This site will no longer be updated.

This is my final post on 

I've decided to come out publicly as a transgender woman, and will be changing my name. I was born in New York City as William Charles Gormley Ortel II, and soon enough will have that formally changed to Sloane River Veda Ortel. 

Further thoughts and observations will be posted at I look forward to writing more frequently, and invite you to follow along there. 


Maximizing Your Philanthropic Impact

When you read up on philanthropy, you come across one word an awful lot: impact.

Obviously that makes sense. If you just want to make someone’s life better, buy me a Jet Ski. If you want to have as big a positive impact on the world as possible, you are starting down an interesting, under-traveled, and complicated road.

There is a spectrum of causes you can support, ranging from the sublime and spiritual to the frivolous. You can help a guy make potato salad, support a local museum, or save somebody’s life.

Clearly, one of these things is not like the other. And that should serve to clarify the stakes. But even charities with the same objectives can differ widely in terms of their effectiveness. Last month, Eric Friedman, CFA, made the point that some charities can make life-saving interventions for a fraction of the cost of other organizations.

So, by using the right approach, you can save more than 600 lives for the cost of one. Conservatively.

That sort of gap in performance denotes opportunity for investors, both in optimizing personal giving and in helping clients achieve the same efficiency. Friedman and I connected over email to take the discussion a bit further, but certainly the hope is that it does not end here. We would both appreciate it if you would share your own questions in the comments section below.

Will Ortel: One of the most influential concepts in investing is the idea of “efficient” markets, which basically states that it is difficult to beat the market because the best investment opportunities are spotted quickly and buyers bid up the price to fair value. Does this same principle apply in charitable giving?

Eric Friedman, CFA: Somewhat, but not as much as in investments. A lot of donor money goes to the nonprofits that are best at fundraising, not necessarily those with the best programs.

Fundraising success is more correlated with being able to tell compelling stories rather than being charities with evidence-based programs demonstrated to have a strong impact. Further, donors often constrain their giving to areas that they relate to, so causes that are not personally appealing to upper-middle-class and wealthy donors tend to be neglected.

As a result, there are broad swaths of extremely effective charities that have huge funding gaps.

There are some very savvy donors trying to close these gaps, but they are small relative to the total amounts donated. For example, grants from the Bill and Melinda Gates Foundation, which is one of the most sophisticated donors and the largest foundation by far, are only about 1% of the size of what Americans donate annually.

Investors frequently complain about not having access to enough information in making investment decisions. The same complaint is probably relevant for charities, but can you compare the information that decision makers use in both contexts?

A key difference between information available to investors and donors is that the regulatory environment for information-sharing is much stricter for investments. For example, mutual funds have to disclose many things about their strategies, and their marketing material is tightly controlled to minimize their ability to over-promise or mislead. Investment firms typically can’t highlight a single winning position without disclosing their whole portfolio performance.

The same cannot be said about charities. While that might make donors cautious, there are also reasons to be more optimistic about the quality of information available.

In the for-profit sector, participants protect their trade secrets and competitive advantages. In contrast, participants in the not-for-profit sector have aligned interests — making the world better — so there is greater potential for sharing information.

In both investing and donating, there are experts who are professionally skilled at identifying the best places to allocate capital. One of the biggest differences is that in the investment world, those experts often guard that information as trade secrets, while experts in the charitable sector more frequently share it publicly.

We are all familiar with portfolios where risk and return are balanced. Can the idea of optimizing risk and return be applied to charitable giving?

One of the most important questions when considering a giving opportunity is the level of evidence that it will be effective. This can be thought of as tied to the level of risk. Some interventions have a lot of evidence, sometimes even being tested with similar scientific practices to what pharmaceutical companies are required to use to get new medicines approved. Other giving opportunities are not conducive to such hard evidence, such as with policy advocacy or research.

As with investing, the lowest risk approach isn’t necessarily the best, but taking risk is only desirable if it has the possibility for an outsized return — or impact.

Charitable giving doesn’t have a quantitative “efficient frontier” in the same sense as exists in investing, but risk and return are still important ideas.

If I give without using this framework or a similar one, what are the risks?

In the investing world, an adviser who is unconcerned about risk and return would undoubtedly be breaching fiduciary duties. With charitable giving, if you’re not focused on the evidence behind your approach and the potential outcomes, then you’re flying blind with respect to impact.

The impact of a charity is fundamentally tricky to understand. Can you talk about that?

Sometimes donors only take a surface look at the evidence for impact, which can lead them in the wrong direction.

For example, many people who want to support education donate to college scholarships without thinking through how much the scholarships actually increase education versus facilitate people graduating with less debt.

Or worse, scholarships may enable universities to get away without controlling costs. It isn’t clear without a fairly deep understanding of the dynamics, but it is very possible that the impact of this type of donation is less than a donor might initially expect.

In contrast, giving to some causes might be greater than what one might assume on initial consideration. For example, research indicates that treating parasitic intestinal worms in developing world countries actually increases educational and economic outcomes in addition to health, possibly by the flow-through effects of improved nutrition.

This is an important reason why using intuition alone is often not a good strategy to maximize charitable impact.

How does this compare to some of the key ways donors have historically evaluated charities?

A lot of donors emphasize financial efficiency, such as evaluating charities based on the percentage they spend on overhead. The problem is that there can be very lean organizations that are not especially effective. In fact, “overhead” costs can often be critical for the success of a nonprofit, such as program evaluations and competitive salaries for quality staff.

To create an analogy to the investing world, don’t you want the companies you invest in to spend money on marketing, R&D, and technology? Similarly, a certain level of overhead is critical for charities.

Of course, donors can rest assured that a wasteful organization is unlikely to have a high impact by any legitimate measure. I think the nonprofit community as a whole now recognizes that it is better to evaluate the program impact of a charity. This is a more difficult task than computing a few ratios from a charity’s IRS filings, but well worth the added effort.

