Volume 3 Issue 52: Two-Cent Economics

Sexless Love?

Surely an interesting notion. While it appears easy to dismiss and laughed at, the notion of men having relationships with virtual girlfriends, it is also important to remember the following observations made by very smart people:

Then president and CEO of Digital Equipment Corporation Kenneth Olson at the annual convention of the World Future Society in 1977: "There is no reason for any individual to have a computer in their home."  

Years earlier, Thomas Watson, Sr. (then CEO of IBM) estimated that the worldwide market for personal computers was fewer than ten.

And the rest, is history. The motivation for today's post is the this article:

In the most recent government study, published at the end of last month, the percentage of unmarried men spiked 9.2 points from five years ago. More telling: 61% of those unwed men reported not having a girlfriend, and 45% said they couldn't care less about finding one.

Why the generational malaise and indifference to sex? Theories abound. The most provocative to me, a Japanese-American and longtime Tokyo resident, is that Japanese women have become stronger socially and economically at the very same time that Japanese men have become more mole-ish and fully absorbed in virtual worlds, satiated by the very technological wizardry their forebears foisted upon them, and even preferring it to reality. "I don't like real women," one bloke superciliously sniffed on Japan's 2channel, the world's largest and most active internet bulletin board site. "They're too picky nowadays. I'd much rather have a virtual girlfriend."

Virtual girlfriends became a sensation last summer, when Japanese game-maker Konami released its second-generation of its popular Love Plus, called, aptly, Love Plus +, for the Nintendo DS gaming system. Konami skillfully arranged for an otherwise deadbeat beach resort town called Atami to host a Love Plus + holiday weekend. Players were invited to tote their virtual girlfriends, via the gaming console, to the actual resort town to cavort for a weekend in romantic bliss. The promotion was absurdly successful, with local resort operators reporting that it was their best weekend in decades.

As I said, it is easy to scoff at the idea of a real person being replaced by a virtual personality. I mean, the common arguments would include, "How will we derive emotional satisfaction?". I won't deny that human companionship is a unique experience presently. The desire for human contact is probably one that is built into our DNA for the very simple reason of maintaining our species. Nonetheless, that is not an emotional notion, but an instinctive one.

Why exactly do we need love from a human being? How is that different from love from a virtual being? You may say that a virtual being does not know what love is. But this begs the question, do we ourselves know what love is? Based on anecdotal experience, we very often hear our friends complain about their partners (wife, girlfriend, boyfriend, husband). That is an indication of mismatched expectations and the lack of acceptance of one's shortcomings. We have a tendency to want we can't have. This is our natural instinct. It is then no surprise that couples tend to become dissatisfied with each after long periods of time (some longer than others).

Let us take the virtual girlfriend example to the extreme. As with all thingamabobs and gadgets these days, they are fully upgradable and at an amazingly scary pace. A new tablet or smartphone becomes out of date six months down the road. What about a virtual girlfriend? Our tastes and preferences may differ from day to day, just like how we prefer a change in ice-cream flavors every once in a while even though our favorite is chocolate ice-cream. I am not so dumb to suggest this as a reason to pursue extra-marital affairs, but I am pointing out the fact that a customizable girlfriend has her advantages.

There is not even the need to do the emotional tango of tit for tat that usually happens with a real girlfriend. A typical scenario would be a romantic evening with roses and a string quartet and whatnot followed by a gentle request that could possibly turn the whole night into a gigantic nightmare because of a poorly worded sentence (i.e. "Honey, can I not take you out to shopping next week?" vs "Honey, would it be OK if we go out shopping the following week?"). While the first question may also contain the intention to postpone the shopping weekend, the poorly constructed sentence could potentially lead to a disaster. All the effort with the roses and the romantic evening is completely forgotten.

If only this was a virtual girlfriend. Not only will the evening be pleasing, but I am fairly certain that the virtual girlfriend would not retaliate to a poorly worded question. In fact, the experience of making a supposedly harmless request is made infinitely more pleasant without the fear of being rejected. All the romantic gestures and roses and string quartet is an added bonus to please the person you love. It should be seen as a genuine gesture to make the person you love happy to soften the blow of the potential bad news that you are about to deliver. Yet, the constant rejection that many people experience has transformed this situation into a case of bribery. In some cases, the girlfriend would even accuse the boyfriend of trying to "buy" her approval.

Is it a wonder if men resort to virtual girlfriends if they had to endure such an emotional roller coaster of a partner? For the pure romantic, they would claim that such an emotional roller coaster is part of the fun and surely, there is very little or no logical reason that can defend such an argument. But then again, love defies logic.

Who Will Fix the US Economy?

Who Will Fix the US Economy? - Henry Mintzberg - Project Syndicate: "...there is no quick fix for America’s current economic problems. Firing workers or even printing money can be easy; changing dysfunctional behaviors is not. The US economy will have to be fixed by its enterprises, one by one, on the ground. Attitudes will have to change, and this will demand great dedication and patience – traits that seem to be in short supply in the US today."

That's just what I said yesterday.

The Exchange Rate Delusion

In the previous issue of the Main Streeter, I showed a bunch of quotes from economists who dismiss the whole undervalued Renminbi notion as hogwash. Michael Spence, Nobel laureate in economics, totally destroys the arguments bashing China. The post is so much of a game-winner (more like finishing move) that I am going to quote the whole post:

MILAN – If one looks at the trade patterns of the global economy’s two biggest players, two facts leap out. One is that, while the United States runs a trade deficit with almost everyone, including Canada, Mexico, China, Germany, France, Japan, South Korea, and Taiwan, not to mention the oil-exporting countries, the largest deficit is with China. If trade data were re-calculated to reflect the country of origin of various components of value-added, the general picture would not change, but the relative magnitudes would: higher US deficits with Germany, South Korea, Taiwan, and Japan, and a dramatically lower deficit with China. 

The second fact is that Japan, South Korea, and Taiwan – all relatively high-income economies – have a large trade surplus with China. Germany has relatively balanced trade with China, even recording a modest bilateral surplus in the post-crisis period. 

