Sunday, April 29, 2012
Wednesday, April 18, 2012
time words
How we think of time
- minute
- hour
- day
- week
- month
- year
- (5-year)?
- decade
- generation/active life/career (20~ years ?)
- lifespan (technically eon, or age)
- century (now also an eon)
- period (i.e. 200 years, as in "the enlightenment" or "the renaisance")
- age [agrarian empires, 3500-800 BC, axial age 800 BC-600 AD, middle ages 600 AD-1450, capitalist empires 1450--] (missaplied term, but who is picky)
- millenium
America the Principled by Rosabeth Kanter
She works in organizational change, or teaches it at Harvard Bus Sch, or both.
Main thesis: The successful way to manage change, or to thrive in a dynamic environment, is by sticking to core principles. The moral compas is your guide.
She would like to see America stick to these three principles, which by implication says she thinks we are slipping away from them. I only remember two: open minds and common ground.
Kanter's Law (named after her, perhaps by her) states that "everything looks like a failure in the middle"-- and your principles guide you to success in the end. Her earlier book "Confidence -- how winning streaks and loosing streaks begin and end" argues this point.
Best quote:
"Reality isn't fixed, only our view of it."
She discusses kaleidoscope vision. Twist the kaleidoscope.
She quotes some middle eastern buisness leaders as saying (in a case study) "If we know his religeon, we will know how he thinks". This upset her, she does not like that level of fundamentalism.
The change element rule of thirds. 1/3 is for it, 1/3 is against it, 1/3 doesn't care. Target those people without alienating the opponents.
Main thesis: The successful way to manage change, or to thrive in a dynamic environment, is by sticking to core principles. The moral compas is your guide.
She would like to see America stick to these three principles, which by implication says she thinks we are slipping away from them. I only remember two: open minds and common ground.
Kanter's Law (named after her, perhaps by her) states that "everything looks like a failure in the middle"-- and your principles guide you to success in the end. Her earlier book "Confidence -- how winning streaks and loosing streaks begin and end" argues this point.
Best quote:
"Reality isn't fixed, only our view of it."
She discusses kaleidoscope vision. Twist the kaleidoscope.
She quotes some middle eastern buisness leaders as saying (in a case study) "If we know his religeon, we will know how he thinks". This upset her, she does not like that level of fundamentalism.
The change element rule of thirds. 1/3 is for it, 1/3 is against it, 1/3 doesn't care. Target those people without alienating the opponents.
Paul Saffo -- Embracing Uncertainty
Mr. Saffo is a forecaster. How to spot the future coming.
"The difference between a forecast and reality is that a forecast must be believable and internally consistent"
wildcards make for better forecasting. For example, predicting that a movie star will become the next governor. He also says it helps to be a smart alec. His "movie star" prediction was a smart alec-y response which proved to be a true prediction. If you are pessimistic, appy the Lilly Tomlin rule.
Mr. Saffo is a big believer in the S-curve. 20 years of slow growth before you hit the inflection point. Implications: when people say things are just around the corner, they are 10-20 years out (we are still at the flat part of the S). When people say it will never happen, it is imminent (they haven't seen it take off in 20 years of effort, so have given up hope. 20 years is the time to inflection).
"Never mistake a clear view for a short distance!"
Next insight-- The future has arrived, but is unevenly distributed. Look for the small anomolies. These are the prodromal signs of change. Look back twice as far as you plan on looking ahead.
We fail our way into the future. Silicon valley is not build on the spires of achievement, but on the rubble of failure.
And he makes a prediction. The robots are coming.
Anomolies:
The trend: changes in computation. The mircoprocessor put a computer on the desktop, and the device was a processor. Optical lasers/fiber optics allowed fast/big bandwith internet and the device became a connection. Now we have cheap sensors (tennis shoes reporting your pace !?!) which give the computer senses. Add wheels and we will have robots.
He called to someone in the audience to illustrate one of his points. They gave the wrong answer. He said "Next time I am going to use a planted response."
"The difference between a forecast and reality is that a forecast must be believable and internally consistent"
wildcards make for better forecasting. For example, predicting that a movie star will become the next governor. He also says it helps to be a smart alec. His "movie star" prediction was a smart alec-y response which proved to be a true prediction. If you are pessimistic, appy the Lilly Tomlin rule.
Mr. Saffo is a big believer in the S-curve. 20 years of slow growth before you hit the inflection point. Implications: when people say things are just around the corner, they are 10-20 years out (we are still at the flat part of the S). When people say it will never happen, it is imminent (they haven't seen it take off in 20 years of effort, so have given up hope. 20 years is the time to inflection).
