Of Guelphs and Ghibellines

INSIDE INVESTMENT January 2013

Of Guelphs and Ghibellines

The Guelphs have papal blessing, but to preserve your wealth you are better off sticking with the Ghibelline camp, writes Lincoln Rathnam

On the 7^th of December, Mario Monti, smarting from political reverses, returned from Rome to his home city Milan to attend the opening of the 2013 opera season. The production was Wagner's Lohengrin and not the usual tour de force by native son Giuseppe Verdi. This has ignited a national anti-German furore. Italian president Giorgio Napolitano cancelled his reservation, although he attributed this to the press of business. (Perhaps he had to accept the credentials of some new ambassador?) The spectacular occurred even as former prime minister Silvio Berlusconi, a fellow Milanese, denounced Monti as being a tool of German interests.

It appears that the centuries-old northern Italian conflict between the Guelphs and the Ghibellines still lives. The Guelphs are traditionally anti-German, like Berlusconi, while the Ghibellines are pro-German, like Monti. For centuries northern Italy has been split between Guelphs and Ghibellines, but they both derive from a rivalry that started five hundred kilometers to the north.

It all began in the 12^th century when Henry the Proud, Duke of Bavaria and Saxony and Margrave of Tuscany, son of Henry the Black, opposed the ascension of Konrad III of the Staufer family (the Hohenstaufen) to the crown of the Holy Roman Empire, which then included much of Italy. When Konrad prevailed, he punished Henry by transferring the Duchy of Saxony to Henry's enemy Albert the Bear of Brandenburg.

Upon the death of Henry the Proud, his son Henry the Lion eventually succeeded to the Duchy of Bavaria. During a brief interregnum, Henry's partisans revolted against the loss of the duchy of Saxony and in 1140 confronted the forces of Emperor Korad III at Weinsberg, using Henry's dynastic name “Welf” as their battle cry. The imperial forces, in turn, called out “Waiblingen,” the name of their nearby fastness which dates from days of Charles the Fat. From these cries sprang the terms “Guelph” and “Ghibelline.”

Konrad III's successor Emperor Frederick Barbarossa returned Saxony to the Welf dynasty, and Henry in turn supported Frederick in his various wars, notably in maintaining Frederick's power in Italy. The rivalry entered Italian politics when Henry the Lion declined to support what he viewed as Frederick's foolish attempt to crush the revolt of the Lombard League, based in Milan, which resulted in Frederick's defeat at the Battle of Legnano in 1176. In fury, Frederick managed to strip Henry of many of his lands. Ever since then the Guelphs and the Ghibellines have, understandably, been implacable foes, although many of them cannot remember why.

Mario Monti may have been thinking about this as he watched and listened to Lohengrin, in which the yclept knight's marriage with Elsa is thwarted when she fails to keep her word. She drops dead as he rides away on a boat in the form of a dove to the Castle of the Holy Grail. “Is this an analogy for the European Union?” he may have asked himself. Of course, the Guelphs like Berlusconi were never really in favour of a union with Germany; they looked south to Rome for their alliances and would happily sail away from the union in a swan or dove boat or any other available conveyance.

Even as Mr Monti was peering through his lorgnette, the Trends in International Math and Science Study was released. It measures the proficiency of students in sixty-three countries. Sitting in suburban Boston, I was gratified to read that my home state of Massachusetts, if considered a separate country, would rank second only to Singapore in the knowledge of science among eighth-graders. This contrasts with the poor showing of the United States overall, which, trailing even Britain, ranked eleventh among nations.

Sadly, one must admit that there are two kinds of countries in the world: guelphs and ghibellines. Massachusetts definitely falls into the ghibelline camp, whilst the poor showing of places like California exhibit clear signs of guelphism.

Back in Italy, the ghibelline north has an income level 125% of the European Union average, while that in the guelphish south is 70%. This is disappointing. In the 1950's, Italy established the Fund for the South (Casa per il Mezzogiorno) which devoted a large part of Italian GDP to developing the region by establishing modern industrial clusters around which development would coalesce.

When I was an undergraduate in the 1960's, I remember my excitement when Prof. Lyons explained that Italy had solved the problem of development, and that this could be applied to the rest of the world, but when I told my father about it he just laughed in an irritating manner. Of course, all this noble effort did was to create a culture of dependency and greater poverty. The fund was disbanded in 1984.

My professional specialty has long been investing in emerging markets. They boom and then go bust over and over again, and most investors end up ruined. One thing I have learned is to stick with the Ghibellines.

Indian takeaways

INSIDE INVESTMENT (Euromoney)

Indian takeaways

Rising levels of obesity have produced an epidemic of type 2 diabetes in India. But there is no part of the country more bloated than its bureaucracy and less healthy than its legal system.  Lincoln Rathnam hopes India’s energetic entrepreneurs can escape these deadweights

A vision of the great Indian subcontinent lay stretched out before me as I stood on the sidelines of Institutional Investor magazine’s annual India Investment Forum held in late September at the Grand  Hyatt in New York City. Looking across the impressive expanse of the main ballroom, I could see high government officials moving slowly forward to their seats like so many juggernauts threatening to crush any entrepreneur who fell under the wheels of their inexorable regulatory advance.