The US has a persistent overall trade deficit that fluctuates in the range of 3-6% of GDP. But, while the total reflects bilateral deficits with just about everyone, the US Congress is obsessed with China, and appears convinced that the primary cause of the problem lies in Chinese manipulation of the renminbi’s exchange rate. 

One problem with this view is that it cannot account for the stark differences between the US and Japan, Germany, and South Korea. Moreover, the real (inflation-adjusted) value of the renminbi is now rising quickly, owing to inflation differentials and Chinese wage growth, particularly in the country’s export sectors. That will shift the Chinese economy’s structure and trade patterns quite dramatically over time. The final-assembly links of global-value added chains will leave China for countries at earlier stages of economic development, such as Bangladesh, where incomes are lower (though without producing much change in the balance with the US). 

A somewhat more sensible concern might be that the dollar’s reserve-currency status causes it to be “over-valued” with respect to every currency, not just the renminbi. That could create additional pressure on the tradable part of the US economy, and thus might help to explain why the US tradable sector has not generated net employment for two decades. But, in order to explain performance relative to Japan and Germany, one would have to argue that the euro and the yen have been undervalued, which makes no sense. 

In fact, the employment generated by the tradable sector has been in services at the upper end of the distributions of value-added per person, education, and income. As a result, growth and employment in the tradable sector have gone separate ways, with healthy growth and stagnant employment. In Germany, by contrast, the tradable sector is an employment engine. The same is true of Japan. 

The US economy’s distinctive features for at least a decade prior to the crisis that began in 2008 were an unsustainably high level of consumption, owing to an illusory wealth effect, under-investment (including in the public sector), and savings that fell short of the investment deficiency. That excess household and government consumption fueled the domestic economy – and much of the global economy as well. 

In several European countries that now confront fiscal and growth challenges, the pattern was somewhat different: most of the excess consumption and employment was on the government side. But the effect was similar: an unsustainable pattern of income and employment generation, and lower productivity and competitiveness in these economies’ tradable sectors, leading to trade deficits, stunted GDP, and weak job creation. 

One could argue that the euro has been and still is overvalued, and that this has hindered many eurozone economies’ productivity relative to non-eurozone countries. But the relative productivity deficiencies within the eurozone are more important for growth, and have nothing to do with the exchange rate. 

The focus on currencies as a cause of the West’s economic woes, while not entirely misplaced, has been excessive. Developing countries have learned over time that real income growth and employment expansion are driven by productivity gains, not exchange-rate movements. This, in turn, requires public and private investment in tangible assets, physical and telecommunications infrastructure, human capital and skills, and the knowledge and technology base of the economy. 

Of course, it is possible for a country’s terms of trade to get out of line with income and productivity levels, requiring a rebalancing. But resetting the terms of trade is no substitute for tackling the structural underpinnings of productivity. 

None of this is peculiar to developing countries. Underinvestment has long-term costs and consequences everywhere. Excess consumption merely hides these costs temporarily.
In the US, productivity deficiencies have led to a pattern of disconnection from global supply chains. So the challenge for America is not only to restore productivity, but also to restore its links to the main currents of world trade. 

China’s growth – and, more generally, that of the major emerging economies – provides a substantial potential tailwind. That is certainly true nowadays for Germany, Japan, and South Korea. The US and others can take advantage of it as well, but only if productivity relative to income levels in specific areas of potential competitiveness begin to rise.  

As long as America economic policy remains focused primarily on deficits, domestic demand, exchange rates, and backsliding on trade openness, its investment deficiencies will remain unaddressed. That means that its employment and income-distribution problems will remain unaddressed as well. 

The good news is that, at a deep level, incentives across advanced and developing countries are aligned. The emerging economies would like nothing more than the restoration of sustainable patterns of growth in the advanced economies, and are prepared to be cooperative players in that process. But focusing on these countries’ exchange rates is not the right way to go about it.

On the surface, this may appear like an economic problem. But I think it goes much deeper than that. The so called economic dominance of the US over the last century has essentially lulled it into a state of complacency. The complacency manifests itself in the form of blaming others for one's own shortcomings. This is not only prominent in the US, but in the Eurozone as well. The problems are amplified by the fact that they are democracies. Don't get me wrong, democracy on its own is not a bad thing. But democracy coupled with self-serving interest groups will naturally lead to a political deadlock much like the current Democrat-Republican impasse and the Eurozone "kick-the-can" debacle.

The finger-pointing scenario is not unlike Mark Zuckerberg vs the Winklevii (Winklevosses). In the movie, the Social Network, Mark Zuckerberg (Jesse Eisenberg) quipped that the Winklevii are not suing him because he "stole their idea", but because for the first time in their lives, something did not go their way. Granted that this is not the first time things did not go as planned for the US, but the so called economic dominance of the US over the last century has created an illusion of strength that leads to this finger-pointing attitude.

As my boss would practice:

Do not blame others for being smart, but blame yourself for being stupid

The quote is not intended to be derogatory in any way, but is a reflection of a self-reflective Asian culture. The Japanese, in particular, practiced this to the extreme in the form of harakiri.  And as Confucius says:

Do not blame everyone and everything, but yourself. Do not blame everyone but yourself for what has happened.

Source: Project Syndicate

Calvin and Hobbes vs Newton

And here is more Calvin, although I can't find the strip for it:

Calvin:

Since September it’s just gotten colder and colder. There’s less daylight now, I’ve noticed too. This can only mean one thing - the sun is going out. In a few more months the Earth will be a dark and lifeless ball of ice. 

Dad says the sun isn’t going out. He says its colder because the earth’s orbit is taking us farther from the sun. He says winter will be here soon. 

Isn’t it sad how some people’s grip on their lives is so precarious that they’ll embrace any preposterous delusion rather than face an occasional bleak truth.