Many advisers shy away from talking about charitable giving with their clients because they view it as too complex or not their specialty. Is there something that simplifies the research process and gives donors access to a broadly diversified, rigorously constructed basket of charities?

Yes. There are several charity evaluators that do very robust research and share their results publicly. The really good ones only give their top ratings to a handful of the most deserving charities.

The group I work with, The Life You Can Save, aggregates research from several reliable sources to provide a broader list of recommendations than any one source individually. Importantly, we try hard to present the information in a way that is easy to digest for both financial advisers and donors.

This was conducted for the CFA Institute and originally posted on the Enterprising Investor


24 Charts: Chaotic China

I bet you’ve been thinking about China more often than usual over the past few months.


Why focus there? The Shanghai Composite sits right around 3,000 today, which is quite a long way down from the 5,000 it was at three quarters ago. There are big questions to ponder. Think like a Chinese policymaker. With a slowing domestic economy and significant evidence of capital flight, do you focus on a stable currency or a stable monetary policy?

That question has, to put it mildly, some implications for the investment community.

It’s also helpful to note that, on at least one quantitative basis, systemic risk in China is the highest of any country in the world. That’s not much of a surprise to those who are paying attention. More than half of the CFA Institute Financial NewsBrief readers who we polled think that the economy will turn in less than 6% growth this year.

Investors looking for additional context have been studying the most recent report to the National People’s Congress (NPC), but it is also helpful to examine the fundamental differences that China has in terms of market structure. Some things do not look at all like they do elsewhere. For instance, credit analysis requires an investor to be, to some degree, an analyst of state policy.

I was eager to get some perspective on what’s happening and what to expect, so I enlisted the help of Gordon Chang, a peripatetic and knowledgeable observer of the region and a return guest to the Enterprising Investor. Chang is the author of two books and also writes for Forbes and World Affairs.

The format of what follows is relatively simple: The charts and questions come from me, and the answers come from him. Let’s jump in.

Chinese Equity Markets Have Grown Meaningfully in Market Capitalization

Chinese Equity Markets have Grown Meaningfully

Enterprising Investor: Looking just at the growth of China’s market capitalization, it’s an impressive track record. How would the Communist Party of China like us to see this? 

Gordon Chang: They’d like you to look at the market as really being modern. Really as a rival to New York, and in some ways it is. For instance, before the collapse of the Chinese stock market last year, the Chinese stock index futures market was the largest in the world. The volume there is very, very big.

The problem is that although you have a lot of money sloshing around China, those markets are not modern. We saw that as the Communist Party tried to rescue stock prices beginning the first week of July. They directly intervened. They criminalized a lot of forms of trading. They prevented the institutions from selling. They directly bought up stock through the so-called “National Team.”

Despite the fact that these stock markets are now about 25 years old, they really haven’t reformed very much. There’s been relatively little progress because the government right now is just dominating the markets. China no longer has functioning equity markets.

As GDP Growth Slows
But GDP Growth is Slowing

We’ve all been told not to trust China’s GDP figures. Can you take us inside the statistics a little bit? 

The National Bureau of Statistics reported 6.9% growth for 2015, but very few people now actually believe that. There’s a consensus forming around 4.0%. For instance, you have the Conference Board reporting 3.7% growth for last year.

Capital Economics in London is saying 4.3%. Although, you can make a case for 1% or 2%, especially when you look at electricity consumption, which is still by far the most reliable indicator of Chinese economic activity, and when you look at price data. For instance, for last year, when they were reporting 6.9% real, they were also reporting 6.4% nominal.

China’s officially in deflationary territory. Q4 was really ugly, because Q4, nominal was 5.8% and real was 6.8%. This is a situation going downward. It doesn’t really matter what China’s growth rate is, whether it’s 6.9% or 1%. The point right now is that Chinese leaders cannot change the downward trajectory. China’s growth has been slowing fast. It’s going to continue to do that.

Eventually, it’s going to go into contraction, and that’s a problem because China has accumulated all this debt in order to create growth. In some way, it’s got to pay this debt back. In one way or another, it’s got to retire these obligations. This means that China’s headed towards a debt crisis.

While Debt Grows Meaningfully

While Debt Grows Meaningfully

It sounds great, 50% year-on-year growth, until you realize we’re measuring debt. And again, that’s just as reported by the government, which we’re taught to suspect fudges numbers from time to time. What could the true number be? 

Their debt, we don’t really know what it is. For instance, McKinsey Global Institute said, in the middle of 2014, that it was 282% debt to GDP. Soros, in Davos in January, said 350%. Some people are talking 400%, which I think is actually closer to the mark.

This is not a good story. There’s an enormous amount of debt out there. A lot has been stuffed away in corners. We don’t have a really good view of what it is. When you combine that with stalling growth, it means that there’s got to be an adjustment, and that adjustment’s probably going to look like 1929.

Are Domestic Borrowers Preparing for a Devaluation?
fx Are Borrowers Getting Ready For a Devaluation

It seems like Chinese borrowers are maybe anticipating a currency move. If they were caught offsides with renminbi revenues and dollar debts, that would be really bad. Is that what’s going on here?

Last year, there was $1 trillion of net capital outflow, according to Bloomberg. Other people say a little bit less. A large part of that net capital outflow were Chinese borrowers switching out of US dollar debt into renminbi debt, because they are concerned about the exposure. They don’t want to get caught on the wrong side of a declining renminbi, which is actually happening right now.

Of course, the central bank is trying to support it, but eventually they’re going to have to relent. They will have to capitulate. When they capitulate, it’s going to probably be at the last moment, because they’re going to hold on for as long as they can do so. When they can no longer do so, we’re going to see a run out of this currency.

Trading Volumes and Margin Balances Have Dropped Appreciably
Something Changed Recently

What’s going on with the plummeting volume and margin balances?

First of all, you’ve got to remember that one thing that’s happened since the first week of July, and that is the central government, through various state entities — the so‑called National Team — has been buying up stock. When the National Team buys out stock, it doesn’t trade them, so you’re going to have declining volume.

