Archive for March, 2009

A Contribution to America’s China Conversation

March 21, 2009

***I wrote this in January 2007, I think it’s more relevant than ever.***

“America’s China Conversation” is a superset of conversations that have to do with the US, over time, losing its competitive advantage and therefore wealth advantage over the rest of the world, with China the most prominent competitor. Generally, in our minds during such conversations, “they” actually might be China, The Far East in general, may or may not be including India, Eastern Europe and other developing nations. I’m sure most readers have had one of these conversations, so you know what I mean.

Here’s a summary of the China Conversation from my perspective.

China possesses a much faster growing economy than the US. China of course is already a formidable worldwide economic force, providing a great deal of the world’s labor and physical plants for manufacturing.

I thought about this and took a look at comparative GDP’s and growth rates.

In 2005, the US GDP was about $12.5 trillion. The same year, China’s was $2.25 trillion.

US GDP during the past five years or so has grown at 3.2%. China’s has been growing at 10.2%. These stats are from Google and generally sourced from the CIA Factbook.

Charting this growth, China would overtake the US in GDP by 2032, just twenty-five years from now.

India’s GDP, in 2005, was $719 billion with a growth rate of 8.4%. In 2032, it will be $6.35 trillion, still the distant third of these (and behind several other countries at that point as well), but still eyebrow-raising. By 2050, India’s GDP would be over half that of the US.

I’m not an economist, but I suspect these numbers paint a telling picture, even if things like ‘leveling off’ will take place. I’m not sure who exactly is leveling off more these days, but of the three, it seems like China and India are developing much more rapidly than the US.

I should also point out that, if and when China’s GDP surpasses the US, China will have a very long way to go before they can reach the same GDP per capita with its much larger population. But GDP per capita speaks to quality of life. I’m not sure about comparative economic power.

WEALTH, WHO HAS IT?

What do we make?

For starters, I am surprised the US is still so far ahead. I mean, what exactly is it we’re producing? Ever since I remember reading the backs of my Hot Wheels cars, I’ve taken as common knowledge that everything is made in China. (or Malaysia or Taiwan…) The fact is, our GDP is composed of almost 80% service. Service is us making each other dinner at the Sizzler; renting rooms to each other at the Holiday Inn; caring for each other at General Hospital (or watching the TV show, as the case may be).

The other 20% is where ‘real’ industry lies. You know, making tractors, making power plants and operating them. I’m not downing services. I just wonder how much of that gives us strength as a nation.

I also wonder about this: if a cheeseburger costs $1.00 at a fast food restaurant and a very similar one costs $7.00 at a restaurant, is that difference a contribution to GDP? You might say these cheeseburgers are different. OK, what about generic or branded toothpaste? Or how about drugs, where by law generics must be identical to the branded version.

Trade

America almost always runs a trade deficit. I’m not concluding this is bad either, but it seems intuitive that if you consume more than you produce, that isn’t good. But it might also be an indicator that even if you wanted to, maybe you just can’t. Translation: what happens when indulgence turns into dependence?

If the other countries are willing to indulge you for a while, and then you become increasingly dependent, and then the countries take away such indulgence, what then?

Computers!

Ah, technology. That’s where we’re the best, right? Well, I suppose, but my guess is most of the insides of my computer would be imprinted with the same “Made in China” moniker as my Hot Wheels. Or maybe Singapore or South Korea? And then there’s software. Well, lots and lots of software is produced here in the US, but what about the growth rates in software development in India and China?

Isn’t it reasonable to assume that these countries are likely to continue to become increasingly better at exporting software development? And while we’re on the topic, how much of the treasured service sector comes from things like customer service phone calls? Aren’t those calls not only just going to India but simply being exported to automation, let’s call it Internet-land? If the “Internet-land” can resolve our problems through automation, they go away. But then, doesn’t the wealth go away, too? (Or a great deal of it?)

Ownership!

Americans are the richest people in the world. We are also the most in debt. I believe in an ownership society but I also believe that, for people, net worth equals assets minus liabilities.

Our companies dominate the business landscape. But what does that mean? For most companies to be dominant in an industry, they would need to be global and they are. It’s likely they would source a lot of their production outside the US, probably locate facilities outside the US, and likely sell to customers outside the US. Even in the age of e-commerce, can’t we at least figuratively follow a transaction? If a US company sources its product from China and sells it in India, is that transaction worth anything to the US economy?