How American Food Got So Bad? (explained through Economics)

If you are also a food fiend, we recommend you visit our sister site: The Food Ninja

I think many of us would struggle when we are asked "What is your favorite American food?". It would probably be easy to name a bunch of restaurants and "Western" food found in America, but not so easy when you want to think of food that originated from the US. I have always wondered why. I guess now, I have some form of explanation:

Tyler Cowen: A lot of good restaurants, they make a lot of the profits on the drinks. When you shut down their ability to sell wine, beer, other drinks, basically it put them all out of business. Those quality restaurants, within a period of year or two, they vanished.

...

Cowen: Compared to a lot of Asian cultures, or European cultures, when it comes to the food scene, very often in America the child is in charge, and that again means soft, and sweet, and gooey.

...

Dubner: Immigration. Or, really, the lack immigration. The Immigration Act of 1924 set quotas that weren’t lifted until the 1960s. More immigration generally means more food innovation. New — you know, everything — spices, ingredients, know-how strategies — and we weren’t getting a lot of either of those. 

Source: Freakonomics

How Generous Are You During Christmas?

Here is a chart from the Economist which compares the income per capita adjusted for purchasing power of a selected group of countries against the amount that they spend on Christmas gifts.

The positive correlation is clear. The countries to note would be the outliers. The Netherlands appear to be the scrooge among the lot. With an income per capita that is almost at the same level as that in Switzerland and the US, the people in the Netherlands are anticipated to spend about only a seventh of those two countries.

Meanwhile, Luxembourg also appears to be spending below the trend given its income level. But it should be noted that the people of Luxembourg still spend the most among the countries shown.

Souce: The Economist

Volume 3 Issue 51: Intelligent Investing

The Making Of A Rogue Trader

Who would have thought that doubling down and going for broke in times of desperation is an instinctive response that are found in the yellow-eyed junco (a type of bird)?:

"To know what goes on in the mind of a rogue trader – and that of every reckless gambler – it helps to be a bird-watcher. The yellow-eyed junco is a type of sparrow found in Mexico and the southern USA. Thirty years ago, three evolutionary biologists at the University of Arizona carried out a series of experiments with seven yellow-eyed juncos that had been caught in the south-east of the state. 

"The experiments were designed to test the birds’ gambling instincts, and the results were intriguing. One bird at a time was placed on a perch in an aviary 3.5 metres from two dishes covered with paper so that it could not spy the contents. The bird was trained to realize that if it flew to the first dish, it would always find two millet seeds to eat; if it flew to the second, it couldn’t be sure of what it would contain. Half the time, there would be four seeds, and half the time there would be none. The biologists were trying to discover how much risk the juncos would take in foraging for food – their main activity in the wild. Mathematically, the two choices were identical since a 100 per cent chance of two seeds was the same as a 50 per cent chance of four…. 

"In the first experiment, the birds were kept hungry for an hour and then allowed to start choosing dishes, with the seeds being replenished every thirty seconds. This meant that, whichever one they chose, they would get plenty to eat unless they were very unlucky. The juncos responded by being risk averse: in nineteen out of twenty-five cases, they chose the sure thing – the dish with two seeds – rather than risk finding nothing. 

"Next, the birds were starved for four hours, and the seeds were replenished only every minute. That tipped the birds into what the scientists called ‘a negative net energy budget’ – gaining two seeds each time they made a choice would not provide enough food to satisfy their hunger, and ultimately to keep them alive and enable them to reproduce. The birds responded by flying to the other dish instead. Facing loss, they started to gamble. 

"The scientists, led by Thomas Caraco, now a biology professor at the State University of New York, concluded that ‘juncos in nature will generally avoid risk unless they face difficult energetic stress’. In other words, they will choose the safe option for feeding – the closest natural equivalent to financial traders making money – unless they find themselves in danger, either through hunger or because it is chilly and they face a cold night requiring reserves of energy. 

"The choices are instinctive rather than intellectual, and they make evolutionary sense for the species. ‘Facing the possibility of starvation, animals are willing to gamble on the “strike-it-rich” policy of risk-prone foraging,’ writes Barry Sinervo, a professor of ecology at the University of California. ‘Some foragers will have a string of bad luck and starve. Some will have a string of average luck and still starve. However, there will always be those lucky few that experience a string of good luck. It is those lucky few that survive and pass on genes to the next generation’…" 

--John Gapper, How to Be a Rogue Trader

Maybe that is why some people say that traders have to have good instincts. As for me, I think that is why trading is most definitely not for everyone and is highly risky for the uninitiated. It relies heavily on instincts and emotions. Of course, you can throw in charting and technical analysis to help "remove" the emotional element, but very often, we see what we want to see.

HT: Brad DeLong

Volume 3 Issue 51: Two-Cent Economics

The Kettle Retaliating Against The Pot?

Who would have thought that the US, the country shouting about China's supposedly dumping practices, is practicing dumping itself?:

China will levy anti-dumping and anti-subsidy duties on certain US vehicle imports, the commerce ministry said Wednesday, a move likely to fuel tensions between the world's two biggest economies. 

The tariffs will be applied for two years to passenger cars and sports utility vehicles with engine capacities of 2.5 litres or more and will take effect Thursday, the ministry said in a statement. 

The decision will affect vehicles produced by General Motors, Chrysler Group, BMW Manufacturing, Mercedes-Benz US International, American Honda Motor and Ford Motor.

But then again, I can't say I am surprised. The US has typically treated every problem they have faced by blaming it on others, and never on themselves. America's trade deficit with China is only one of 88 countries which the US has deficits with. Why single out China?

The US trade deficit is merely a symptom of a much bigger disease. It has been around for the last 30+ years and only in the last decade or so has the US been making noise about it (see Chart 1)

Chart 1

This is because it has started to feel the crippling problems that come with the trade deficit:

THE answer to the basic question is "it depends" and I will let the others describe what the issues are. But I would like to use this opportunity to discuss the fallacy of measuring bilateral trade deficits. 

Consider the iPad. 

