It is irrational to establish or maintain a common currency in Europe. If, however, the decision was based on ideology, then the policies designed to hold together the cracked and bursting union are misguided.

Many of the Eurozone’s countries are insolvent to the extent that every bond they issue must be considered a PIK. These countries will surely face higher refinancing costs as investors flee and traders attack.

Each country has now been put on notice that some form of austerity and reform is necessary. Both austerity and reform are nice words for nasty things. Without a currency to make the price adjustments, domestic factor prices, such as wages, must bear the brunt.

As desperation and internal politics, not least an unruly public, drives countries to the brink, discipline needs to be instilled.

The Spanish bank bailout was ill advised. Any bailout is ill advised. At this point bailing any country out will only encourage solvent or marginal economies to seek a bailout or at best renege on their fiscal responsibilities.

An opportunity exist(ed) in Greece. Here is an economy which is not sufficiently integrated into the core Eurozone that its ejection would cause the minimum (of any other Eurozone country) of chaos.

A single exit is necessary (and may not be sufficient) to hold the union together. Greece is a convenient candidate. It should be forcibly removed from the union and denied any bailouts or transfers. The indictment of Greece will serve as a stern signal to Spain, Italy and Ireland, that non-compliance and fiscal irresponsibility has a high price. That price must be sufficiently high to compensate for the contagion risk associated with the ejection of a member state.

Following such drastic action, a more measured approach can be taken to cementing the union. Fiscal union or a banking union will need to be established. That is another long and painful discussion.

Forget about fiscal union. If you cannot get convergence in the productivity of all factors of production, that includes not just labour but land and capital as well, you will not have convergence in the reward to factors, and thus convergence in factor prices.

Under a common currency, efficiency would require that factor prices were sufficiently flexible to clear markets. Without factor productivity convergence, this implies domestic price volatility across the common currency zone. Europe is an interesting live example of this failure.

The theory tells us that it must accumulate imbalances over time. In Europe, these imbalances have reached crisis levels. The failure to recognize the fundamental causality leads the EuroZone to pursue misguided policies.

The failure to understand this causality also leads to misguided trading strategies in the face of European asset volatility.

On the policy front, attempts to maintain currency union are misguided. The Eurozone should be dismantled and domestic currencies introduced to provide the additional degree of freedom in price discovery.

The process of breaking up will be painful and there will always be some chaos. The alternative is analogous to attempting to stretch a rubber band indefinitely.

Capital Raising in Asia. Raising Capital for Hedge Funds. Raising Capital for Private Equity.

After the financial crisis of 2008 the only investors in either hedge funds or private equity to resume investing with any significant appetite have been US pensions and endowments. In Europe, the appetite for hedge funds has fundamentally changed in favour of greater regulation, liquidity and transparency, which, at least in part, was thought to be addressed by the application of UCITS III. For private equity, some appetite has returned, certainly more so than for hedge funds, where the investor appetite for offshore, limited liquidity, unregulated funds haves been decimated.

In Asia, the appetite for hedge funds was similarly decimated after 2008 and has remained moribund ever since. The number of Asia ex-Japan ex-Australia institutional investors is sparse. Most of the investable wealth lies in the hands of the first or second generation of families where the operating business remains in full force and continues to generate high returns on equity in the 20% – 30% range, making low volatility and low return investments relatively unattractive. Diversification and risk mitigation are concepts not yet fully developed in the strategies of these investors. When hedge funds were sold to these investors pre 2008, they were largely, either intentionally or accidentally, mis-sold as a capital protection strategy. When liquidity was denied in the depths of the crisis through the invocation of redemption gates and suspensions of NAV, the trust between fund managers and investors was irreparably broken.

Private equity investments, whether in venture or growth are more in line with the culture of enterprise and returns expectations of LPs in Asia. Whereas Asian LPs are intolerant of illiquidity in hedge funds, they are more receptive of long gestation investments in private equity.

Traditionally, the wealth management industry in Asia has been dominated, almost to exclusion, by private banks. This is natural given the shape of the investor base, comprising mostly high net worth individuals and families and only a small collection of institutions. Institutional investors, including sovereign wealth funds, endowments, corporate pensions, often have professional investment management resources, whereas high net worth individuals and families often do not. This is changing as some of the trust between private clients and private banks has been eroded following the poor quality of investment advice which became apparent in 2008. As a reaction, more family offices are being established to perform due diligence on investments offered by private banks. Unfortunately, there remains a distinct dearth of experienced investment professionals and thus many family offices end up turning to the same private banks for advice and investment products.

While the appetite for hedge funds has not and is not expected to recover anytime soon, the appetite for private equity has recovered albeit in a slightly different shape. Investors have more appetite for direct deals while remaining cautious of blind pool funds. While trust has yet to be rebuilt, investors are happy to invest where they have greater visibility and control and where their experience in their own operating businesses gives them either comfort or finds them strategic opportunities.

Private equity funds, for principal-agency reasons, have never been significantly distributed to Asian LPs. Private banking marketer compensation and incentives are responsible for this. The average tenure of a private banker in Asia is relatively short with the vast majority of bankers never surviving a single private equity fund’s life in a given bank. Average tenures have fallen from 5 years to under 3 years in recent times. This makes private equity unattractive to private bankers even if they are attractive to their underlying investors. As a result, less private equity capital is raised than could potentially be raised. In a word, private clients are under-served in private equity products.

Another problem is that the quality of due diligence and origination staff can be poor. The corporate environment and bureaucracy inherent in multi business line banks naturally discourages relevant entrepreneurial talent. Staff turnover is high, which in the hedge fund and private equity industry is highly disruptive and undesirable.

