Is China Coming off the Rails?

I spoke with Gordon Chang of Forbes and my colleague Jason Voss about the heightened risks in China. Read and listen to the whole thing here. If you like this kind of stuff, you should subscribe to Inside Investing.

Here's an excerpt of the post: 

In the past month, many security analysts have begun asking whether the miraculous growth of the Chinese economy is headed for a standstill. While we were at a conference in Canada last week, we noticed that overnight rates in China had begun to spike, so we arranged to speak with Gordon Chang as soon as we got back to New York City.

Gordon is one of the world’s experts on China and has authored a number of articles and books on the country, in addition to speaking to the media frequently. He spoke with me and my colleague Jason Voss about what’s happening in China, what we can expect to happen in the future, and how the market has evolved.

In addition to speaking about the loans that Chinese banks have made and the curious ghost cities that have been popping up in china, we discussed the philosophy of the Chinese government and the relationship that their notable portfolio of treasuries has with the United States’ future. Check out the podcast below, and read on for a few clips from Gordon’s excellent Forbes column.

“The overnight repo rate in China has just hit 25%, an indication the credit market is now frozen.

This month, liquidity tightened considerably. Two government bill auctions failed, and several banks defaulted on their interbank obligations. Overnight rates in the last few weeks surged to about 15% but had fallen back, settling in at just north of 7%. The 25% rate indicates credit is becoming unavailable.

Nothing is going right for China at the moment. In the last few hours, the HSBC Flash PMI for June came in at 48.3, down considerably from the 49.2 final reading for May. The country’s problems are now starting to feed on themselves.”

“And there is a broader issue. For more than four decades, Washington has sought to “engage” Beijing and bring it into the international community. Inside the existing geopolitical order China prospered, and in the past quarter century the people who have benefited the most from the American-led system are not the Americans but the Chinese. In a peaceful world the Chinese manufactured and traded their way up through the ranks of nations and, as a consequence, transformed their country for the better.

Yet their leaders no longer accept the world as it is. Once deft, subtle, and patient, Chinese diplomacy has, especially since the end of 2009, become shrill and hostile. And Beijing has increasingly set itself against America—as well as its generals and admirals. We are now hearing war talk in the Chinese capital from civilians, such as new leader Xi Jinping, and flag officers alike.

Unfortunately for Chinese policymakers, the resulting controversies are occurring in conjunction with others, both internal and external. As Fitch suggested last week, more geopolitical risk is the one factor, during this period of economic fragility, that could push the Chinese economy over the edge.”


So I guess It's Not News....

I learned, via cryptogon, of a recent attempt by two Japanese nationals to creep into Switzerland via Italy. This wouldn't have been that strange, except they were carrying $134 billion (with a b) in possibly counterfeit US Government securities. 

It gets even crazier. The securities are in denominations that are not available to ordinary human beings in the private market. Some of these bonds are available only to states and carry billion-dollar denominations.

So, if they're real, this is a pretty big deal. Italy gets a finder's fee and the private market becomes aware that the Japanese government or some other nation-state actor (the only people who could get these things) want to do something with their US government debt holdings.

If they're fake, it's even more interesting. Though it's of course fascinating to surmise that foreign governments are dumping US Treasuries, what about the supposition that there might be in circulation a quantity at least as large as $134 Billion in fake Treasury obligations? Obligations so realistic as to be indistinguishable for 7 days to Italian authorities? This story came out there in a press release dated June 4.

An Open Data Source for Risk Analysis

I was delighted to learn somebody is trying to create a new, open-source model for producing opinions on creditworthiness. Any attempt to replace broken credit rating agencies as decision makers for who receives capital should be greeted as a wholly welcome step. 

Freerisk is not yet - and does not seem to hope to be - a replacement for rating agencies in their entirety. It is instead a way to lever individual analysts by allowing them to query across a wide range of SEC filings at once using a relatively simple language called SPARQL. In addition, it provides a framework for people to share insights from these statements with each other. In time, the creators hope to move to a more user-friendly way of getting data from their database (which is wonderful). 

The creators are toying with the ability to include comments and insights from footnotes into standard query data in hopes of creating a fuller picture from a standard query. 

A great potential "value add" for this comes in the example of highlighting an interesting footnote. Having read company filings, I can attest that a great deal of their footnotes are pretty boring. There are occasional gems contained therein which make the process worthwhile, but wouldn't it be nice if there was a way to get quickly to the interesting ones? 

The difficulty that Freerisk and other projects like it will face in replacing credit rating agencies is that consumers have come accustomed to regarding credit simply: as a letter. There will always be a market for the distillation of knowledge that can be gathered off of a platform like Freerisk into a format that allows for simple, "thumbs up/thumbs down" evaluation.