What about on the stock market? Maybe the company’s stock price was boosted because it’s revenues and profits were improved by the transaction. Would it surprise us to know that much of the stock of the company was owned by foreign investors? Would it surprise us to know that much of the stock was also owned by US banks that were also, in fact, significantly owned by foreign investors?

The Incumbent

Wealth, or more specifically, the promise of continued wealth, benefits from being in a favorable incumbent position versus others. For example, since Wall Street exists in America, and since Wall Street is the de facto center of the financial universe, it won’t be unseated. Echo the sentiment for things and places like Hollywood, Silicon Valley, the US dollar, the English language. Does this logic even deserve to be refuted or is it just obviously nonsense?

SO WHAT?

In twenty-five to fifty years, all these trends seem to suggest that the US won’t be so dominant.

We still have a vastly dominant military force, but even that begs the question of our power. Won’t funding a vastly dominant military be increasingly burdensome on the economy that must fund it, when others are less encumbered?

Conclusions?

This post isn’t so much about conclusions as perspective. Many Americans (most reading this article) grew up in a time when the US was unquestionably the dominant force on so many levels of the global playing field that that paradigm is deeply ingrained in our psyche. Moving forward, a one among many mentality seems more appropriate.

Create a positive feedback loop

March 15, 2009

In your periodic review of what you’re doing, assess your feedback loops. 1. Are they working 2. Are they positive or negative? Always implement a positive feedback loop. Stressful circumstances tend to destroy feedback loops … both their basic function and any inherent positivity built into them. This is something that should be reversed, especially in stressful circumstances.

Positive feedback loops are necessary to create a basic action, result, reward, stimulus, action… cycle. Is there any difference? A positive feedback loop proactively led creates action, directs action, and ultimately yields both productivity and new opportunity.

This is neither meant to be new-age or convenient business speak. When I think about any project or team or relationship I have ever been a part of, the most healthy/rewarding/successful of those universally occurred when there was a core positive feedback loop.

So what happens when bad things happen? When bad things happen that invade a theater (if you’ll grant me some writer’s license to borrow the military reference) to such a degree as to damage a positive feedback loop, up near the top of the list of things to address is re-establishing a positive feedback loop. I would argue that until it is re-established (which is not to say it is the top priority at all times), you don’t yet have a new winning strategy.

Furthermore, creating expectations about actions, results and rewards forces any plan into smaller, more clear bites. Whereas a grand plan often lacks the structure for this loop – and frequently fails to produce anything – a vague plan with an identifiable positive feedback loop is more likely to create sustainable inertia that can be guided toward a goal.

When a particularly difficult obstacle is encountered along the way, it’s essential to carry forward the positive feedback loop. To put this in simple terms, I’ll use my own physical training for reference. I’m not a “hard trainer.” In fact, when I’m training, the maximum positive gain I’m looking for is simply a more positive and often more social recreational schedule. So this isn’t about climbing mountains or breaking records (although the same rule would apply). I took a few weeks off last winter. A few weeks turned into more like a couple months. Getting back into training really only occurred after I re-established a positive feedback loop. Why? Because the one-off runs alone could not themselves jumpstart me back into training. Why? Because when I had a positive feedback loop firmly in place, I had a schedule, and I did the other things in my life I needed to in order to get good runs in…ok in plain English that means buying a new pair of running shoes and drinking more water. Once I forced myself back into a positive feedback loop, doing the right things became easy again.

(A note on positive versus negative: this post isn’t about cheerleading versus browbeating. When I think about a positive feedback loop, I’m primarily thinking about taking information in about my actions or those of my team, digesting it in light of a positive direction I’m heading, and communicating it back in a way that yields new well-directed actions. People like rewards – and can sustain criticism – but neither work very well if, again, the positive feedback loop is not firmly in place. As long as your team, or you yourself in the case of a personal project, will take feedback within this structure, it shouldn’t matter if the feedback is a high-five or critical. It should be positive, and received positively, either way.)

About Face

March 12, 2009

Check out this article

Yahoo: Meltdown Accounting Rule

The House of Congress beats down a guy whose organization’s job is to promote transparency. They harangue him to get banks to cover up the value of their junk assets. These same politicians a few years ago beat on these same types of administrators to expose their junk assets.

For the enforcer, it’s damned if you do, damned if you don’t. For the politicians, it’s more hot air all the time.