Also, this is a partial re-nationalization of state enterprises, so this is bad on two counts. That’s why you have volume declining. One thing that’s fascinating: Bloomberg reported that volume of the stock index futures market — which was the world’s largest prior to the mid‑June collapse — volume in the July-August-September time frame declined 99%.

This is an indication of how tough the central government has been, how determined it’s been to support stock prices. They’re going to do everything they possibly can to prevent the market values from tanking, but when they do that, they’re killing volume, and China no longer has a functioning stock market right now. It just doesn’t. It’s the government playing.

What we see in terms of changes in the Shanghai Composite, when they go up, it’s mostly the government. When they go down, it’s when the government isn’t looking.

Zooming Out, You Wonder: What Currency Volatility?

It Cant Just Be the Currency

The renminbi is this big specter that looms over any thought an investor might have regarding China. Recent currency moves have not been that big, if you look at them on a long time horizon. 

There has been talk about further devaluation, but what range of values are we really talking about here?

The central bank has said that they’re not going to have a big one-time devaluation, which might make sense. They will continue to support it until they no longer have dollars and foreign currency to do so, which means that when it adjusts, it’s going to adjust sharp. It’s going to be sudden, and there’s no bottom to this market.

They will hold on until the very last moment. They can prevent large downward movements to the renminbi, but they really cannot, I think, do this for that much longer. There’s too much money coming out of the country.

One of the things that’s even worse: There was, in February, a much smaller decline in the foreign exchange reserves compared to January, when it was $99.5 billion. It declined to under $30, about $28 billion in February. That’s because basically no one’s allowed to remit money out of the country. Or, if they do so, it’s under very tight circumstances.

China’s essentially re-imposed very strict capital controls. A lot of these controls are off the books, so they’re not official. This works for a little while, but the problem is: Who’s going to put their money into a country when they may not be able to get it out?

The issue for China is going to be inward flows. Eventually those inward flows will stop, because of what they’re doing to prevent the outward flows.

Forex Reserves Seem to Have Been Spent to Support the Currency
ForEx Reserves are Being Spent to Support It

But Are They Just Replacing Outward Capital Flows?

Seemingly Directly Replacing Outward Capital Flows

The reported declines in foreign exchange reserves I think have been minimized. They give us a number. We can back check it, but it’s hard to do that.

Also, the one thing they’ve been doing is they’ve been engaging in forward transactions to hide the decline in the foreign reserves. They’re going with these derivatives. This is what Brazil did in 2013. It never ends well. Yes, China has a lot of firepower, but it’s declining fast.

Also, some of the funds in the reserves may not be liquid, so, therefore, they may not be available for defense of the currency. There’s a big black box there, and the global financial community just relies on the numbers that China has been giving us. I don’t know if we can actually do that.

Chaos Is Becoming Consensus

Chaos is Becoming The Consensus

This is definitely news. We were joking at the beginning of this. We titled our last conversation, “Is China Going Off the Rails?” At the time, that was not a question many were asking. Recently The New York Times ran a headline saying the answer was yes: “A New Economic Era for China as They Go Off the Rails.” Are enough people talking enough about this? Are too many?

I think that the global financial community understands that there are real problems in China, and they didn’t understand this, let’s say, eight or nine months ago.

For instance, you go back to August of 2015. You have relatively unimportant news coming out of the Chinese manufacturing sector causing big drops in equity markets in Asia, Europe, and the United States. For instance, we had six days in August when we lost $2.1 trillion in value because of inconsequential things happening in China.

Now, when you have bad news out of China, it doesn’t necessarily affect global markets. I think we’re becoming inured to that. Also, I think the global financial community, although it understands there are problems there, I don’t think they understand the dimension of the problems.

They see the Chinese government sort of rescuing things, but they don’t really look behind how that’s occurring and the sustainability of Beijing’s moves. Beijing’s moves: They can do this for a year or two, but the problem is that as they prevent the adjustment, the underlying imbalances are becoming bigger.

As the underlying imbalances become bigger, the inevitable adjustment has to be severe. Chinese leaders are continuing to do this stuff until they no longer have the ability to do that. When they no longer have the ability to do it, their economy will go into free fall. I don’t think the global financial community understands that.

China Seems to Be Moving from One Sort of Outlier to Another
Is This a Transition from One Sort of Outlier to Another

How much of this is just demographics?

At the moment, they have a massive working-age population supporting a relatively small number of retirees, but World Bank estimates have us right at the inflection point where it heads the other way. By 2050, China will have more retirees than the rest of the world and perhaps a less dynamic population and economy, by extension.

A view that’s forming is that really this is the beginning of the end for them. Is it the case that there are a couple of reforms that they can enact, burn off some bad debt, and get back to business, or are we witnessing a structural decline?

There are structural economic reforms that if they were implemented could save China, but the problem is that those reforms are not possible within the context of the political system that China’s president, Xi Jinping, will not change. The answer is that we’re not going to see the reforms that are necessary.

Indeed, at Premier Li Keqiang’s work report at the ongoing National People’s Congress meeting, it’s clear that they’re prioritizing growth over reform. They’ve basically given up on reform. Yes, they talk about it, but they’re not implementing it.

That means that what we’re seeing is essentially a long, slow decline. Without reform, they aren’t going to be able to make the changes that are absolutely necessary. There’s just no political will to do that.

In fact, if we look at the changes in the economy since Xi Jinping became China’s general party secretary in November 2012, he’s taken China backwards. He’s recombining already large-state enterprises back into monopolies.

We’re seeing the partial re-nationalization of the Chinese economy as more and more state ownership of state enterprises. More state money going to favored market participants. Foreign companies are losing market share, because they’re being attacked by the state.

These are all things that are regressive, so Deng Xiaoping’s policy of reform and opening up is over. We’re going back to a Maoist-inspired economy. That may sound a little harsh, but indeed what Xi Jinping is doing is very reminiscent of what we saw in the 1950s. This is a bad story for China.

