls—but
housing for “the masses” is made
from pre-cast concrete that quickly
begins to crack and leak. The $100
million cost of the mammoth
Mangyongdae Schoolchildren’s Pal-
ace (1989), notes Mr. Meuser drily,
“exceeds the total monthly income
of the entire working population of
North Korea.” No wonder this book
carries a warning.
One day the regime will fall and
democracy will come to North Ko-
rea. We can only hope that, when it
does, the successor government will
preserve the monumental, public,
propagandistic Pyongyang in all its
perverse glory. It would be a real
tourist destination, the world’s only
totalitarian-kitsch theme park—a
kind of lopsided Disneyworld—and
an object lesson in what happens
when art is hijacked by the state,
and the individual is ground be-
neath the wheels of a repressive
ideology.
—Mr. Gibson is the Journal’s
Leisure & Arts Features editor.
THE WALL STREET JOURNAL.
Let Your Kids Play With Matches
The World Until Yesterday
By Jared Diamond
Viking, 498 pages, $36
BY STEPHEN BUDIANSKY
It must say something about the
deep human longing for big ideas
that explain everything that books
like Jared Diamond’s “Guns, Germs,
and Steel” (1997) or Thomas Fried-
man’s “The World Is Flat” (2005) do
so well. Nobody could possibly read
them for literary pleasure: Books of
this sort are invariably ponderous,
plodding, even deathly dull, their au-
thors attempting to leaven the pro-
ceedings with gimmicks (lists, cutesy
acronyms) and hand-holding autho-
rial intrusions (“let me explain . . .”)
as a substitute for good writing.
They sell like hot cakes.
“Guns, Germs, and Steel” trans-
formed Mr. Diamond from an ob-
scure ornithologist and physiologist
(his original specialty was the gall
bladder) into a star among “public
intellectuals.” That book’s basic
premise—which earned Mr. Dia-
mond the enmity of academics in
both the humanities and social sci-
ences and from both ends of the po-
litical spectrum—was that the
global domination of Western soci-
eties was mostly geographic and en-
vironmental happenstance. Favor-
able climates and soils and the
availability of animal and plant spe-
cies suitable for domestication
largely determined everything that
has occurred in the 11,000 years
since the rise of agriculture: Food
surpluses due to more efficient cul-
tivation led to higher population
densities, political centralization
and advanced technology.
Jared Diamond is sensibly
cautious about
romanticizing the primitive
world or suggesting
traditional customs always
reflect innate wisdom.
The Kaulong practice of
widow-strangling
produced no societal
benefit, for instance.
Mr. Diamond’s theory had the vir-
tue of offering a neat explanation for
cultural differences that did not rely
upon any suggestion of inherent ra-
cial superiority of one group over
another. It had the vice of embracing
an environmentally deterministic
idea of cultural evolution that most
anthropologists view as naïve or ri-
diculous, and of ignoring altogether
the role of human agency. Leftist so-
cial historians pointed out that Mr.
Diamond completely swept out of
the picture moral choices such as co-
lonialism and enslavement that kept
many parts of the world in subjuga-
tion for centuries. Conservatives
complained that the author dis-
counted the importance of Western
moral and political philosophy, par-
ticularly the concepts of individual
liberty, property rights and free mar-
kets, in making scientific and mate-
rial progress possible.
In “Collapse” (2005), Mr. Dia-
mond extended the idea of environ-
ment as a cultural driving force to
explain the sudden demise of civili-
zations, such as the Anasazi of the
American Southwest and the Easter
Islanders, and sweepingly argued
that their fate will be ours unless we
Monday, January 7, 2013 | 29
BOOKS
reduce human population and re- by,” “Before answering this ques-
source consumption. In “The World tion,” “In the preceding section we
Until Yesterday,” however, Mr. Dia- discussed,” “Having thus addressed
mond backs away some from the the question . . . .” In other places he
search for pat, all-encompassing an- sounds like a tedious professor lec-
swers. The book is a much more per- turing to morons: “There are differ-
sonal and anecdotal account that ences among people of the same
draws heavily on his own experi- age.”
ences among the primitive tribes of The sense of having stumbled
New Guinea with whom he has lived into a middle-school textbook is re-
for extended periods since 1964 inforced by the gratuitous inclusion
while carrying out field work on the of numerous clunky color photos de-
ecology and evolution of birds. picting the obvious, such as a fat
Although his stated purpose, as American eating a box of fried
the book’s subtitle declares, is to chicken to illustrate our unhealthy
find out “what can we learn from modern diet. He spends pages on di-
traditional societies?,” Mr. Diamond dactic definitions of terms: “war,”
is appropriately cautious about ro- “religion,” “tribe.” He describes, in
manticizing the primitive world or mind-numbingly unnecessary detail,
suggesting that traditional customs the physical appearance and techno-
always reflect innate environmental, logical amenities of a modern air-
medicinal or spiritual wisdom. One port in New Guinea (ATM, baggage
of the most admirable qualities of conveyor belt, X-ray scanners) to
this book is, in fact, a refreshing make the point that a modern air-
skepticism toward simple explana- port in New Guinea now looks the
tions. Mr. Diamond notes early on same as a modern airport in the rest
that, while some traditional beliefs of the world. I think we get it.