According to research by Ken Kraemer at UC Irvine, the component parts of the iPad are imported to China from South Korea, Japan, Taiwan, the European Union, the US and other places for final assembly. None of the component parts are made in China: it's only role is assembly.  

- Hal Varian, Chief Economist at Google

When are trade deficits not a problem?

TRADE deficits, or more concretely current account deficits, have to be financed by net capital inflows, and it is really the cause of the deficit and the nature of the financing that determines whether or not persistent trade deficits are harmful. If a country is running a trade deficit mainly because domestic investment levels are very high, the high investment levels should generate enough growth in the economy that the costs of servicing the foreign capital inflow can easily be covered. In that case many years of trade deficits are unlikely to be a problem. 

- Michael Pettis

A COUNTRY'S trade deficit and, for that matter, its current account deficit (the trade deficit plus the income earned by foreigners on their asset holdings in the country net of what the country's citizens earn on the assets they have invested abroad) are never a problem. But they may reflect a problem. To see this, suppose Raul Castro and his brother were finally to die and the country were to normalise relations with the U.S. and move to a market economy. A vast amount of capital would then flow into Cuba, where labour is cheap and vacation beaches are splendid. The equipment, building materials, vehicles, furniture—you name it—flowing into Cuba would all be counted as imports and show up as a huge trade deficit for Cuba. That wouldn't reflect Cubans spending beyond their means. It would reflect something terrific for Cuba—investment that will lead to jobs, higher wages, and higher living standards. The Cubans might have the highest saving rate of any people in the world and they would still run a massive trade and current account "deficit". But the term deficit is loaded because there is no sense in this illustration in which Cubans are going into debt by spending more than they earn.

- Laurence Kotlikoff, William Fairfield Warren Professor at Boston University

In essence, it all boils down to what the US has been importing. It doesn't take a genius to guess what is the reason that a country that has the highest obesity rate in the world spends its money on. No, not just food, but typically, consumption. Over-consumption and over-borrowing is the real problem behind the trade deficit symptom.

It's about time to start pointing fingers at oneself instead of blaming others.

Volume 3 Issue 50: Two-Cent Economics

The Next Generation Apple TV

The Old Generation Apple TV

As a disclaimer, I am no Apple geek and am no tech writer. I occassionally delve into techy stuff and indulge myself in Apple products once in a while. That is the extent of my Apple experience.

But recently, after some light-hearted discussion with more intelligent people, I came up with a possible idea for the possible Apple TV that Steve Jobs apparently cracked.

Nonetheless, let me first put down a few thoughts. Apple has never really been an inventor. They were not the first to invent a portable mp3 player (iPod). They were not the first to invent a touchscreen phone (iPhone). They were not the first to invent a music player (iTunes). They were not the first to allow music downloads (iTunes Store). What they did was put a bunch of really cool stuff together. So, what I came up with is not very different. I am combining a bunch of really cool existing technology and ideas together to form what could possibly change the whole TV-viewing experience.

1. Youtube, Netflix, iTunes

Video-streaming is the in-thing these days. It is fun and convenient because it can be like a box of chocolates. You never know what you're gonna get. More and more people are sharing videos of stuff they think are interesting or cool or worth watching. The Apple TV will contain video streaming, no doubt. Of course, by extending the idea of iTunes and Netflix, you can basically get a movie store that allows you to download/stream movies by paying a small fee. With increasingly fast internet speeds, this is becoming more and more possible.

2. Pandora, Amazon etc.

Now, combine the streaming experience, with a software that recognizes tastes and preferences. Of course, currently Youtube has some element of that, but very often, there are just songs and movies out there that we may like but we do not know that they exist. Using the Amazon-based idea of "Users who have bought Book A, also purchased Book B", we could create a whole new experience for the user. Now, users can find out movies that they like without having to look it up. Typically, the movies would probably be categorized by genre's actors/actresses, movies with twists, length of movie/video. And we can look them up based on these categories.

With the above two features, it is probably not a game-changer yet. You could probably do that with Netflix already. But very often, we forget that there are two components to the TV. Well, it is a recent phenomenon. There is the TV unit, and the very often forgotten unit, the remote. Essentially, the remote is the key determinant of the user's experience with the TV.

3. The "iRemote"

Now, imagine a new remote app called the "iRemote". Presently, most remote controls only allow you to navigate the TV screen using irritating arrow buttons that allow you to move up, down, left and right. But now you're going to have a touchscreen to navigate the TV. You don't even need an additional device. You just need your current iDevice, be it the iPod, iPhone or iPad. They can probably be connected through wifi or bluetooth, so you don't have to irritatingly point your remote at the TV to ask it to do stuff. Now, imagine coming home from a tired day and plopping yourself down on the sofa, busting out your iPhone or iPod, and voila, you can control your TV from there. No need to look for the remote in between the sofa seats and what not.

4. Siri

This is the clincher. If you thought the "iRemote" was cool, imagine controlling your TV with voice command. The possibilities are limitless. There are just days that I come back home and just feel like I want to watch a movie but I don't know what movie to watch. I just know I need something relaxing and funny to take my mind of things. So what do I do? I just tell Siri to connect to the Apple TV and find me a movie that is funny and relaxing. As the Apple TV recognizes genres and my preferences, it will bring up a list of movies that I may like. I can even filter it by asking Siri to remove movies that have Jim Carrey in it because I find him irritating. Maybe narrow down the list to those that only feature Adam Sandler or Seth Rogen. All this from voice command, without so much as touching the remote or scrolling through an irrelevant list. I don't even have to care if I already have the movie or not because of the streaming capabilities. I can tell Siri to turn on the subtitles, or turn down the volume or change the brightness without having to even touch any button on the remote. OK, maybe I have to call up Siri.

Another way to use this is, very often, let's say we are just sitting around waiting for our friend or wife/husband or somebody to get ready and we have about 2-3 minutes to spare, we don't know what to do with it. Instead of just whining about it, call up Siri and ask it to find you a 2-3 minute video clip that has cute kittens or what not in it. Or show you your favorite band's latest music video. Or if you have 25 minutes to kill, you may even call up your favorite episode of How I Met Your Mother. You do not have to dig out a DVD, or scan through your hard drive for it. Siri and your Apple TV does it for you.

