Friday, October 29, 2010

(BN) Goldman Sachs, Apple Might Top This Wish List: William Pesek

Lots of fear by australians, but this is expected.

Bloomberg News, sent from my iPad.
Goldman Sachs, Apple Might Top This Wish List: William Pesek

Oct. 29 (Bloomberg) -- Leave it to tiny Singapore to tell us where the global economy is heading.

We used to look to the gargantuan U.S. economy for guidance on financial trends. After Wall Street's collapse, we turned to the Group of 20 nations. More insight might be gleaned looking at an island nation with 5 million people.

The idea that a place with no natural resources and a state-capitalism model is a global bellwether will strike many as absurd. Yet Singapore Exchange Ltd.'s attempted takeover of Australia's stock exchange shows how Asia's money is changing the face of finance and geopolitics as we know it.

Singapore Exchange's A$8.1 billion ($7.9 billion) bid for ASX Ltd. might not go through amid an outcry from Australian lawmakers. It almost doesn't matter. The point is that fast- growing and cash-rich Asia is about to go shopping in ways that might shock the biggest developed economies.

This transaction is full of chutzpah. Singapore's stock market is half the size of Australia's and the deal looks expensive. The real issue is ambition. Singapore is clearly prepared to spend big to get economies of scale that don't come naturally. Expect more of this dynamic in Asia -- even from smaller countries that get little attention globally.

How will the West respond when China, Japan and India go on a mergers-and-acquisitions tear? And those are just Asia's three biggest economies. Executives from Seattle to London should also expect more phone calls from acquisitive companies in South Korea, Indonesia, Taiwan, Hong Kong and sovereign wealth fund managers everywhere.

Next Wave

China has been scooping up energy assets around the globe, and has $2.6 trillion of reserves to accelerate the campaign. It seeks to leapfrog over the years needed to build domestic corporate powerhouses. In today's world, it's easier to buy a chunk of International Business Machines Corp. than create and cultivate brands over time. As the yuan rises, tech leaders like Nokia Oyj or Motorola Inc. become cheaper for mainland executives. Why censor Google Inc. when you can just own it?

The next wave of globalization features developing nations buying the crown jewels of developed ones, and it will be messy. In 2005, the U.S. Congress freaked out when China's CNOOC Ltd. bid for oil company Unocal Corp. and scuttled the deal. Just wait until China sets its sights on Boeing Co., Microsoft Corp. or Goldman Sachs Group Inc.

Goldman Envy

This last name has long been coveted in Asia. Government officials in Tokyo and Seoul crave having globally known, savvy and profitable financial leaders. That tends to be code for having their own Goldman. Now, Asia could just buy the real thing. Well, try to at least.

It's hard to believe developed-market lawmakers would let many household names fall easily into Asian hands. Creative attempts would be made to explain why Pacific Investment Management Co. being acquired by foreigners poses a national- security threat. Or why Apple Inc. or cable news network CNN must remain American concerns.

Never mind how these arguments might run afoul of World Trade Organization rules. The next few years will see a disorienting flurry of takeover bids from Brasilia to Beijing, putting politicians in unprecedented positions. Nationalistic tendencies will collide with globalization as never before.

Singapore helped prove the point that Asia has money at a time when others don't. Its investment firms in recent years took stakes in Citigroup Inc., UBS AG, Barclays Plc and others, shoring up some of capitalism's biggest names. Bidding for Australia's ASX is the next logical step and a reminder that Singapore's long game is worth watching.

Bet on Gambling

Take casinos, which are suddenly the rage in conservative Singapore. The government realized it had to let its hair down to net more of the tourism dollars flowing elsewhere in Asia. Welcoming casino-resorts run by Genting Singapore Plc and Las Vegas Sands Corp. was a gamble that is clearly working. So was revamping downtown to host Formula One races. Tourist arrivals are exploding, and other Asian capitals are racing to emulate Singapore's success.

Singapore is working to reinvent itself as a biotechnology hub with reasonably liberal immigration laws to feed its development. Its transparent financial system has been a magnet for hedge funds setting up shop in Asia. The ASX bid is recognition that Singapore can't grow much beyond its domestic market and must look outward.

Opportunities Abound

Asia wants to avoid Japan's arrogant and ill-considered purchases during the bubble years. Buying Rockefeller Center and the Pebble Beach golf course didn't work out so well for investors. Officials and executives in Singapore, Beijing, New Delhi and Seoul must avoid the temptation for such vanity deals.

Opportunities abound, though. Several governments are sitting on hundreds of billions of reserves and companies are hoarding cash. Add the desire to grow economies and corporate balance sheets and you have a clear recipe for expansion -- and a huge one as Asia floods markets with more equity than ever amid booming demand for initial public offerings.

This shopping spree will shake up the global power balance like rarely before. Perhaps nowhere is this huge shift more apparent than in tiny Singapore.

(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: William Pesek in Tokyo at wpesek@bloomberg.net

To contact the editor responsible for this column: James Greiff at jgreiff@bloomberg.net

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Wednesday, October 27, 2010

World Cup soccer's psychic octopus dies


Results much better than most 'professional' traders. 

World Cup soccer's psychic octopus dies

By Michelle Martin

BERLIN (Reuters) - Paul, the oracle octopus who shot to fame in the World Cup this summer for his uncanny ability to predict the results of Germany's soccer matches, has died at his home in Oberhausen at the age of two.

English-born Paul made headlines across the globe after he correctly forecast how Germany would fare in seven matches, before his psychic powers were tested again for the final.

After Germany's semi-final defeat, Paul tipped Spain to beat the Netherlands in the final, which prompted one news agency to report he had spurred a jump in demand for Spanish government bonds. Paul's prediction duly came to pass: Spain won.

Staff at the Oberhausen Sea Life Center in western Germany said in a statement they were "devastated" to learn of Paul's death when they returned to work on Tuesday.

"He appears to have passed away peacefully during the night, of natural causes, and we are consoled by the knowledge that he enjoyed a good life," said the centre's manager Stefan Porwoll.

Before matches, two containers of food were placed in the eight-legged creature's tank, each one bearing the flag of one of the teams about to compete for their chance to become world champions. The container Paul picked first was seen as his pick.

Following the World Cup, a Spanish zoo made a transfer bid for Paul but his German keepers refused to sell.

Paul will be kept in cold storage until the center decides how to mark the mollusc's extraordinary life, Porwoll added.

"We may decide to give Paul his own small burial plot within our grounds and erect a modest permanent shrine," he said.

Paul, who was hatched in Weymouth, England, may yet continue to dazzle the world with predictions from beyond the grave.

A Russian newspaper said in July it had got Paul to predict who would be Russia's next president -- but that the results would be kept secret until the election year of 2012.

Sea Life said Paul would live on as the object of a host of commercial enterprises ranging from special clothing lines to mobile phone applications inspired by his fame in Oberhausen, one of Germany's most cash-strapped cities.

Meanwhile, donations made in honor of Paul's achievements would help to fund a planned permanent rescue center for sea turtles on the Greek island of Zakynthos, Sea Life said.

(Additional reporting by Karolos Grohmann; editing by Paul Casciato and Tom Pilcher)


(BN) Wall Street Proprietary Trading Goes Under Cover: Michael Lewis

They have the house edge. And they don't know what lending is. So can anyone fault that they are going back to what they do 'best'?


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Wall Street Proprietary Trading Goes Under Cover: Michael Lewis

Oct. 27 (Bloomberg) -- A few weeks ago we asked a simple question: Why are the same Wall Street banks that lobbied so hard to dilute the passages in the Dodd-Frank financial overhaul bill banning proprietary trading now jettisoning their proprietary trading groups, without so much as a whimper?

The law directs regulators to study the prop trading ban for another 15 months before deciding how to enforce it: why is Wall Street caving now?

The many answers offered by Wall Street insiders in response boil down to a simple sentence: The banks have no intention of ceasing their prop trading. They are merely disguising the activity, by giving it some other name.

A former employee of JPMorgan, for instance, wrote to say that the unit he recently worked for, called the Chief Investment Office, advertised itself largely as a hedging operation but was in fact making massive bets with JPMorgan's capital. And it would of course continue to do so. JPMorgan didn't respond to a request for comment.

The fullest explanation came from a former Lehman Brothers corporate bond salesman named Robert Wosnitzer, who is now at New York University, writing a dissertation on the history of proprietary trading. He's been interviewing Wall Street bond traders, he said, and they have been surprisingly open about their intentions to exploit one obvious loophole in the new law.

The innocent eye might have trouble spotting this loophole. The Dodd-Frank bill bans proprietary trading (Page 245: "Unless otherwise provided in this section, a banking entity shall not engage in proprietary trading") and then appears to make it clear what that means (Page 565: "The term 'proprietary trading' means the act of a (big Wall Street bank) investing as a principal in securities, commodities, derivatives, hedge funds, private equity firms, or such other financial products or entities as the comptroller general may determine").

Invitation for Abuse

The big invitation for abuse, Wosnitzer says, lies in the phrase "as a principal." It falls to the comptroller general - - or, more specifically, the General Accountability Office, which is overseen by the comptroller general -- to determine precisely what the phrase means.

And, at the moment, the GAO pretty clearly hasn't the first clue. ("We're really too early in the process to speak to how we might define it," said spokeswoman Orice Williams Brown.)

Never mind: Wall Street is busily defining the term for itself.

Make an Argument

"One trader I interviewed," Wosnitzer says, "said that from here on out, if he wants to take a proprietary position in a credit, he will argue that he bought the position because a customer wanted to sell the position, and he was providing liquidity; and in order to keep the trade on, he would merely offer the bonds 10 basis points higher than the offered side, so that he will in effect never get lifted out of the position, while being able to say that he is offering the bonds for sale to clients, but no one wants 'em. When the trade finally gets to where he wants it -- i.e., either realizing full profit, or slaughtered by losses -- he will then sell it on the bid side, and move on.

Of course, there is all sorts of flawed logic here, but the point is that...there are a hundred different ways to claim to be acting as an agent or for a customer.''

This ambiguity is no doubt one reason the financial reform bill passed in the first place. Even its clearest prohibitions are couched in language inviting Wall Street to evade them.

But the new game of cat and mouse raises a simple, even naive question: Why do these giant Wall Street firms want so badly to make huge bets with their shareholders' capital?

Save Us

After all, the point of the ban on proprietary trading is as much to save the banks from themselves as to save us from them. We have just come through a period where putatively shrewd individual bond traders lost not millions but billions of dollars for their firms, by making really stupid bets.

Even before the crisis there was never any reason to think that traders at big Wall Street firms had any special ability to gamble in the financial markets. Anyone with a talent for investing is unlikely to waste it on Morgan Stanley or Bank of America; he'll use it for himself, or for some hedge fund, which allows him to keep more of his returns.

And if this were true before the financial crisis it is even more true after it, when trading inside a big Wall Street bank will be less pleasant and more fraught with politics.