and practices may reflect effective Some of the “lessons” Mr. Dia-
adaptations to environmental condi- mond draws, moreover, border on
tions and social needs, others are the fatuous, or at least strained.
more about maintaining internal Raise our children bilingually; re-
power hierarchies, while still others spect the elderly; have stimulating
have no sane reason for existing at dinnertime conversation instead of
all: They are just unique products of watching TV or playing videogames.
Martin Schoeller/August(4)
the infinite vagaries of human imagi- “Diet and eating habits are an area
nation and the quirks of history. in which there is a lot that we can
To take one particularly bizarre do as individuals to help ourselves,”
and grisly example, up until 1957 the he informs us. No, really? Do we
Kaulong people—one of a dozen sim- need to read 500 pages about primi-
ilar tribes living in identical environ- tive societies to reach such cookie-
mental circumstances on the island WELL-ADJUSTED Children in the Hadza tribe of New Guinea are allowed to play cutter self-help prescriptions?
of New Britain, just east of New with and even suck on knives as infants. Other groups in the area bear scars from But when Mr. Diamond gets done
Guinea—practiced the ritual strangu- playing near fires as toddlers without supervision. Young people in these cultures trying to distill everything into a few
lation of widows. None of the adja- grow to be responsible, articulate and competent—and the ‘adolescent identity talking points suitable for a publicity
cent tribes did, and, as Mr. Diamond crises that plague American teenagers aren’t an issue.’ release, he ends with more interest-
observes, there is no evidence that ing and subtle observations. I was
“Kaulong widow strangling was in issue.” But Mr. Diamond admits that organized around a series of topics particularly struck by what the New
any way beneficial to Kaulong soci- all these impressions “are just im- (war, religion, children, danger and Guineans themselves had to say
ety or to the long-term (posthu- pressions,” hard to measure and accidents, health, language), it really about the benefits of having entered
mous) genetic interests of the stran- prove, and his ultimate verdict is nu- is at heart a ramble. That could be the modern world in the decades
gled widow or her relatives.” It was anced: “At a minimum . . . one can fine, too, except that Mr. Diamond since their first contact with West-
just one of those things, yet it was say that hunter-gatherer rearing suffers from an all-too-familiar syn- erners in 1931. While they valued
so firmly ingrained as a custom that practices that seem so foreign to us drome, albeit one that normally af- much of the technological conve-
the widows themselves perpetuated aren’t disastrous, and they don’t flicts academic scientists only after nience of the Western lifestyle—
it, insisting that a male relative produce societies of obvious they have won a Nobel Prize; he is matches, clothes, soft beds and espe-
strangle them when their husbands sociopaths.” convinced that everything he has cially not having to worry constantly
died, even taunting or mocking his One advantage of Mr. Diamond’s done and every thought that has oc- about having enough to eat—it was
manhood if he quailed at the task. anecdotal approach in “The World curred to him not only is interesting the non-material benefits that
Mr. Diamond offers some intrigu- Until Yesterday” is that the details but contains a valuable insight worth loomed even larger, above all the
ing evidence to suggest that tradi- can be interesting even when they sharing with the world. (This in- end of tribal warfare.
tional societies may have a thing or do not offer any larger lessons. This cludes Mr. Diamond’s experience of “Life was better since the govern-
two to teach us about raising chil- is especially the case when it comes having recurrent diarrhea in the jun- ment had come,” one Western an-
dren, however. He notes that in most to the many bizarre and varied su- gle, from which he draws a consider- thropologist was told by members of
hunter-gatherer cultures children are perstitious traditions he describes, ably less-than-profound conclusion the Auyuna tribe, since a man “could
nursed on demand until age 3 or 4, such as elaborate food taboos (eat- regarding the importance of leave his house in the morning to
sleep with their parents, are com- ing kangaroo tail, according to one personal hygiene.) urinate without fear of being shot”
forted instantly when they cry, and Aborigine tribe, causes premature It also results in much uneven- by an arrow from a hostile neighbor-
play together in multi-age play baldness), and to some of the more ness of coverage. He expends dozens ing tribesman. In 1931, Mr. Diamond
groups. They also are rarely pun- hair-raising practices that appar- of pages belaboring the utterly obvi- notes, a New Guinea highlander liv-
ished and allowed far more freedom ently were the norm in the primitive ous—the Western diet has too many ing a few dozen miles from the coast
than we are generally comfortable world. Infanticide, he notes, is a not calories and leads to high rates of di- would never have seen the ocean in
with. Among the !Kung and Aka pyg- uncommon practice in traditional so- abetes—while inexplicably devoting his lifetime: The idea of traveling
mies of Africa, children are never cieties, a way of disposing of de- little more than a sentence to the en- even 10 miles from his village “with-
physically disciplined, on the formed, sickly or simply excess chil- tire subject of sex, courtship, love out being killed by an unknown
grounds that they “have no wits and dren that would be an unsupportable and marriage, offering the single ob- stranger . . . would have been un-
are not responsible for their ac- burden on their parents and the servation that, in most traditional thinkable.”