And all I did was to combine four very simple ideas and technology together and you already have an amazing device. I am certain that the brilliant engineers at Apple can come up with something a little bit better than this but I'd like some credit for my very own version of Apple TV.

The No Jerk Rule for Bankers

How about that?:

The Barclays chief executive has imposed a "no jerks" rule at the bank. 

Bob Diamond said "jerk" bankers were epitomised by an infamous 2002 episode in which six Barclays staff ran up a £44,000 alcohol tab over lunch at a London restaurant. 

"Everyone gets stressed from time to time but no one should ever not be nice. You know what a jerk is when you see it," he said. 

In an interview with the Times, Diamond said the rule applied to bankers considered to be prima donnas, too greedy, too ostentatious or poor team players. He said he had already kicked out 30 staff for breaking his new ethics rule.

Volume 3 Issue 49: Two-Cent Economics

The China Bears’ Feeble Growl

Taking a break from Eurozone posts. Although all eyes are probably more on Eurozone right now, I think there are still those who are keeping half an eye on China right now. China just cut its required reserve ratio last week, indicating a slightly less bullish scenario on the horizon. But is this the beginning of what is so widely touted as a asset bubble burst? Here is Yu Yongding, the current President of the China Society of World Economics:

"In recent months, bearish sentiment about the Chinese economy has surged, owing largely to three conjectures. First, China’s housing market is on the brink of collapse. Second, China’s fiscal position will worsen rapidly because of massive local government debt. And, third, the collapse of underground credit networks in bustling cities such as Wenzhou will lead to a broad financial crisis across the country. 

In fact, despite its problems, China’s economy remains in good condition – at least so far. Indeed, it is not yet near to hitting the rocks."

Why? The surge in house prices in China is not a full-fledged asset bubble. I say this because it is fueled by real demand, which is opposed to speculative demand. At the core, it is a reflection of the increase in the wealth of the Chinese peopled. Here is what Yu has to add:

But the fall in housing prices is unlikely to turn into a rout, because real demand for houses will remain strong after speculative demand is driven from the market. As soon as housing prices fall to an affordable level, buyers will enter the market and set a floor under the decline.

What about the problem with local debt?

A significant proportion of total local-government debt either has no direct relation to local governments, or cannot be guaranteed by them. Therefore, in legal terms, it is not government debt at all. In addition, given that local-government debt comprises 27% of China’s 2010 GDP, while central government debt and policy loans stand at 20% and 6% of GDP, respectively, the total public debt-to-GDP ratio is approximately 53% – lower than Germany’s. So, while China should not be complacent about local-government debt, panic is unwarranted.

...and shadow banking?

But the severity of Wenzhou’s underground credit crisis has been exaggerated. In fact, Wenzhou’s underground credit accounts for less than 20% of total credit in the region, while the region accounts for less than 1% of China’s GDP. The total volume of affected bank credit in the crisis was just above RMB3 billion – roughly 0.5% of bank loans in the Wenzhou region. So, the damage that the breakdown of Wenzhou’s underground credit networks has inflicted on the regional banking system is limited, with scant national impact.

Source: Project Syndicate

Volume 3 Issue 50: Intelligent Investing

Motivation From Shit - Part 2

In the previous issue, I talked about how demoralizing things can be when our hard work is dismissed as shit and how we can deal with it. In this issue, we will look at the other extreme. Instead of telling you that your work is shit, how would you like it if someone grin-fucks you?

What is grin-fuck? Here:

In business when someone smiles and shakes your hand assuring you that they have heard and will act upon your recommendation or concerns when in truth you have already been ignored and dismissed. 

Manager Bob: "Our associates will not repond positively to further cuts in their benefits. I strongly recommend against it."

Executive Dick: (Smiling, shaking Bob's hand and massaging his shoulder)"Thanks Bob, we'll take that under advisement. You know our employees are our most important asset."

Dick then processes Bob's pink slip and cuts non-management benefits by 30%.

Would you prefer it if someone were to tell you that you did a great job even though there was still a lot of room for improvement? To get an idea of how destructive grin-fucking is, here is what Mark Suster has to say:

But we couldn’t leave it as just a market positioning experience. People started to believe that there was real intellectual insight into the bullshit PowerPoint slides and customer surveys they were spitting out. By “people” I mean the people who were on the project. By “people” I do not mean the rest of us. Most people I knew were walking the halls talking cynically (it was London, after all!) about “integrated strategy” but then we’d go to company meetings and noone would say what they really thought it public. In small meetings they’d tell the senior management that they were happy Accenture was finally creating some original thought and that they supported it. Then those same people would come out for beers that night and declare that the people creating integrated strategy were “wankers.” 

I was nearing the end of my tenure at Accenture so my cheekiness and irreverence were on the rise. At a strategy offsite with several hundred strategy employees I was giving a presentation on stage and I asked, out loud, “why do we keep grin fucking each other (you could actually say that out loud in England) on the topic of Integrated Strategy? Privately you all acknowledge that nobody believes in it yet we’re letting our leadership continue to invest our money and reputation on something we know is going to fail because it has no real basis. I sure wish more people would speak up.” Obviously I got many laughs and applause. I guess not the most politic thing I’ve ever done, but you can ask anybody who was in the strategy practice of Accenture in London in 1999 and they’ll confirm I really did this. 

Don’t be a grin fucker. Stop the corporate bullshit when it hits your desk. You don’t have to do it as publicly and vocally as I did – in fact I don’t recommend it. But please be willing to politely and respectfully stand your ground when an internal initiative is off base or you don’t agree with it. I’ve stated previously that I believe that respectful open debate is the highest form of democracy. It also makes good business sense. Stand for high quality. Stand for holding people accountable when they’re proposing something you believe could damage the company’s reputation or waste time and resources. Make your arguments fact based. 