If anything, I think freerisk is simply an excellent substitute for certain functions of a Bloomberg terminal for people willing to learn a Query language (not many). It's nice to see so much data opening up for public consumption, especially with the ability to share relevant insights on a public forum.

Education: Where's the Radical Change?

Greg Mankiw had an Op-Ed in the New York Times recently about the changes that he will be implementing in his freshman economics course as a result of the recent "great recession."

It's interesting that even though there is a frenzied discussion about what economic educators have been doing wrong in the past few years, there is little discussion about what they have been doing wrong for the past hundred. To this observer, there is a need for a genuine re-imagining of the educational process. 

It can be argued that there isn't much wrong with the traditional "Tell 'em what you're gonna tell em, tell 'em, then tell 'em what you told 'em" method of teaching, but there wasn't much wrong with swords until europeans found out about gunpowder. 

I'm not saying that there is no value in the traditional system, and I say that not just because some of my professors might stumble across this website. Arnold Kling blogged a few weeks ago that for an autodidact, the presence of the Internet makes for a golden age of learning. 

It's cheap to harp on the transformative power of the internet, but I wonder why there isn't more of a societal method to acknowledge autodidactic learning of the sort that can take place over the internet.

The exercise of blogging (when done regularly, sorry for sparse updates) is after all much like writing a spate of reaction essays to topics as they are presented by cobloggers and the news cycle. Isn't there grist somewhere in there for an educational process to replace the quiz-and-lecture format?

There's nothing wrong with kickin' it old school, but a new school needs to emerge.


Warren Buffet: Human?

Since I am still a young buck, I am often surprised to read past works of financial commentators who I respect very much and find that their commentary reflects present trends. I was directed by the excellent Felix Salmon to an article that Michael Lewis wrote in 1992 about Mr. Buffet's rescue of the troubled Salomon Brothers.  

His windfall came out of the shareholders' pockets, since his cheap option dilutes the value of the existing shares. Although a few of them sued, the deal never met the popular resistance it deserved, mainly because it involved Buffett. Public feeling was that if it was wrong, Buffett would never have done it; therefore it must have been right.

In effect the moralist had sold his reputation, without pausing to measure the man willing to pay such a price for it. Perhaps heartened by the critical success of the first foray, Buffett quickly made the business of saving CEOs from corporate predators a rule rather than an exception in his portfolio. He cut about $1.2 billion more of similar sweet, off-market deals with the chief executives of U.S. Air, Champion, and Gillette.
Curious to this observer is the similarity that this pattern of investments has to his more recent investments in Goldman Sachs and GE. In his more recent review of a 960 page biography of Buffett, Lewis happily points out further deviations from the folksy style of investment that Berkshire Hathaway trumpets in its annual newsletters, and notes the similarity of the recent Berkshire investment in Goldman Sachs to Buffett's investment in Salomon.

He stops short of acknowledging that in another customer of Buffett's positive image rental service has been General Electric - an institution that he mentions only as an entity which used to have a AAA rating that is "in the process of collapsing."

At the conclusion of the interview, he notes that this biography will be valuable to a reader in twenty years because it paints the most renowned investor in history with a human brush. This only leads me to wonder: why must we wait so long to see him thusly?  


Dustin Curtis Has A Pretty Good Point...

This post was originally published on a prior version of my site. 

Dustin Curtis recently did a redesign of American Airlines' website (apparently out of sheer frustration) and he makes a pretty good point...check out his rant here and his redesign here

How does a company like American Airlines justify having such a medieval website? Are they actually trying to prevent customers from booking on line? They are actually driving people (like me) away from their website to places like kayak that make it possible to book a plane ticket without internal hemorrhaging. 

Businesses need to begin to understand that a website is essentially another employee. Having a website as archaic as American's is kind of like having these guys greet your customers. 

" wanna go to Fiji?" AA should listen to Mr. least get the guy on the right a clean shirt.


America's AAA Rating at Risk

I remember reading that America's storied AAA rating was at risk years ago, but it seemed to have been ignored by most talking heads at the time. 

Now we have an op-ed in the FT from a former Comptroller General of the United States about it. It's worth a read. 

An excerpt: 

For too long, the US has delayed making the tough but necessary choices needed to reverse its deteriorating financial condition. One could even argue that our government does not deserve a triple A credit rating based on our current financial condition, structural fiscal imbalances and political stalemate. The credit rating agencies have been wildly wrong before, not least with mortgage-backed securities.

