Monday, July 5, 2010

How To Be A Player

1. Sell High-tech German goods to Chinese
Premise: The Euro is low vs. the RMB now and it is not coming back for a long time (never). If the Eurozone were to break up, the Mark would appreciate while every other European currency depreciated. This means that the Euro is currently holding down the cost of German exports. If you were going to make a large investment in high-tech machinery, now would be the time to do it. There must be at least a few cash rich Chinese companies, moving up the ladder of sophistication, and facing rising labor costs, that want to replace a thousand worker assembly line with a machine and a few engineers. I hear Germany makes machines like that. Will they pay me to find said companies?
2. Help Americans invest in China
Premise: Returns in America are low and will be for a long time. Alternatively, the Fed will allow for a higher rate of temporary inflation and during that time the dollar will be a carry trade currency. Either way, an investment in China looks attractive as it offers high returns with a good chance of currency appreciation or inflation induced asset appreciation. The problem is that traditional investment options suck. The property and stock markets have already peaked. The types of businesses likely to thrive in the next few years are the exact type not listed in Shanghai, Hong Kong, or New York. They are small and medium consumer oriented businesses. There just might be some money in helping Americans find these investment opportunities.
What do you think, and how do you think it?

Friday, February 26, 2010

Let's End the Recession Now. Let's Target NGDP.

The entire political and economic universe revolves around the question of whether or not Scott Sumner's policy will be adopted. The author of the blog The Money Illusion has the answer to our economic problems and, just as in the case of Frederick Kagan when he first advocated the strategy that would later be called 'The Surge', the silence in response to his arguments is deafening.

Sumner's main argument is that this recession was caused by excessively tight money supply. (Not the financial crisis, but the recession.)This argument would likely strike many as some form of uber-Keynsianism, where inflation is always good. (William Greiderism possibly). However, he is an Hayekian.

Sumner's proposed solution is a mechanism by which we will have more inflation during recessions, but tighter money during recoveries. It is automatic and removes discretion from the Federal Reserve because, like most of us, the Federal Reserve thinks it's better at doing its job than it actually is. The mechanism is that the Federal Reserve targets nominal gross domestic product growth at 5%.

It's possible that, as Dems face electoral doom this fall, NGDP targeting will gain credibility. Without the adoption of this policy, I believe Desmond Lachman and Nouriel Roubini when they predict that the recovery will yield to a second recession later this year.

Alternatively, the Dems could introduce major protectionist legislation aimed at China. If Obama publicly favored a bill imposing a 40% tariff on all imports from China, Dems could tap anti-China sentiment, find a scapegoat for the economy, purport a solution, and drive the debate into favorable territory for the entire election season.

Monday, February 22, 2010

Why Blog?

It just dawned on me that, aside from the time cost, career-wise there's almost no downside to blogging. I used to worry that if I just blogged about what I was doing, it would be considered boring and nobody would read it. Well, even in the case of well-read blogs, hardly anyone is paying attention, so that's really irrelevant. Best case scenario is a few people actually consider some of your ideas, they leave comments, discussion ensues, and your better off for it. Perhaps they are a future employer, investor, or customer. Worst case scenario is that it still functions like an extremely long resume.
I also used to worry that blogging needed to be profitable, cool, or therapeutic to be worthwhile. Alternatively, posts had to have a hard-hitting argument, or in depth research and analysis like 538, thus the large quantity of never published drafts stored in this blogger account. But, I now believe, poor writing and all, that blogging is it's own justification. The 99.9% of people that ask me 'what have you been up to?' but don't really care to know will not read this blog. And putting my thoughts online is the only practical way the other .01% could ever know.
I take great inspiration from the blog 'The Money Illusion' by Scott Sumner. Thanks to Ryan for bringing my attention to it, as it had been in my feed reader but I had previously always ignored it.