Yet Wall Street's biggest firms apparently still badly want their traders to be allowed to roll the bones. Why?

What They Do

One answer -- which Wosnitzer points to -- is that this is what Wall Street firms now mainly do. Beginning in the mid- 1980s, the Wall Street investment bank, seeing less and less profit in the mere servicing of customers, ceased to organize itself around its customers' needs, and began to build itself around its own big and often abstruse gambles.

The outsized gains (and losses), the huge individual paychecks, the growing ability of traders to bounce from firm to firm from one year to the next, the tolerance for complexity that doubles as opacity: all of the signature traits of modern Wall Street follows from the willingness of the big firms to allow small groups of traders to make giant bets with shareholders' capital, which the shareholders themselves don't and can't understand.

The new way of life began at Salomon Brothers in the early 1980s, right after it turned itself from a partnership into a publicly traded corporation; but it soon spread to the others.

''That was the particular moment when a new culture of finance crystallizes," Wosnitzer says. "And it restructures all of finance. All of a sudden it's 'I made X, pay me X minus Y or, screw you, I'm leaving.'"

Keep It Simple

There's a simple, straightforward way for the GAO to construe the Dodd-Frank language, and it would reform Wall Street in a single stroke: to ban any sort of position-taking at the giant publicly owned banks. To say, simply: You are no longer allowed to make bets in the same stocks and bonds that you are selling to investors.

If that means that Goldman Sachs is no longer allowed to make markets in corporate bonds, so be it. You can be Charles Schwab, and advise investors; or you can be Citadel, and run trading positions. But if you are Citadel you will be privately owned. And if you blow up your firm, you will blow up yourself in the bargain.

(Michael Lewis, most recently author of the best-selling "The Big Short," is a columnist for Bloomberg News. The opinions expressed are his own.)

To contact the writer of this column: Michael Lewis at mlewis1@bloomberg.net

To contact the editor responsible for this story: James Greiff at jgreiff@bloomberg.net

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Tuesday, October 26, 2010

(BN) Four Big Banks Should Plan to Bail Out of Europe: Matthew Lynn

That's right.


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Four Big Banks Should Plan to Bail Out of Europe: Matthew Lynn

Oct. 26 (Bloomberg) -- Forget terrorism, cyber-warfare and deadly viruses. Some European countries face a more imminent threat to their national security: Big banks could bring down the economy if they failed.

Right now, regulators are approaching it in different ways. The British may split up retail and investment banking. The Swiss are looking at almost doubling the recommended bank- capital requirements.

Not surprisingly, the banks are fighting those proposals and claiming that such measures would cripple their ability to compete in the global market.

There is a simpler solution, and one that would be fairer to the banks that are too big and the nations that are too small to host them: The lenders should move to a bigger country. Four banks in particular -- HSBC Holdings Plc, Barclays Plc, UBS AG and Credit Suisse Group AG -- should be making plans to leave Europe. An amicable divorce would be better for both sides.

There is no question that governments and financial regulators are right to be giving some serious thought to the issue of banks that have become too big to fail.

The near-collapse of Lloyds Banking Group Plc and Royal Bank of Scotland Group Plc during the credit crunch left the U.K. with a huge bill. In Switzerland, UBS had to be bailed out.

Irish Excesses

In Iceland, the meltdown of the financial industry has just about bankrupted the country. Ireland is still paying the price for the excesses of its banks.

Both the U.K. and Switzerland are aware that the collapse of HSBC or Credit Suisse would easily turn them into another Iceland or Ireland. It would be irresponsible not to try and prevent it. It is as much of a threat to national security as the Soviet Union was at the height of the Cold War.

So how should they deal with that? True, better regulation is part of the answer. You need a lot of faith in the ability of the supervisors, however, to feel confident they can spot every crazy risk the bankers might be taking. In reality, even the board may not really know what liabilities have been tucked away in some complex derivatives contract, and how they might blow up one day. It is impossible for outsiders to be certain.

The U.K. has set up a commission headed by John Vickers, an Oxford University professor and former Bank of England economist, to look at the possible separation of retail and investment banking, as well as banning proprietary trading.

Swiss Proposal

In Switzerland, a government panel has recommended the country's biggest banks should hold total capital equal to at least 19 percent of their assets. That's almost twice the 10.5 percent level that the Basel Committee on Banking Supervision recommended last month.

They are both perfectly sensible proposals. Splitting up the banks would make the system safer. The investment arms take most of the risks. Hive them off into separate units, and if they go bust, it doesn't matter much to the rest of the economy.

Likewise, the more capital a bank holds, the safer it is. If there are big losses on an investment, then the money is there to cover them. It needn't be catastrophic.

HSBC and Barclays have both said they may relocate overseas if the U.K. moves to split them up.

In reality, both the banks and the regulators are getting this issue upside down.

Time to Move

The problem isn't that the banks are too big. It is that they have grown too large for the economies of the nations where they happen to be based. And once you put it like that, the solution is obvious. Barclays and HSBC should leave the U.K., while UBS and Credit Suisse should leave Switzerland.

It is rough on British or Swiss taxpayers that they have to shoulder the responsibility for huge banks that don't have much to do with their own economy -- and most of whose staff are far better paid than the average taxpayer in either country.

And yet, it is hardly fair on the banks to be placed at such a disadvantage to their main competitors. Obviously, it's going to be impossible for HSBC and Barclays to keep up with Citigroup Inc. and BNP Paribas SA if they have to split their businesses. And it will be tough for Credit Suisse to stay at the top of its industry if it has to hold twice as much capital as its international competitors. Capital, after all, is the raw material of banking. The less you have of it to play with, the less you will be able to do.

So why not just move elsewhere? That way, taxpayers are freed of the potential burden of a bailout, and the banks are released from rules that make it impossible for them to compete.

There is nothing that unusual about a bank moving when regulatory regimes change. HSBC has already done it before: In 1993, it moved its head office from Hong Kong to London, and the Bank of England became its lead regulator.

Where would the big banks go? China or the U.S. would be possibilities. Of course, the U.S. might not want another too- big-to-fail bank on its soil. But they would bring much-needed jobs and tax revenue. In the end, it is for the banks and local authorities to decide.

But as any marriage counselor would concede, sometimes a relationship has been outgrown by both sides. And when it has, it is simply better to move on.

(Matthew Lynn is a Bloomberg News columnist and the author of "Bust," a forthcoming book on the Greek debt crisis. The opinions expressed are his own.)

To contact the writer of this column: Matthew Lynn in London at matthewlynn@bloomberg.net

To contact the editor responsible for this column: James Greiff at jgreiff@bloomberg.net

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Thursday, October 21, 2010

(BN) Saskatchewan Premier Still Doesn't See Benefit of BHP Bid for Potash Corp.

Humans and animals hate being pushed to a corner. It was a stupid decision to go hostile. I can't see this going through.

Bloomberg News, sent from my iPad.
Saskatchewan's Premier Doesn't See Benefit of BHP Bid

Oct. 20 (Bloomberg) -- Saskatchewan Premier Brad Wall said BHP Billiton Ltd.'s $40 billion hostile offer for Potash Corp. of Saskatchewan Inc. isn't beneficial to his province or to Canada, citing lost revenue stemming from the deal.

The Saskatchewan cabinet will make a final decision today on how it will advise the Canadian government on the transaction, Wall told reporters in Regina, the provincial capital. Canada's federal government has until Nov. 3 to block the bid, unless BHP agrees to an extension of the review.

Wall has been in negotiations with BHP over compensation, according to an e-mail from an official of the Canadian province. Saskatchewan has rejected an offer of C$370 million ($362 million) of infrastructure investment because the amount falls short of offsetting the C$3 billion in lost provincial revenue over 10 years, the official said, declining to be identified because the talks are private.

"I still do not see how this takeover is a net benefit to Saskatchewan or Canada," Wall told reporters just before entering a cabinet meeting. "At the very basis of a net-benefit analysis, we would need C$3 billion. That would just be keeping the province whole. That would not be a net benefit."

BHP is confident it can address the province's concern over lost revenue, the company said today in a statement.

"This is a proposal for an American-controlled company to be taken over by an Australian-controlled company," Canadian Prime Minister Stephen Harper said in response to a question in the House of Commons today.

'Make Commitments'

BHP "is prepared to make commitments which go beyond the requirements of prevailing Canadian legislation that should effectively address the tax loss concerns of the province," the company said in its statement.

BHP will restructure the deal to ensure tax revenue will remain the same for the provincial government, reported the StarPhoenix, a Saskatchewan newspaper, citing Andrew Mackenzie, a company executive.

Saskatchewan will formally announce the province's position on the hostile takeover offer tomorrow, Wall said.

Wall's speech will include previously undisclosed details about the government's response to BHP's bid, Kathy Young, a spokeswoman for the premier, said in an interview. She declined to elaborate.

Potash Corp. dropped $1 to $142.43 at 4:15 p.m. in New York Stock Exchange composite trading. BHP advanced 2.5 percent to 2,192.5 pence in London.

Liberal Opposition

Canada's Industry Minister Tony Clement said the federal government is talking with BHP and the province as it assesses whether to approve the bid.

"We're in contact with the government of Saskatchewan," Clement told reporters outside Parliament in Ottawa. "They're a key player in this."

The main opposition Liberal Party formally announced they want the federal government to reject the $130-a-share bid because it would mark a "sell-off" of the province's potash industry, raising the potential the deal could become an election issue.

BHP's bid is facing increasing "political headwinds," Paul Cliff, a London-based analyst at Nomura Holdings Inc., wrote in a report today. He estimates BHP will raise its offer to about $150 a share to win Potash Corp.

"A key risk to the transaction is that it becomes a broader political issue," Cliff said. "At this point, we believe economics are more likely to prevail and that the bid will eventually be endorsed by the Government of Canada's Investment Review Division."

'Net Benefit'

Under the Investment Canada Act, the central government can block transactions if it finds they don't provide a "net benefit" to the country. There are "serious questions" on whether BHP's offer meets the criteria of the net-benefit test, Saskatchewan's Energy and Resources Minister Bill Boyd said Oct. 6.

"I don't see any net benefit at all, I only see negatives," Stephen Jarislowsky, chief executive officer of Jarislowsky Fraser Ltd., said today in an interview. His company held 8.73 million Potash Corp. shares as of Sept. 30, according to Bloomberg data.

The Conference Board of Canada, an independent researcher of economic and public policy issues, said Oct. 4 in a report that Potash Corp.'s takeover by BHP would cost Saskatchewan C$2 billion in lost tax revenue over 10 years. The province commissioned the report.

Potash Corp., which is based in Saskatoon, Saskatchewan, has rejected BHP's offer as too low and said it's seeking alternative offers amid rising prices for agricultural commodities.

To contact the reporter on this story: Christopher Donville in Vancouver at cjdonville@bloomberg.net .

To contact the editor responsible for this story: Simon Casey at scasey4@bloomberg.net .

