Thursday, August 30, 2012

The Great Wall of steroids

One of the main themes of this blog has been to warn investors of China.

So these results by a state-owned "national champion" come as no surprise to readers here:

China Cosco - the world's largest operator of dry bulk ships - sinks to an all-time low in Hong Kong after posting a H1 loss of $767M. The country's 2nd largest ship operator - China Shipping Container Lines - posted equally dismal earnings. Neither company sees any relief in sight for industry overcapacity. 

Overcapacity, inefficiency, massive corruption, and a woefully extractive government have created an environment where things can end very badly very quickly.  

But recall just a few years ago, all the world extrapolated China's GDP figures into infinity, announced the demise of American hegemony, and advised that the entire planet should learn Mandarin so as to communicate with our new masters.

This strain of sycophancy occurs in life in many forms.  Steroids and other performance enhancing drugs provide a short-term boost to strength and speed for athletes, who rationally believe that an edge over their competition can provide riches and glory within their respective sports.  But, when these agents are removed (either by testing or other means) performance invariably suffers and, well, sic transit gloria mundi.

It is similar with China.  Massive industrialization and manufacturing capacity, aided by the performance enhancer of state-directed loans, provided incredible GDP numbers for 20+ years.  The problem was they also laid the seeds of rapid decline as the Schumpteterian forces of creative destruction were not allowed to flourish.  It is as if a mediocre wrestler was provided massive amounts of performance enhancers without learning proper technique.  For a time, he will dominate, but once the enhancers are removed, there is little he can do to compete.

The recent trial of Bo Xilai is amusing in its effort to convince "ordinary" (i.e., non-Communist Party) citizens of China that its elite are not completely out of control.

Again, the decline of these types of export-driven economies can occur very rapidly.  Paul Samuelson's (who holds deity-like status in the economics field and holds a Central Bank of Sweden Nobel Prize) economics textbook reflects the danger of extrapolating these forces very well.  In the 1980 edition, it states Soviet Union  GDP would outstrip America by 2012.

Sunday, August 26, 2012


I have recently started reading (and duly subscribing) in The Economist newspaper once again after a near decade long hiatus.  It seems as though this publication has regained some of its previous journalistic ability as well as displaying a newly minted wisdom regarding the world that would make its founder, Bagehot, proud.

Anyway, in an interesting article regarding the Standard Charter investigations by U.S. authorities (for the record, I think the bank produces some of the most insightful reports on and and all emerging markets extant) the following point regarding the balance of power in the modern world should be blown in huge typeface for every single economics and political publication produced:

"Above all, investors have been reminded that Standard Chartered's vaunted emerging market franchise is vulnerable to the conflicting values of those markets and the country that prints the world's reserve currency"

The article is entitled "My Dollar, my rules".

I could not have said it better myself.  You are not allowed to play Stratego without Monopoly Money.

U.S. Elections

I have commented on this a bit previously, but I think its time to prepare for a victory by the incumbent in October.  People generally gravitate towards the devil they know...

Friday, August 24, 2012

Who would have thought?

Read this.

Then this.

Tick.  Tick.  Tick...


The below snippet from an article detailing the formation of a "gold commission" within official Republican policy is a silly hearkening back to times when it was an advantage for the U.S. to establish credibility via such a standard, and the comparative little cost in its adherence.

Today, the situation is starkly different, to put it mildly, and it is shocking to me that ANY abdication of power with respect to U.S. foreign policy is endorsed by the traditionally more Hawkish party.

As I have said on previous occasions, a return to the gold standard exports the control of U.S. monetary policy to the marginal gold producing countries (stable, friendly jurisdictions like China, Russia, Uzbekistan, and Ghana).

“There is a growing recognition within the Republican party and in America more generally that we’re not going to be able to print our way to prosperity,” said Sean Fieler, chairman of the American Principles Project, a conservative group that has pushed for a return to the gold standard.

Tuesday, August 21, 2012

Academic Paper of the Day

On the dangers of equating uncertainties...something that I have discussed on this blog  previously.

Full paper here.

"The quantitative aspirations of economists and financial analysts have for many years been
based on the belief that it should be possible to build models of economic systems—and
financial markets in particular—that are as predictive as those in physics. While this perspective has led to a number of important breakthroughs in economics, “physics envy” has
also created a false sense of mathematical precision in some cases. We speculate on the origins of physics envy, and then describe an alternate perspective of economic behavior based
on a new taxonomy of uncertainty. We illustrate the relevance of this taxonomy with two
concrete examples: the classical harmonic oscillator with some new twists that make physics
look more like economics, and a quantitative equity market-neutral strategy. We conclude
by offering a new interpretation of tail events, proposing an “uncertainty checklist” with
which our taxonomy can be implemented, and considering the role that quants played in the
current financial crisis."

Wednesday, August 15, 2012

"Dat Bezel"

Galbraiths Bezel seen flying over central Europe.  Investing in Gold (even promises of physical gold) without actually holding it on your property or person is an inherently risky proposition considering all the available nodes of deception and theft.

The below is probably not typical, but any investor in the explosion of Gold and Gold-indexed securities issued during the past 6 years should examine very seriously what, precisely, they own...and wether or not a 20-50% decline in Gold prices would mean for their investment in both liquidity and return "of" capital terms.

WARSAW -- This week's collapse of a gold-derivatives business that Polish
regulators say was a Ponzi scheme has hit tens of thousands of customers,
shaken confidence in the effectiveness of the nation's financial regulation,
and is roiling national politics in the European Union's largest emerging

  On Monday, the company, Amber Gold, Sp. z o.o., which sold a gold-indexed
investment of its own design and offered higher interest rates than banks, said
it was halting operations. It pledged eventually to repay about $24 million it
said it owed to roughly 50,000 clients in Poland.

Monday, August 13, 2012

The Pendulum

Most of philosophy and economic "doctrine" is hopelessly apologetic, and the popularity of terms like "shareholder value" dissected and debated with zeal from proponents of both sides of the debate.  Shareholder value is still the accepted format for evaluating the management of public companies, and there are millions of words written to justify corporate take-overs and showering C-level executives with stock options.

More interesting to me is how necessity has caused apologists from the "shareholder value is not the only metric of value for the firm" camp to be taken much more seriously.  Bad economic times swings the pendulum and the apologists fill the demand for more "traditional" notions of company management.

What is not usually discussed by those same proponents, however, is the unhelpful fact that in such environments, firms that scale well with political connections tend to (putting it mildly) "outperform" other firms.

Do we need incentive structures for the management of public companies to go even further in that direction?