tions,” Mr. Diamond writes. “Instead, group. In hunter-gatherer societies, societies, “willing sex partners are And one New Guinean woman
!Kung and Aka children are permit- the overriding fact of life is a limited almost constantly available.” I am told Mr. Diamond that what she val-
ted to slap and insult their parents.” food supply, and a woman who is sure I am not the only reader who ued most of all about life in the U.S.
In one tribe in the New Guinea still nursing an older child may might have been interested in hear- was its “anonymity,” the freedom to
Highlands, Mr. Diamond noticed that abandon or deliberately neglect a ing a little more about that. be alone, to have privacy, “and not to
most of the adults had serious burn newborn so that the older will live; People who write in order to have one’s every action scrutinized
scars. It turned out these were likewise she may abandon one of write a good book, as opposed to and discussed.” As Mr. Diamond in-
mostly acquired in infancy: The two twins. Other primitive tribes those who write to impart their sightfully notes, this is simultane-
adults made it a practice never to in- similarly do away with the old and great wisdom, know that the first ously one of the greatest disadvan-
terfere with a baby, to the point of sick; this is sometimes done by leav- rule is that most of one’s thoughts tages of the modern world, the
not preventing them playing around ing them behind when shifting camp, are not even worth writing down, loneliness, alienation and tension of
or touching a fire. (Other groups let sometimes by more active means— and a good many that do get written constantly being among strangers.
small children play with sharp like encouraging them to jump off down deserve to be ditched before One wishes that the author’s willing-
knives.) cliffs. anyone else sees them. Mr. Dia- ness to confront complexity and
Westerners who have lived with The problem with combining a mond’s prose, which shows little evi- avoid simple answers had informed
these small-scale societies are sort-of-anecdotal memoir with a dence of ever having been subjected more of this disappointingly uneven
“struck by the precocious develop- sort-of-big-idea book, however, is to such discipline, is at times almost book.
ment of social skills in their chil- that Mr. Diamond insists on trying to comically inept. He frequently —Mr. Budiansky’s latest book is
dren”; they are responsible, articu- milk significance out of everything sounds like a caricature of a particu- “Blackett’s War: The Men Who
late and competent, and the that happens to him, with consider- larly tedious professor, pausing ev- Defeated the Nazi U-boats and
“adolescent identity crises that ably varying degrees of success. Al- ery few paragraphs to interject, Brought Science to the Art of
plague American teenagers aren’t an though the book has been nominally “Now, let’s consider,” “Let’s begin Warfare,” forthcoming from Knopf.
30 | Monday, January 7, 2013
Portuguese agent Jorge Mendes, left, with Argentinean soccer legend Diego Maradona, center, and Real Madrid’s Radamel Falcao in Dubai in December.
Controlling a Top Soccer Team
Without Actually Buying One
BY GABRIELE MARCOTTI
Jorge Mendes is an agent who
doesn’t live in Madrid. But it
doesn’t take a rocket scientist to
figure out why the former semi-
professional soccer player, DJ and
nightclub owner might feel that
the Spanish capital is very much
his town.
Mendes represents three im-
portant players at Atletico
Madrid: Tiago, Diego Costa and
Radamel Falcao. He also has Ru-
ben Micael, currently on loan at
Braga. And it is across town at
Real Madrid where his presence is
really felt. Cristiano Ronaldo, the
man challenging Lionel Messi for
the unofficial crown of world’s
greatest player, is a Mendes cli-
ent. So are two more regulars,
Pepe and Angel di Maria, and two
reserves, Fabio Coentrao and
Ricardo Carvalho. Even Real
Madrid’s manager, Jose Mourinho,
is a Mendes man.
It isn’t unheard of for a single
superagent to represent a big
chunk of one team. But it is ex-
tremely rare for him to also man-
age the manager.