How can one justify bestowing a triple A rating on an entity with an accumulated negative net worth of more than $11,000bn (€8,000bn, £7,000bn) and additional off-balance sheet obligations of $45,000bn? An entity that is set to run a $1,800bn-plus deficit for the current year and trillion dollar-plus deficits for years to come?


The Zombism Scare and the Way we Validate our Information

Recently, a satirical article was posted on the internet in such a way that an untrained observer would think it was on the BBC website. The article detailed an alleged mutation in the Swine Flu virus.  

There has been a small outbreak of "zombism" in London due to mutation of the H1N1 virus into new strain: H1Z1.

Similar to a scare originally found in Cambodia back in 2005, victims of a new strain of the swine flu virus H1N1 have been reported in London.

After death, this virus is able to restart the heart of it's victim for up to two hours after the initial demise of the person where the individual behaves in extremely violent ways from what is believe to be a combination of brain damage and a chemical released into blood during "resurrection."

The likely intent of the article was to produce belly laughs among a subculture of individuals who are web savvy enough to understand the article to be fake. My roommate and I both saw it and immediately laughed. Another effect was to induce an element of panic among people who didn't know how to spot a fake website. 

Both groups had a great reason to spread the article around; but one group was spreading a joke while the other was spreading an article which contained a credible threat to their life. 

It didn't even occur to me that there were very many people who would take this seriously, until a friend made a reference to it in conversation and discussed it in a serious tone. I was taken aback, and frankly didn't know how to break it to him that he had been trolled

This is curious to me because we are all part of a generation that is (at least in theory) supposed to be more web savvy. If we're so great, how come people who are part of our generation are still falling for this stuff? 

I'll posit a guess that it comes not in a small way in the way that we get our information. I found that website through, a website which is designed to link its users to other interesting information on the internet. Much of the content that users are directed to is pretty entertaining, so I assumed it would be a joke because of the source.

My friend likely received the link through a more traditional source; perhaps a friend or a family member sent him a link and advised him to be cautious.

It then became clear to me that he wasn't using the same internet I was, even though there is no barrier to him accessing the internet in the same way as I have been.

If he wasn't using my internet, then there must be a whole other group of people who use the internet as a superpowered post office/newspaper. They haven't developed the tools to validate information from sites that they don't always go to because for them the internet is a collection of websites which they regularly visit. These people hang out on ESPNthe New York TimesYahoo!Youtube, and the like. 

Since they always go to the same sites, their ability to detect a poor source atrophies. One doesn't need to think as hard about information they get from the paper of record as one does when gleaning information from a collection of lower-profile blogs and websites. 

We begin to see a clash when the more web-savvy culture crashes with the first. An excellent NYT article worth a full read profiles the people behind these "trollings." One prominent troll characterizes his activities as "Leading on confused people" and adds "Why don't people fact-check who this stuff is coming from? Why do they assume it's true?"

I would guess it's because they're not conditioned to.

Hey! This Isn't Right!

I guess a group of "investment firms and hedge funds" are Chrysler's demons. 6:20 in the video. Linked here.

The level of control the president has been exercising here must be brought up. He emphasizes that this process will be "quick", "efficient", and "controlled". If this doesn't terrify you, you aren't thinking about it.

To characterize the president's actions as unjust is close to a patriotic imperative. He has been able to draw those banks that have accepted TARP money to his heel and force them to abide by his diktat as concerns the Chrysler bankruptcy. It should be a gigantic; neon exclamation point that those who object to the government's handling of this event are those who have not taken TARP money. 

These healthy financial institutions, who have not taken a dime of government money are forced to deal through those who have taken taxpayer dollars in order to gain a voice in negotiations. I'm still just a neophyte, but if this isn't criminal, it should be.

From the open letter of the "investment firms and hedge funds," courtesy of John Carney

As much as anyone, we want to see Chrysler emerge from its current situation as a viable American company, and we are committed to doing what we can to help. Indeed, we have made significant concessions toward this end - although we have been systematically precluded from engaging in direct discussions or negotiations with the government; instead, we have been forced to communicate through an obviously conflicted intermediary: a group of banks that have received billions of TARP funds.

Perhaps these guys are engaged in doublespeak as much as Obama. Look to the point about how they must deal through conflicted intermediaries; in the past there has been a certain binary question. That question has been: Is this the government, or is it a private company? Who exactly are investors dealing with?


Someone Actually Bought CDS on Italy from Milan?

 When stories like this come out, you know there's more than a little bit of trouble afoot. Beyond the strong arm tactics being used by the Milanese government, there is this little nugget:

In 2007, Milan also sold a credit-default swap, exposing itself to the risk that the Republic of Italy might default
What kind of lunatic buys insurance against Italy going bankrupt from an Italian city?