Investors also extrapolate from their mostly poor experience with structured products where high fee and high margin products with often complicated payoff designs are pushed onto clients. There is but one single significant distribution channel for structured products.

Private equity is by its very nature a long gestation strategy and investors require a high level of comfort that they are offered the best opportunities, subjected to deep scrutiny and due diligence and that their agents’ interests are aligned with theirs. In Asia today few, if any, such agency businesses exist to fill this need.

Until a more efficient placement agency model arises, private equity GPs and hedge fund managers have few options, and private banks, for all their agency issues, remain the primary channel for capital raising.

We are in the midst of a global synchronized slowdown. 

In the long run, the US economy will recover and likely outpace the Chinese economy. In the even longer run, the Chinese economy will likely outpace the US economy. The Chinese themselves are likely to be outpaced by the Indian economy. If only someone could define the long run and the longer run.

No one has a crystal ball, and I don’t purport to possess one. These are my educated guesses.

In the short to medium term, the world faces a synchronized slowdown. The recoveries in the US and Germany were indirectly and directly driven by the massive fiscal boost of China post 2008, as well as its domestic debt monetization policies. Now China has slowed, as it must, with a massive debt hangover after a drunken orgy of infrastructure investment. Risks run high in China given the lack of transparency and the ubiquitous instances of dodgy accounting and statistics which confound even the Party itself. The poor performance of the domestic onshore share market is indicative of the ills of the Chinese economy. Still, China’s neighbours bet heavily on it as an engine of growth, as do many Western investors. Only a minority understand the difficult position that China is in with an overlevered shadow banking credit system akin to the SIVs of pre 2008, diminished demand for its exports in a newly financially responsible (and slowing) US and a recessionary Europe.

As the global equity markets continue to tumble it is time once again to gradually reduce shorts and increase longs. China plays like Caterpilar and Yum for example, will struggle to maintain their pace of growth. US brands and intellectual property will regain prominence as production is brought home and consolidated.

Banks are for tactical trading (or gambling on). Anyone with an inside view on banks will know that their business models are complex beyond the comprehension of the board, CEO or senior management. Investors should beware. China banks’ balance sheets are the stuff of fiction with systemic mis-classification of non performing assets. All other banks may not be as disjointed from reality but still defy understanding or quantification by management, shareholder or market. Regulators haven’t got a chance.

In Europe, emerging market assets can be bought at depressed if not distressed prices. In the US, structured credit assets also represent good value.

Assets that have remained resilient through the 2008 crisis and continue to appreciate include fine art, rare wines, important antiques and luxury prime real estate. Decades of oppression by the rich and widening income and wealth inequality have created two worlds, one which remains vibrant and another in depression. Its not a bad idea to ransom the rich. Or ransom other rich.

For more sophisticated investors long short and arbitrage strategies present rich opportunities. Dislocation and mayhem always result in less sophisticated investors making strategic errors resulting in inefficient pricing which can be monetized. Basically, if you’re not the sophisticated investor monetizing such opportunities, you are the unsophisticated investor paying for the sophisticated investor’s next Patek Philippe or Bentley.

An as yet unaddressed fracture in the market for capital is the failure of the fractional reserve banking system. Banks do not need to fail in order to fail the economy. Banks are no longer even slightly inefficient conduits of capital, they are broken conduits, leaky pipes and ruins of financial infrastructure. Replacement conduits will be richly rewarded. Venture capital, private equity, mezzanine finance, hedge funds and other private finance institutions fill this gap.

When the troops fail the general, its not always clear who’s to blame. But when different divisions fail each other, the blame is crystal clear. Generals are to blame.

Large organizations are often difficult to manage. Large organizations with multiple objectives are even harder to manage.

Executives who plough on heedless are storing up disaster. Some organizations can wheeze on for years or decades while executives drive forward without addressing the problems associated with complexity.

Each type of business has its own specific problems, so it is hard to generalize. However, there are a small number of principles which apply mostly generally.

1. It is easier to build from scratch than to fix what’s broken. This is self evident from a constrained optimization perspective since there will be more constraints than need be when fixing an existing problem.

2. Do less, but do it better. Every new objective compounds the complexity problem. For the executive, focus is all important. By diluting their attention and resources, executives do not risk, they guarantee, at best mediocrity and at worst correlated, cross objective failure.

3. Identify and prioritize. If one aims to do less and achieve more, prioritization is all important.

4. Related to point 1 is the concept of not mixing old with new. It is tempting to retain old resources for continuity. The implication of points 1 and 2 above is that continuity can and often should be sacrificed.

5. Identify structural strengths and develop them. Attempting to develop structural weaknesses is a mission for fallen heroes.

7. In the set of structural strengths, focus and invest in the weakest. Such areas have no right toi be weaknesses.

8. Conglomeration is a financial dream and an operational nightmare. Don’t forget the operational aspects of integrating businesses. Even related businesses can be operationally very different. These differences only surface during the integration.

9.  Having focused and achieved, it is time to diversify and destroy value. This is the imperative of ambition. True ambition means never ever focusing and thus leaving a trail of disaster behind. The secret to operating under this model is to push ahead even faster so that the trail of disaster is left further and further behind. While disastrous for the organization, this strategy can be successful for the individual executive. That said, shareholders are becoming more aware and less tolerant of such strategies.

10. There are exceptions to the limitations of complexity. They are few and far between but everyone believes, almost without exception, that they are the exception. This introduces a cyclicality that in some cases, the astute investor can bet on, or against, depending on your point of view.