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Saturday, October 16, 2010

(BN) Najib Plans Tallest Tower, Rail Works to Boost Malaysian Growth in Budget

The tallest buildings spell excesses and the building will be completed in time for the worst recession in Malaysia in 2015.

Bloomberg News, sent from my iPad.
Najib Plans Tallest Tower, Rail Works to Boost Malaysian Growth

Oct. 16 (Bloomberg) -- Malaysia will build a 100-floor tower and a mass rail project as Prime Minister Najib Razak boosts spending in a budget that he says is "pivotal" to spurring growth and helping the nation achieve developed status.

Najib, also finance minister, tabled a 2011 budget plan yesterday for government spending of 212 billion ringgit ($69 billion), 2.8 percent larger than this year's outlay. Gross domestic product may expand 5 percent to 6 percent next year after growing a faster-than-forecast 7 percent in 2010, according to the Ministry of Finance's 2010/2011 economic report.

The leader, 57, aims to rejuvenate an economy where growth fell to an average 4.7 percent a year in the past decade from 7.2 percent in the 1990s, when then-Prime Minister Mahathir Mohamad wooed overseas manufacturers, developed highways and built the world's tallest twin towers. The government is counting on private investment to support its plans as it tries to cut one of the region's biggest budget shortfall ratios.

"Fiscal consolidation is taking a backseat to growth and political considerations," said Kit Wei Zheng, a Singapore- based economist at Citigroup Inc. "Anything that is potentially unpopular has been effectively shelved. It raises valid questions if the government has the political will to push though the painful but necessary reforms."

The benchmark FTSE Bursa Malaysia KLCI Index fell 0.4 percent yesterday. It has risen 17 percent this year, while the ringgit is the second-best performer in Asia excluding Japan with an 11 percent gain. The currency ended the day little changed at 3.0855 a dollar.

Deficit Narrows

The budget deficit is forecast to narrow to 5.4 percent of GDP in 2011 from 5.6 percent this year, the report showed. The country aims to achieve 6 percent economic growth next year, Najib said in his budget speech at parliament in Kuala Lumpur.

"The growth targets are reasonable and realistic" while the deficit target is "moving in the right direction," said Pankaj Kumar, who oversees about $560 million as chief investment officer of Kurnia Insurans Malaysia Bhd. "At the end of the day, it is the implementation and execution which is key, especially the infrastructure projects."

Malaysia plans to build six highways around Kuala Lumpur and construct a 300-megawatt gas-fired power plant in the state of Sabah, Najib said. The country will start on a mass rail project in the capital in "early" 2011, which is expected to attract 40 billion ringgit in private-sector investment, he said.

Tallest Building

A 100-floor, 5 billion-ringgit tower called Warisan Merdeka will be completed in 2015. The building, to be developed by Malaysia's biggest state asset manager Permodalan Nasional Bhd. in Kuala Lumpur, will be the tallest in the country, Najib said. The 88-floor Petronas Twin Towers are currently the nation's tallest buildings.

The state-controlled Employees Provident Fund, Malaysia's biggest pension fund, will undertake the development of a 10 billion-ringgit housing and commercial project. The nation plans to start a 3 billion-ringgit regasification project in Melaka state in 2012, and develop an oil services and equipment center in the southern state of Johor, he said.

The planned public and private partnership projects will lure 12.5 billion ringgit in private funding, Najib said.

Malaysia has eased barriers to foreign investment since early last year, when the global recession hurt exports of Unisem (M) Bhd. semiconductors and IOI Corp. palm oil. That didn't prevent foreign direct investment from tumbling 81 percent to $1.4 billion in 2009 from $7.3 billion the previous year, according to the United Nation's World Investment Report.

Investment Falls

Private investment has declined from an average 25 percent of GDP in the 1990s to 10 percent over the last decade, according to yesterday's report. The government said last month it has identified private sector-led projects worth $444 billion that can spur investment and push the nation towards developed- nation status by 2020.

Najib has said he wants to triple gross national income to 1.7 trillion ringgit in 2020 from 600 billion ringgit in 2009 and create 3.3 million jobs. To reach that target, Najib estimates that the country needs 2.2 trillion ringgit of funds, with 92 percent coming from private investment.

"The previous growth model, which had successfully progressed the nation from a commodity-based to an industrial economy, is unable to uplift the nation to a fully developed economy," Najib said in the report. "The 2011 budget is, therefore, pivotal towards the expeditious implementation of initiatives under the new growth model."

Revenue Rising

Total government expenditure in 2010 may reach 206.2 billion ringgit, according to the ministry. State revenue may rise 2.3 percent in 2011 to 165.8 billion ringgit amid higher contributions from corporate and personal taxes and income from petroleum, the report showed.

The government will seek to diversify its sources of revenue, of which about 40 percent comes from petroleum revenue, the finance ministry said.

Still, the government said this week it will further postpone the implementation of a goods and services levy intended to broaden the tax base. Najib, who hasn't set a new target date for the sales tax, said yesterday Malaysia plans to raise the service tax to 6 percent from 5 percent, and widen the tax to cover pay-television services.

Najib has tried to cut operational expenses, including trimming subsidies for sugar, gasoline, diesel and liquefied petroleum gas in July to save more than 750 million ringgit in government expenditure.

Subsidy Cuts

Subsidies paid by the government to keep prices of fuel and other essential goods and services low will fall 4.9 percent to 23.7 billion ringgit in 2011, the ministry said. "Subsidies for selected items will be further rationalized to remain purposeful," it said in the report, without providing details.

Inflation is expected to be "moderate" and stay below 3 percent in 2011 after probably remaining in a "benign" range of between 2 percent and 2.5 percent this year, the ministry said. Malaysia's monetary policy is accommodative and such a stance will be maintained to support the economy, according to the report.

The government said it plans to adopt a minimum wage policy and will continue to attract foreign talent to work in the country. Still, Najib said Malaysia plans to increase the levy it charges for foreign workers.

To contact the reporter on this story: Shamim Adam in Kuala Lumpur at sadam2@bloomberg.net

To contact the editor responsible for this story: Chris Anstey at canstey@bloomberg.net

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Friday, October 15, 2010

(BN) UBS Is in Talks With Dozens of Proprietary Traders Considering Hedge Funds

Hopefully the days of financial engineering and sexy derivatives are over. The young should be guided to down to earth jobs, not trading, which is a valueless game they cant beat. Entire lives are wasted on these type of activity.


Bloomberg News, sent from my iPad.
UBS in Talks With Proprietary Traders Over Hedge Funds

Oct. 15 (Bloomberg) -- UBS AG, the largest Swiss bank, said it has been in talks with "dozens" of proprietary traders from firms worldwide who may start their own hedge funds as banks seek to comply with new U.S. rules aimed at curbing risk.

"A lot of it is just talk and chatter, but there are very advanced discussions as well," Stuart Hendel, UBS's global head of prime brokerage, said in an interview in Singapore yesterday. "In the next 12 months, there is going to be much more of a startup phase than there has been in the last couple of years."

Banks including Goldman Sachs Group Inc. and JPMorgan Chase & Co. are complying with the Dodd-Frank financial-overhaul act in the U.S. that prohibits them from risking capital by betting for their own accounts. Goldman Sachs, which makes about 10 percent of its revenue from proprietary trading, decided to disband the principal-strategies group, two people with knowledge of the decision said last month.

Some traders are teaming up to form groups, said Hendel, who is based in New York and was in Singapore to attend UBS's annual hedge fund conference. Managers will also leave existing hedge-fund firms that haven't reached their high-water mark, or the historical peak net asset value of a hedge fund, he said.

"Funds with poor performance will splinter," he said.

It will be harder to raise assets as investors need managers to put in place the necessary infrastructure and risk management platforms before putting their money into hedge funds, he said.

"The bar is going up," Hendel said. "You can't start with three people in a garage anymore on your Mastercard."

More Closures

Prime brokerages provide services such as cash and securities lending, custody, introduction to potential investors and startup consulting services to hedge funds.

There will also be more hedge-fund closures as about a third of funds are still under their high-water marks, making them unable to charge incentive fees two years in a row, he said. Some also will fail to achieve "the size and scale they need to survive and thrive" as they find it tough to raise assets, he said.

"Investors are focusing on a lot of different things that have to be resourced by the underlying hedge funds and you can't do that with $20 million, $30 million, $50 million," said Hendel, who joined Zurich-based UBS last year from Morgan Stanley where he was the global head of prime brokerage in New York. "If you don't have $100 million in the U.S., you're going to struggle."

The industry's assets declined 1.2 percent to $1.65 trillion in the second quarter and remain below the peak of $1.93 trillion in June 2008, according to data provided by Chicago-based Hedge Fund Research Inc.

More Scrutiny

Investors are "spending much more time doing their due diligence" and paying more attention to investment strategies, said Des Anderson, head of trading at the Asian office of London-based hedge-fund firm Marshall Wace LLP.

"The lead time to getting investments now is much longer than it was pre-crisis," Anderson, who is based in Hong Kong, said today at the UBS hedge-fund conference. "In the past, you could expect to get investment within two to three months of detailed meetings; now it's at least six to nine months."

There have been 73 Asian hedge fund closures this year, according to Singapore-based industry data aggregator Eurekahedge Pte, after 107 in 2009. Singapore-based Amoeba Capital Partners Pte, run by the former head of Asian investments at Morgan Stanley's asset-management unit, is returning money to investors in its stock hedge fund, citing "tough" industry conditions, Managing Partner Ashutosh Sinha said this month.

Darwinian Evolution

The proportion of Asian hedge-fund managers overseeing $50 million or less has grown to 66 percent of the industry, from 57 percent two years ago, according to Eurekahedge.

Managers in Asia are seeking to consolidate by merging with others or joining more established hedge-fund firms, said David Gray, UBS's head of prime services in Asia-Pacific.

"What we're seeing is probably an evolution, Darwinian in a way," said Hong Kong-based Gray, who also was in Singapore for the conference. "Once the froth of the bull market leaves and you're left with some of the harder commercial realties, you will see some players leave the business, but you will see others evolving to either merged structures, joining platforms."

Fund Performance

Hedge funds had their best September on record, led by managers investing in Asia ex-Japan and emerging markets, and funds that trade equities, according to Eurekahedge.

The Eurekahedge Hedge Fund Index, which tracks more than 2,600 funds worldwide, rose 3.5 percent last month, bringing its year-to-September advance to 5.2 percent, Eurekahedge said in an e-mailed report this week. The index had its second-best monthly return since May 2003, the Singapore-based data provider said.

"When the opportunity set improves, hedge funds will start increasing their conviction, putting more money to work, buying and selling a little more, increasing their exposure to the market," Hendel said. "That will bode well for the industry."

To contact the reporter on this story: Netty Ismail in Singapore nismail3@bloomberg.net

To contact the editor responsible for this story: Andreea Papuc at apapuc1@bloomberg.net

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Thursday, October 14, 2010

(BN) Goldman Gets 38% Right as No. 1 Firm Rating Financial Companies Worldwide

Wait, isn't anyone going to say that's 62% wrong?