"Never mistake a clear view for a short distance!"
Next insight-- The future has arrived, but is unevenly distributed. Look for the small anomolies. These are the prodromal signs of change. Look back twice as far as you plan on looking ahead.
We fail our way into the future. Silicon valley is not build on the spires of achievement, but on the rubble of failure.
And he makes a prediction. The robots are coming.
Anomolies:
- DARPA grand challenge. First one, only 4/20 make it out of the starting gate. Next one, 18 mo later, all but 4 finish.
- Roomba. Not only do people buy them, they name them and take them to visit friends houses.
- Another DARPA grand challenge, city driving. The robots all drove well, on the same day as California had a 100+ car pileup on the freeway.
The trend: changes in computation. The mircoprocessor put a computer on the desktop, and the device was a processor. Optical lasers/fiber optics allowed fast/big bandwith internet and the device became a connection. Now we have cheap sensors (tennis shoes reporting your pace !?!) which give the computer senses. Add wheels and we will have robots.
He called to someone in the audience to illustrate one of his points. They gave the wrong answer. He said "Next time I am going to use a planted response."
Monday, April 16, 2012
starscriber
Neat company. Their pitch:
all emerging markets have prepaid wireless subscribers. They all run out of money at some point. Most of the world is on a 2G network with a $15 Nokia phone. These people have do something called "flashing" - where they call their friends or their boss and hang up on the first ring. That's a "flash" - the recipient now knows to call that person back. The phone company gets no revenue from this. On a daily basis this happens - are you ready - 8 billion times around the word (almost half of all cellphone calls are flashes each day!). It is a well-known form of communication. Starscriber goes to these countries and tells the consumers there is an easier more effective way to do this kind of "flash-messaging" with their service, they are up and running in Nigeria, Indonesia and Latin America.
http://www.starscriber.com/en/index.html
"Connecting the unconnected"
all emerging markets have prepaid wireless subscribers. They all run out of money at some point. Most of the world is on a 2G network with a $15 Nokia phone. These people have do something called "flashing" - where they call their friends or their boss and hang up on the first ring. That's a "flash" - the recipient now knows to call that person back. The phone company gets no revenue from this. On a daily basis this happens - are you ready - 8 billion times around the word (almost half of all cellphone calls are flashes each day!). It is a well-known form of communication. Starscriber goes to these countries and tells the consumers there is an easier more effective way to do this kind of "flash-messaging" with their service, they are up and running in Nigeria, Indonesia and Latin America.
http://www.starscriber.com/en/index.html
"Connecting the unconnected"
pixar story rules
Cut and paste from http://www.pixartouchbook.com/blog/2011/5/15/pixar-story-rules-one-version.html
Pixar story artist Emma Coats has tweeted a series of “story basics” over the past month and a half — guidelines that she learned from her more senior colleagues on how to create appealing stories:
#1: You admire a character for trying more than for their successes.
#2: You gotta keep in mind what’s interesting to you as an audience, not what’s fun to do as a writer. They can be v. different.
#3: Trying for theme is important, but you won’t see what the story is actually about til you’re at the end of it. Now rewrite.
#4: Once upon a time there was ___. Every day, ___. One day ___. Because of that, ___. Because of that, ___. Until finally ___.
#5: Simplify. Focus. Combine characters. Hop over detours. You’ll feel like you’re losing valuable stuff but it sets you free.
#6: What is your character good at, comfortable with? Throw the polar opposite at them. Challenge them. How do they deal?
#7: Come up with your ending before you figure out your middle. Seriously. Endings are hard, get yours working up front.
#8: Finish your story, let go even if it’s not perfect. In an ideal world you have both, but move on. Do better next time.
#9: When you’re stuck, make a list of what WOULDN’T happen next. Lots of times the material to get you unstuck will show up.
#10: Pull apart the stories you like. What you like in them is a part of you; you’ve got to recognize it before you can use it.
#11: Putting it on paper lets you start fixing it. If it stays in your head, a perfect idea, you’ll never share it with anyone.
#12: Discount the 1st thing that comes to mind. And the 2nd, 3rd, 4th, 5th – get the obvious out of the way. Surprise yourself.
#13: Give your characters opinions. Passive/malleable might seem likable to you as you write, but it’s poison to the audience.
#14: Why must you tell THIS story? What’s the belief burning within you that your story feeds off of? That’s the heart of it.
#15: If you were your character, in this situation, how would you feel? Honesty lends credibility to unbelievable situations.