Friday, February 19, 2010

The Iraq War and The Great Recession

The political universe is now aligned almost exactly as it had been in fall 2006. At that time, the defining fact of American political life was the war in Iraq. It was going badly, American soldiers were dying. An election was coming and the American electorate was deeply disturbed. Democrats interpreted that unhappiness as resentment over the lead up to the war and as a call to withdraw troops. It wasn't that the people wanted to withdraw, they wanted to win. But, Republicans didn't seem to have a feasible plan for winning, and there were daily new revelations of the administration's incompetency in the initial phases of the war. If nothing changed, the GOP would lose power and the war simultaneously. The president's popularity had plummeted while he fruitlessly spent all of his political capital on his domestic agenda. As far as the war went, he seemed to be simultaneously agreeing with Republican calls for more troops and Democratic calls for less troops.
One wonk knew how to solve the problem. The answer came from a deep understanding of another similar trauma in our nations past. It was a simple plan, not requiring extra troops or funds. So simple, that he seemed to be driven semi-mad by the fact that it was not obvious to everyone. He could have been excused for interrupting a presidential address to congress to stand on a soap box and yell through a blow-horn "WE ARE NOT USING COUNTER-INSURGENCY TACTICS TO FIGHT AN INSURGENCY!!!!! ABSOLUTELY NOTHING YOU SAY OR DO IS RELEVANT UNTIL YOU CONSIDER THIS FACT!!!!! (or I am bat-shit crazy, one of the two.)
Frederick Kagan had spent a great deal of time thinking about what had gone wrong in Vietnam and it was all too clear to him that we were making the same exact mistakes. In both cases, we just needed to fight the war as it was. It was an insurgency, therefore we needed a counter-insurgency strategy. Luckily, his arguments were given a platform by The Weekly Standard, the Heritage Institue, and AEI, but, it could almost be said they did him and the nation a disservice by not suspending all other activities until his policies were given an up or down vote by the president.
Now, George Bush didn't spend half a career studying US mistakes in Vietnam (he spent it studying how to get elected president), nor was he an expert in military strategy. But, the guy he had in charge, Rumsfeld, reputedly had grand theories about just this type of non-traditional war. And this expert seemed to be saying that the president, the military, and the public were being too pessimistic, which basically sounded like he thought we needed to get used to the current rate of casualties. This was how it was gonna be. But, he will vigilantly protect against the possibility that this war will cause us to let down our guard for the next war.
So that's where things stood: the reality of the war, the discontentment of the public, the president's inaction, Rumsfeld's stubbornness, the rise of anti-war Obama, the decline of John McCain, the inevitable outcome of the election. All tied together by congress and the administration's complete obliviousness to the man on the soapbox with the blow-horn -forced against his will by circumstances- to scream repeatedly 'the sky is blue'. I stared open-mouthed, thinking 'is anybody gonna listen to him?' Something had to give.
See the parallels?
Today, the defining fact of American political life is that we are in the worst economic recession most of us have ever seen. A full year after the bailouts and the stimulus, Americans are going busto left and right. We've lost our retirement savings, the entirety of the equity we had in our houses, our jobs, and there aren't any profitable entrepreneurship activities in sight. We are still saddled with debt accumulated during the boom, we're going bankrupt, defaulting on our mortgages, getting locked out of the credit system, and, most importantly, things aren't getting any better. China's smooth handling of the economic crisis has dealt as big a blow to American economic leadership as the blow to our military leadership would have been had we exited Iraq and seen an Iranian proxy government established. The American public is deeply disturbed. The Republicans are interpreting this to mean they were not happy with the stimulus, the new build up of public debt, an the ominous tax raises it portends. It's not that people want the government to withdraw from the economy. They just want jobs and growth. But Democrats don't seem to have a feasible plan to turn around the economy, and there are daily new revelations about the administration's incompetency during the bailouts and the enactment of the stimulus package. If nothing changes, the Dems will lose control of congress, Obama will be a one term president and we will all live through a deflationary economy for years to come. The president's popularity has plummeted while he has fruitlessly squandered all his political capital on healthcare legislation. As far as the economy goes, he seems to be simultaneously supporting Democratic calls for more government spending and Republican calls for less government spending.
One wonk knows how to solve the problem. The answer comes from a deep understanding of another similar trauma in our nations past. It is a simple plan, not requiring extra regulation or funds. So simple, that he seemed to be driven semi-mad by the fact that it was not obvious to everyone. He could have been excused for interrupting a presidential address to congress to stand on a soap box and yell through a blow-horn "WE ARE NOT TARGETING TREND-LINE NOMINAL GROWTH!!!!! ABSOLUTELY NOTHING YOU SAY OR DO IS RELEVANT UNTIL YOU CONSIDER THIS FACT!!!!! (or I am bat-shit crazy, one of the two.)
Scott Sumner had spent a great deal of time thinking about what had gone wrong in the Great Depression and it was all too clear to him that we were making the same exact mistakes. In both cases, we just needed to respond to a drop in real growth by maintaining nominal growth. It was a deflation, therefore we needed an inflation strategy. Luckily, his arguments were given a platform by the academic blogosphere, but, it could almost be said they did him and the nation a disservice by not suspending all other activities until his policies were given an up or down vote by the president.
Now, Barack Obama didn't spend half a career studying the mistakes made in the Great Depression (he spent it studying how to get elected president), nor was he an expert in economics, but the guy he had in charge, Bernanke, supposedly had grand theories about the exact sort of deflationary trap we now find ourselves in. And this expert seems to be saying that the president and the public are being too pessimistic, which basically sounds like he thinks we need to get used to the current levels of employment and growth. But, he will vigilantly guard against the possibility that the current and previous efforts to improve the economy will result in inflation.
So that's where things stand: We face sovereign debt crises, a commercial real estate crash, the stimulus is wearing off, quantitative easing is winding up, our only real growth has come from finally working through pre-crash inventories of some goods, the dollar is now strengthening again, the public intends to vote anti-incumbent straight down the ballot, fringe right wingers are gaining credibility everyday, Obama's inaction, Bernanke being stubborn - all tied together by congress and the administration's complete obliviousness to the man on the soapbox with the blow-horn -forced against his will by circumstances- to scream repeatedly 'money is too tight.'