What this means is that Men-
des’s role at Real Madrid may be
unprecedented at the highest level
of soccer—and possibly all of
sports.
In some other sports leagues,
such as the NBA, Mendes’s situa-
tion is expressly forbidden be-
cause of the potential for conflicts
of interest. Imagine if the same
agent represented Kobe Bryant,
Pau Gasol and Metta World Peace,
plus Los Angeles Lakers coach
Mike D’Antoni, and you begin to
understand why. Soccer, however,
remains largely unregulated in
this regard.
It’s because of soccer’s
laissez-faire regulations
that Mendes enjoys huge
influence over Real Madrid.
With Mendes, it isn’t just the
quantity of clients, but also the
quality. Then there is the fact that
Real Madrid is among the biggest
clubs in the world by any metric.
Placing a transfer value on
players is tricky and subjective,
but it isn’t a stretch to suggest
that his Real Madrid clients alone
approach the $500 million mark.
The Atletico crew is less lucrative,
but Falcao also has a buyout
clause in his contract of about $78
million.
Indeed, the recent Globe Soc-
cer Awards in Dubai were an ode
to Mendes’s hegemony. Falcao
won Player of the Year; Atletico
Madrid won Team of the Year;
SPORT
Mourinho won both Coach of the
Year and an award for being the
biggest media attraction in soccer.
And Mendes himself won Agent of
the Year—for the third straight
year.
These awards aren't the oldest
or most prestigious in the game—
it sometimes feels as if baubles
are handed out based on whoever
shows up—but they’re still a de-
cent bellwether of soccer clout.
And there is little question that
Mendes’s influence is outsize and
unmatched. At Real Madrid, it is
becoming an issue that could turn
messy as contractual and person-
nel issues come to the fore. Fur-
ther complicating matters is the
club’s unusual structure.
At most clubs, the coach works
with a general-manager figure to
decide personnel matters. Usually,
the general manager gets his way,
pending final approval from the
chief executive and/or president.
But Real Madrid hasn’t had a tra-
ditional general manager since
Jorge Valdano, who often failed to
see eye-to-eye with Mourinho, left
the club in 2011. Mourinho now
answers directly to Jose Angel
Sanchez, the club’s de facto CEO.
So what does this mean? Take
Ronaldo, who has expressed inter-
est in extending and revising his
contract, which expires in June
2015. There is no question that he
deserves a new deal and a raise.
THE WALL STREET JOURNAL.
HEARD ON
THE PITCH
Big Boys’ Cup of Kindness
Though a dozen third-round
matchups have yet to be decided
HEARD ON
in the English FA Cup, the sides al-
ready have an idea of what the
THE FIELD
fourth round will look like. And it
raised the possibility of only three-
all Premier League fixtures. The
winner of the West Ham-Manches-
ter United replay will face Fulham
or Blackpool, Manchester City could
play Stoke City if Stoke beats
Crystal Palace, while Sunderland
will meet Everton, if they can over-
come Bolton and Cheltenham,
respectively.
The draw was otherwise fairly
gentle on the top Premier sides.
Tottenham knows it will face a
club from the Championship in
Leeds or Birmingham. And Chelsea
travels to League One side Brent-
ford or League Two’s Southend.
Brighton, which stunned New-
castle 2-0 on Saturday, was re-
warded with another stiff test,
albeit at home. The Seagulls host
either Swansea City or Arsenal,
who drew 2-2 in Wales on Sunday.
Finally, the giant-killer from the
fifth tier of English soccer, Luton
Town, will get a taste of the Pre-
mier League when it travels to
Norwich. Luton booked its spot in
the fourth round after beating the
Championship’s Wolves, a team
that sat some 60 places above it.
The fourth round will unfold
European Pressphoto Agency
over the weekend of Jan. 26.
—Joshua Robinson
Vilanova Bounces Back
Barcelona manager Tito Vi-
lanova returned to the bench Sun-
day night after undergoing surgery
for a recurrence of his cancer of
the salivary gland last month.
His assistant, Jordi Roura, has
been in charge for several weeks,
but Vilanova appeared to recover
quicker than expected. Roura said
before Barcelona’s clash with Espa-
nyol that Vilanova, 44, “still has to
undergo treatment but he is in
good spirits and very strong. That’s
the important thing.” —J.R.