Any did they put their money with their mouth is? Obviously NOT!!

Bloomberg News, sent from my iPad.
Goldman Gets 38% Right as No. 1 Firm Rating Financial Companies

Oct. 14 (Bloomberg) -- It's been a rough three years for banks, securities firms and insurers -- even rougher for the analysts whose job it is to predict how the stocks of these firms will perform, Bloomberg Markets reports in its November issue.

Starting in the second half of 2007, the financial system unraveled. First, the market for securities backed by subprime mortgages collapsed. By the second half of 2008, stock markets around the world were in free fall. Then, starting in March 2009, stocks roared back in the most powerful rally since the 1930s.

"I don't even remember when things were normal," says Daniel Harris, a financial services analyst at Goldman Sachs Group Inc. "Every analyst that has been around in financial services during this time has a newfound respect for the depth that stock prices can go to."

A semblance of normalcy returned to the markets in the summer of 2010, says Frederick Cannon, co-director of research at investment bank Keefe, Bruyette & Woods Inc. "We actually had a stretch this August when most of Wall Street went off to the Hamptons and you could finally take a little bit of a breather for the first time in three years."

Goldman Sachs and KBW did better than most at figuring out where markets were headed. Goldman is No. 1 and KBW No. 2 in the Bloomberg Markets ranking of the world's best financial sector research firms. Goldman's Harris is one of the top three analysts of financial service firms, according to data compiled by Bloomberg.

2,500 Analysts

The ranking is based on stock recommendations made by more than 2,500 analysts worldwide at 77 research firms and investment banks from January 2008 to July 2010. It looks at the analysts' "buy," "hold" and "sell" calls on shares of 90 of the largest banks, diversified financial service companies and insurers in the U.S., Europe and Asia with at least 20 analysts covering them.

Even the best of the firms and individual stock pickers failed to accurately predict the fall and rise of most big financial stocks. Goldman Sachs's analysts won their No. 1 rank by making 30 accurate calls on the 79 financial stocks they follow, or 38 percent, while KBW's No. 2 post was based on 27 prescient calls on 78 stocks.

"It was a very difficult climate to make stock recommendations in," says S.P. Kothari, a professor of management and deputy dean at Massachusetts Institute of Technology's Sloan School of Management in Cambridge. "First, you had to predict the downfall of the financial sector in 2008, which only very few people did. Then, you had to change your outlook to catch the recovery -- all within a relatively short period of time."

Looking for Ideas

Jason Brady, a managing director at Santa Fe, New Mexico- based Thornburg Investment Management, which oversees about $56 billion, says he doesn't read analyst reports for picks on individual stocks.

"It's unusual to see original thinking in these reports, even though that's what's most valuable to me," he says. "The ones who are different aren't always right, but they're frequently the most interesting and thoughtful."

Harris's best call was the "buy" he put on retail broker TD Ameritrade Holding Corp. on Dec. 9, 2008, according to Bloomberg data. The shares sold at $12.80 at the time and rose 46 percent in the following 12 months. After the Goldman Sachs analyst put a "hold" on the stock in December 2009, it declined 16 percent through the end of July.

Schwab Sell Call

While he called the rise of TD Ameritrade, Harris advised investors to sell Charles Schwab Corp. in September 2009 before going to a "hold" recommendation earlier this year; its stock has since fallen 16 percent.

"We liked Ameritrade better than Charles Schwab because we thought their management was being more aggressive in what they were trying to do to battle a very challenging environment," Harris says. "They were active managers of their capital. They made the acquisition of Thinkorswim to boost their trading activities."

TD Ameritrade acquired Thinkorswim Group Inc., a New York options brokerage, in January 2009 for $748.6 million to tap into fast-growing investor interest in the options market.

Volatile markets have been the least of New York-based KBW's tribulations. In 2001, the investment bank lost 67 employees, including 22 from its research department, in the Sept. 11 terrorist strike that brought down the World Trade Center.

'A Wild Ride'

"It's been a crazy time for us for the past nine years," says John Howard, 56, co-director of research with Cannon. He has been at KBW since 1982 and moved to research from sales in 2001 as part of the effort to rebuild that department. "Combine 9/11 with everything that has happened over the past couple of years in the market, and it's been a wild ride for the firm," he says.

Howard sits in KBW's "living room" -- a lounge on the fourth floor of the firm's new midtown Manhattan offices -- next to a memorial sculpture made from a steel girder salvaged from the Trade Center. The sculpture complements a painting of an American flag in the lobby with the names of the KBW dead written on the stripes.

KBW is the seventh-largest U.S. investment bank, with a market capitalization of $949.9 million and a total of 562 employees today. It provides advisory services mostly to other financial firms.

Crash Economics

The market crash and subsequent rise made equity analysts' jobs harder, because the events had little to do with individual companies' performance, says Anton Schutz, who uses KBW's research and trading services in his management of $250 million in financial shares at Mendon Capital Advisors Corp. in Rochester, New York.

"Macro developments drove the stocks so that intelligent stock picking was difficult," Schutz says. "But you still had to make sure you didn't buy the losers such as Bear Stearns and that you picked the survivors such as JPMorgan. KBW helped solve that puzzle for us."

Cannon, 54, says his analysts do bottom-up research, focusing on a financial company's fundamentals more than on the economic climate in which it's operating.

"We were able to see macro trends during the financial crisis because we were looking so hard at the micro level," he says. "When we looked across the about 600 banks we cover, it was staring us in the face."

A Hold on Discover

KBW analyst Sanjay Sakhrani, who's one of the top two U.S. credit-card analysts, according to Bloomberg data, reacted early to deteriorating economic conditions by putting a "hold" on the stock of card issuer Discover Financial Services in December 2007, as delinquent payments began to rise.

The stock fell 39 percent in the next 18 months. In the 13 months after Sakhrani, 35, switched to a "buy" rating in June 2009, the stock rose 44 percent.

Sakhrani in mid-August 2009 added American Express to his buy list. He thinks American Express will benefit from a rise in consumer credit quality, growth in spending and an increase in fees.

Goldman's Harris says that, unlike KBW, his team uses the expertise of the firm's economists to help pick stocks. Goldman was one of the first banks to predict, in 2007, that interest rates would remain low for a long period of time. At the end of 2009, it forecast there would be no rate hike until at least 2012.

"I leveraged the knowledge and the forecasts that Goldman had on interest rates and unemployment to help me determine what the best stock selections were," Harris, 36, says. "Our macro research helped our micro research."

Burnell Picks Goldman

A timely "buy" rating on Goldman Sachs itself helped earn Wells Fargo & Co. analyst Matt Burnell a spot among the best analysts of diversified banks. His call came in April 2009, a month after the market turned positive. By July 30 of this year, when he still had a "buy" on the stock, it was up 33 percent.

Burnell, 48, says he saw Goldman stock rising because of its strong market position and modest exposure to mortgages and other loans. At the same time he rated Goldman a "buy," he put a "hold" on investment bank Morgan Stanley because 62 percent of the bank's common equity consisted of shaky commercial mortgages and other real-estate investments. The stock has been flat since then.

Before moving to Wells Fargo, Burnell worked in fixed income for 12 years at Merrill Lynch & Co., now owned by Bank of America Corp.

'Balance Sheet Perspective'

"As a fixed-income analyst, you have more of a balance sheet perspective as opposed to an earnings-per-share focus," he says. "Also, knowing how the debt market works can be very helpful because bond price movements are often a leading indicator of stock price movements."

When financial stocks began their recovery in mid-2009, many U.S. regional banks outperformed their Wall Street counterparts. Deutsche Bank AG's Matt O'Connor made a series of calls on U.S. regional banks that places him among the best three analysts in that category. He's also one of the best three analysts of commercial banks.

Deutsche Bank ranks No. 3 among firms with the largest number of accurate calls.

The 35-year-old O'Connor's best regional bank call was his June 2009 "buy" recommendation on Minneapolis-based US Bancorp. By the time he put a "hold" on the stock in May, it had climbed 45 percent. After his "hold," it declined 7 percent through July 30.

Keeping Doors Open

"We had noticed that a lot of banks were pulling back in key business areas, but because US Bancorp was stronger it had the ability to keep the doors open for business," he says. "The downgrade came after the weaker banks had gotten stronger, and we wanted to take profit."

As the financial crisis rippled across the globe in late 2008, one hard-hit country was South Korea. The economy and stock market fell so far so fast that President Lee Myung Bak declared a national emergency. Gross domestic product contracted 5.1 percent in the last three months of 2008 alone.

Five months after the national alert, top Asian equity analyst Hunpio Hong of KTB Securities Co. in Seoul went from a "hold" to a "buy" rating on Korean banks, according to Bloomberg data. His best call was his June 2009 "buy" recommendation on Seoul-based Shinhan Financial Co. By the end of July this year, the stock was up 54 percent.

Shinhan is South Korea's largest financial company by market value.

'A Difficult Decision'

"It was such a difficult decision at the time," says Hong, 42, who has a Master of Business Administration from the University of Washington. "The stock performance had partly been beyond my analysis because of the crisis, but in mid-2009 I saw that the downward trend of Korean banks' net interest margin was coming to an end."

The net interest margin is the difference between what a bank pays in interest to depositors and what it earns from loans.

While most South Korean banks have come back from the crisis, Europe's have not. The region's financial institutions fell more than 50 percent from January 2008 through July, according to the Bloomberg Europe Banks and Financial Services Index. Chintan Joshi of Nomura Holdings Inc. ranks as one of Europe's premier bank analysts for finding exceptions to the bad news in the Scandinavian market, according to Bloomberg data.

"The world was in a very bearish place at the time," says Joshi, who came to Nomura when it acquired Lehman Brothers Holdings Inc.'s Asian and European operations. "But the Nordic macroeconomic situation was better, and the banks didn't have much exposure to U.S. subprime mortgages."

Nordic Lights

Joshi, 31, works from London for Tokyo-based Nomura, tied at No. 14 in Bloomberg's firm ranking. His best call was a March 6, 2009, "buy" recommendation on Oslo-based commercial and investment bank DnB Nor ASA. The bank's stock had soared 272 percent as of July 30.

Earlier, in November 2008, Joshi had given a "buy" recommendation to Oslo-based Nordea Bank AB. Nordea's stock gained 44 percent before Joshi put a "hold" rating on it in September 2009. It's been flat since.

MIT's Kothari says that what often distinguishes successful analysts is their willingness to take a risk.

"It's essential to have the courage to be a little bit different from the herd mentality that most analysts may exhibit," he says. "That courage is what makes some of these analysts stand out."

The analysts themselves say picking stocks in some of the most volatile markets in history has been an education.

"The past few years have probably been the biggest learning experience I could have had as an analyst," says Goldman Sachs's Harris. "The environment was so volatile and so uncertain. That shapes you."

To contact the reporter on this story: Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net .

To contact the editors responsible for this story: Michael Serrill at mserrill@bloomberg.net Nick Baker at nbaker7@bloomberg.net .