#16: What are the stakes? Give us reason to root for the character. What happens if they don’t succeed? Stack the odds against.
#17: No work is ever wasted. If it’s not working, let go and move on - it’ll come back around to be useful later.
#18: You have to know yourself: the difference between doing your best & fussing. Story is testing, not refining.
#19: Coincidences to get characters into trouble are great; coincidences to get them out of it are cheating.
#20: Exercise: take the building blocks of a movie you dislike. How d’you rearrange them into what you DO like?
#21: You gotta identify with your situation/characters, can’t just write ‘cool’. What would make YOU act that way?
#22: What’s the essence of your story? Most economical telling of it? If you know that, you can build out from there.
Presumably she’ll have more to come. Also, watch for her personal side project, a science-fiction short called Horizon, to come to a festival near you.
Pixar story artist Emma Coats has tweeted a series of “story basics” over the past month and a half — guidelines that she learned from her more senior colleagues on how to create appealing stories:
#1: You admire a character for trying more than for their successes.
#2: You gotta keep in mind what’s interesting to you as an audience, not what’s fun to do as a writer. They can be v. different.
#3: Trying for theme is important, but you won’t see what the story is actually about til you’re at the end of it. Now rewrite.
#4: Once upon a time there was ___. Every day, ___. One day ___. Because of that, ___. Because of that, ___. Until finally ___.
#5: Simplify. Focus. Combine characters. Hop over detours. You’ll feel like you’re losing valuable stuff but it sets you free.
#6: What is your character good at, comfortable with? Throw the polar opposite at them. Challenge them. How do they deal?
#7: Come up with your ending before you figure out your middle. Seriously. Endings are hard, get yours working up front.
#8: Finish your story, let go even if it’s not perfect. In an ideal world you have both, but move on. Do better next time.
#9: When you’re stuck, make a list of what WOULDN’T happen next. Lots of times the material to get you unstuck will show up.
#10: Pull apart the stories you like. What you like in them is a part of you; you’ve got to recognize it before you can use it.
#11: Putting it on paper lets you start fixing it. If it stays in your head, a perfect idea, you’ll never share it with anyone.
#12: Discount the 1st thing that comes to mind. And the 2nd, 3rd, 4th, 5th – get the obvious out of the way. Surprise yourself.
#13: Give your characters opinions. Passive/malleable might seem likable to you as you write, but it’s poison to the audience.
#14: Why must you tell THIS story? What’s the belief burning within you that your story feeds off of? That’s the heart of it.
#15: If you were your character, in this situation, how would you feel? Honesty lends credibility to unbelievable situations.
#16: What are the stakes? Give us reason to root for the character. What happens if they don’t succeed? Stack the odds against.
#17: No work is ever wasted. If it’s not working, let go and move on - it’ll come back around to be useful later.
#18: You have to know yourself: the difference between doing your best & fussing. Story is testing, not refining.
#19: Coincidences to get characters into trouble are great; coincidences to get them out of it are cheating.
#20: Exercise: take the building blocks of a movie you dislike. How d’you rearrange them into what you DO like?
#21: You gotta identify with your situation/characters, can’t just write ‘cool’. What would make YOU act that way?
#22: What’s the essence of your story? Most economical telling of it? If you know that, you can build out from there.
Presumably she’ll have more to come. Also, watch for her personal side project, a science-fiction short called Horizon, to come to a festival near you.
Kevin Kelly-- the next 100 years of science
Kevin Kelly, active in the Long Now, self-proclaimed science groupie.
Transcript of the talk is here
Science is a structure of sustainable changes.
Recursion/self-reference is the fundamental principle of the universe (he does not say it as strongly, but this comes across). Self reference creates a new level; this explains the growing complexity of XX (science, civilization, life ITSELF!)
If science is how we know things (the god of truth/knowledge). Next wave of science a tripod:
Transcript of the talk is here
Science is a structure of sustainable changes.
Recursion/self-reference is the fundamental principle of the universe (he does not say it as strongly, but this comes across). Self reference creates a new level; this explains the growing complexity of XX (science, civilization, life ITSELF!)