Yes, they can stave off problems while they have more and more state control, but eventually this whole thing just fails, as it did before.

You say the recipe is similar to Mao’s in terms of centralizing control. What are some other major points of concordance between what Xi Jinping has been doing and the 1950s period in China?

When we look at it, I think the most telling thing is the re-creation of state monopolies, which is absolutely the wrong way to go. China created growth in the 1990s when they went the other way, when they were breaking up state monopolies, allowing state enterprises to compete with each other.

Now, we’re about a year and a half, two years into a reversal process. That means there’s more and more of these recombinations. That means less and less competition. That can’t be good for the competitiveness of these enterprises except for competitiveness at home.

Of course, the bigger they get with no competitors, yes, they will be able to maximize profits. Only in China, though. Around the world, they’re going to get beaten, because they are losing those qualities of competitiveness that are absolutely necessary to compete in global markets.

Growth in Energy Consumption Has Stalled
Slowing Growth in Electricity Usage

Analysts love to look at electricity usage in China, under a theory that you can’t really trust GDP that much.

For 2015, electricity consumption increased by 0.5%. Generally speaking, GDP growth has been about 85% of the growth of electricity. We’re talking a pretty low GDP number.

Of course, electricity’s only one indicator, but there are others that corroborate, essentially, a no‑growth environment. If we go back to the last downturn at the end of the 1990s, a lot of people were saying electricity was no longer so indicative. Afterwards, after that downturn passed, people went back and realized electricity was indeed still the best indicator.

Now, people are saying there’s a move away from manufacturing to services, so therefore electricity is not as important as it once was. There may be a little bit of truth in that, but nonetheless, when you look at all the range of indicators that we have, electricity, I believe, is still number one.

We’re seeing so many other signs of minimal growth that I think electricity still is telling us what the Chinese economy is doing.

And Rail Volume Has Fallen
And Theres Less Stuff Moving Around

How relevant is rail freight volume?

Rail freight was one of the three indicators that Premier Li Keqiang mentioned as the things that he looked at when he was a provincial party secretary. This is going back to 2007, when he was talking to the American ambassador.

This was in a WikiLeaks cable. The three things he mentioned were electricity consumption, rail freight volume, and bank lending. Rail freight volume is something we can measure. It’s something that is easy to verify, and we see it going down.

People say, “Well, more stuff is being moved by truck.” Maybe, but nonetheless, the decline in rail freight volume is especially troubling because it is so large, these percentage decreases. I think that, essentially, we’re looking, again, at another factor showing basically the contraction of the manufacturing sector.

I think the manufacturing sector is contracting. It did last year, 2% or 3%, maybe a little bit more. There may be an increase in services, but not nearly enough to make up for the decline in manufacturing, especially because the central government devastated the financial services industry beginning in the middle of July, when they tried to rescue stock prices.

A lot of things are going in the wrong direction right now. Not everything, but a lot of them.

We’ll get to the stuff that’s going in the right direction in a little bit.

That’s a one‑minute discussion.

It seemed a bit that way when I started digging through the data. What is going in the right direction?

There are more retail sales, certainly not as much as the central government statistics indicate. The problem with the increase in consumption, I think, is that it’s basically a derivative of growth elsewhere, especially growth of investment.

Investment growth is completely unsustainable. It’s anti‑reform. When investment growth starts to choke even more than it is now, I think it’s going to take consumption with it. What we’re seeing from consumer products companies is some growth, but not very much.

A lot of people like to report, “Oh, say, well, the growth of volume over Alibaba’s platforms and, online retailers,” but they’re really taking away sales from bricks and mortar. When you start to look at companies that sell across both platforms, online and offline, there really is unimpressive growth or even some contraction in the earnings of these companies related to China.

There’s some positive story there, but it’s not enough to counteract the collapse of manufacturing.

The Export Picture Is Grim

A Grim Export Picture

Should we be taking the recent export numbers as an accurate signal?

There might be a little bit of distortion related to Chinese New Year, but when you combine January and February numbers for both imports and exports, they’re both down deep in the double digits. That eliminates entirely the New Year effect.

Trade is just disastrous. You notice that Premier Li Keqiang, in his work report, didn’t have a target for trade this year. That’s the first time, I think, ever. For the last four years, they have not met their target.

Last year, their target was 6% growth in exports and imports combined. It actually came out down 8%. They missed by 14 percentage points. It’s not getting any better, as we saw from January and February.

This is a real indication of problems in the Chinese economy. The import number, I think, is the more important one because that reflects manufacturing demand, and it also reflects consumer demand. You have some pretty atrocious‑looking numbers coming out of imports and exports.

Certainly, just looking at this chart, even if you take the 12‑month average, it’s negative. There’s a very senior person on Bloomberg saying, “Oh, no, it’s not that bad. It’s only down 4% on average all year,” which seems like a spurious argument.

Aluminum Consumption Fell Sharply
A Sharp Drop in Aluminum Consumption

Is there anything in particular to be made about of the drop-off in aluminum consumption?

That’s a reflection of contraction of manufacturing. You’re going to see that in steel and coal statistics as well. That’s pretty much across the board in the manufacturing sector.

It Appears China Is in an Industrial Recession

Industrial Recession

The satellite index is the most negative and, presumably, the most reliable.

It’s hard to hide from space. The satellite indices have been the most negative, but even traditional ones, the one done by Markit, the London‑based research firm, it’s just been continually negative in manufacturing.

Even their services indices, which are still above water, they’re heading towards the contraction point. This is an economy which is slowly grinding to a halt.

If they devalue their currency, presumably it makes their exports more competitive?

Yeah, but they can’t do that. The reason is they will trigger even worse capital outflow. They’re basically prevented from doing that. Donald Trump says, “Well, they’re manipulating their currency to help their exporters.”

