ObjectiveFunction

What Rebalancing of Chinese and American Consumption?

Sir, any idea what venue the bands are playing at Hampshire College (13 Nov)? The link just takes you to the college site and the show doesn't appear on any of their calendars. Thanks!

Banking Concerns and Chinese University Rankings

Be interested to look over the next 20 years and see to what extent China follows the French model, where CEOs nearly all come from the same few grands ecoles, or the US model where CEOs are as likely to come from "non-elite" schools as elite ones (except in professions like banking and law where elite school grads dominate).

An Ivy League degree is still a major asset, to be sure, but in corporate America the C-level isn't nearly as dominated by elite school college/MBAs as one might think. Especially if you exclude the many people who came out of "Podunk State" and were then sent to an elite exec MBA program only after they'd already marked themselves as rising stars in their companies.

Chinese Railways and Speculating Pig Farmers

The jury is definitely out as to whether China's overbuilding today to meet tomorrow's infrastructure needs will turn out to be a smart play (i.e. the most productive investment of their people's wealth) in the long run (10-20 years).

For one thing, you're using today's technologies. For railways, that might be a safe bet unless, say, maglev widely displaces conventional rail within the next 20 years. Or for conventional electric power. But what if, say, you spend $50bn paving the Gobi desert with expensive solar panels (that are basically sophisticated computer chips and need long distance transmission), only to find that 5 years later someone's invented a cheap, rugged stick-on solar roof tile? Or hydrogen cells have become economical?

Example: If you're ever on Hawaii's big island, drive down to the windy south tip. There you'll see two arrays of wind farms -- a 5 year old farm operating and a 15 year old farm next to it, idle and rusting. Both of these were supposed to be running for 30 years or more.

Second, you don't ever truly know what demand for this infrastructure is going to be tomorrow, and predicting this for 10-20 years out is even harder than for 5-10 years out.

If you've underbuilt, you'll strain the assets and underperform, and may need whole new expansion projects later (which often requires significant rework). Ask any highway builder in a growing "edge" city -- as soon as you build or widen roads, traffic appears to clog them.

Or even worse, you overbuild and the facilities are underused due to behavioral or demographic shifts. Or people don't use it as expected because it's too hard to get to now (e.g. numerous airports which built in virgin farmland but now find themselves surrounded by busy city streets). Now you have a white elephant.

Predicting the future is a VERY tricky game when there's billions of dollars at stake that must be financed and repaid. Just because these projects are "public works" does not relieve them of their obligation to pay for themselves. Otherwise they just create a long-term drag on the public purse, displacing future investment opportunities.

Growing Pains Create Friction Between China and India

Oh yes, just as white folks suffer from irrational fears of a "yellow peril", there's an equally bigoted segment in China that believes that 1/4 of the earth's landmass ought to be Chinese by right, and that all the rich open spaces -- e.g. the Americas, Australia and Siberia -- were unfairly stolen by Europeans from 1700-2000.

So watch out, Russians, especially since they're committing demographic suicide even faster than the Chinese.

What You Don't Know About Gaming Could Make You Obsolete

Important and enormous topic. I'm sure I have nothing novel to add here, except to note that a lot of games (e.g. MMORPGs) do involve substantial social interaction and collaboration (team play), via text and voice. It just uses a new media, language and customs that older generations have trouble adapting to (and some therefore find menacing or degenerate).

Geekspeak and acronyms are just the tip of the iceberg here -- entirely new sets of social customs (what used to be called "Netiquette" but has now spread well beyond chat rooms) are continually evolving for use by a global and multicultural meta-community most of whom speak English imperfectly (native or not).

This new means of collaborating and communicating is already widely used in professional networks and communities in "techie" fields, and of course in the media business (marketing and increasingly journalism). Other more traditional functions are quickly following suit.

Chinese Railways and Speculating Pig Farmers

Excellent piece. I loved the Bloomberg item. It's like the old saying "when your plumber or unemployed second cousin starts giving you stock / real estate tips, it's time to get out".

Mr. Pettis is the most clearheaded and honest commentator out there on China, although he clearly deeply loves China too, and predicting severe economic reversal there gives him no pleasure.

In contrast, a lot of SA readers (not implying that any of the other comments here fall into this category) seem to want to cram everything they read on China into some cultural meta-narrative, either:

(a) the "decline of the decadent West / rise of the East" (the latter summoning ancient racist images of inscrutable Asiatic hordes sweeping out of the steppe), or...

(b) the equally crude and racist narrative of "China at last claiming its 'rightful' share" -- by implication, 25% -- of the world's resources and power, after centuries of malevolent white oppression and exploitation. (And how dare those foreign devils criticize anything we do).

Much like emerging Germany in the late 19th century, powerful, self-confident and energetic but also self-pitying, resentful of neighbors and increasingly, openly racist and xenophobic. And look where that led....