If science is how we know things (the god of truth/knowledge). Next wave of science a tripod:
- immense depth of observation
- full exploration of the parameter space (deterministic search)
- simulations (random search)
What you imagine is as important as what you measure
Science is how we surprize God
Thursday, March 29, 2012
black queen hypothesis
The theory is proposed in The Black Queen Hypothesis: Evolution of Dependencies through Adaptive Gene Loss J. Jeffrey Morrisa, Richard E. Lenskia, and Erik R. Zinserc
In the context of evolution, the BQH posits that certain genes, or more broadly, biological functions, are analogous to the queen of spades. Such functions are costly and therefore undesirable, leading to a selective advantage for organisms that stop performing them. At the same time, the function must provide an indispensable public good, necessitating its retention by at least a subset of the individuals in the community — after all, one cannot play Hearts without a queen of spades.
Gene loss can provide a selective advantage by conserving an organism’s limiting resources, provided the gene’s function is dispensable. Many vital genetic functions are leaky, thereby unavoidably producing public goods that are available to the entire community. Such leaky functions are thus dispensable for individuals, provided they are not lost entirely from the community. The BQH predicts that the loss of a costly, leaky function is selectively favored at the individual level and will proceed until the production of public goods is just sufficient to support the equilibrium community;
HIV treatment as prevention
Nice opening session discussing two contrasting strategies for HIV transmission prevention-- Pre-exposure prophylaxis, and immediate HAART.
PrEP provides substantial but incomplete protection against transmission. Rates are estimated from 39-62%. An alternate calculation looks at risk reduction. In these studies, PrEP reduces the three-year transmission risk from 0.04 to 0.01. Oral dosing (tenofovir) is effective, but not nearly as effective as a topical gel. The gel delivers much higher drug concentrations to the area concerned, with fewer chances for side effects. There is no evidence that PrEP selects for drug resistant strains. The gel also stops transmission of herpes. In all cases, adherence is the key factor in the real world. An interesting factor is that PrEP is associated with an increase in pregnancy and also with other STDs. The suggestion is that people feel protected, so do not take other measures.
HAART provides an alternative route. A functional therapy suppresses the virus to non-detectable levels. This means the person no longer transmits (real world check-- as long as the therapy is still working, and the patient is adhering ...). A problem is the common belief that the epidemic is driven by people in the primary phase of infection, many of whom (80%!!) are not aware that they are infected. At particular risk in EU are young homosexuals.
A suggested solution was mandatory (or at least strongly encouraged) universal HIV testing for all 15 year olds, with yearly followup. Anyone with positive results is immmediately put on HAART. Some epidemic models suggest that this would effectively stop the epidemic from spreading, and lead to almost no new infections by 2050. While this would initially cost more, after 10 years it would be substantially cheaper since we would have much fewer cases.
In one Kenya study, 84% of patients with primary infection did not know they were infected.
Finally, Brooks Nichols from Erasmus presented a mean field approximation of the epidemic in a rural African community of approx 150K. She used the model to compare the effectiveness of targeting PrEP to a small number of highly active individuals vs a large number of randomly selected individuals. Not surprisingly, targeting the hubs proved better control for significantly less cost. We are talking about simulating this using my zombie code.
PrEP provides substantial but incomplete protection against transmission. Rates are estimated from 39-62%. An alternate calculation looks at risk reduction. In these studies, PrEP reduces the three-year transmission risk from 0.04 to 0.01. Oral dosing (tenofovir) is effective, but not nearly as effective as a topical gel. The gel delivers much higher drug concentrations to the area concerned, with fewer chances for side effects. There is no evidence that PrEP selects for drug resistant strains. The gel also stops transmission of herpes. In all cases, adherence is the key factor in the real world. An interesting factor is that PrEP is associated with an increase in pregnancy and also with other STDs. The suggestion is that people feel protected, so do not take other measures.
HAART provides an alternative route. A functional therapy suppresses the virus to non-detectable levels. This means the person no longer transmits (real world check-- as long as the therapy is still working, and the patient is adhering ...). A problem is the common belief that the epidemic is driven by people in the primary phase of infection, many of whom (80%!!) are not aware that they are infected. At particular risk in EU are young homosexuals.
A suggested solution was mandatory (or at least strongly encouraged) universal HIV testing for all 15 year olds, with yearly followup. Anyone with positive results is immmediately put on HAART. Some epidemic models suggest that this would effectively stop the epidemic from spreading, and lead to almost no new infections by 2050. While this would initially cost more, after 10 years it would be substantially cheaper since we would have much fewer cases.
In one Kenya study, 84% of patients with primary infection did not know they were infected.
Finally, Brooks Nichols from Erasmus presented a mean field approximation of the epidemic in a rural African community of approx 150K. She used the model to compare the effectiveness of targeting PrEP to a small number of highly active individuals vs a large number of randomly selected individuals. Not surprisingly, targeting the hubs proved better control for significantly less cost. We are talking about simulating this using my zombie code.