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Monday, October 11, 2010

As we can well see, fund managers who can't match the index are aplenty. And remember, these are the 'top stock funds'.

- green for performance above index
- red for underperformance


Sunday, October 10, 2010

Book: The Meaning of the 21st Century

Chapter One

© James Martin - All forms of replication prohibited.

THE MEANING OF THE 21ST CENTURY

THE MAKE-OR-BREAK CENTURY
by JAMES MARTIN

Skip to:

The Transition Generation
The Earth's Resources
The Canyon
When Would You Want to be Alive?
Momentum Trends
Surprises
An Egg Shell
Eco-Affluence
Wealth and Civilization
Petroleum Addiction
Leverage Factors
China
Dichotomy
Technology's Avalanche
Humanity's Grandest Challenge
Mega-Problems
THE TRANSITION GENERATION

At the start of the 21st century, humankind finds itself on a non-sustainable course – a course that, unless it is changed, will lead to catastrophes of awesome consequences. At the same time, we are unlocking formidable new capabilities that could lead to much more exciting lives and glorious civilizations.

This could be humanity's last century, or it could be the century in which civilization sets sail towards a far more spectacular future. Decisions that will lead to these wildly different conclusions have to be made soon. They depend upon our being able to understand the options of the 21st century, think logically about our future, and collectively take rational action.

We live on a small, beautiful and totally isolated planet, but its population is becoming too large, and growing rapidly in its desire to consume products that need resources beyond what the earth can provide. Technology is becoming powerful enough to wreck the planet. We are traveling at breakneck speed into an age of extremes – extremes in wealth and poverty, extremes in technology and the experiments that scientists want to perform, extreme forces of globalism, weapons of mass destruction and terrorists acting in the name of religion. If we are to survive decently, we have to learn how to manage this situation.

The message of this book is vitally important. We have reached a situation where grand-scale decisions have to be made. Collectively, humankind needs to be taught about the future so that they can understand these decisions. Rules of the road need to be put into place. As we will explain, the 21st century is a very critical century. It is a make-or-break century.

Problems confront us that could become awesome, but this is a book about solutions – many solutions. With these solutions we will bring about a change in course – a great 21st-century transition. If we get it right, we have an extraordinary future. If we get it wrong, we face a disruption that will set humanity back centuries. A drastic change is needed in the first half of the 21st century to set the stage for extraordinary events in the rest of the century.

The problems that lie in the future of all today's children are not difficult to understand. Nor are the solutions available to us.

A major reason why we have the problems that this book describes is that most of our institutions don't have a long-range view of the future. If we look ahead, it is a short-distance view, not a long-distance view. Finding answers to the problems that could wreck our future often needs a long-term view. Given the nature of the 21st century, our young people need to be shown the long-term views.

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THE EARTH'S RESOURCES

Humankind has been able to thrive for thousands of years because nature provided it with resources like topsoil, underground water, fish in the oceans, minerals, oil and wetlands — but these resources are finite, like cookies in a jar. We are using up the cookies, and some don't have substitutes. Nature also provided us with an ozone layer and a delicately regulated atmosphere, with forests that remove carbon dioxide from the atmosphere and yet every year we destroy 44 million acres of forest. Carbon dioxide is being pumped into the atmosphere at a rate greater than the Earth's forests can absorb it. Every year, we lose 100 million acres of farmland and 24 billion tons of topsoil, and we create 15 million acres of new desert around the world. An inch of good topsoil can take a thousand years to form, but when people destroy windbreaks by cutting down trees, it can be washed or blown away in months.

Water is vital for our survival and for producing food. It takes about a thousand tons of water to produce one ton of grain that, fed to cows, produces only 18 pounds of meat. Today mankind is using about 160 billion tons more water each year than is being replenished by rain. If this water were carried in water trucks, it would require a 300,000-mile-long convoy of trucks every day – a convoy length 37 times the diameter of the Earth. This is how much water we are using and not replenishing.

During the lifetime of today's teenagers, fresh water will run out in many parts of the world, making food production difficult. Many fish species will be too depleted to replenish themselves. Global warming will bring hurricanes far more severe than Katrina, and will cause natural climate control mechanisms to go wrong. Rising temperatures will lower crop yields in many of the world's poorest countries, such as those in central Africa. The immense tensions brought about by such situations will occur in a time of extremism, religious belligerence and suicidal terrorism, and this will coincide with terrible weapons becoming much less expensive and more widely available.

This interconnected set of problems has an interconnected set of solutions. If humans implement these solutions, we can gradually achieve a sustainable and highly affluent set of civilizations. Working towards sustainability requires many different types of actions in different subject areas. However, sustainability alone is not enough; we need to be concerned with survivability. We need to be able to control the diverse forces of extreme technology that are part of our future.

Today's young people will be the generation that brings about this great transition. They are ultimately responsible for the changes we describe – a transition unlike any before in history. They are the Transition Generation. It is vital that they – all of them – understand the 21st century roadmap and the critical role they will play. For many, understanding the meaning of the 21st century will give meaning to their own lives.

This massive change in course is inevitable in this century. It needs to happen sooner rather than later. The longer we delay, the more traumatic it will become. The transition is the sum of many changes, each of which is easy to understand. These changes need to be taught to young people – the generation that will bare the brunt of making them happen. They will need good research, excellent scholarship, and leadership on a large scale – all things we are good at today in our best enterprises.

However, today there are major roadblocks preventing the actions that are needed. There are huge vested interests with massive financial reasons for not changing course. There is bureaucracy that constitutes a form of paralysis. Collectively, governments seem barely able to move in the directions needed. There is large-scale corruption and massive financial subsidies for doing the wrong thing. Above all, there is widespread ignorance of the problems we describe. The most powerful people today have little understanding of the solutions and little incentive to apply them. Politicians in democratic countries are fixated on finding votes. The next election dominates their thinking. Powerful business executives are eager to achieve short-term profits. It is their job to please shareholders who will judge them by this quarter's results. For the powerful people who control events, the desire for short-term benefits overwhelms the desire solve long-term problems. If these roadblocks are not removed we will steadily head down paths that lead to catastrophe – famines, violence, wars over water, pollution, global pandemics, runaway climate change and, particularly dangerous, terrorism with new types of mass-destruction weapons.

The Transition Generation will not sit around and watch their world being unnecessarily damaged. Their frustrated desires to remake the world and address problems that they have inherited from the 20th century need not result in social unrest. That is the protest model of the 20th century. Today's youth are more informed and educated. They understand the complexity of 21st century problems, and they do not seek simplistic answers. Indeed, the challenge of these problems excites and animates them. They are forming international youth networks to address global warming and AIDS. They are entering the world of business, taking their new perspectives and challenging the short-term thinking with images of long-term sustainable development.

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THE CANYON

Think of the 21st century as a deep river canyon with a narrow bottleneck at its center. Think of humanity as river rafters heading downstream. As we head into the canyon, we'll have to cope with a rate of change that becomes much more intense – a white-water raft trip with the currents becoming much faster and rougher – a time when technology will accelerate at a phenomenal rate.

As the world's population grows, global tensions and pollution will climb, and the danger of massive famines will increase. The population of the world will continue to rise, probably until it reaches about 8.9 billion (a figure from the latest computer models). The ability to feed such a population will steadily decrease as water-tables drop, farms in poor countries disappear and the huge new consumer classes in at least 20 countries change their eating habits so that they eat more meat (which needs much more grain and, thus, much more scarce water).

Demographers, who map out the course of world population growth, expect it to decline slowly after it reaches its peak in mid-century. It has been falling in most First World countries; the fertility rate in these countries has dropped below the replacement rate of about 2.1 children per woman. The planet's population growth is occurring mainly in poor countries. At the narrow part of the canyon, the world's population will be at its highest and the world's resources under their greatest stress. Because the canyon is going to get rough, there are major uncertainties about what the peak number of humans will be.

The decades in which we are swept towards the canyon bottleneck will be a time when we unlock extraordinary new technology – nanotechnology, biotechnology, extreme-bandwidth networks, regenerative medicine, robotic factories and intense forms of computerized intelligence. Although much harm may be done to the climate by mid-century, the fuels that cause global warming will be partially replaced by various forms of clean energy. Eventually, there will be an endless supply of energy that does little environmental harm. Instead of smokestacks and carbon-based fuels, we'll have clean industry and a hydrogen economy. The insidious chemicals that interfere with our health will mostly be banned. The oceans will become more protected, but not until immense damage has been done. The global environment will become well instrumented and better understood, so that we become capable of managing it well.

The job of the transition generation is to get humanity through the canyon with as little mayhem as possible into what we hope will be smoother waters beyond. Solutions exist to most of the serious problems. The bad news is that as we are heading toward the canyon, our leaders are not preparing to make the passage smoother for us.

We may see a post-canyon world with smoother sailing, but a different set of events will be taking us into a different type of turbulence. 21st-century technologies will give us the ability to change life, to transform humans and, indeed, to interfere with the inner sanctum that makes us human. Computer intelligence will race far beyond human intelligence. New science will take us into a world that changes very fast, raising questions about how we stay in control.

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WHEN WOULD YOU WANT TO BE ALIVE?

It is common today to find people depressed about the future, sometimes abandoning hope that any actions can save us. But when one maps out the possible courses of this century, I think it is the most exciting time to be alive.

Young people have sometimes asked me a question: "If you were to pick any time in history to be alive, which time would you pick?" There have been moments in history when there was excitement in the air and people vying with one another for creating better ideas – London in the Shakespeare years, or Paris of La Belle Époque. Would I want to live in the Athens of Pericles or the Florence of Michelangelo?

When I reflect on such times, it seems to me that none can compare with the lifetime of today's young people. We don't have the high-culture civilization of Athens or Florence, but this is a far more extraordinary time. Debates about the meaning of the 21st century and the global evolution of human affairs, will be immensely rich in content. Technology will reach a self-evolving chain reaction for which history provides no guideposts.

Reflecting on the subject matter of this book, I reply to their question: "If I could choose any time to live, I would want to be a teenager now (in a country where great education is available)." There is excitement in the air – perhaps more excitement than at any other time. Many people react to this by saying "You've got to be crazy. We're heading into the canyon" We're trashing the planet and there'll be extreme tensions caused by over-population, over-consumption, water and other resources running out. There'll be corporations larger than nations, runaway nanotechnology and devastating famines. We have terrorism, weapons of mass destruction and the possibility of a biotechnology war. Worse, we may have the catastrophe of a roasted planet. Why not pick a benign safe time like the 1950s? — but we were then terrified by the hydrogen bomb. The Russians exploded a 50-megaton bomb and talked of a "doomsday machine." Why not pick 100 years ago? — but then First-World teenagers were drifting towards the trenches of World War I.

The most important reason I would choose today is that, more than at any other time, young people will make a spectacular difference. Revolutionary change is essential and today's young people will make it happen. There needs to be a crusading determination to bring about the changes we describe. Today's young people will collectively determine the outcome of this make-or-break century. If they understand what is possible, the Transition Generation can open up a highway to by far the most creative era in history.

