Had to repost this: Talking Twin Babies

April 12, 2011

If this does not make you smile and/or laugh then you are not human


United States USD Policy is Misguided

September 27, 2010

I begain writing this about a week ago, and am beginning to see some media reports supporting my argument below, thankfully. Hopefuly, these opposing opinions to current US Policy are not too late.

Recent media reports indicate a growing strain between US-Sino relations over the Chinese policy on currency valuation. The fervor of Chinese currency manipulation is once again bubbling within the United States.

The US, or at least those proponents of this agenda believe China’s cheap currency is artificially low and therefore is creating unnatural imbalances in global reserves and global trade.

In layman’s terms these folks think the shit we import from China is too cheap, giving Chinese manufacturers an unfair pricing advantage in global trade. As a result, dollars flow (as well as the currencies of other developed countries) into China and just stay there.

The logic being espoused now is that in order to correct these imbalances the Chinese should be letting their currency appreciate (at least against the dollar) by as much as 20-40% as of recent reports. This is a large movement as it pertains to currencies, and normally would be something that might happen naturally over the course of years, if not the better part of a decade.

Recent reports claim that a growing consensus of US policy makers want to see this kind of movement in the Chinese currency over a far shorter time frame.

For more than two decades US consumers have benefited directly and indirectly from a relatively weak Renminbi (Yuan). We were able to consume more Chinese imported / manufactured goods for less money. Indirectly this helped to keep inflation in check, and benefited industries who were able to capitalize on China’s relentless demand for natural resources and those companies who were able to arbitrage the cheap cost of Chinese labor.

Now that US unemployment stands as high as it has been in over a generation, America seems abruptly convinced that part of our troubles have arisen from the fact that our finished goods cannot compete with the prices of Chinese finished goods and therefore China is “keeping a good man down”. Funny we don’t consider our legacy cost structures part of the problem.

If not absurd, the evangelical approach supporting a rapid rise in the Renminbi is at least short sighted, and may actually dangerous for the US.

The end result of a rapid rise in the Renminbi (RMB) against the US Dollar would certainly help US manufacturers compete better on price in the global market place, this would particularly benefit our durable goods industries like cars that are assembled here. However increasing the purchasing power of the Chinese consumer dramatically and quickly seems to me might have other adverse consequences.

For one, despite continued commentary that inflation is not an issue, anyone who does grocery shopping in the United States can tell you otherwise. Food prices have not benefited from the deflationary recession that took home prices and the prices of other durable goods down. As per-capita purchasing power increase for the Chinese consumer, we here at home will be competing with them more heavily for grains, dairy and protein which will surely drive up global prices.

The same scenario that is described for food would also apply ubiquitously across all commodities and natural resources. In fact a fast rise in Chinese purchasing power might incentivize stockpiling, creating additional pressure on the prices of all natural resources.

In addition a stronger RMB relative to the USD specifically implies not only an increase in the relative purchasing power for the Chinese but concurrently a relative decrease on the purchasing power for Americans, a major double whammy. In the areas where we compete to consume natural resources this could have dramatic, adverse and even rapid consequences.

The direct impact would be modest to severe rise in price driven inflation, particularly for “headline” CPI. Core CPI would be less impacted in the near term as it excludes food and energy prices. I won’t explore how the government gooses these numbers anyway.

The political agenda out of Washington is currently misguided, if not dangerous. An article today appearing in Bloomberg alludes to this as well. In the article Nobel-Prize winning economist Robert Mundell says that U.S. legislation to press China to raise the value of the yuan [RMB] would be a “disaster” and fail to narrow the trade deficit between the two nations. He goes on to say:

The bill “would create a very damaging thing to the world economy and the stability of Asia,” Mundell said. “This would have a wounding effect on the stability of international relations. There’s never been any precedent in economic history where a country through any legal system was forced to appreciate its currency relative to another country.”

“It’s not going to have much of a dent in the U.S. deficit,” he said. “America has had a huge deficit since the 1980s. None of that is going to change if China changes its exchange rate.”

Policy makers should try to keep the currencies within a range to prevent “huge swings” in the price of raw materials such as oil, he said.

The euro-dollar fluctuation “is a terrible thing for the world economy,” Mundell said. “We’ve never been in this unstable position in the entire currency history of 3,000 years.”

I agree with Mundell. What he doesn’t say directly but he alludes to is that US policy smacks of protectionism, and at a time and with a trading partner that could undermine the global recovery. A protectionist policy agenda with China could easily and quickly escalate to stimulate a new geopolitical divisiveness that in its worst form could lead to war(s).

This week in fact the House of Representatives is voting on a China trade tariff that would inflate the cost of more Chinese goods imported into the US. This comes after a handful of other trade tariff disputes since Obama took office on things such as tires and gift boxes. In retaliation earlier this year China proposed a tariff on US chicken going into China.

There is no good that can result from an escalation of trade tariffs, a system that was mostly dismantled through globalization. It is only a matter of time before the US/China trade was draws allies inspired to align their home interests by protecting their own major industries.