The questions are how much, and Lyon Humbled
who makes that decision. Ordinar- If the FA Cup held few surprises
ily, the CEO, general manager and for top English sides, the Coupe de
manager would huddle together, France more than made up for it
with the chief executive consult- on Sunday. Lyon, the cup holder
ing the bean-counters and having and Ligue 1 title contender, fell to
ultimate say. But here, there is no Epinal, semiprofessional strugglers
general manager, and the manager from French soccer’s third tier. Epi-
and player share the same agent. nal, 19th in its division, rattled
It isn’t an untenable situation, of Lyon’s cage with two quick goals,
course, but it is far from ideal. but the Ligue 1 outfit was up 3-2
Such is Mendes’s status as a after 61 minutes. A 76th-minute
superagent that there seems to be equalizer from Epinal brought extra
no limit to what he might do. time and a penalty shootout,
The most fanciful—but theo- where the minnows booked their
retically possible—theory is that spot in the last 32. —J.R.
one day he’ll package a bunch of
his clients with Mourinho and of-
fer a giant bulk deal to one lucky
club, perhaps some nouveau-riche
entity with a billionaire owner
looking to make an instant splash.
With a bit of foresight, he could
assemble an impressive Mendes
United team (managed by
Mourinho, of course) without
breaking the bank in transfer fees.
Mendes rose to the top of the
soccer world because he’s good at
what he does. But it’s because of
soccer’s existing laissez-faire reg-
ulations that Mendes now enjoys
huge influence over Real Madrid’s
affairs.
—Gabriele Marcotti is the
world soccer columnist for
Agence France-Presse/Getty Images
the Times of London
and a regular broadcaster Epinal’s players celebrate
for the BBC.
THE WALL STREET JOURNAL.
‘Formal Fridays’ Defy Conformity
Dressing in Their Sunday Best Suits Some Employees Tired of Casual Office Wear at Hip Firms
BY ANDY JORDAN
San Francisco
T
he trappings of a noncon-
formist workplace were on
display recently at the head-
quarters of a startup here named
Pulse: There was the foosball ta-
ble, the containers of free M&Ms,
the bottle of whiskey on top of
the fridge.
And the guys standing around
in suits and ties.
It was Friday, after all, and to
truly defy conformity at some
tech outfits on that day of the
week, one must not wear jeans or
flip-flops.
Pulse employees were practic-
ing “Formal Friday,” dressing in
their Sunday best. “It is kind of
flipped…because we’re super ca-
sual the entire week,” says Akshay
Kothari, co-founder of Pulse, a
startup that makes a news-orga-
nizing app. “You want to break
the monotony.”
Many American companies have
come around to practicing Casual
Friday, encouraging employees to
dress down after four days of busi-
ness wear. Silicon Valley was a pio-
neer of that basse couture, often
opting for casual every day.
But Casual Friday just won’t do
anymore for some hip companies
here and in other trendy cities—
now that everybody’s doing it.
At some tech startups, Formal
Fridays stem from employees’ de-
sire to free themselves from the
hoodies and jeans that are stan-
dard weekday dress.
It helps to be able to shock
their East Coast counterparts. The
instigator for Formal Fridays at
Pulse, Albert Lai, says East Coast
clients visiting the San Francisco
office on a Friday are surprised.
“They kind of assumed all Califor-
nians just wore Hawaiian shirts all Reginelli, who wore a hand-tied
day,” he says, wearing a bow tie
he says it took an hour to tie.
For some Silicon Valley compa-
nies, like gaming giant Zynga Inc.,
there are informal Formal Friday
traditions, where small groups of
employees dress up on occasional
Fridays.
Even Facebook, whose chief ex-
ecutive, Mark Zuckerberg, took
the hoodie and T-shirt uniform to
new heights, has a design team
that often dresses up for what has
come to be known as
“Corporate Friday,” a
team tradition that dates
back to as early as 2005.
“There may be a drop
of irony to it as the pre-
vailing dress code at Face-
book is casual, but more
than that I think it’s a nod
to the culture of tran-
scending corporate poli-
tics,” says Skip Bronkie, a
designer on the team.
“Sometimes,” he says, Albert Lai
“you just want to bring
the heat for no particular reason
at all, and Corporate Friday is
your opportunity to suit up.”
It is difficult to pinpoint when
the tradition got started, but one
early proponent was the Barbar-
ian Group, a New York digital
marketing and creative agency. It
started at Barbarian’s Boston of-
fice as a 2004 cocktail-fueled joke
that led to email invites with im-
ages of Ken and Barbie dolls
dressed in formal duds.
The invitations motivated staff- Shaw, Microsoft corporate vice
Monday, January 7, 2013 | 31
OFF THE WALL
a particular team, tends to agree.
When employees of his company
dress up on some Fridays, “I feel
like a banker…and I want to pro-
duce.”
For jobFig, instituting even a
semiregular Formal Friday was a
way to introduce some cohesive-
ness in a company with no formal
office, he says.
The three full-time people on
the payroll work from home in pa-
jamas on some days, they say, so
the occasional Formal Friday at
one employee’s house was de-
signed to bring the team together
in a more formal atmosphere.