Wednesday, May 13, 2009

The Case For Jeb 2012

Buy Jeb Bush for 2012 GOP nominee contracts on intrade right now. Yes, he could very well decide not to run, but the upside in the event that he does decide to run outweighs the downside when he doesn't. Maybe I'll post more analysis about this but just wanted to get on record.

Sunday, November 9, 2008

Chinese Stimulus Package

Yesterday the Chinese government announced it would spend nearly 600 billion USD in stimulus efforts. Morgan Stanley's Qing Wang and Steven Zhang gave us a heads up that this was coming here. They expected the announcement of a proactive stimulus policy to be made at the end of the month. Not only was it made earlier, but prior to the announcement, Chinese finance minister Xie Xuren was called back from Peru under what seem to be emergency circumstances. One partial explanation for the timing of the announcement is to frame the Chinese leadership in the best possible light heading into this Friday's G20 summit.
I think it's more likely that the Chinese government just caught on to the extent to which economic conditions have deteriorated domestically and realized they had to do something immediately. The amount to be spent is far larger than Zhang and Wang had anticipated although the announcement has been criticized for including infrastructure projects and earthquake recovery funds which were already to be spent. It had the effect of boosting Asian markets on Monday. Tokyo's benchmark stock index rose 5.8%, Shanghai's 7.3% and Hong Kong's 3.5%. The Yen also depreciated some which is interpreted to mean some are willing to make large investments financed by Japanese lenders.
I doubt these rallies will last as I don't think the markets had fully priced in the information that has spurred the Chinese government to action. Over the next few weeks, I think we'll see ever more stunning drops in exports and retail sales, rising unemployment and bankruptcies, and ultimately social unrest.
From Plastic News China; The twice-yearly China Import and Export Fair in Guangzhou is an important barometer of China's exports. The most recent fair, held earlier this month, witnessed a 10 percent drop in trade volume. According to the Xinhua Agency, orders from the U.S. posted the biggest decline: more than 30 percent from last year.
From the China law blog:The downturn in shipping is having a profoundly negative effect on all segments of China's maritime industry. Shipbuilders are finding that their shipbuilding contracts are being extensively breached. Since shipbuilders in China are mostly new companies, they are heavily in debt. These breaches threaten the life of the entire shipbuilding industry in China."

The Baltic Dry Index can be used as a stand-in for the amount of shipping occurring. From the chart you can see demand for exports has nosedived in the past few months.