At home in the US, the result would further squeeze the middle-class American budget that Obama so adimantly wants to protect. It’s not the wealthy that rely on cheap products from China Mr. Obama, its the men and women who are trying to stretch every dollar.

My alarmist comments are not unfounded by anyone who knows a little bit of history and has a little bit of vision. But the future of human survival will depend on social order. A major imbalance in global resource production and consumption (particularly in food and energy) could tip a boat that has been running evenly for more than half a century. If you want to consider what happens when people cannot eat, consider the Middle East and Africa where poverty rates and lawlessness run hand in hand.

What makes this policy misstep so dangerous in my opinion is that it is driven not by rational thinking that can be tested and rebuffed, but instead by dogmatic Middle-Class zealotry. The administration in its effort to return middle-class Americans to work, may incite the worst bout of protectionism seen since before World War II, an action that could certainly inspire a new Cold War, and as mentioned before possibly a real one. I am not a Republican, nor do I consider myself to be overly conservative, but I think they have got this RMB agenda all wrong.

I believe the Obama Administration has done a tremendous job with what was left behind by the Bush Administration. However, I see forcing China on its currency as having the potential to undermine everything accomplished thus far, and with the potential to recreate a level of global instability far in excess of what was left behind by the Bush Administration.

It seems to me that a better agenda for the administration would be to focus on USD stability instead on RMB parity. The vast majority of the World’s commodities are priced in USD. In addition, US corporations are faced with the onerous task of calculating their currency exposures on a regular basis. Even small and medium sized business who may not have significant overseas sales are victims of price instability caused by commodity fluctuations. Consider the chart below.

DXY: US Dollar Index Spot Summary - USDI Chart 2006-2010

DXY: US Dollar Index Spot Summary - USDI Chart 2006-2010

The USD index has made moves of 10-15% three times now in the last two years. This is unprecedented volatility in the world’s largest reserve currency. The USD Index has spiked when fear spiked, and sank when fear subsided. The US currency has effectively become the beneficiary/victim of the global risk on/risk off trade. With equity and bond markets now chasing highs, the dollar is again heading downward.

At some point, however, I suspect unless we stabilize our currency, it will begin to lose its place as the preferred store of value. Not to mention what this volatility has done to commodity prices effecting everything from food and fuel, to industrial goods. Companies who bare the brunt of controlling costs or raising prices are force to make decisions today that may be totally obsolete a few months from now, based on currency movements alone. Regardless of the structural imbalances between China and the US, and despite objective (or subjective) relative valuations of the RMB vs the USD, I have to believe that price stability predicated by US Dollar stability is the more immediate issue rather than the RMB/USD exchange ratio.

In a world of uncertainty and unprecedented volatility, we need stability. We are so focused on China’s proported currency manipulation when the truth is we ought to be more concerned over our own.

Remember China has about four times the population as the US. The more the RMB appreciates, the greater the increase in 1.2 billion people’s purchasing power. Are we really sure we want to force that agenda? Seems idiotic to me.


“The Big Short”, eReaders and Notable Quotes

July 31, 2010

So after almost two years with absolutely no time to read a book, I finally chose to opt-in to the Kindle App for my 3GS iPhone.  I was trying to avoid the whole eBook thing being part Luddite and all.  Nonetheless, I am now a total convert, and see absolutely no reason why I would ever need to buy an eReader.  The small screen and large type on an iPhone is perfect for someone like me.  With massive adult onset ADHD, having to only reread one or two sentences to catch my place beats the hell out of rereading the same page over and over again after my mind wanders or eyes stray.

I got through what I assume in print version is a short book in just under one week, working approximately 70 hours in my “day” job, and having time enough to spare with my wife and son.  My first eBook experience was Michael Lewis’ The Big Short: Inside the Doomsday Machine, one of the many financial crisis related books on my list but not on a shelf.  Michael is of course a brilliant writer, and my iPhone and the Kindle app made me a brilliant reader, highlights, bookmarks and all.

I particularly like the ability to highlight a book and then to see a summary of your highlights.  I also love the fact that it always knows where you left off whether on the phone or on my laptop.  I am notorious for losing my place in a paper book.

If not having time to read was the old problem, the new problem is what to do with the stack of books I amassed in anticipation of one day (year) having the time to read them all.  Now they are destined to sit in book purgatory for a very long time.  In fact I’d imagine that if those poor books could communicate, they’d probably be hugging my ankles begging me to stay off my iPhone and pick them up.

This brings me to my newest quandary.  Does one need to commit to only buying books he doesn’t physically own in digital form, or are we at the point where its ok to buy the digital copy even though I haven’t cracked the physical form?

I suppose all those people who bought/kept books to fill shelves in order to look smart have a legitimate excuse when their smarter friends are over for dinner and notice that most of the dusty books have not be as much as creased in the spine.  Those who need it have an easy and defendable position that they read it digitally.

Does this mean that books will become souvenirs, or at least some new type of home decor or ornament?  We may eventually want physical mementos of the knowledge we’ve digested either to remind ourselves of all we’ve learned or to illustrate to others our knowledge, interests and tastes.  Thus books may transform from being containers of actual knowledge to mementos of knowledge consumed?  In that case, we’ll no longer need the pages?