Yes, they are manipulating their currency, but they’re keeping it at an artificially high value. They have to do that to prevent capital outflow. It’s basically our exporters are being helped by China’s currency manipulation now, which is a reversal, of course.

Traditionally, China kept its currency below its market value in order to help exporters. Now, it’s keeping it above market value.

Industrial Profits Aren’t Growing

Long-Lived Profit Recession

How does the government talk about the stagnation in industrial profits?

They don’t. I think earnings, as reported out of Chinese companies can be a little bit not as reliable because of the nature of the accounting profession and other things. Nonetheless, it’s more reliable than what comes out of the Bureau of National Statistics because some of those numbers are completely made up.

It’s just fantasy land. At least with the accountants, they’ve got to at least have some responsibilities to the market. Therefore, it does give us a better window into what’s actually happening.

This is true at the revenue level as well. If you look at the Shanghai Composite, revenues are not growing. This is also true of indices in the States. In many ways, it’s the elephant in the room for global equity markets. Is there a way out of this?

I don’t think there is a way out of it. I think that they’re heading to that adjustment as the Chinese economy continues to slow. Especially when it gets to that contraction point, where it’s very close already, then I think we’re going to see a lot of things happen very quickly.

They’re just hanging on right now, and they’re able to do that. They can slow the inevitable, but they can’t prevent it because they have not been able to repeal the laws of economics. That’s why they’ve now got this fight with Moody’s over their ratings.

That just shows, Moody’s said, “Look, you can’t have the impossible trinity.” China then gets outraged that Moody’s would ever say that. What China’s trying to do is say, “Well, oh, the laws of economics do not apply to China.” They do apply. They apply differently because of the degree of state control, which is becoming more and more state control, but nonetheless, they cannot prevent the inevitable.

Non-Performing Loans (NPLs) Are Booming

Booming NPLs

Does this headline increase in non-performing (NPLs) capture the reality?

The numbers have gone up, but the reported number is not nearly as high as they, in effect, are, because people are not applying international standards.

A lot of this stuff is being rolled over, and so, therefore, it’s being counted as good. It’s only good because banks have been ordered not to call in loans. This means we’ve seen a lot of credit growth, but we haven’t seen growth in the economy, which you would expect.

As interest builds up, you have to lend more and more just to roll over what exists. That’s what occurring now. If you were to actually apply international standards to the loan books of these banks, we’d be seeing NPL ratios of 20%–30%, easy.

Banking Assets Are Ballooning

Screen Shot 2016-03-22 at 112411 AM

We’ve got overall banking assets that have slowed to “just” 40% growth year on year.

It’s crazy. It’s absolutely crazy. What they’re doing is they’re just throwing a lot of money. People say, “Well, look, they’ve got a relatively high reserve requirement ratio for the banks, and they’ve got relatively high interest rates.”

They say, “Therefore, they have a lot of ammunition.” No, they don’t, because you can throw more money into this economy, and it isn’t going to do any good because there’s a fundamental lack of demand for money.

Yes, the government will build infrastructure, and yes, technically that does create gross domestic product, but it’s only government directed. Private businesses just don’t have a need for money, unless it’s connected to some government infrastructure or other government program.

That means, essentially, that it isn’t going to work. You throw more money in this economy, you just have more money. You don’t have more growth.

It’s a sad state in the world, when you think about it, if people are sitting around going, “Oh, you know, I don’t need more money.” That says a lot.

That says a lot. China’s not the only country with that problem, but their problem is so much greater than our problem here in the States, for instance.

Did a Memo Go Out?

Did a Memo Go Out

The all‑system financing aggregate hit an all‑time high, after having been trending downward. Is this just evidence that the government is opening a spigot somewhere?

Absolutely. They’ve done this before, and they say they’re not going to do it again, because Premier Wen Jiabao, who authorized the stimulus program in November 2008, he put too much money into the economy.

He created about as much credit in five years as the entire US banking system, even though in November 2008 the Chinese economy was less than a third the size of America’s. Everyone said, “Well, look, that’s not what we should be doing.”

They say, “Oh, no, no, no, no, we’ll never do that,” but of course, that’s exactly what they’re doing. A memo did go out. Everyone was told to lend, and this is what we got. We got a lot of money supply.

Real Estate: Supply Crunch?

A Supply Crunch in Real Estate

If you look at the leading indicators of inventory, like land purchased and the actual amount of real estate that’s under construction, you see it trending down. Meanwhile, you see a 50% year-on-year increase in the price of one square meter in a Tier 1 city.

Tier 1 cities, there is still demand for real estate. There’s no question about that. When you start going to Tier 3 cities, there’s just enormous amount of supply, and there’s very little demand, so it’s a bifurcated market.

If you’re in Beijing and Shanghai, you have a relatively healthy real estate market, and prices are still going up. You start to get out of China’s major cities, and there are real problems. What they did to create growth in the past was just to build, build, and build, and now they don’t know what to do.

Even in places like Guangdong Province, which is a relatively prosperous, modern province, you now have calls for state enterprises to buy apartments, because that’s the only way they can do this to solve their problem, use one state entity to bail out another.

There’s a real problem once you get out of Beijing, and Shanghai, and Guangzhou.

Where I live in Brooklyn, a million bucks buys you a fixer‑upper, but travel 500 miles in any direction and you can have almost whatever you want for that price. Is that the analogy?

That’s the same thing, yeah.

A Retail-Driven Bubble?
A Retail-Driven Bubble

I want to ask you about retail investors and the domestic stock market. One of the things you notice when you look into it is there’s this incredible boom in the number of trading accounts that were opened in the mainland. Then, the government discontinued the statistics on it.

About two or three months after they discontinued the statistics, the Shanghai Composite hit its recent high. Did we see recent inflows of retail investors who were basically gamblers? Is that what’s going on?

There was a lot of that, especially because when you start to go back to September 2014 or so. Keqiang’s policy was to talk up the stock market. You did have a lot of retail investors start to go into it, especially when prices started to move up. That created momentum.