Toward a New Theory of the Cost of Equty Capital

Remember that "cost of capital" isn't just the (average) cost to raise new capital in the markets. It is also the "opportunity cost of capital", i.e. the point at which you're better off taking your project dollars (in your example, operating cash) and investing them externally (i.e. in a diversified bundle of stocks and bonds) instead of in your company's projects. That's why it's often referred to as a "hurdle rate".

On Oct 19 10:33 AM Tom Armistead wrote:

For example, I recently saw an analyst use 13% weighted averaged cost of capital for a company with no debt, in point of fact they had a huge cash surplus. So if a company doesn't have to raise money what is their cost of capital?

Is There Really a Global 'Cabal' Aiming to Dump the Dollar?

Good read, thanks. You, Mike Pettis and, for macroeconomics, Andy Xie, are the best commentators on China right now.

Lights at the End of the Tunnel

Still betting on at least one Pandemic to wipe out a large chunk of the poor, separating societies with a competent social order and resources from those which will be decimated. To quote the DKs "the rich will have more room to play..."

One other semi-relevant comment: seems to me that ~3/4 of the most driven, talented under-30 people I encounter in my business (Eastern USA) are of South Asian heritage. Ambitious too -- virtually every person who has reached out to me via my college and MBA networks has been a South Asian. The Asian century is already here, and welcome.

What Stories Aren't Being Told?

It's a tough question to address to SA readers, since a lot of the "untold stories" (which I take to mean "untold" by MSM) originate here -- so they aren't untold at all. (on the other hand, there's a lot of nonsense and ranting on SA too -- signal to noise ratio).

The traditional MSM slam against the blogosphere is that it's all commentary on a core of facts/research done by mainstream news orgs (i.e. MSM). And sure, there's plenty of commentary -- wacky and otherwise. But there are also a number of highly economically literate commentators (including yourself) who are doing basic analysis and providing it gratis to those with the discernment to recognize it.

MSM reporters -- predominantly people who have never actually worked in business and who are ideologically suspicious of it -- are increasingly tapping into this resource and using it to educate themselves, then in turn educating the public.

Sorry, that's not what you asked for. I think your bullets are good points. But again, they're all topics you'll find discussed here.

China Urges Citizens to Buy Gold and Silver

Not to be too condescending -- I am a great admirer of the Chinese people and civilisation, though not of their governments, present or past -- but in many ways Chinese society is still quite medieval in its core instincts, for all their passion for technology and education. And given the last 400 years, can you blame them?

By "medieval" I mean, a very weak social contract in which "wealth" was only what you could touch: i.e. (a) farmland, (b) livestock, or if you could get hold of it, (c) specie, preferably compact enough to carry or hide.

It is only a very strong social contract, with enforceable contracts, that allows "wealth" to be vested in pieces of paper.

Aging of U.S. Workforce Accelerates During Recession

44% of seniors still say they need the money, even if they also like work. That's a lot of folks.

Consider also these choice quotes from a McKinsey & Co. publication on the Baby Boom from Oct 2008 (written pre-Crash):

"New McKinsey research reveals that 60 percent of boomers won’t be able to maintain a lifestyle close to their current one without continuing to work...

"50 percent of the generation’s population, controlling almost 25 percent of total US consumption by 2015—envision a comfortable retirement like that of the affluent but haven’t prepared for it....

"Our analysis also indicates that 60 percent of boomers will need to work just to maintain 80 percent of their current consumption and that more than 40 percent (29 million) will be working at age 65. That is twice the number of people from the silent generation who were working at the same age (14 million, or 30 percent). By 2015 more than onethird of the labor force will be over the age of 50."

I'm Slowly Rebuilding My Chinese Position

On Sep 01 12:20 PM doubleshortetf wrote:

> Now is good time to buy FXP when all the investment gurus in unison are recommending Chinese stocks and even "taxi drivers" and clueless herd investors believe China with 1/3 US GDP will save the world.

Yup. Remember the old line about how "when your unemployed second cousin or the guy behind the deli counter starts giving you stock or real estate tips, it's time to get out of the market"? Well....

www.bloomberg.com/apps...

Pig farmers in Guangzhou province were buying copper or nickel, Liu wrote, citing CCTV. Residents in Wenzhou city of Zhejiang province, “famously investment savvy,” are reportedly using bank loans to stockpile copper scrap, with one merchant saying he has stored 20,000 tons... Housewives in Wenzhou may have stockpiled metals as “they just have too much cash on hand

I'd formulate some kind of clever quip about silk purses, but I'm too tired.

High Frequency Trading Glitsch

Toto, I don't think we're underneath the buttonwood tree anymore.

The only "open outcry" is shorts getting mangled....

Blockbuster Chinese June Loan Growth: Is the Final Stock Surge Ahead?

Amen, and David Merkel agrees with you.

alephblog.com/2009/07/.../

And if you're looking for the "pride coming before a fall" angle, here's a little "stimulus" Chinese-style. Audis and Beemers for everybody! (in officialdom, that is -- everyone else can drive Geelys)

www.bloomberg.com/apps...