Anyway, enough of the commercial. Having worked at Lehman Brothers for two years out of a well-regarded MBA program, albeit as a bona fide “rookie”, I felt it worthwhile to list those passages that I either felt Michael stole from me, or more likely that resonated deeply with my own experience, perspective and insight.

I’ll do it, but only after you explain to me how you are going to fuck me” [My success has hinged on the fact that I always told and still do tell clients how a firm is trying to fuck them]

Senior management’s job is to pay people,’ he’d say, ‘If they fuck a hundred guys out of a hundred grand each, that’s ten million more for them.  They have four categories: happy, satisfied, dissatisfied, disgusted.  If they hit happy, they’ve screwed up: They never want you happy.  On the other hand, they don’t want you so disgusted you quit.  The sweet spot is somewhere between dissatisfied and disgusted‘”  [This could not be more true and manifested itself in my short tenure at Lehman when I asked my direct boss why in a year of record Wall Street bonuses (2007) my bonus was going to be 30% of what was promised to me.  His answer was, really: “cash isn’t for rookies”]

The market was paying Goldman Sachs bond traders to make the market less efficient.” [This idea struck me as I was watching the original House Inquiry into the Abacus CDO with Fabrice Tour and his supervisors from Goldman Sachs.  In their testimony, they defended their positions as market makers.  At one point one of them made a dogmatic point that market makers serve a higher social purpose in allowing society to thrive with liquid markets.  I was yelling at the TV like folks do at the Friday night midnight showing of Rocky Horror Picture Show.   A market where only one firm is providing price discovery is by definition inefficient.]

His house was worth a million dollars and maybe more yet would rent for no more than $2,500 a month.  ‘It was trading more than thirty times gross rental,’ said Ben.  ‘The rule of thumb is that you buy at ten and sell at twenty.‘” [This is good advice, and still few people probably know it.]

Eisman had a curious way of listening; he didn’t so much listen to what you were saying as subcontracted to some remote region of his brain the task of deciding whether whatever you said was worth listening to, while his mind went off to play on its own.  As a result, he never actually hears what you said to him the first time you said it.  If his mental subcontractor detected a level of interest in what you had just said, it radioed a signal to the mother ship, which then wheeled around with the most intense focus. ‘Say that again,’ he’d say.” [This sadly and quite brilliantly describes me and most of the people I still work with]

“‘Everyone who was trying to sell something was wearing a tie,’ said Ben.  ‘Everyone who was there to buy wasn’t….‘” [True]

What are the odds that people will make smart decisions about money if they don’t need to make smart decisions–if they can get rich making dumb decisions?” [Excellent question, and something I don’t think has been addressed by financial reform, I touched on this in an old post from September 20, 2008 in: Corporate Governance: Redefining Independence.

All that was clear was that the profits to be had from smart people making complicated bets overwhelmed anything that could be had from servicing customers, or allocating capital to productive enterprise.  The customers became, oddly, beside the point” [This is also very sadly and very importantly true.  Price transparency is the enemy of Wall Street.  Market makers provide little if any value in markets where price discovery is ubiquitous.  Market makers depend upon opacity to make a living.  I touched on this point in another old post about a year and a half ago: Today’s Regress is Tomorrow’s Progres.  If none of that makes sense consider how much price competition there is for trading stocks today.  Individual investors can now trade shares for pennies.  There is no profit at those levels for brokers or their firms.]

In the late 1980s an early 1990s Salomon Brothers had entire years–great years!–in which five proprietary traders, the intellectual forefathers of Howie Hubler, generated more than the firm’s annual profits.  Which is to say that the firm’s ten thousand or so other employees, as a group, lost money.” [Wow!]

The people in a position to resolve the financial crisis were, of course, the very same people who had failed to foresee it” [This passage reminds me of something an old colleague and friend so eloquently said just after Lehman’s failure, “Is it reasonable to expect that the same fools who got us into this mess would be at all qualified to get us out?”  I noted this in Unreasonable Expectations]

The problem wasn’t that Lehman Brothers had been allowed to fail.  The problem was that Lehman Brothers had been allowed to succeed.”  [Hindsight being 20/20, brilliantly stated]

This was yet another consequence of turning Wall Street partnerships into public corporations: It turned them into objects of speculation.  It was no longer the social and economic relevance of a bank that rendered it too big to fail, but the number of side bets that had been made upon it.” [Two nice points. 1. No Wall Street firm, barring Goldman can even claim to have a partnership culture anymore after so many forced marriages and divorces through thee decades of consolidation. That said, Goldman’s long history as a public company has mostly diluted the original partnership culture, although one could argue that it is the strongest of the remaining large market making financial institutions. 2. Leverage ratios, segregation of client assets, FDIC and SIPC insurance and all of the traditional risk management/mitigation tools are effectively useless when the size of the counter party risk in the system totally and complete dwarfs the size of the entire system.]

‘When I hear ‘Chinese wall,’ I think, You’re a fucking liar’” [I suppose one could totally agree with that statement. I assert that when I hear the C-word, its more like speaking about Cancer in some families.  There are things that are understood, but are simply never discussed publicly.]