Co-founder Dillon Compton
says the Friday formality “helps
me keep sort of serious and fo-
cused sometimes.” Florian Mau-
rer, jobFig’s programmer says
The Barbarian Group (2)
there is also an added benefit: It
helps ensure “that I do my laun-
dry before Thursday,” he says.
As for the reaction they get
when they encounter people in
the Valley when they venture out
Employees at Barbarian, above left and right. The marketing agency was an early proponent of the ‘Formal Friday’ trend. on Fridays? “They think we’re
tourists, mostly,” Mr. Mikkelsen
ers to get dolled up each Friday. president, corporate communica- to see more companies putting says.
Kevin Chan, the senior art direc- tions. “But if we are held up as the A-game back in their dress —Shira Ovide
tor who spearheaded Barbarian’s the founders of casual dress work- and believes employees are more contributed to this article.
Formal Fridays on both coasts, places, then of course we are productive when they dress in for-
says the company has “always happy to accept the joyful acco- mal attire.
loved to challenge and subvert—to lades of those freed from the Ravi Mikkelsen, chief executive Watch a Video >>
do things a little differently.” shackles of ties and other uncom- of San Francisco startup jobFig, a Scan this code to see a video on
He also says the work attire for fortable work attire.” software company that predicts Silicon Valley’s ‘Formal Fridays’ or
“Barbarians” is otherwise pretty Ms. Ramsey says she is excited job candidates’ compatibility with watch online at WSJ.com/PageOne.
casual (he is known for his tank
tops), so Formal Friday, now a
regular occurrence, “gives Barbar-
ians a good excuse to get formal
one day of the week.”
A Peet’s Coffee shop in San
Francisco’s Financial District has
ARE YOU A
about five employees who initi-
ated an informal Formal Friday
routine about a year ago, accord-
ing to one of the baristas, Bob
bow tie and a top hat on a recent
SALES STAR?
Friday. The outfit, combined with
his scraggly beard, caused him to
resemble a modern-day Abraham
Lincoln. “Someone actually told
me to stay honest, in the eleva-
tor,” he says.
“Friday’s the best day of the
week anyway, right? Why not cel- IF SO, WE WANT YOU ON OUR TEAM.
ebrate it with some style and Do you want a career where your talents can shine? Do you have the
grace,” says Kyle Serpa, another
business know-how and technical background to increase adoption of
employee there, dressed on a re-
cent Friday in suspenders and a our products by institutional customers? Are you engaging, confident
tie. and results-driven?
“At Peet’s we foster
creativity and individual-
ity of our baristas,” says IF THIS IS YOU, WE’D LOVE TO MEET YOU.
Denyelle Bruno, Peet’s Dow Jones seeks the best salespeople. If you’re as dynamic, innovative,
vice president of retail and ambitious as we are, we’d like you on our team. Help us sell the
operations and market-
ing. products and services that are the foundation from which the world’s
One style maven is business does business. Powered by The Wall Street Journal, our trusted
happy to see hipsters content impacts more than 42 million people worldwide.
stepping up their sarto-
rial game. “These people
are not in college any-
more. They need to look
like adults,” says Lydia
Ramsey, a Savannah, Ga., busi-
ness-etiquette expert and author FOR MORE INFORMATION AND TO APPLY:
of the book, “Manners That Sell.”
Ms. Ramsey blames Microsoft http://dowjones.com/careers/joinourteam
for cementing the casual dress
culture so common in the tech
sector, but says startups today
have “taken it to a new low.”
“Looking back at photos of Bill
[Gates] and Steve Jobs in the
early days, it’s hard to see how
Microsoft would be the instigator
©2012 Dow Jones & Company, Inc. All rights reserved. 3DJ505
of casual clothes,” says Frank
32 | Monday, January 7, 2013
Email: heard@wsj.com
Should Buyers Go In Fear
Of New Euro-Zone Bonds?
A new dawn is coming to
the euro-zone government
bond market. All new bond
issues must contain collective
action clauses (CACs), ulti-
mately a tool that facilitates
debt restructurings by allow-
ing a majority of holders to
sanction changes to terms
and conditions. First the
Netherlands, then Germany
and Spain will issue such
bonds in the coming days.
Should investors be con-
cerned?
CACs are a product of the
euro-zone crisis. Politicians
decided in 2010 to require
them to help stop the as-
sumption by taxpayers of
risks that should be borne by
private investors. All new
euro-zone government debt
will be required to contain
CACs, as will 55% of overall
issuance in 2013, with the re-
mainder made up by increas-
ing the size of bonds issued
before 2013.
Investors might argue that
the new CAC bonds should
trade at a discount to exist-
ing bonds precisely because
they facilitate restructuring.