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MOMENTUM TRENDS

I don't sit at my desk with a crystal ball. Crystal balls don't work. So, why is it sensible to write a book about the future?

There are trends that are foreseeable because they have unstoppable momentum, like a freight train but on a grand scale. Many of these high-momentum trends will have profound consequences and seem either inevitable or very difficult to change. For example, the growth of the Earth's population can be estimated, and from these estimates we can examine the supply and demand for food, water and other basics.

There are about a hundred freight-train trends that can help us understand aspects of the future. Some are obvious, like the decline of ocean fisheries. Some are clear to experts in the field. Some are long-term, like the spread of greenhouse gases in the atmosphere. Some are relatively short term changes to a new form of behavior, such as the Internet changing how corporations buy goods.

Some large-scale trends are inevitable because of technology. We know that telecommunications bandwidth is set to grow inexorably because of the inherent bandwidth of optical fibers. The most famous long-term prediction is "Moore's Law." In 1965, Gordon Moore, a founder of the great chip company, Intel, stated that the number of transistors on a silicon chip would double every year-and-a half, and it has done so for decades. Diverse forms of technology grow continuously, following their own form of Moore's Law. As we'll see, Moore's-Law trends are fundamentally different from freight-train trends.

Together, these long-term trends form a skeleton of the future. Putting flesh on that skeleton can be done in different ways. We can't predict the future in detail, but we can study the alternate directions it can take and how to influence it.

When we look at the long-term trends in aggregate, it is clear that we are in deep trouble. Every six weeks the planet's population has a net increase equal to the population of New York. Extreme differences between rich and poor nations widen even more dramatically, with the wealthiest lifestyles being flaunted in the face of the poorest via television and the forces of globalism. The age of terrorism reflects new types of tensions. Much of the water, essential for growing food, comes from large underground aquifers and dates back to many ice ages ago. When this ancient resource is used up, we'll have to live mainly on rainwater. There'll be wars over water.

When environmental shortages become severe in poor countries, civil violence can erupt. In 1994, during a drought, Africa's two most densely populated countries, Rwanda and Burundi, suffered an explosion of genocidal murder and atrocities that killed nearly a million people.

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SURPRISES

To map the world in terms of trends having unstoppable momentum suggests a substantial level of predictability. However, even among predictable trends, major surprises occur suddenly. If a surprise is going to make a dent in the freight-train-like momentum, it must be very big. Even though America was shockingly jolted by the attacks of 9/11, the momentum trends of its time continued, and only a few showed a blip on their curve. By contrast, in the early 20th century, the grandly civilized Belle Epoque era, with Paris as its flagship, was largely swept away by the unexpected nightmare of World War I. In 1990, a major economic/political surprise changed the map of history – the Soviet Union collapsed, and people's lives were left in tatters in one of the world's best-educated nations.

America has such an impressive economic momentum that it sails through turbulent weather like a grand ship. But there could be surprises big enough to upset the USA. The USA is increasingly dependent upon Third-World economies, which have taken over much of the manufacturing and services that were integral to the US economy. A rapidly growing proportion of what Americans buy is made in China. The USA used to be home to the world's best programmers and system designers. Now much of that work is done in India. Economies have a pattern of booms and recessions, sometimes with economic collapses. The Asian crisis of 1997 brought much of the Third World to the brink of financial meltdown. Economies are becoming increasingly interconnected, so that an economic bubble in the vigorous part of the Third World, followed by what economists call a "hard landing", could play havoc in the USA.

Some surprises may be very unpleasant. If a terrorist organization set off atomic bombs, like the Hiroshima bomb, in American cities, the aftermath would be devastating and would create extreme political paranoia.

One of the worst surprises might be something that at first appears far less dramatic – a flu epidemic. The flu of 1918 killed twice as many people as World War I. A new strain of flu, H5N1 avian flu, has a set of characteristics that would make it very dangerous if it spread to people. There is no vaccine for it yet, and we can't make a vaccine until we know the particular strain of flu. If such a flu starts spreading, some governments are likely to quarantine people and shut down air travel. Because economies of wealthy countries depend increasingly on international business and supply chains, the disruption to multinational business could be devastating. A worse scenario could be a pandemic that surprises nature, because humans have created an artificially modified pathogen.

Peter Schwarz, a long-term professional in creating scenarios of the future, says that surprises large enough to change the momentum-trend skeleton of the future, appear inevitable once the underlying patterns of behavior are examined. A major terrorist attack on the American homeland by Muslim extremists was predicted well before 9/11 – so much so that the destruction of the World Trade Center might conceivably have been avoided. A Third World bubble economy or lethal flu epidemic has an aura of inevitability, and it is sensible to take precautions.

Often surprises occur because politicians don't listen to scientists. Before hurricane Katrina caused devastation in New Orleans, the situation had been modeled in detail. The models indicated that a Category 3 hurricane could result in broken levees and extremely dangerous flooding of the city. Katrina was Category 5 for a time, but the city was not evacuated. President Bush said he didn't "think anybody expected" the levees to break.

A message that turns up repeatedly in this book is that we'd better listen to the scientists.

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AN EGG SHELL

The Earth is a small sphere sitting in endless black emptiness. It has a thin and complex surface layer in which things grow. If a model of the earth was a thousand feet across, this surface layer would be the thickness of an eggshell.

In the thin layer of Earth's soil, great forests grow, along with all manner of plants that create oxygen and absorb the carbon dioxide that creatures breath out. The plants and sunlight create weather patterns, forming streams and oceans, and an ecology that is able to regulate itself. The mechanisms of regulation are very intricate. They provide a breathable atmosphere and a climate that humans have adapted to. The Earth's ecology is a living thing – green and beautiful, with insects and pollination, and complex weather.

This surface shell is generally stable but if it is interfered with too much it can change to a different state. It has periodic ice ages. 20,000 years ago, Britain was buried under ice almost two miles deep. Amazingly, the average temperature towards the end of the ice age was only 5° Centigrade lower than it is today. While the average was 5° lower, some parts of the earth were 20° lower. If we interfere with the eggshell gently, it will adjust and return to stability. However, if anything interferes with it too much, it will change to a different state. This could be chaotic for humans, especially as their population is much larger than that which would have evolved naturally.

The behavior of the Earth is studied with the discipline of Earth System Science, which treats the Earth's geosphere and biosphere as an integrated entity. James Lovelock, the father of Earth System Science, calls the Earth's complex system "Gaia." Like other complex systems, such as city traffic or world finances, Gaia has a behavior of its own. We can change the behavior of city traffic or world finances, but if we change the behavior of Gaia, we may trigger a very slow but ultimately massive change in the climate. The consequences of this would be devastating later in this century. A concern today is that we are inadvertently putting too much pressure on the delicately adjusted shell of the Earth. We are messing with forces of a grand scale.

At present this totally isolated blue planet is in a period of natural warming. It is bad luck that this is the time when human civilization started to also cause artificial warming. We are pumping greenhouse gasses into the atmosphere, in large quantities, at a time when Gaia was already feeling the heat. To make this situation worse we are interfering with the elaborate control mechanisms that give the shell stability. We cutting down forests at a rapid rate, changing the surface of the Earth with industry, building large numbers of cities, and diverting water to them. Much of the surface of the planet is becoming scrub vegetation or desert. We are interfering with the control mechanisms that have kept the planet healthy for millions of years.

We now have computer centers around the world that study this in great detail. Scientists create highly detailed models of the planet's ecosystem, which run on some of the world's largest supercomputers. Some Earth system scientists see the Earth as being ill, with its temperature becoming too high. If we continue to pump greenhouse gasses into the atmosphere with "business as usual", we'll create feedback mechanisms that cause runaway change. Every living thing can enjoy good health or bad health. Lovelock says that the earth has a fever. Gaia has been there before, he says, and recovered, but it took many centuries.

Lovelock, a highly knowledgeable and respected scientist, paints a grim scenario. Much of the Earth will become too hot for farmers to grow food. We don't know exactly to what extent the warming is irreversible. If Gaia is sick, we must clearly try to cure the sickness. That will need a massive effort to lower the content of carbon in the atmosphere, and to make sure the rain forests and other means of disposing of carbon are sufficient.

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ECO-AFFLUENCE

Sooner or later, we must realize that we have to live within the planet's means. We can't use more water than the Earth is capable of providing. A globally sustainable civilization doesn't mean one that's poor or without joy. On the contrary, we can have spectacularly affluent civilizations where we don't use more resources than the environment can provide. I call this eco-affluence. There can be new lifestyles of the grandest quality that heal rather than harm our global ecosystem.

A quality of life that doesn't damage the environment doesn't mean "back-to-nature." You don't have to live like Thoreau (unless you want to). It could mean living in a superbly sophisticated city, near family, with the excitement of creative work, cultural diversity, elegant parks and superlative entertainment. Cities can be both beautiful and ecologically correct. A good lifestyle may mean developing a connection to religion, beauty and community. Future civilizations will be anything but simple, and they will have a wide variety of lifestyles.

There are many ways to be affluent without harming the environment. Some involve the love of nature, some involve high technology and some involve opera, baseball, theater, or jazz. The Earth will have large protected areas of ancient and immense biodiversity, and some people will be passionate about understanding this biodiversity. Some will be crazy about ocean racing, paragliding, birding, breeding orchids, hydroponics, cricket, camping or walking in beautiful places. Digital technology will bring global computer games with virtual reality of great richness. With hi-fi earphones and high-definition goggles, we can take state-of-the-art entertainment anywhere.

Around the world a vast new buying class is growing that wants to consume like Americans. One finds American-style shopping malls everywhere. Soon this new consumer class will grow to 4 billion people. As early as possible in that growth, there needs to be a transition that limits the amount of carbon dioxide pumped into the atmosphere. There should be clean energy sources, new types of cars, and efficient use of water. To avoid playing havoc with the planet, we need eco-affluence to become highly fashionable, worldwide.

The future will be characterized by a rapid growth in knowledge and new techniques for putting knowledge to work. Routine work will continue to be done by machines, leaving humans to focus increasingly on jobs that demand human feeling and creativity. The 21st century will bring extraordinary levels of eco-affluent creativity. There will be a near-infinite number of eco-affluent avocations and hobbies.

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WEALTH AND CIVILIZATION

One important freight-train trend is the ongoing increase in human productivity caused by improving technology and better management. From 1995 to 2005, productivity in America rose by slightly more than 3% per year – because of increased automation and more ingenious business mechanisms. Some economists expect a long-term productivity growth of around 2.5%. If this continued for a 100 years, society would be 12 times wealthier in real terms. China (starting from a lower base) is likely to be 20 times wealthier in real terms. It is possible (probable, I think) that the era of nanotechnology and robotics will sweep us to higher growth rates than those predicted by today's economists. However such growth in affluence will not be possible, unless it is eco-affluence. It is vital that this major new wealth be spent in ways that heal rather than harm the planet.