This is a very common problem. We get people who tell us that our ideas are great in front of us (grin-fuck), and then when they go for their coffee breaks or lunch breaks, they criticize the hell out of it. How is that helpful to us in any way? Mark continues with a personal story on how sometimes, bitter medicine can be useful:

When people come to present their businesses to me I try my best not to grin fuck them. I give direct, honest, blunt, polite and (I hope) useful feedback. It isn’t always “rah rah.” Last week I met with a founder who had sunk his personal money into buying a technology asset and hadn’t yet raised money – he was struggling a bit. He told me that he had offers to sell the assets to somebody else. I told him I thought he should sell the company rather than sink more money into his venture. I told him to sell now even it it was at a loss. 

I told him I thought it was too complicated of a business, he lacked the skills on his team to pull it off, it would take too much money and in the end I wasn’t sure it would be a valuable product. I said as I always do, “my view point is ONE data point. I might be wrong. Get lots of data points. Mix mine into your pot and see how it settles. I’m not always right but I’d rather tell you what concerns me than to sweep it under the rug.” In this gentleman’s case I was worried about his personal money because he wasn’t a 20 something. He had a family. And he was one of those guys that you meet and you just want to help because he’s so earnest and nice.

He wrote me afterward and here is our exchange: 

Him: ”Mark,Cold shower and all, how did I take the heat? Did I take the tough message at least reasonably well? Always looking how I can get better. 

Also – new terminology for delivering that type of news: “You Simonized me (as in Simon Cowell from American Idol)!! I grew up and played sports all my life. I come from a world that if the coach wasn’t yelling at you, it meant he didn’t care. I appreciate you giving it to me straight.” 

Me:“LOL. I didn’t mean to Simonize you. I care about you and just wanted to be sure that you didn’t waste any personal money. All startups are hard. Most lose money. Yours had more complexity and less engineering talent secured on the team than most. That’s all.” 

Him:“I understand and that is the way I took the feedback. Like I said, pleasantries do not help people learn. You helped me and I am grateful. I thank you for that”

To this gentleman I’m grateful for the feedback and I’m here to help if I can. Maybe people humor me, I don’t know? But I find that 70% of the time people prefer honesty as long as it’s delivered with care, with detail and with humility. I get emails like the one above all the time. People often tell me that I helped change their business by challenging some of their early thoughts. It’s one of the most rewarding parts of my job.  

I’m sure that 30% of the people thinking I’m a wanker for not saying I love what they’re doing. I’m OK with that. As long as I help other people by not grin fucking everybody. 

I found that most VC’s never gave me any feedback when I was pitching. The “loved what I was doing but were working on other things and would love to stay apprised of my progress.” Either that or they would “noodle on it and get back to me.” Yeah, right! 

Take the harder path. Politely speak your mind. Take a stand. Join the debate. Don’t be a grin fucker. It makes life too boring.

I don't want to be cliched and say that constructive criticism is useful. Everyone knows that. But the problem is, it is difficult to give constructive criticism. Usually, when we find a loophole, it is through our intuition and first impression. In an attempt to "protect" another person's feelings, we polish our criticism and very often, the meaning gets lost in translation. It could even misdirect the person to make the wrong kind of correction.

Quite frankly, I prefer the brutally honest, no-holds barred criticism. Whatever doesn't kill me, can only make me stronger. I hope...

Source: Both Sides Of The Table

Volume 3 Issue 49: Intelligent Investing

Motivation From Shit - Part 1

From TechCrunch:

By saying something is “shit”, no matter how good it actually is, you force people to reexamine their work. The end result is usually better. 

There are also stories of (Steve) Jobs telling people that an idea is “shit” — and then coming back a few days later with the same idea. It seems that his default was to call something “shit”, maybe without even really thinking about it. 

Is that helpful? Not on the surface, but the truth is that nothing is perfect. Something can always be made better. And people wrapped up in their own idea or product often lose perspective. They may believe what they’ve done is perfect — or at the very least, the best they can do. But it’s often not. They can do better. It’s all about motivation.

Creativity is a challenging business. Not only do we have to struggle through the mud to come up with the best possible output all the time, we have to take this shit from our peers and bosses. Before you jump to the conclusion that this is a post about bitching about my job, I assure you that it is not. 

Swallowing our pride is bitter medicine. Our initial reaction would very often be "Who the hell is that guy to tell me that my work is shit?". And I don't think that we would be entirely by thinking that as well. Seriously, how can anyone else sitting across from us (or whatever) tell us with just a couple of minutes of looking over, that our work is shit when we spent many sleepless nights "perfecting it". 

For many of us, this can be very demoralizing. It would appear that our efforts have gone unappreciated. For some of us, this could even turn into a personal issue. In my experience, such problems is not so different from the one I described in my post on "dwelling":

I'd like to share a fictional story about Adam and Eve (forgive the biblical reference)

Eve texts Adam at 11.03 am one Saturday morning,

"Hey Adam, how are you doing? Just wanted to wish you good morning! I love you!" 

2 hours and a few minutes later, at 1.08 pm, Adam finally struggles to get out of bed, no thanks to his Dota buddies who insisted on "One more last game" for the 6th time at 4 am. Adam drags himself to the bathroom, brushes his teeth, shaves (and do all the hygienic things that most men do :P) and then jacks off while he takes a shower, steps out, puts on a pair of shorts and a t-shirt, grabs his cell phone, parks his butt on that magical sofa, flips the TV on with his well-trained clicking finger or thumb, looks down on his phone and then finally sees the message that Eve sent him about 3 hours ago (It's 1.59 pm now). So Adam opens the message and thinks to himself, "Aww, that's sweet..." (Adam is a nice guy by the way, he is just nocturnal).

"Hey baby, I just woke up not long ago. I'm starving. You've had your lunch, right? I think I'll just stop by the cafe outside to pick up some food", Adam unsuspectingly replies.