That’s why you have a sharp increase in the number of retail accounts in the first part of 2015. Then, of course, June occurs. You have the beginnings of real problems. The markets start to turn down. Then you have retail investors start to leave, because they’ve been burned, lost their money.

I think that a lot of it was retail driven, but also, there’s Chinese institutional money in there. Even some foreign money’s starting to flood in when they saw the markets turn up. There’s a lot of stuff going in, but the real sensitive stuff was the Chinese retail investors. When they get burned, that becomes a social stability issue.

Why Do Vehicle Sales Keep Growing?
Why Are Vehicles Still Selling So Well

Vehicle sales seem to be a bright point though.

Vehicle sales have done really well. Vehicle sales started to tail off last summer, but they’ve recovered. Right now, they’re starting to turn down again. This has been a real pillar industry, and we have seen state enterprises go out and buy vehicles in the hundreds. They then store them. That’s called lot rot. There’s been a certain amount of that.

Nonetheless, there’s no question that vehicle sales have held up well. Either you see the wealthy in Tier 1 cities buying cars at a pretty healthy clip. I don’t think that’s going to last, but, nonetheless, it is one of the bright spots.

So Bad It’s Good?
So Bad Its Good

There’s some sense that we’re getting totally used to the negative economic surprises that are coming out. Our expectations are low. Maybe the news is so bad it’s good on China. I wonder how you’d react to that statement.

Apart from what we saw in August and September last year when it was, as I mentioned, unimportant news really triggered very big falls in equity markets around the world. Now, I think people are not focused on China. They’re focused on problems closer to home.

I think that’s what’s really driving markets right now much more so than that. When China starts to have real troubles, then again, we’re going to see the same phenomena that we saw last August and September. Again, I don’t think that bad China news has really been discounted.

A lot of people still say low sixes for growth. People are saying four, which the consensus is now at. If it really is closer to one or two, then clearly they haven’t discounted all the bad news. When it gets to zero and negative one, watch out.

Presumably there’s even a threat to the government’s ability to stay in power at that point.

People talk about that right now. I was on a panel for a bank with Asian connections in Boston [several] weeks ago. Afterwards, a young Chinese woman came up to my wife, and she’s the type who would come to the United States, get an education, work five years, and then go back to China for their career.

She told my wife, “I’m not going back. None of my friends are going back. My friends in China are saying this government might not last.” Yeah, there’s a lot of talk about that right now among Chinese themselves. There is a real issue about where this is going to go.

Can the Government Keep Growing Revenues?
Can The Government Keep Growing Revenues

One potentially reassuring thing is that the government has done a decent job at actually growing its revenues, although it’s grown debt much faster.

Spending is growing much faster than revenue growth.

Yes, there was revenue growth in 2015, something on the order of, I forget exactly, like 7% or 8%. Fiscal spending last year, according to the government itself, was up 15.8%. There’s a pretty big gap there, and those are official numbers. Who knows what the real numbers are.

We know that a lot of central government spending is not disclosed in the central government’s budget. Military, for instance. A lot of military expenditures are not there.

There have been fantastic increases in fiscal spending. Last October, fiscal spending year on year up 36.1%. November it was up 15.9%. They didn’t disclose December, and I don’t blame them, probably because it was pretty bad. This is an out of control spending government.

While it’s good for them that they’ve got some revenues and they’re able to drive that line higher, they’re not able to drive it as fast as spending.

You’ve got to remember that in the work reports that we’ve been seeing at the National People’s Congress meeting, they’re increasing their deficit from 2.4% of GDP, which is what they claimed for 2015, to 3% this year.

Now, 3% is a psychological line, not just for the Chinese but for others. China is probably going to bust through 3% in reality, because they don’t disclose all their spending. Who knows what they’re going to be next year. This is not going in the right direction.

I realize I haven’t asked you at all about security. China’s neighbor and a critical part of the global security question is North Korea, who’s been testing their nuclear weapons . . .

And long‑range missiles.

. . . and threatening to use them preemptively. How should we be contextualizing that? Will China be an effective partner in working with the North, and what really can be done there?

I don’t think so, for a lot of reasons. First of all, the China and North Korea relation has eroded, especially after the execution of Jang Sung‑taek in December 2013, because Jang handled relations with Beijing.

The real problem is you’ve got a government in North Korea, a regime, where you have Kim Jung Un, the ruler, feuding with the military, which is still the most important institution in North Korean society. It’s unstable, and I don’t think the Chinese or anybody else can actually have much influence where you have intense infighting.

Plus, also, you’ve got intense infighting in Beijing. Not as bad as it looks like in Pyongyang, but, nonetheless, this is an unstable situation as well. You’ve got two governments right now that are starting to splinter, and that means that north Asia is exceedingly dangerous.

That’s not great news, but thank you so much, Gordon, for sharing your view and for spending time with us. I’m sure Enterprising Investor readers are quite pleased to have your perspective, as well.

Thanks so much, Will.

This was written for CFA Institute and first published on the Enterprising Investor.


10 Keys to a Retirement System that Works

When clients ask you whether the hodgepodge of social security programs, private savings accounts, and employer-sponsored retirement plans that we collectively rely on will be sufficient to provide them with a comfortable living after they stop working, you probably have an easy answer at the ready. “Ha!”

We can fix that. Read how on the Enterprising Investor


The Reasons We Honor Irving Kahn, CFA

About 10 days ago a young man passed away to whom CFA Institute owes a lot. He was 109. His name was Irving Kahn, CFA.

I never had the pleasure of meeting him, but I do have the honor of starting a discussion about his legacy in this forum and talking about what his example means to me — and what it should mean to professional investors everywhere.

Why do we choose to honor this man? Perhaps it’s because as a teaching assistant to Benjamin Graham, he watched and guided the creation of this industry from the very beginning. Or perhaps it’s because he belonged to the first class of CFA charterholders, a group of people who set in motion a social movement that helped professionalize the world of investing. He was among the founders of the New York Society of Security Analysts, one of our largest societies, as well as the Financial Analysts Journal, a sister publication to the Enterprising Investor.