But the sovereign-debt crisis
An Ironclad
Optimism Is
Risky for Miner
A sharp rise in iron-ore
prices is girding Australia’s
mining sector. Spot prices
are up more than 70% since
September to almost $150 a
ton. For miners that took a
cautious line in 2012, this
makes production more eco-
nomical.
Fortescue is likely a
higher-cost miner
than BHP Billiton
and Rio Tinto, so
lower prices hurt it
more.
Take Fortescue Metals
Group. When ore was at $90
per ton last year, Fortescue
made no free cash flow on its
output, says Goldman Sachs.
In September, Fortescue
halted work on its Kings
iron-ore project. But with
prices back up, it now feels
sure enough to resume work
on the project. Its annual
production capacity should
HEARD ON THE STREET
Rising Tide
Estimated proportion of CAC bonds
in total bond debt outstanding
160%
120 2030
80
2020
40
2016
2013
0 focus on this issue. In partic-
Germany France Italy Spain
Note: Assumes maximum debt without CACs
is issued each year
Source: RBS The Wall Street Journal
has already made clear that
euro-zone government bonds
contain credit risk, meaning
that this is already priced in.
In Greece, the bigger factor
in last year’s debt restructur-
ing was that the vast major-
ity of its bonds were issued
under local law and thus
could be amended by parlia-
ment. That is true of nearly
all other existing euro-zone
government bonds.
The new rules could in
fact mean CAC bonds may
roughly triple by the end of
2013 compared to the year
that ended in June. Fortes-
cue forecasts an average
2013 ore price of about $120.
But recent volatility is a
warning sign. Prices should
fall further out as Chinese
demand cools and supply
rises. Rio and BHP Billiton
plan an extra 250 million
tons of capacity by 2016 in
Australia’s Pilbara area
alone. CLSA forecasts the
price to hit $85 in 2014.
Fortescue is likely a higher-
cost miner than BHP and Rio,
so lower prices hurt it more.
Fortescue shored up its
balance sheet recently. But
with the stock up 73% from
its September trough, it is
now valued at 13.4 times
2013 earnings—about the
same as BHP and at a small
premium to Rio. Yet these
larger rivals enjoy lower
costs and greater diversifica-
tion. Fortescue’s price al-
ready contains a fair dose of
optimism. More from the
company itself wouldn’t help
matters.
—Robb M. Stewart
FINANCIAL ANALYSIS & COMMENTARY
Reuters
A trader at bond auction
in Madrid
trade at a premium if the risk
of a debt restructuring rises,
because they will account for
a relatively small share of
euro-zone governments’ out-
standing debt. Indeed, it
won’t be until around 2020
that CAC bonds make up the
majority of outstanding euro-
zone government debt, RBS
estimates. So holders of CAC
bonds might be better placed
to hold out.
But blocking stakes will
need to be relatively large.
Equities Can Still Defy Gloom
Can the European equity-
market bull run keep going in
2013? Talking about the Conti-
nent’s stocks in such terms
might seem odd after a year
in which the euro zone flirted
with disaster. But the Stoxx
Europe 600 index is up 23%
since last year’s June low, re-
covering strongly after the
European Central Bank smoth-
ered fears of a euro-area
breakup. European equities
rose 14.4% in 2012, outper-
forming U.S. stocks.
Investors’ yen for Euro-
pean stocks could grow in
2013, even if economic growth
remains elusive, though it
could be time for investors to
become more choosy.
Much still depends on poli-
tics. If European governments
can avoid falling out and stick
to their reform plans, that
should encourage confidence.
In turn, the premium inves-
tors demand for investing in
equities over risk-free assets
like 10-year German bunds
and U.K. gilts should fall,
meaning stock valuations
should rise. The equity risk
premium for European stocks
declined to 8% toward the end
of 2012 from 9% midyear,
Goldman Sachs estimates. If
that premium fell to what it
terms a “normalized” 3.5%—
and bond yields also head to
“normal” levels—European
stocks could rise more than
20% from their current level.
The important terms and
conditions of a bond can be
changed at a meeting at
which 66.67% of bondholders
are represented and 75% of
them vote in favor of
changes.
Ultimately, for strong is-
suers like the Netherlands
and Germany, there is likely
to be little differentiation be-
tween new and existing
bonds; for riskier credits like
Spain, there might be more
ular, Spain relied last year on
tapping existing bond issues
for 65% of its funding, Bar-
clays notes.
But for investors right
now, the more noteworthy
factor about new issues of
government bonds, particu-
larly from stronger issuers,
should be the skinny returns.
The Netherlands’ new three-
year issue is expected to
carry a coupon of 0%. Even
allowing for the small posi-
tive yield that being priced at
a discount will allow, buy-
and-hold investors are almost
guaranteed to lose money—
through inflation.