Conditions have deteriorated so quickly that power generation in China actually fell in October:
'With more than 70 percent of electricity consumed by industrial users, economists track the power figures for an insight into the health of the manufacturing sector.
Sure enough, factories have moved down a gear in recent months, and economists polled by Reuters expect figures on Nov. 13 to show that industrial production growth slowed to a six-year low of 11.3 percent in the year to October.'

In a desperate attempt to avoid "mass incidents", local governments are stepping in to pay some of the wages owed by failed companies. From this chilling Washington Post article:

In the city of Dongguan, the local government handed out about $3.5 million on Oct. 21 to the employees of Smart Union -- which sold its toys to Mattel, Disney and Hasbro -- after the 7,000 workers staged a strike.

Hu Weicai, 38, who worked with the plastic molds used to make electronic toys, said employees became nervous when the owners slipped three months behind on salary payments. The workers occupied the factory and the surrounding streets until government officials promised them they would be paid.

"The government was very afraid when they saw what was happening. What the government fears most is workers making trouble. They paid us to stabilize our moods," Hu said. Indeed, signs posted at the gates of closed factories did not direct former workers to places where they could get help, but instead displayed a warning. In large black characters, they reminded workers that they could be detained for stirring up unrest, for disobeying security officials or even for 'unlawful gathering.'

The Chinese government cannot create demand which has suddenly disappeared. Furthermore, the current downturn is only a triggering event for the much larger correction which China would inevitably face, which is not dependent on external events, and which will be greatly exacerbated by China's own property market bubble bursting.
The Chinese consumer cannot save us. (But maybe the Japanese consumer can.)

Monday, September 29, 2008

McCain got bad beat and hes short stacked, Time to pick a spot and push.

Not to be stuck in total denial of reality, if you squint at it there is a way that John McCain's comeback is inevitable and Republicans can fend off total slaughter come November. Assumption #1 congress has to pass a bailout plan. Assumption #2 In order to pass that bailout plan McCain has to play an integral part. Assumption #3 The McCain campaign realizes that their only chance of winning the election is to be seen playing a central role in brokering a successful bailout package. Assumption #4 possibly the white house also realizes that they need to let McCain broker the deal if they are to get a deal. (and, again, there will be a deal cuz there has to be.)
This is the exact sort of big issue, capitol gridlock situation that McCain has used to establish himself as a maverick by bucking Republican orthodoxy to achieve a bipartisan solution that just about nobody is happy with. (But its still better than the status quo!)
Having passed the bailout, the elimination of most worst-case scenarios will cause an immediate improvement in the market and the economy although the ripple effects of whats going on right now will be present through election day.
Not saying this will actually happen, just saying that if it does people will say that it was some amazing turn around but in reality it was inevitable and predictable with the proper model.

The scale of events these days is enough to make a US presidential election seem trivial. As such its a good time to mention some other inevitabilities. It is inevitable that the US will adopt appropriate fiscal and monetary strategies to cope with this economic situation. Its impossible that political leaders who are unwilling to act correctly according to economic theory will not gain power. They (collectively) know the theory. The theory is correct. It is also impossible that self interested actors would not choose to adopt correct strategy if they can, considering the advantage correct strategy would give them over their political opposition. (Correct as in avoiding disaster, although there is a lot of room for sub-optimal strategy.)
This will certainly be a period of increased concentration of industry in the hands of government, and possibly increased protectionism. However, the inevitable result will be the adoption of consumption increasing policies by the governments of the G8 ex-US plus China. These countries will all be forced both by politics (the US twisting arms) and economic circumstances to undergo reform. In the end they are too dependent on the US as an export partner to not give in to US demands and US demands will be increased consumption on their part which will ultimately free them from dependency on the US as an export market.
People who think that China is going to own the US and UK financial system need to realize that our financial problems are merely a precursor to their much more serious problems which will require an international bailout as they don't have the technical sophistication to engineer it for themselves. Therefore, the reverse,(China selling of large chunks of equity at in their banking sector at firesale prices to Western firms) is more likely.
Of course, I am probably wrong about all this, there are so many more ways to be wrong than to be right. The goal is to develop strategies to make a profit when you are right and break even the rest of the time.