Adam heads out the door, gets a call from his good friend, Chuck, who invites him to go for a movie. Having no prior plans, Adam accepts, grabs a quick lunch, heads out with Chuck and the guys to catch Saw V. Little did Adam know that 30 seconds after he replied and slid his cell into his pocket, Eve had replied:
"Hey you! I was thinking maybe we could catch a movie later. Maybe some dinner afterwards. What do you think?"

If only Adam's cell was not in "Silent" mode. He had classes on Friday and forgot to switch the modes. One knows too well how the vibration doesn't really feel like anything when you are walking with the cell in your pocket. Girls, if the cell is in your handbag, you wouldn't notice a vibrate right? Especially with that arsenal of "goodies" in your bag.

Unknowingly, Adam sits through the 2 hour movie that started at 3 pm, and ended at 5,36 pm because of advertising. Guys being guys, went on to get a few good rounds of Dota going at the nearest LAN shop and before they know it, it's 7 pm, and time for dinner. Now, hold your horses, you bet that Adam didn't check his cell and went to dinner with his buddies, right? Wrong! Every guy checks his cell phone after walking out of a LAN shop. After all, they have to check if their girlfriend texted them. To his surprise and panic, Adam sees 2 unreplied messages and 1 miss call and replies immediately:

"Hey, I am so sorry. I didn't see your message earlier. I was out with my friends. We went to watch Saw V. I know you're not really a big fan of horror movies. It's kinda late to pick you up for dinner now, but I will make it up to you another time. I'm really sorry".

Perfectly honest mistake by a perfectly honest guy who really cares about his girlfriend. While some girls may understand that and accept his apology, but it is all too common that some girls may start giving a guy like Adam a cold shoulder. Reason?

Well, at 11.03 am after Eve texted Adam, Eve goes to freshen up, gets all dressed up (which by then is already 12.30 pm), hoping that Adam would have replied by then and he could swing by, pick her up for lunch and catch a movie (She was planning to watch Saw V with him because she knew how he loves horror). Thinking that she might appear too desperate or being too clingy towards Adam, Eve decides not to call Adam and bug him. "He's probably taking a shower". At 1.30 pm, Eve begins to think, "He's taking an awfully long time to reply. I wonder what he is up to." Another 29 minutes of see-sawing goes by, not knowing if she should or should not call Adam, thankfully Adam replies. "Phew". Eve jumps in shock of her ringtone, opens the message immediately and smiles. "Finally, he replied". She quickly replies his message, hoping to at least catch a movie with him later.

The rest as we deem to be history happened. Now, in between the hours of 2.00 pm to 5.30 pm, she texted Adam:

"Hey, are you back from lunch yet? I haven't heard from you. What are you doing? Did you get my message?"

Another 40 minutes goes by. Eve calls Adam. But his cell was on silent mode. Apparently the vibration wasn't that great either. Perhaps it was off because he was in the cinema. Who knows...

Now Eve is beginning to get really frustrated. "What is Adam really doing? Why hasn't he replied my message? Why didn't he pick up my call? He must be playing computer games with his friends again. Is he out with another girl? I guess that's quite unlikely. He's not the cheating type. If only I could see him. I made sure I left my schedule open this weekend just to see him. I even decided not to go to Jenny's birthday party because it was the premier weekend for Saw V. What is he doing? Where could he be? Maybe he is watching the movie with his friends. Why didn't he invite me along? Is he embarassed about me? Does he think I am too clingy? Am I too clingy? Should I give him more space? Why am I so frustrated? He probably just didn't see my message. But why would someone own a cellphone and not be reachable? Might as well not own a cellphone".

As you can see, this thought process can go on and on and on. This is called "dwelling". To the unsuspecting guy (I guess he may or may not be innocent, but he would in no way suspect he was doing something very wrong), he will wonder what he really did wrong. All he did was just being late in replying an sms. Besides, his girlfriend has been late in replying his messages before too.

On the other end of things, Eve is all worked up, decides to give Adam a cold shoulder and demands to herself that she deserves to be treated better. So now, what is seemingly a small situation had been blown out of proportions because of an innocent mistake. Eve continues to give Adam the cold shoulder for a few days. Adam still wonders why can't Eve forgive him for replying an sms late. Eve has replied more texts late than he has, as far as he remembers. But of course Eve's reasons were "completely valid".

Now, boys and girls, at some point in our relationships with our significant other, we would have encountered a situation similar to this. So it is my hope that we ponder about this story with an open mind and stay aware that some mistakes can be innocent. The best way to avoid a cold war like this one would be to communicate. Talk to your partners. Be clear and honest.

All this could have been avoided if Eve had said in the first message that she wanted to watch Saw V with Adam. She wanted to "act cool" by not being the clingy girlfriend, or so she thinks and thus played a small role in building this mountain out of a molehill. Adam on the other hand, piled on the dirt by not checking his cellphone every 15 minutes, but can he really be blamed? Maybe... If he was the kind of guy who puts his girlfriend ahead of everything he does, he might have checked his phone sooner.

So, once again, communication is key. I guess I take back my point about women being evil. Nonetheless, the mathematical proof is concrete. Hope you liked the story.

I had entitled that post, "Of Mountains and Molehills". I think that's pretty much how we should take the comment that our work is "Shit". Don't dwell on it, and move on. Give it a day or two, and go back to figuring out why did that person say such a thing? Personally, I think this is the only way to improve.

We will continue with Part 2 of this ultra-long post on Motivation From Shit in the next issue.

Another Eurozone Post??!

I just posted this morning about how the former ECB President was dreaming if he expected austerity to be expansionary:

I guess he (Michael Boskin) can't be too blunt about the former ECB President. How can fiscal consolidation be expansionary? The private sector is not spending, the government is not spending, the consumers have no jobs, so they have no money to spend. So who is spending? If no one is spending, how can the economy expand? What is this confidence fairy thing?

Now, if you think I am talking junk, here is Joseph Stiglitz on the issue:

Public-sector cutbacks today do not solve the problem of yesterday’s profligacy; they simply push economies into deeper recessions. Europe’s leaders know this. They know that growth is needed. But, rather than deal with today’s problems and find a formula for growth, they prefer to deliver homilies about what some previous government should have done. This may be satisfying for the sermonizer, but it won’t solve Europe’s problems – and it won’t save the euro.