— Richard Barley
Sure, a steady rather than
rapid decline in risk aversion
seems likely, even if the euro-
zone crisis remains in abey-
ance. Other measures also
suggest equities are underval-
ued, but perhaps not hugely
so. European stocks trade at
11.3 times expected earnings
for 2013, 15% below their 30-
year average, according to
UBS—not unreasonable, given
the weak economic outlook.
If market valuations rise
only steadily from here, inves-
tors could look to augment re-
turns with higher income. His-
torically, as the equity risk
premium has fallen, the corre-
lation between stock prices
has also dropped, Goldman
notes. That implies more op-
portunity for stock-picking.
Back from the Brink
Stoxx Europe 600
300
275
250
225
200
2011
Source: WSJ Market Data Group
THE WALL STREET JOURNAL.
OVERHEARD
Happy New Year! Thanks
to its big opening-day rally,
the U.S. stock market is off
to a fine start this month.
On the face of it, the
famed January indicator of
stocks has a fine record. In
82 of the past 112 years,
what direction the Dow
Jones Industrial Average
took in January correctly
predicted whether the index
would be up or down for the
year. But this calculation
stacks the game in the indi-
cator’s favor. If stocks rise in
January, they must reverse
those gains over the remain-
der of the year, and then
some, for the indicator to be
wrong. So it is better to
judge January’s predictive
power by how stocks did
over the 11 months that fol-
low it, rather than the year
that includes it. By this mea-
sure, the January indicator
loses ground, predicting the
direction of stocks in 70,
rather than 82, of the past
112 years. That might not
seem all that shabby. Then
again, that’s not much better
than November, which has
correctly predicted the Dow’s
direction over the following
11 months 69 of 112 times.
And it is worth keeping in
mind that the Dow slipped
this past November.
Companies with strong bal-
ance sheets that prioritize re-
turn on capital over growth at
all costs should find favor.
Shares in chemicals company
AkzoNobel, for example, rose
sharply last month when it
sold an underperforming U.S.
asset. Generous dividend pay-
ers should prosper, too,
though only those with reli-
able earnings and cash flow.
Some traditionally “safe,”
high-yielding sectors like utili-
ties face increased political
pressure on revenue.
Safe and steady may not
be the most exciting mantra
for European equity investors.
But after the traumas of the
euro-zone crisis, it should
prove a merciful relief.
— Andrew Peaple
Friday:
287.83
'12 '13
The Wall Street Journal
WSJ.com/Heard
Black
Friday for
the U.K.
Friday wasn’t a good day
for the U.K., or for Chancellor
George Osborne.
A service-industry survey
suggested the economy was in
fresh trouble, 10-year govern-
ment-bond yields briefly rose
above those of lower-rated
France and the government
faced a growing backlash over
tax and benefit changes.
The rest of 2013 is likely to
pose more tough challenges.
The service sector, which
accounts for around three-
quarters of the U.K. economy,
unexpectedly contracted in
December; the Markit/CIPS
purchasing managers index
fell to 48.9 from 50.2 in No-
vember. That increases the
risk that the U.K. economy,
which has flatlined since
2010, faces a renewed down-
turn after an Olympics-in-
spired bounce in the third
quarter of 2012.
Meanwhile, gilt yields con-
tinued to rise. Ten-year yields
hit 2.13%, up 0.3 percentage
point in just three days and
their highest level since May,
before receding slightly. In re-
cent months, gilts have
sharply underperformed Ger-
man government bonds, and
at one point Friday topped
those of double-A rated
France. That suggests inves-
tors have largely priced in a
U.K. downgrade in 2013 from
at least one of the three big
ratings firms, a move that be-
came more likely after Mr. Os-
borne’s autumn budget state-
ment revealed he would miss
a key debt-reduction target.
Also, forthcoming changes
to strip child-benefit pay-
ments from households with a
higher-earning parent will
send marginal income-tax
rates for many families soar-
ing—in some cases far above
the 45% top income-tax rate
levied on the highest earners,
the Institute for Fiscal Studies
says. That will reignite doubts
over the government’s compe-
tence, after last year’s budget
contained a raft of measures
that had to be swiftly re-
versed and raise fresh ques-
tions over the credibility of
its deficit-reduction strategy.
The economy remains bur-
dened by a high stock of debt,
while real wages have been
squeezed by above-target in-
flation. Gilt investors face
heavy issuance and growing
uncertainty over future U.K.
monetary policy. Without ro-
bust growth, the govern-
ment’s fiscal policy threatens
to drift ever further off track.
If the euro-zone crisis re-
mains dormant, the U.K. will
lose some of the haven status
that has helped keep bond
yields so low—and see its do-
mestic problems brought into
ever sharper relief.
—Richard Barley