Or maybe it’s because, at 109 years old, he still loved the stuff that we professional investors do day in and day out. Kahn was still working when he passed away, even though he had more than earned his retirement and could have moved somewhere with a better climate than New York City and lived a life of leisure.

I Guess He Just Loved This Game.

The investment industry is considered boring by the uninitiated. We are unrepentant geeks. We print out annual reports and read them in alphabetical order. Our nicknames for things — the Swissie, crack spreads, 2s10s — make literally no sense to other people. When our contemporaries are profiled in the media, they often come off as morally bankrupt. This characterization is so common that it’s discussed as a TV Trope.

So when we, or at least, when I see a distinguished investor quietly grinding out alpha because he likes it, I find it inspiring. I like it, too.

And hearing about someone else who likes it makes me feel like a little bit less of a nerd. So in part I honor him because I hope I can retain his enthusiasm. But I also honor him because there is much to learn from his example. In particular, I think he did three things that every professional investor should emulate.

He Read Different News Sources.

One of the more intriguing stories about Irving that I’ve come across is that he was actually responsible for the expansion of the Financial Times to the United States. In the early 1950s, he would — at great expense — procure copies of the pink paper because he was fascinated with European companies. When he later traveled to London, he met with the FT to see if he could convince them to begin publishing in the United States. They laughed at him. By the time he was profiled for CFA Magazine, they had been hand delivering a weekend Financial Times to him for more than 40 years as a way of saying “thank you” and “we’re sorry.”

He Didn’t Keep His Knowledge to Himself.

When Irving got to Wall Street, “analyst” was not a job title. Analysts were called statisticians. We owe the existence of the investment management profession in large part to the work of Irving and his mentor Benjamin Graham, who would trek up from Wall Street to Columbia Business School after work to teach others how to properly analyze companies. Many people would have just turned in year after year of stellar performance and allowed their investors to believe they were magicians instead of passing on their knowledge.

He Kept Learning.

There are very few widely respected investors who don’t spend most of their time engaged in their primary job: learning new stuff. Kahn could have decided after 30 (or 40, 50, 60, or even 70) years of experience that he had all the knowledge he needed, and fallen into the trap of trying to force markets to fit his well-constructed beliefs rather than updating them. Instead, he kept reading.

I imagine that the investment career I have ahead of me will be different in many ways from the one that Kahn had. At the very least, I’ll never have the same difficulty getting a hold of the Financial Times. I hope I can mimic his example in these three important ways though. 

This was written for CFA Institute and first published on the Enterprising Investor.


    Free Investing is the new Free Checking

    Are you paying for checking? You totally don’t need to. 

    Most Americans, at least, have access to a free checking account that offers many of the features we closely associate with a traditional investment account: secure storage of and access to money.

    It’s not farfetched to ask the same question about an investment account and provide the same answer. Particularly for investors who own index funds (or “closet index” funds with low active shares), it’s becoming increasingly apparent that there is no need to pay significant fees for a diversified portfolio. Vanguard has long offered target date funds that combine their low-cost index offerings, but Charles Schwab’s “Intelligent” portfolios, which do not have associated fees, are a harbinger of what is to come.

    I’ve already said that in the fight against algorithmic investment services, financial advisers “had better compete on something other than cost, accuracy, and speed” but haven’t yet taken that analysis further. My colleague Lauren Foster has noted that robo-advisers and financial advisers had better start getting along, but I will state that more strongly.

    Charging for Non-Differentiated Investment Products Is About to Get Very Hard.

    If you are selling the same thing as everyone else, and that thing is infinitely scalable at minuscule marginal cost — like many equity index funds — there is little reason for someone to pay you for it. A preponderance of services have evolved to combine various low-cost investments into “customized” investment portfolios, but those products have essentially the same characteristics. The algorithms that combine the products are as scalable as the products themselves.

    This leads to a competitive dynamic that is easy to name but difficult to survive: a race to the bottom. Vanguard’s ownership framework, which is not designed to earn a profit, seems to be structured in anticipation of this competitive dynamic.

    There is not going to be only one firm providing low-cost index funds, but it is difficult to imagine a true need for the hundreds of them that exist now. In 2012, Business Insider did a survey of S&P 500 index funds and found that Vanguard effectively dominated its competition. Businesses attempting to extract excess fee income from either these non-differentiated funds or the construction of a portfolio comprised of them will have a difficult time justifying their existence.

    So Are Professional Investment Managers Going Away?

    No way. Fortunately for investment professionals, we are not selling buggy whips. As long as there are organizations and individuals with money, there will be a market for figuring out what to do with it. That market is simply evolving, which is why Lauren’s framing of the next step for advisers as “getting on the right side” of the trend is so perceptive.

    I have personally never been more bullish on the future of the investment profession, but that doesn’t mean it’s going to look the same. It’s unlikely that there will be many highly paid employees doing work that could easily be performed by algorithms in the years to come. Instead, look for small teams of investment professionals to be levered as never before by software. To me, it seems like there will still be ample room to provide products along one of three lines:

    • Personality: A more pleasant interface to money management than is otherwise available. This can take the form of a trusted adviser, but also software that integrates more thoughtfully into your daily life. I imagine that many investors would pay for value-added services, particularly for things like life coaching bundled alongside financial advice.
    • Performance: Pure alpha. Simple enough — there has always been a market for outstanding investment results and it is hard to imagine that changing. It will likely become more difficult for “closet indexers,” who are in essence pretending to provide active management, to pass by undetected, but many professional investors will probably welcome that development.
    • Permanence: Advice for the wealthy centered on specific issues relating to their legacy. This currently includes considerations like trust and estate planning, but I imagine that it will evolve to encompass a range of products that are not currently widely offered, like charitable plans that rival investment plans in sophistication, diversification, and analytic rigor.