More pandering, more pretending…while the wealth of the world hangs in the balance.

Freedom Necessitates Responsibility

March 12, 2009

With a little perspective, it is easy to see that the country and the economy is dealing with the symptoms of irresponsibility. In too many ways on too many levels, the majority took the easy way. Those in power took the easy path. Pandering. Fast money. And the slightest bit of hard work we would reward with consumption. Inevitably, laws as sure as gravity dictate that over time you cannot eat more than you kill, as an individual or as a whole. This is what we have done.

The problem with being in the throes of the symptoms is your need to treat symptoms. I don’t really have a problem with treating symptoms, immediate pain relief. The problem is what does treating symptoms have to do with the underlying illness? Freedom necessitates responsibility. When you are irresponsible, freedom shrinks.

My biggest hope is 2009 is a turning point for personal responsibility to make a big comeback. Unfortunately, many don’t even know what that really means.

One way or another, personal responsibility will make a comeback, I just hope it happens sooner rather than (dangerously) later.

The Conservative Investor Paradox

March 11, 2009

Many people with significant stock holdings in 2008/2009 lost 50% or more of their money. Many of these people maintained higher lifestyles than they could afford and worked in jobs dependent on a growth economy. It might be you, your neighbor, your cousin, but “they” is a big part of the population.

It’s the comeuppance that the conservative millionaire-next-door has foreseen coming for years. The only ones “least affected” are the most conservative. If that’s the case, are they going to seek out the buying opportunities out there? Generally no. Why? Because being truly conservative with money is a behavior that is a derivative of a psychological core. People’s core psychology (their programming) doesn’t change based on an environmental change. They stand to make money the same “old fashioned” way they always have, but they aren’t going to seek out aggressive investment strategies based on a down market scenario.

Terra Firma

March 11, 2009

A funny thing happened yesterday. The stock market moved up significantly yesterday on a rosy bit of good news from Citigroup. Of course, this news is barely meaningful to most people, most companies, and the general economy. That wasn’t interesting. Neither is the fact that in all likelihood any gains from yesterday and any ensuing gains this week will be given up again. What is interesting is how many people understand this. In a sense everybody “around the water cooler” understands this now. To me, of great importance when bad things happen is acceptance. Not acceptance to give up, but acceptance to be comfortable and clear headed recognizing a reality that is hard to face. I’ve found understanding and fully accepting reality is the hard part. Only then can you find “terra firma” and respond in earnest. I don’t think we’re there yet (I don’t even think I’m there yet), but I think we’re getting there.

Projections and Pension Funds

March 6, 2009

Interesting article today at SeekingAlpha today (here). Scroll down to the part about the Chicago pension fund. It’s starting to become public knowledge that many pension funds are underfunded or will become so soon. Notice the part about those funds return expectations. Many of these funds need a high return (some 8-10%+) in order to keep up with their future commitments. 8-10% ain’t happenin’ right now and at least according to Lass, historically never happens with any kind of regularity for these types of funds.

When you model anything, you have to make assumptions. Not only do most models never incorporate the “down-side”, they generally incorporate positive growth as a base level assumption. Something like a pension fund that requires that type of growth in its models is extremely problematic because policy decisions up and down the food chain (ALL the way up and down) are based on the future solvency of them. When the models (the almighty black and white) show artificial solvency, and then that changes, the domino effect is drastic. Positive growth economic modeling, in addition to modeling of very low cost of borrowing money to fuel such growth, has created a Hydra-like monster — the Wall Street Journal headlines of today.

DC REITs

March 6, 2009

Publicly traded REIT’s have taken a bath in the market. Now that stocks have been beaten up so much so fast, the question is where and how do you take advantage? The source of fear in the world of REIT investing is 1.) uncertainty regarding the solvency of the company’s financial structure(s) assuming market conditions stay the same or worsen, and 2.) risk of cashflow. For REIT’s, cashflow is of course tied to rents, which are tied to tenants and their ability to pay it.

During an upstroke market, stocks are based on appreciation and expansion, which is based on growth strategy, plans, and ability to execute. When shopping for REIT’s at a discount, you’re really shopping for survivability (not growth so much) such that the REIT can stay alive and recover back to full value, more or less. Survivability and insight into survivability is the new “alpha.”

