Donation for Wiped Out Shareholders of City of Glasgow Bank in 1878

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The The collapse of the City of Glasgow Bank (CGB) collapsed in October 1878. Before the recent financial crisis, it was the largest commercial banking failure in the United Kingdom.

When the bank collapsed shareholders were wiped out. In those days, the public helped out these investors by collecting donations. This is unthinkable today….

Here is a receipt for a donation made by someone:

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City of glasgow bank shareholders donation

From a research report on CGB’s failure by the Bank of England:

The suffering and financial burden placed on shareholders was widely covered in the press. Coverage typically portrayed the shareholders as socially vulnerable and financially ruined investors, with small shareholdings.The public were reported as viewing the failure of CGB and the impact on its shareholders as a national tragedy. Public sympathy led to fund-raising events for CGB shareholders, including the establishment of a relief fund, which received £379,670 in donations by 1882, and even a public recital of the works of Shakespeare.

Source: Desperate adventurers and men of straw: the failure of City of Glasgow Bank and its enduring impact on the UK banking system, Bank of England

On The Correlation Between Chinese Stock Market Performance And Economic Growth

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The Shanghai Composite Index is basically flat year-to-date.After a strong run up Chinese equities plunged heavily a few weeks ago. Now they appear to have stabilized due to meddling in the market by the state.

Though much of the media has focused on the Chinese equity market and the economy, the reality is that the stock market in China is small when compared to other countries. For example, the stock market capitalization of all the listed firms as a percentage of the GDP in China is smaller than in the US and Canada. Hence the spillover effect due to the fall in equity prices on China’s real economy will be small. In addition, Chinese households hold only a small portion of their financial assets in stocks compared to Americans.

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China Stock Market as a percentage of GDP

In general, there is very low relationship between a country’s economic growth and equity market growth. In China also the stock market is not a leading indicator of economic growth and vice versa.From last year thru the peak this year Chinese equities soared while the underlying economy barely experienced growth.

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China Stocks Growth vs Economic Growth

From a CIBC research report:

During the late 1990’s and early 2000’s the market’s performance seemed almost inversely correlated with the economy’s growth. Around the time of the financial crisis, the relationship between these two variables seemed to grow stronger. However, the recent run-up and crash appears to prove that that correlation was tenuous at best and points to the weak predictive power of Chinese equities.

Source: China’s Irrational Exuberance by Royce Mendes, CIBC World Markets, Aug 11, 2015

Frontier Markets Have Low Correlation To Emerging Markets

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In recent weeks, emerging markets such as the BRICs have become more like submerging markets. One way investors can diversify their portfolios is to consider including equities from frontier markets. However frontier stocks are not for the faint of heart. These markets tend to highly volatile and can decline sharply for a variety of reasons including liquidity and political upheavals. For example, during the Egypt political crisis a few years ago, the market was shutdown for many months and stocks plunged by over 75%. As mentioned earlier such huge losses cannot be borne for most retail investors. However for those willing to take the risk, frontier markets such as Egypt, Pakistan, Nigeria, etc. offer some potential advantages such as the low correlation to emerging and developed markets.

From an article by Franklin Adatsi in Money Observer:

In an era of rising systemic risks, the attractions of an emerging markets portfolio can be enhanced by diversifying the potential sources of alpha, and adding frontier exposure can be one way to go about this.

With low correlation to each other and to emerging markets (as shown by the table below, click to enlarge), frontier markets can help diversify country risk, a major risk factor for emerging market portfolios.

China, South Korea and Taiwan make up 50 per cent of the MSCI Emerging Markets Index and key non-Asian markets such as Brazil, Russia and Indonesia tend to be highly correlated with China and the emerging markets index.

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Frontier markets

With the concentration of country risk and the high correlation between major emerging market country stock indices, seemingly isolated economic events in one country can create knock-on effects that can be felt more widely. Frontier markets, do of course, carry considerable risk, but crucially these tend to be more country specific.