An important statement is that the world's increase in wealth will be very much greater than its increase in population. This conjunction of freight-train trends offers hope that the world will be made a more decent place for most of humanity. However, the increase in wealth will be very unevenly distributed. The new wealth will be based largely on intellect, so the vast majority of it will go to countries that are already the richest, and have the best universities, while many of the poorest countries will skid into deeper poverty unless a well-planned effort is made to prevent this.

The forces of the near future are so large that they will inevitably change civilization. Part of the 21st century transition is a change in civilizations – different civilizations with different cultures. What's the point of ever-more extraordinary technology if it doesn't build better civilizations? Human survivability and creating new concepts of civilization are inextricably linked.

We need to ask fundamental questions about civilization. What sort of a world would you like your children to live in? What should be the principles of a civilization in which biotechnology can change human nature? In Thomas Jefferson's world, constructive debates raged about future civilization. We need something similar. What principles are right for the 21st century, when so much will change?

Society needs visions of a better future. We need a broader vision of the future's diverse possibilities because civilization is certain to become more multi-faceted and complex than it is now. As in the grand epic legends like Lord of the Rings, progression towards that vision may be blocked by catastrophes, battles and bureaucrats, and distractions so seductive that we can't resist them.

The 21st century transition, if we get it right, will not only steer the planet away from a course leading to mayhem, but it will also set the stage for an extraordinary evolution of civilizations very different from what we know today.

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PETROLEUM ADDICTION

The First World, and particularly the USA, has to break free from its economy's addiction to petroleum. However there is a problem in dong so. The world's reserves of oil (not counting the undiscovered ones) are of the order of a trillion barrels. At today's prices that is worth very roughly 60 trillion US dollars. If humanity set out vigorously to stop future climate catastrophes by moving to non-petroleum forms of energy, much of this vast amount of money would be abandoned.

>Saudi Arabia doesn't want to abandon its huge and only fortune. Nor does Russia or other oil-rich countries. Nor do the petroleum companies. Massive vested interests are linked to oil fortunes. Governments have been persuaded to give outrageous subsidies to oil-related industries. The car industry is linked to the oil industry, rather like the military-industrial complex that Eisenhower worried about.

The enormous forces that govern the earth's climate are shifting. Our detailed computer models show that we are moving towards a state in which the mechanisms of climate change will become irreversible, but if we act quickly, we can stop climate change becoming a catastrophe of unprecedented scale. We need to act now, not in a decade's time, because the window is steadily closing. The time for action with the least cost and biggest payoff is now. One giant oil company ran full-page ads in leading newspapers saying exactly the opposite – that there is a covert duty to burn oil faster than ever in order to exploit the oil company's window of opportunity, which will open until global warming slams it shut.

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LEVERAGE FACTORS

Throughout this book I use the term leverage factor to refer to small and politically achievable actions that can have powerful results. Archimedes said "Give me a large enough lever and I can move the earth." There are many examples of leverage factors, where a relatively small action or minor change in rules can cause massive changes in outcome. For example, a tiny catalyst can cause a major chemical reaction. Anti-trust laws have a major effect on the evolution of capitalism's tendency toward creating monopolies. Injecting a tiny amount of a vaccine into our blood can trigger our immune system into producing enough antibodies to make us immune to a disease. Most of the harmful momentum trends have leverage factors that could help us avoid much of the harm.

One dramatic example: When women in poor countries learn to read, they tend to have fewer children, and it is relatively easy and inexpensive to teach them to read. The most effective way to lower the fertility rate is to provide birth control and teach women to read. This helps women to improve their lives, and it is a relatively inexpensive solution that brings dramatic results.

The Roman Empire didn't use hay to feed animals. Hay wasn't needed in a Mediterranean climate because grass grew well enough in winter that there was no need to cut the grass in autumn and store it. Hay came into use during the Dark Ages. The simple idea of using hay was a high-leverage event because it enabled populations in northern Europe to make widespread use of horses and oxen. Hay eventually permitted cities such as London to grow and become great centers of activity.

Smallpox has been humanity's most dreadful disease. In the 20th century 300 million people died from it (a terrible way to die). In 1966 a totally uncompromising leader, Donald A. Henderson, set out to eradicate smallpox from the planet. When there was an outbreak of smallpox, everyone in a ring around the outbreak was vaccinated. Slowly, in one country after another, in a program called The Eradication, smallpox was wiped out. The last natural case of smallpox infected a cook in Somalia on October 27th, 1977. No human has had smallpox from natural causes since then.

There can be evil leverage factors as well as good ones. After 1977, the only smallpox virus existed in a Maximum Containment Laboratory at the Center for Disease Control in Atlanta and a similar repository at the Moscow Institute. Different strains of the disease were kept in little plastic vials in a liquid-nitrogen freezer. The CDC's entire smallpox collection would fit in a lady's handbag and weighed about one pound. The USSR concluded that The Eradication gave it a unique military opportunity. In total secrecy, it created a facility that could make up to 100 tons of weapons-grade smallpox per year. Intercontinental ballistic missiles were modified so that they could carry large quantities of smallpox virus to target destinations and release them.

To address the many difficult problems in this book, we need to identify effective leverage factors. Some leverage factors are unexpected, such as the introduction of World Wide Web software, which made the Internet user-friendly. It cost relatively little but it ushered in the mass acceptability of Internet use and electronic commerce. This simple software was an extraordinary lever.

We need to separate in our minds the momentum trends and leverage factors from the overwhelming noise of smaller issues. Identifying them is a powerful way to think about how to make the future better. There is an enormous amount that can be done to transform the journey ahead.

Major countries will jostle to have a leading competitive position in the new car and power-generation industries. The race for clean energy products will become as intense as competition in the computer industry was.

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CHINA

The biggest leverage factor I can think of is that the all-powerful central government of China decides that it can help stop the world wrecking the Earth's climate. Today the world worries about China burning enormous quantities of coal. The Chinese government could set a directive for China to identify every type of product that could lessen global climate damage, do the necessary research and development, and manufacture such products at the world's lowest cost. Such a mission would help stop China's serious dependence on oil imports.

There is every indication that climate change is going to become a very expensive problem, but that the First World is going to drag its heels in creating large-scale solutions. The First World is trapped in vested interests, so as the alarm about climate damage grows, the size of this expert market for China could become enormous, and extremely profitable.

China could mass-produce and export ecologically benign cars in vast numbers. As we will describe, these will be radically different from the cars that we drive today. It could mass-market products for producing energy without greenhouse gasses, including large-field solar panels, multi-megawatt wind generators, fuel cells for cars and the home, fuel for fuel cells, products that are the basis of green buildings and China's impressive pebble-bed technology (explained later). All of these will drop in cost substantially as they achieve large sales. It makes sense to embrace all of the non-carbon solutions – green buildings, energy efficiency, eco-affluence, and alternate sources of energy.

China could achieve low-cost manufacturing, excellent research, and capture the market quickly because it is not ensnarled in the First World's expensive subsidies, bureaucracy, price distortions, old methodologies, and the massive financial interests of the old energy industry, car industry, nuclear industry, and building industry.

Eventually the global annual sales of such products and services (including cars) will become much larger than the global revenue from petroleum-based products -- trillions of dollars per year. Major countries will jostle to have a leading competitive position in the new car and power-generation industries. The race for clean energy products will become as intense as competition in the computer industry was.

The Chinese government has decreed that by 2010, 10% of that vast nation's energy must come from renewable sources. China won't have effete objections to the aesthetics of wind generators, or politics that block the development of fuel cells. It won't have a crippling bureaucracy that delays the building nuclear power stations. This and its phenomenally low-cost manufacturing give it huge competitive advantage. It would be a win-win opportunity of enormous magnitude for much of China's growth to come from saving the planet.

A tragedy of the present time is that in the First World, and especially in the USA, there is government commitment to and aggressive lobbying for the wrong solutions. There are massive subsidies for planet-wrecking technology. The American car industry is on welfare. Sir Crispin Tickell, a top British environmental advisor to governments, comments: "I find that those at the top of the Chinese government understand the implications of environmental issues better than those in almost any other government in the world."

Sooner or later, there will be great public alarm about climate change. It may border on hysteria. At that time, China could be ready with the products that could help lessen the damage.

The world, inevitably, is going to have a great transformation. This is part of the meaning of the 21st-century. China, the giant of the future, could either make the world's problem worse with massive carbon dioxide emissions, or it could decide that it is going to lead the 21st-century revolution.

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DICHOTOMY

The 21st century presents an extreme dichotomy. In the strongest countries it will be a time of great increase in wealth and a massive increase in what humans can achieve. In the weakest countries, there will be a cycle of steadily worsening poverty, disease, violence and social chaos. Many nations are destitute, or failed, nations, not developing nations. Developing countries are on a ladder to improvement, step by step they can improve their lot. Destitute nations are so poor that they cannot reach the bottom rung of that ladder. There is no way to educate one's children, no way to create better farming, no way to enter the world of trade. Below a certain level, poverty is so crushing that there is no way out without well-planned external help; hunger and disease only get worse. It is entirely possible for the wealthy nations to stop this vicious cycle in the poorest nations. Almost a third of the world's people live in places where they earn less than $2 per day. Half a billion live on less than $1 per day. Between now and mid-century, most of the 2 to 3 billion increase in population will be in the poorest countries. Such destitution leads to desperation. Extremist Islam seminaries, offering food, and advocating terrorism and jihad, is spreading in some of these countries.

We can look at the future in two ways. We can ask: What is the right thing to do? Or we can ask: What is the most likely thing to happen?

As we look at the poorest nations of the world or the destitute shantytowns within not-so-poor nations, it is difficult to understand the true horror of what is there unless you've been there. If we ask what the right thing to do is, there are clear, fundamental answers. End poverty. Eliminate disease and squalor. Educate children. Teach women to read. In short, clean up the mess. Take a set of actions that lift the destitute society to the bottom rung of the ladder of development, from which they have a chance to progress. To get to the bottom rung of the ladder they need help from the outside. Without that help, the destitution will get worse. This is not an impractical ideal. Jeffrey Sachs and his associates have worked out in detail how to do it. It does not need a large amount of financial aid; it needs basic know-how putting into place along with enough money to make sure that change happens. Without the know-how and the management, money does little good. The cost to the rich nations would barely be noticed.

However, if we ask what the most likely thing to happen is, we observe that the United Nations sets goals, but there is not much action. Politicians in rich nations make speeches and feel good about their words, but their television-watching constituency mostly doesn't care about faraway poverty. Not enough money is spent by rich countries to help poor ones. Powerful governments (like the Chinese) bring about powerful changes in their own country, but destitute nations have no such government. They desperately need help, which they are not getting. So, for these nations, if we ask what is probably going to happen, the answer is an inexorable spiral into worsening conditions. To answer "More of the same" would not be correct, usually, because below a certain level of poverty, the situation slowly deteriorates.