Put another way, if we just want a REIT to survive, we want the economy that its tenancy is part of to be alive and kicking. The underlying earning power of a REIT is the assets it owns, which is all about its localized economy. If the stock price of a REIT is at a discount, you’re getting a piece of the profit potential of those assets at a discount. If those assets’ true earning power is going to stay the same or grow over time, you win based on the arbitrage of the hold.

DC real estate ought to win in this market because its economy is propped up by an expanding government that is not going away any time soon. Private individual real estate assets in DC are not seeing the same level of discount as many other parts of the country because this concept is not particularly genius. However, publicly traded REITs with a heavy DC concentration have seen a huge depression in market value. As long as those REITs do not have an undue level of risk based on their financial structures, those are, probably, undervalued stocks.

CMBS thought

March 5, 2009

A bank lends money with a piece of property as collateral. The borrower defaults. The lender forecloses. The foreclosure process is administered through a trustee which is a third party, generally for the maximum benefit of the bank. The trustee and bank are aligned and there is clear communication to establish an understanding of outcomes.

To me, there is a very natural and obvious problem when the singular bank above becomes plural. Very plural. Further, when this plural becomes a body of confused and conflicted parties. That is what CMBS does/did to loans, many of which are now in default.

It strikes me that a significant distinction between the defaults of the 80’s and the defaults of this period is the securitization (pluralizing and anonymizing) of the debt and debtholder. While my limited knowledge of CMBS would suggest there are people out there who “know what to do”, I think the size, scope, and complexity of this problem make it “mindbending.” By that I mean, right now, anything that has anything at all to do with CMBS is a fog of players without a clear understanding of the game they are playing. In theory, the guy the “most in the know” has a shot at taking advantage of an information advantage. The problem is, in this mindbender, the common cliche of “knowing enough to be dangerous” is an unending circular reference.

What Is Sound Tax Policy for the US?

March 2, 2009

This is my first posting in a while, so apologies if it’s a little rusty.

I am writing to “think out loud” about new tax policies of the Obama administration. The first thing I would like to say is I don’t like high taxes anymore than the next guy. In fact, selfishly, I would like to pay as low taxes as possible. However, I think that many conservatives do not realize how bad the financial state of affairs in this country really are. I think there is a gross underestimation of the financial woes of this country. Even after many documentaries and books have been written about the terrible condition of the economy and balance sheet of the US, it would seem very few people are willing to recognize that our economy is in terrible shape. Perhaps we are all desensitized. Perhaps words like “terrible” don’t mean anything. I really don’t know. What I do know is I certainly would not want to be in charge of tax policy! Talk about damned if you do, damned if you don’t. I think it’s weak logic for anybody to really think about the traditional “lower taxes to create an environment of long term economic development” angles as anything but nonsense in this time. I also think it’s simply conservative ideology to defend the arguments along the lines of “every man for himself” as a basis for low taxes.

I’m not sure raising taxes, in any form, on anyone, is the right answer. I don’t know. I do know that from everyone I’ve heard from that decries tax increases, I have not heard a good answer for producing enough revenue for the USA to pay for what the USA commits to paying. And let me be specific. Debt commitments, military commitments, medicare commitments, social security commitments. Countless soft and hard “guarantees” such as FDIC and its equivalents in many areas of our financial and commercial markets which are going to be relied upon big time. We cannot pay for the things we have already committed to, let alone the commitments that are as yet forthcoming.

The USA as an entity resembles General Motors. It is saddled by commitments, it is divided by internal politics, it is marked by a history of “management theory of the year” initiatives, and few if any pretend to know how to make it healthy.

Things are going to get worse. I guess my main point is, while some of the tax proposals I’ve been hearing don’t sound great, I’m waiting to hear something else that sounds anything like the USA being able to pay for its past, present and future commitments, especially without even more leverage. In the absense of credit (like printing more “treasuries”), the only way to get more cash is to increase revenue, which for governments by and large means raising taxes. I suppose I’m having a hard time finding fault with President Obama’s progress so far. His tax proposals are a far cry from the highs this country has seen. To me, between backing all the financial institutions while our credit system gets “less unhealthy,” funding all our existing commitments, and helping soften the very real pain of a terrible economy, some tax increase is not only inevitable but, on the balance, a fairly healthy response. I don’t know what serious alternatives there really are, and it is frustrating to hear conservatives chastise President Obama for raising taxes, when there aren’t any credible alternatives being proposed.