Source: Frontier markets: what’s in a name?, Money Observer, Sept 7, 2015

For example, Saudi Arabia has just 1% correlation with the S&P 500 and a negative correlation with emerging markets.

Investors that have the risk tolerance to invest in frontier markets should consider ETFs rather individual stocks.The iShares MSCI Frontier 100 (FM) ETF contains the top 100 companies from these markets and provides a simple way to access them.

Disclosure: No Positions

The 19 Largest German Companies By Market Capitalization

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German equities declined swiftly in recent weeks due to the slowing economic growth in China.However some of the concerns regarding China’s impact on German firms may be over-estimated by investors.

From an article in the WSJ last month:

The DAX has had a wild ride this year. It was up 26.2% by April 10, but by Monday’s close the index had given up all its gains and more, falling into the red. Even after Tuesday’s rally, spurred on by a Chinese rate cut, it was lagging many European peers on a year-to-date basis, up 3.2%.

Germany’s economy expanded 0.3% in the first quarter from a quarter earlier and 0.4% in the second. The apparent inability of the economy to accelerate much could be cause for concern in an environment of weaker global growth, particularly given Germany’s export franchise. But there are reasons to believe that Germany can rely on domestic support.

German export countries 2014

True, in the second quarter, German exports provided the biggest growth impetus, figures published Tuesday show. And in 2014, China was Germany’s fourth-biggest export market, accounting for EUR74.5 billion of German exports. That is equivalent to 6.6% of total exports, or 2.6% of German gross domestic product.

But the rest of the eurozone, U.S. and U.K., where growth has picked up, account for 52.6% of exports. While some 25% of exports do go to emerging markets, according to Berenberg, slower growth in these nations isn’t a new phenomenon, even if markets are only now panicking about it; Germany has kept its head above water. Eastern European countries, like Poland, Hungary and the Czech Republic, where Germany has major export exposures, are proving resilient.

Source: Germany’s Fate Doesn’t Depend on China, WSJ

The following chart shows the major trading partners in 2014:

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Germany - Trading Partners 2014

Source; De Statis

Though China is the 4th largest export market for Germany, it is the 2nd top source of imports for Germany.

For investors looking to gain exposure to German equities, one way is to invest in the largest firms. In order to identify such companies I referred to the Financial Times FT Global 500 2015 list. The German firms appearing the list are shown below: 

FT Global 500 2015 - RankCompanyMarket value $m (as of Mar, 2015)Sector
49Volkswagen124,335.3Automobiles & parts
50Bayer124,157.7Chemicals
74Daimler103,741.0Automobiles & parts
87Basf91,489.5Chemicals
90Siemens90,196.5General industrials
92SAP88,793.3Software & computer services
98Deutsche Telekom83,314.0Mobile telecommunications
103BMW80,263.3Automobiles & parts
106Allianz79,417.8Nonlife insurance
200Henkel48,145.6Chemicals
203Deutsche Bank47,978.8Banks
208Continental47,106.4Automobiles & parts
282Deutsche Post37,852.2Industrial transportation
285Linde37,787.2Chemicals
294Munich Re37,258.2Nonlife insurance
383Fresenius30,129.9Health care equipment & services
390E On29,817.3Gas, water & multiutilities
478Fresenius Medical Care25,800.0Health care equipment & services

Source: FT

Investors with a long-term horizon can consider adding stocks such as Fresenius Medical Care AG & Co.(FMS), Allianz(AZSEY), Continental(CTTAY) and Henkel (HENKY) in a phased manner.