I am not in the habit of name-dropping but it would be foolish not to leverage on the comments of a Nobel Laureate.

 Source: Project Syndicate

Quote Of The Day

"Sacrifice needs to be observed to be sustained"

Source: Scott Adams (of Dilbert fame)

More Eurozone Stoof - Part 3.14159

I really lost count how many Eurozone posts I have made in the past few weeks or months. It is not a lot, but the frequency is increasing simply because I think the Eurozone is about to blow us all to kingdom come. Here is another Project Syndicate post which puts the problem (and solution) in a very nice way:

Reforming social-welfare benefits is the only permanent solution to Europe’s crisis. One hopes that, with the help of national governments, the European Central Bank, the International Monetary Fund, and the European Financial Stability Facility, the holes in the sovereign-debt-funding dike will be temporarily plugged, and that European banks will be recapitalized. But this will work only if structural reforms make these economies far more competitive. They must both lower the tax burden and reduce bloated transfer payments. Too many people are collecting benefits relative to those working and paying taxes.

This only stops short of saying that the lazy and corrupt are piggy-backing and free-loading off those who are working hard and paying taxes. Sounds like another country I know that begins with M. And I think that Michael Boskin is being too kind here:

Some experts, such as former ECB President Jean-Claude Trichet, argue that fiscal consolidation would be expansionary. Specifically, it would boost confidence, which would lower interest rates and offset any direct effect on demand, as occurred in Ireland and Denmark in the 1980’s. But that is less likely now, as many countries are undertaking fiscal consolidation simultaneously, non-sovereign interest rates are already low, and monetary union prevents the most troubled countries in the eurozone – Portugal, Italy, Ireland, Greece, and Spain – from devaluing their way to competitiveness.

I guess he can't be too blunt about the former ECB President. How can fiscal consolidation be expansionary? The private sector is not spending, the government is not spending, the consumers have no jobs, so they have no money to spend. So who is spending? If no one is spending, how can the economy expand? What is this confidence fairy thing?

If they keep believing in the confidence fairy that is going to make everything OK magically, then we are in for a tough 2012 ahead. 2012 is going to make 2011 look like a walk in the park, and 2011 is the year where three Middle Eastern/North African regimes fell, a tsunami/earthquake/nuclear disaster hit Japan, multiple other earthquakes all over the world, the US debt ceiling circus/comedy/tragedy, the floods in Thailand, and much, much more. Can 2012 be any worse than this? You bet, with the way the Eurozone jokers are acting.

Source: Project Syndicate

Breaching 10,000

Just a few hours ago, the number of page views of this newsletter had just breached 10,000. This is by no means a great achievement, but it is a milestone nonetheless. For over two and a half years of writing, on and off initially, 10,000 views seems like a really small number. The first post was published on 26 July 2009 and now, 863 days or 72 months later, the Main Streeter (the current name of this newsletter) has garnered slightly over 10,000 page views. This meant that on average, there were about 11.6 views per day or 139.0 views per month. On the surface, this kind of average seems appalling and would be in most circumstances a sure sign of telling me that this is the best time to quit. 

Being the optimist that I am, I try to look on the bright side. Here is a better picture of what the statistics look like:

I like to see that as an upward trend. The dip you see in December is only because it is only the 6th of the month, so the cumulative volume is still rather low for the month. What I am trying to take away from this is that the trend is an increasing one. It appears to have flattened out somewhat, but this means that I have to work harder to provide articles of better quality. I will make that my primary goal in 2012 as the Main Streeter looks set to make another major change.

While major changes can seem startling at times, but the Main Streeter is an ever-evolving entity. What this means is that it will never stop growing and changing. I recently changed the layout of the page and I am currently working on improving the quality of the content, among several other major projects, for the Main Streeter. Stay tuned for a great year ahead!

More Eurozone Stoof

To some, the problems are very obvious:

First, and most obviously, Europe already has its own in-house lender of last resort. The European Central Bank can make available all the euros needed to backstop Italy’s debt. And printing them would only offset, through mild inflation, the effects of the otherwise Draconian relative price adjustment that is taking place under the corset of the common currency. 

So it is puzzling that some observers have saluted the IMF’s involvement as a virtuous effort by the international community to bring the listing European ship to port. Why should the IMF (or, for that matter, the international community) do for Europe what Europe can but does not want to do for Italy? Why should international money be mobilized to pay for European governance failures? 

And if, as appears to be the case, Germany is playing a dangerous game of chicken with some of its eurozone partners, why should the cost be shifted to the IMF for the benefit of Europe’s largest and most successful economy? Letting the ECB off the hook in this manner would simply validate for Europe as a whole the same moral hazard feared by German and other leaders who oppose ECB intervention.

My sentiments exactly.

Source:  Project Syndicate

Quote Of The Day

On days like these, we need some of us need a little more push than others to keep moving forward. Keynes said:

“The theory of economics does not furnish a body of settled conclusions immediately applicable to policy. It is a method rather than a doctrine, an apparatus of the mind, a technique for thinking, which helps the possessor to draw correct conclusions.”

I feel more useful already.

Ikea: The Place To Pick-Up Women (or Men)?

If Ikea wasn't that crowded all the time, I bet it would be a really fun place to be. But then again, if it was that fun, it will be a crowded place. Here is a great story of what the elderly do in Ikea in China:

At 62, Tang Yingzhuo, a retired widow looking for love, doesn't think it is appropriate to scope out men at bars, clubs or Karaoke joints. That's why she goes to IKEA.

This says it all.

Volume 3 Issue 48: Two-Cent Economics

The Shit Which Is Eurozone

Time is not my friend today. But neither it is the Eurozone's. Here is a great summary of what's going on over there and why we are all going to die. No, not literally. But I think at this point, recession is just over the horizon.

Source: Ezra Klein