    What have I left out? Do you see a vector where financial professionals can offer value above and beyond that provided by low- or no-cost indexing services? Let me know in the comments section. After all, “free checking” has been around for a while, and it would be difficult to argue that the retail banking industry has altogether gone away since then.

    This was written for the CFA Institute and originally posted on the Enterprising Investor


    Can Financial Advisers Make Their Clients Happy?

    Financial advisers work with their clients to understand their goals and needs, then suggest investments that make sense in that context, and thereafter consult with them periodically to make sure everything is on track to realize those aspirations.

    That simple feedback loop can be a powerful force. Even professional investors who don’t believe it’s possible to beat the stock market will acknowledgethe value that comes from dealing with an adviser and working towards well-defined goals and checking in over time.

    In that process, advisers gain a lot of highly personal information about their clients’ innermost selves. In a world where the fees advisers can charge are shrinking and the market for financial advice is arguably being disrupted, it would behoove financial advisers to extend their value proposition.

    As an observer, it seems that one way they might do that is by taking on something of a life-coaching role. Since advisers must justify their value among a sea of algorithms and exchange-traded funds, they had better compete on something other than cost, accuracy, and speed. Empathy, intuition, and rapport are core strengths of financial advisers, and they should be building business plans that take those fully into account.

    What would the world look like if the financial adviser’s job was also to focus their clients on taking tangible steps towards becoming happier, better-adjusted people?

    Think Before You Laugh

    There is a market for the pursuit of happiness. The “self-help” industry is estimated to generate $1 billion per year in the United States. At minimum, this is a sign of engagement with the concept of self-improvement.

    Annual spending on self-help is just one measure of how consumers interact with products and literature aimed at improving their lives. What if that same information could be delivered as a service by somebody with an unusual amount of insight into a particular consumer and who was already regularly talking about long-term life goals with them? It seems likely that if the proper approach to integrating life and financial goals was applied, consumers would find substantial value there.

    Joe Biden repeatedly said, “Don’t tell me what you value. Show me your budget, and I’ll tell you what you value” during the 2008 and 2012 US presidential elections. Those words were piercingly perceptive. As investment professionals, we are exposed to a vast array of explicit and implicit data about the values of our customers. Every decision to save or spend is reflective of the ambitions your clients have and the difficulties that they face in reaching them.

    How Can Financial Advisers Actually Help?

    It’s not necessary to transform yourself from security analyst to psychologist to begin helping your clients reach both their life and financial goals. It can really be as simple as framing the goals that you discuss in a way that focuses on more than just their financial implications and by paying attention to a client’s non-financial desires (like finding more time to read or doing yoga regularly) that might otherwise get ignored in favor of more “heavyweight” aspirations like retirement or buying a house.

    Though even listening to these goals is important, consider taking two simple steps to extend the conversation a bit further. It might be useful to encourage a conversation about pursuing non-financial aspirations as more than just an icebreaker. Get granular with them and figure out what they are driving after. Then jot down notes and discuss what would be a reasonable goal for them to pursue in time for your next annual or quarterly review. Some clients may find that this approach brings them additional insights and helps them work towards their ambitions.

    If you’d like to get serious, structure these conversations so that you can discuss how often your clients are having the sorts of experiences that researchers have determined lead to happiness. Though these are not rigidly defined, they provide a framework for inquiry and can give you the opportunity to suggest objectives that may help your clients increase their overall happiness. Here are a few of the key elements that recur in academic discussions of what contributes to happiness. If you’re really trying to understand what makes your clients tick, it might make sense to ask about them directly or indirectly:

    • How often are they having new experiences? They don’t necessarily need to be traveling the world on a regular basis. Simply trying new restaurants or going on hikes from time to time can be enough.
    • How do they play? It could be golf, tiddlywinks, or World of Warcraft. Experiencing the sensation of play is a powerful driver of happiness.
    • How close are their relationships? Friends and family are critical to feeling fulfillment in our lives, and grasping how your clients relate to these groups and the sort of satisfaction they receive from them will greatly help you to understand them.
    • Are they finding meaning? A sense of meaning can be a powerful contributor to happiness, and most people are eager to talk about the areas of their lives where they are finding it. It could be through volunteer work, raising their children, or their day job.
    • Do they appreciate the good things in their lives? People who take time to reflect on their positive experiences by writing diaries or simply acknowledging the good times they’ve had are found to be happier in general than those who don’t.

    Integrating an understanding of what drives happiness into a wealth management practice can be useful in a lot of ways. On one hand, it gives advisers the opportunity to help clients work directly towards success and fulfillment, but it can also help them troubleshoot relationships with problem clients.

    This is just an armchair survey of a developing branch of human understanding, but if you find yourself intrigued consider watching the documentary Happy, which talks through the research in some more depth and gives examples of particular aspects of happiness in detail. It might be a powerful set of information to tuck away.

    This was originally written for CFA Institute and published on the Enterprising Investor.


    Three Charts That Will Rekindle Your Interest in Financial Market History

    This post originally ran on the Enterprising Investor.

    Interest in financial history (as measured by Google Trends data) has been declining fairly steadily since April 2004 and has since fallen by about 80%. If that roughly describes the amount you’ve focused on financial history over the last 10 years, it’s likely time for a quick refresher.

    In the introduction to our New York Financial Market History Roundtable, our head of curriculum development Bobby Lamy noted that portfolio managers from around the world have consistently told him that an understanding of financial market history and how it affects the investment process is key to doing their jobs well.

    In other words, it’s surprising that global interest in a topic that senior investment professionals around the world find valuable is dwindling. What should investors be paying attention to?

    That question permeated a nearly two hour discussion in which investment luminaries Richard Sylla, Marty Fridson, CFA, Tom Scherer, and Jack Malvey, CFA considered why investment managers find so much value in the study of market history, what can be learned from it, and how investment professionals might use history to make better decisions in the Future of Finance.