Disclosure: Long E.ON

Knowledge is Power Special: Hammurabi’s Code, Circus of Innovation, Trading Places Edition

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  1. Socialism in America — Crooked Timber
  2. Rio: Brazil’s silicon beach | World news | The Observer
  3. Stumbling and Mumbling: Who benefits from benefits?
  4. The great corporate cash-hoarding crisis | Al Jazeera America
  5. America dumbs down: a rising tide of anti-intellectual thinking
  6. Uwe E. Reinhardt – Economix Blog – NYTimes.com
  7. China’s latest scandal is counterfeit condoms – Los Angeles Times
  8. Can businessmen make good politicians? | Business Line
  9. Brutal competition batters supermarkets the world over, The Guardian
  10. US Health Care System Cartel… Until Death Us Do Part | Common Dreams 
  11. Elizabeth Warren on factors ailing the middle class | Juggling Dynamite
  12. America’s Middle Class: From Boom to Bust – News – Politics – Voice of Russia – US Edition
  13. Ruth Whippman: How Corporate America Is Turning Into a Cult and Why It’s Harming the American Employee
  14. Uwe E. Reinhardt: Americans Are Shocked, Just Shocked, Over Hospital Bills – NYTimes.com
  15. Comparing Health Systems – UK NHS Performance | The Nuffield Trust
  16. A public option for banking | Al Jazeera America
  17. America’s Long and Productive History of Class Warfare – Justin Fox – Harvard Business Review
  18. The Fallacy of Financial Education | The Baseline Scenario
  19. 401ks Are Not Broken, You Are | The Big Picture
  20. Why Are Wages Sticky? | Uneasy Money
  21. Silicon Valley’s circus of innovation – Venkatesh Rao – Aeon
  22. America’s Workers: Stressed Out, Overwhelmed, Totally Exhausted – Rebecca J. Rosen – The Atlantic
  23. BBC News – American Dream breeds shame and blame for job seekers
  24. Our health spending problem is all about prices – These 15 charts show our health care prices are totally insane – Vox
  25. America’s greatest export is its debt – The Week
  26. How have these corporations colonised our public life? | George Monbiot | Comment is free | The Guardian
  27. The Price Of Human Life, According To GM | Common Dreams
  28. Millions see no benefit from soaring stock prices 
  29. Field of Schemes | sports stadium news and analysis
  30. Low-cost airlines have come a long way. But who will win the battle? – Telegraph
  31. ‘Worldly life is frightening:’ Famous Siberian hermit prefers taiga to civilization — RT News
  32. Articles: Psychopaths-in-Chief
  33. Waste vs. Value in American Health Care – NYTimes.com
  34. Best Care at Lower Cost: The Path to Continuously Learning Health Care in America – Institute of Medicine
  35. Special Delivery: The Postal Service Story : All Songs Considered : NPR
  36. Why don’t Chinese spend more money? – The Curious Capitalist – TIME.com
  37. How the Maker of TurboTax Fought Free, Simple Tax Filing – ProPublica
  38. Uwe E. Reinhardt: Hammurabi’s Code and U.S. Health Care – NYTimes.com
  39. As Immigrants Move In, Americans Move Up | Daniel Griswold | Cato Institute: Free Trade Bulletin
  40. The era of the textbook cartel and $300 textbooks is ending | AEIdeas
  41. The Quiet Collapse of the Italian Economy | Euro Crisis in the Press
  42. Why Italy will not make it | Euro Crisis in the Press
  43. Why Canada’s inland shipping industry is making a major comeback | Financial Post
  44. The real story of US coal: inside the world’s biggest coalmine | Environment | The Guardian
  45. Business-Managed Culture – Business Values – Share Holding – Shares vs Public Ownership
  46. The Overwhelming Case against Capital Gains Taxation | International Liberty
  47. Too many choices, high costs and bureaucracy: British expats grade American healthcare system ‘a pain in the arse’ | Money | The Guardian
  48. Investment Riches Built on Subprime Auto Loans to Poor – NYTimes.com
  49. How Many Americans Have A Passport? | TheExpeditioner Travel Site
  50. Federal Spending: Where Does the Money Go
  51. America’s Incredible Shrinking Stock Market | Canadian Investment Review
  52. Investment Strategies for Volatile Markets – Fidelity
  53. Don’t Even Think About Trading Places in Markets – Bloomberg View

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Sears Tower, Chicago