Michael Porter, the Harvard superstar of business gurus, told me forcefully: "We have all these countries that are failing; all these people in these countries that have no opportunities, no sense of self-worth. This is creating very divisive forces. … We're caught in a conundrum. We want to respect the citizens of countries to make choices. We believe deeply in democracy. We want people to guide their own destinies. Yet, what if that keeps not working, and we have these long-term, planet-wide consequences. What do we do about it? That is a discussion that the world, right now, is not prepared to have."

The richest parts of humanity will spend huge amounts of money improving their lives, while the poorest parts of humanity live an almost sub-human existence. The richest kids will play video games full of virtual violence while the poorest kids live in shanty cities full of actual violence. People in rich societies will strive to live longer, vigorous lives, while the world's poorest have shorter brutal lives, ruined by AIDS, sporadic warfare, political anarchy and the growing threat of starvation.

Deep inside most of us, if we think deeply, there is a sense of what is the right thing to do. We don't need to invoke the concept of conscience to say this. Understanding the right thing to do is largely a matter of deep common sense.

In entirely different aspects of the story we have to tell, there is a stark difference between the right thing to do and the most likely thing to happen.

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TECHNOLOGY'S AVALANCHE

At the time that America's Founding Fathers were debating what their future society should be like, a handful of similarly thoughtful men in England met at each other's houses (when there was sufficient moonlight to ride by). They were practical men, neither aristocrats nor scholars, but manufacturers who came together because they were excited by new ideas. They built new types of machines, like the loom and the steam engine. Together they set in motion an avalanche of technology that became the Industrial Revolution. Like all avalanches, it moved slowly at first, but each wave of technology brought with it new ideas for improving things, and the waves picked up speed and followed each other increasingly quickly. Two and a half centuries later, the avalanche is thundering down the mountainside with awesome power. As a consequence of technology, the 20th century saw population and consumption multiply furiously, heading to levels that the earth could not sustain.

The avalanche will continue to accelerate. Theoretical research in science indicates that technology will probably increase in power for centuries. To stop it would take a catastrophe of extreme form. Almost all technology can be used for good or for evil. As technology becomes more powerful, both the potential good and potential evil become greater. The spectrum from good to evil expands and will become extremely wide as the avalanche continues. The larger this range, the greater the need to accelerate the best technologies and suppress the worst. We need the wisdom to recognize that some new technologies are a godsend and others could wreck civilization. New energy technologies that will lessen damage to the climate are vital; technologies that facilitate the spread of weapons of ever more mass destruction should be stopped if possible.

Lord Martin Rees is the President of the British Royal Society, so steeped in scientific history since 1660. He could hardly seem more civilized, living and working as he does amid the ancient magnificence of Trinity College in Cambridge, overlooking gardens sloping down to the river Cam. Despite the calm, Lord Rees has profound reasons for believing that civilization could experience "an irreversible setback." A deeply thoughtful and broad-ranging scientist, he says that we have so many dangers ahead that he rates the odds of Homo sapiens surviving the 21st century as "no better than fifty-fifty." He spelled out this reasoning in detail in his book Our Final Century. He is concerned that some big-budget scientific research will become too dangerous and that one low-budget maverick could trigger something uncontrollable. Current technologies already raise questions about whether we can control technology, and far wilder technologies are not on our radar screen yet.

If you think Lord Rees's claim sounds far-fetched, imagine the accelerating avalanche of technology continuing for a thousand years. Ultimately, it will become far too dangerous to live with. At some point in the future, humankind will not survive unless well-thought-out action is taken to ensure human survivability. That time will probably occur in the 21st century. This is the first century in which Homo sapiens could be terminated.

Even if Homo sapiens survives, civilization may not.

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HUMANITY'S GRANDEST CHALLENGE

A vital task for the 21st century is to learn how to cope with the avalanche we have started, and its consequences. As technology becomes more powerful we'll be rather like a teenager learning to drive on a Lamborghini. You should think of the 21st century as taking us through a driving tests and then establishing a Highway Code so that we can be reasonably safe with the forces of technology and globalism that we are unleashing. This is the century when we learn to control what we are doing. If we can cope with the Lamborghini, we will probably cope with future centuries

Today's young people will live at a time of extraordinary opportunities and immense problems. How do we help the poorest nations of the world transform themselves? How will the world cope with fully transparent globalism, mass-destruction weapons and terrorism? How do we take advantage of the accelerating avalanche of technology at the same time as preventing it wrecking our world? If we survive this formidable century, we will have acquired the wisdom to survive long term.

The main theme of this book should be taught and talked about everywhere – that the 21st century is unique in human history in that it will produce a great transition that enables humanity to survive. This transition is spelled out in detail in chapter 13.

>Some aspects of the transition will occur with revolutionary suddenness. They may be triggered by a catastrophe, or a government that realizes that desperate action is needed. What started with the Industrial Revolution now needs another corrective revolution – the 21st Century Revolution. This viewpoint was taken from the first printing of this book by the government of the European Union, stating its response to the global warming crisis. However the 21st Century Revolution needs to be about much more than global warming. It is about the whole set of problems that we face, and which ultimately need to be addressed in an integrated fashion. If we get it right it right, will make the planet sustainable and manageable. If we get it wrong we'll be in deep trouble.

The Industrial Revolution and the 21st-Century Revolution, then, balance one another. The Industrial Revolution started the extraordinary events of the last 250 years, and the 21st-Century Revolution will gain control of those events so that they don't destroy us. If we establish an appropriate Highway Code for the future, the 21st century and centuries beyond it can be magnificent beyond anything we can imagine because technology will enhance human creativity and culture in ways enormously beyond anything that is generally realized today.

The generation now at school is the one slated to bring about this momentous transition – both the parts of it that are revolution and the parts that are more gentle. Collectively the task of the Transition Generation is awesome. All young people need to be taught about the meaning of the 21st Century.

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MEGA-PROBLEMS

The problem most talked about at the moment is global warming and its effect on the Earth's climate. It's important to understand that there are other problems, some more serious than climate change, for example, the possibility that a World War with nuclear and biological weapons could wipe out civilization. Box 1 lists 16 large-scale problems that we face.

BOX 1.

The following are the large-scale problems of the 21st century:

GLOBAL WARMING Global warming will lead to severe climate change. Unless stopped, it will upset the basic control mechanisms of planet Earth.
EXCESSIVE POPULATION GROWTH World population may grow to 8.9 billion people, with a growing demand for consumer goods and carbon-based energy, far exceeding what the planet can handle.
WATER SHORTAGES Rivers and aquifers are drying up. Many farmers will not have the water essential for food growing. There will be wars over water.
DESTRUCTION OF LIFE IN THE OCEANS Only 10% of edible fish remain in the oceans, and this percentage is rapidly declining.
MASS FAMINE IN ILL-ORGANIZED COUNTRIES Farm productivity is declining. Grain will rise in cost. This will harm the poorest countries.
THE SPREAD OF DESERTS Soil is being eroded. Deserts are spreading in areas that used to have good soil and grassland.
PANDEMICS AIDS is continuing to spread. Infectious pandemics could spread at unstoppable rates, as they have in the past, but now with the capability to kill enormous numbers of people.
EXTREME POVERTY 2 to 3 billion people live in conditions of extreme poverty, with lack of sanitation. The difference between rich and poor is becoming ever more extreme.
GROWTH OF SHANTYCITIES Shantytowns (shantycities) with extreme violence and poverty are growing in many parts of the world. Youth there have no hope.
UNSTOPPABLE GLOBAL MIGRATIONS Large numbers of people are leaving the poorest countries and shantycities, wanting to find a life in countries with opportunity.
NON-STATE ACTORS WITH EXTREME WEAPONS Nuclear or biological weapons are becoming easier to build by terrorist organizations, political groups or individuals, who are not acting for a given state.
VIOLENT RELIGIOUS EXTREMISM Religious extremism and jihads may become widespread, leading to large numbers of suicide terrorists, and religious war between Muslims and Christians.
RUNAWAY COMPUTER INTELLIGENCE Computers will acquire the capability to increase their own intelligence until a chain reaction happens of machines becoming more intelligent at electronic speed.
WAR THAT COULD END CIVILIZATION A global war like World War I or II, conducted with today's vast number of nuclear weapons and new biological weapons, could end civilization.
RISKS TO HOMO SAPIEN'S EXISTENCE We are heading in the direction of scientific experiments (described by Lord Martin Rees) that have a low probability of wiping out Homo sapiens. The combination of risks gives a relatively high probability of not surviving the century.
A NEW DARK AGE A global cocktail of intolerable poverty and outrageous wealth, starvation, mass terrorism with nuclear/biological weapons, world war, deliberate pandemics and religious insanity, might plunge humanity into a worldwide pattern of unending hatred and violence – a new Dark Age.
All of these mega-problems are multinational. None could solved by one country alone. All countries participate, to different degrees, in causing most of the problems, so they should naturally participate in the solutions. Perhaps the worst problem is the least probable – #15: the possibility that some scientific activity could accidentally wipe out humanity.

The 16 mega-problems are interconnected, and because of this, the solutions are interconnected to a large extent. Most of the solutions are not technically very difficult; they're not "rocket science." There are two exceptions to that.

Most of the problems are the consequences of bad management and absence of foresight. There is no silver bullet. Many different factors have to be brought into play to deal with the problem, as is the case in the management of corporations.

Just as the problems are the result of bad management, so the solutions need to be the application of excellent management. This is an age the most brilliant management in corporations. Every year there is crop of superstar corporations, that are wonderfully well managed. But, the brilliant management is being applied where there are large profits to be made, but not to the giant problems listed in Box 1. This is one of the changes needed.

Part 1 of this book explores the trouble we are running into and indicates that there are solutions – many important solutions. But it emphasizes that if we continue to delay taking action, the consequences will be long-term catastrophes on a grand scale. Part 2 describes technologies that will give us extraordinary new capabilities, but (as increasingly in the future) can get us into new types of trouble. With this background, Part 3 opens with a chapter spelling out the meaning of this very critical century. Humankind with appropriate training is impressively resourceful, so once the canyon is visible it will find ways to deal with it. There will be some serious damage, so part of the resourcefulness will be to make the most of a damaged planet. Part 4 describes a new world we are heading towards. Can we create new lifestyles that will usher humanity towards higher levels of civilization? Can we cope with technologies that are enormously disruptive? Can we escape from the obsolete ideas of the 20th century?

Can the fresh thinking of a newly powerful country, like China, create 21st-century ideas. Can it take 21st century action faster than the older countries that are ensnarled in the complexities they have created.

Can we stop the evil side of our nature from burning the house down, or blocking the way to what could be unimaginable human advancement? Will the 21st-Century Revolution be relatively gentle, as the Industrial Revolution was, or will the inevitable changes occur with revolutionary earthquakes?

If we understand this century and learn how to play its very complex game, our future will be magnificent. If we get it wrong, we could be plunged into a new type of Dark Age.

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