A profusion of dark-suited men, businessmen presumably, swarmed warily around these lumbering structures casting verbal flower petals upon them while carefully avoiding the turning wheels.  Foreigners of various types mixed in this crowd, watching with fascination, and occasionally joining in. At the same time, one particularly bulky functionary made his way slowly, like a fully-laden oil tanker carefully negotiating its way up Thane Creek in the port of Mumbai, to the speaker’s platform.

There he called for greater transparency and, observing that many businesspeople are criminal fraudsters, asserted that putting these miscreants in dark, damp jails will encourage the others to invest more in the country. In introducing one particularly interesting session – Inefficient Indian Infrastructure: Are We Ready for Change? – the panel’s chairman noted that the past two years have been a, “period of desolation for the Indian infrastructure sector.”

Contractual, legal, and financial issues have been like so many snakes at a garden party for wireless phone operators and power plant owners. The impression left was that these problems stemmed largely from governmental actions and inactions and that government’s answer to the question posed must therefore be an emphatic, “no.”

A speaker representing private industry noted that the World Bank’s “Ease of Doing Business” index ranks India 132 out of 183 countries. This index is composed of factors that include dealing with construction permits, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts, and resolving insolvency.

Of particular note is India’s rank in “enforcing contracts” of 182, putting it just behind Angola (181) and ahead only of Timor-Leste, which is last of all. In India contracts cannot be enforced through the courts and that private means must be employed, as was once the case in Chicago.

India ranks 166 in the difficulty of starting a business, which is only slightly better that the West Bank and Gaza (177). This may be a particularly perverse example of George Soros’ reflexivity principle at work: when no one wants to come to your house you react by double bolting the door. In dealing with construction permits, India ranks 181 out of 183, putting it behind Ukraine but ahead of Albania and Eritrea.

Yet Indian entrepreneurs both in India and around the world are unusually successful. In the United States, Indians constitute the highest income ethnic group. One speaker noted that in the last fifteen years, thirteen of the fifteen highest returning listed stocks in Asia have been Indian companies.

India, in fact, has a lot going for it. Demographics are very favourable. One speaker said that in the year 2020, the average age of the population of India will be twenty-nine, while that of China will be thirty-seven and that of Japan forty-eight. Younger populations are more dynamic and produce more economic growth.

Another driver of economic growth is the migration of the relatively unproductive rural population to metropolitan areas. A large number of rural dwellers can be thought of as an untapped pool of future growth. This year, the rural population of China fell below 50% for the first time. But of the BRIC nations, India leads with 71% still living in countryside, compared to 27% in Russia and only 17% in Brazil.

Another advantage India has is the ineffectiveness of its meddlesome bureaucracy. One head of a state-controlled bank told the following story. A central banker at the Reserve Bank called him one day. The official said, “I am seeing these Western Union signs all over the country with offers to do money transfers. We have never authorized them to operate here, as far as I know. But I would be embarrassed to ask them directly on what authorization they operate, so will you do it?”

The banker did so and was told that Western Union had gone to the Post Office and had been given a letter saying it could operate in India. A very good line from the conference was that of a fund manager who said, “We worry about what is politically difficult to do, but what we should be worrying about is that even what is achieved politically may be administratively quite difficult.”

When one thinks of these striving entrepreneurs in relation to their government, one can imagine a game of Whac-A-Mole, that old arcade favorite where the player holds a large mallet with which he whacks the moles as their heads randomly pop up from holes in a table. In this case the player is the government and the moles are entrepreneurs. For India, it is fortunate that the lumbering player is much less energetic than the moles.

Happy "New Normal" New Year, from the current New Yorker issue

Banking, broadly defined, from yesterday's FT

California: The turkey in the coal mine?

California has among the highest taxes in the US, plus it has the biggest budget deficit in the land. Despite the state's large scale consumption of resources the state ranks 47th of the 50 states in the support for education. Why? It's because the state, which has 12% of the nation's population, supports 30% of the nation's welfare recipients, so there is little money left for anything else, like schools. A great many of the the constitutionally idle prefer the California lifestyle, it appears, to places like, for example, Nebraska, and there is the appeal to those from south of the border many of whom lack the skills needed to participate in the non-welfare economy. California dreaming is turning into a nightmare as the social deterioration wrought by its policies continues. (See Financial Times, May 30, 2012: "California democracy fetters drive to balance books" by Matt Garrahan.)

Is the Irish mortgage problem intractable?

Ten percent of Ireland's 760,000 home mortgage are more than 90 days in arrears. Already over ten percent have been restructured. Of the restructured mortgages, 50% are more than 90 days in arrears, so a total of 15% have been restructured or are in arrears. The number of restructured mortgages was up 10% in the first quarter. Getting into arrears even if you can pay is a way of getting a mortgage reduction. What are the implications for the US and the UK?

Is the smart Irish money leaving the euro for the dollar?

In this morning's FT, there is an interesting article entitled "Wary Irish reluctant to jeopardise recovery." In it, one Bernard O'Reilly, a retired civil servant, is said to believe that many Irish citizens are voting for the fiscal discipline treaty out of fear. This fear has other implications: "If Greece goes down," Mr. O'Reilly said, "we are next in the firing line. I know people who are trying to put their money into US dollars. We just don't know what is going to happen here." Is "smart money" going into the dollar? Does this explain the weakness of gold? The money is going into the dollar, but it's not smart. It's a trap for investors based in other currencies.