Wednesday, March 28, 2012
economics
in terms of national income, a country with a long running current account deficit has been borrowing goods and services from the rest of the world. In order to support this one, or both, of the non-external sectors of the economy will have expanding debt positions and due to this the economy tends to restructure around consumption over investment and production. Because the external sector is a net drain on capital from the country, the government and/or private sector must continually expand their debt in order to maintain economic growth.
clipped from http://www.nakedcapitalism.com/2012/03/spain-follows-greece.html
spain is headed for a hard time
clipped from http://www.nakedcapitalism.com/2012/03/spain-follows-greece.html
spain is headed for a hard time
Cultivating genius
Another perspective on where good ideas come from, this one courtesy of Jonah Lehrer, writing in March 2012 Wired.
he starts from David Bank's paper on the problem of excess genius. Bank notices that genius comes in clumps. He postulates that this is due to a confluence of factors
Jonah Lehrer thinks the answer is in Paul Romer's concept of meta ideas, from his essay on economic growth
Romer concludes
Oscar Omoro (a FX trader) has this to say about meta-ideas and currency values
Lehrer concludes that we shoud support genius in science/arts the same way it is supported in sports. The US has a tremendous system to cultivate athletic talent at every stage of its development.
he starts from David Bank's paper on the problem of excess genius. Bank notices that genius comes in clumps. He postulates that this is due to a confluence of factors
My sense is that high points in cultural history require the confluence of many factors; some of these are more important than others. When all or most of the factors coincide, then one has a Periclean Athens, Laurencian Florence or Elizabethan London. When only several factors combine, the cultural eruption is more humble -- one gets Goethe's Weimar, or the Lake Poets. Things trail off gradually; if virtually none of the factors obtains, then we call it a Dark Age.He tests many, and finds none.
Jonah Lehrer thinks the answer is in Paul Romer's concept of meta ideas, from his essay on economic growth
meta-ideas are ideas about how to support the production and transmission of other ideas.Romer gives the 17th century idea of patents and copyrights. Lehrer lets this slide. These meta-ideas at SEVENTEENTH CENTURY ideas, and NO LONGER SUPPORT THE PRODUCTION AND TRANSMISSION OF IDEAS, they block it.
Romer concludes
We do not know what the next major idea about how to support ideas will be. Nor do we know where it will emerge. There are, however, two safe predictions. First, the country that takes the lead in the twenty-first century will be the one that implements an innovation that supports the production of commercially relevant ideas in the private sector. Second, new meta-ideas of this kind will be found.
Only a failure of imagination, the same one that leads the man on the street to suppose that everything has already been invented, leads us to believe that all of the relevant institutions have been designed and that all of the policy levers have been found.
Oscar Omoro (a FX trader) has this to say about meta-ideas and currency values
Meta-ideas come from a previously unknown source, and possesses the power to propel a large and growing audience into thinking in some new way.
Meta-ideas contain a kind of formula to perpetuate themselves. This formula can include a degree of fear (or greed), such as the fear (or desire) that gold prices will rise and a nation’s currency will decline. The formula has power because it associates some well-recognized truth with the particular emotion it intends to sway.
Lehrer concludes that we shoud support genius in science/arts the same way it is supported in sports. The US has a tremendous system to cultivate athletic talent at every stage of its development.
Tuesday, March 27, 2012
modern fairy tales
http://www.amazon.com/dp/014311784X?tag=braipick-20&camp=213381&creative=390973&linkCode=as4&creativeASIN=014311784X&adid=0KTW4441J1ZQMFDV52DZ
My Mother She Killed Me, My Father He Ate Me: Forty New Fairy Tales
My Mother She Killed Me, My Father He Ate Me: Forty New Fairy Tales
crash acoming?
Further to your highlighting Helene Meisler’s comments and graph on NYSE margin debt, for several years I too have tracked this number and have found that when combined with VIX as a measure of investor complacency, it is a useful tool for raising orange and red flags around market tops.
The fundamental ‘thesis’ of combining margin debt and investor complacency in one index (margin debt divided by VIX) is that a combination of high investor leverage and high investor complacency is a toxic mix indeed. As you know, margin debt figures are reported with a one month lag, so to try the make the indicator more timely, I estimate margin debt one month in advance.
Thus, for March 2012, I estimate NYSE margin debt could be in the range of $300-$305b. Dividing 300-305 by 13.66 (the VIX low in March so far, on Mar 16th) yields an indicator value of 21.96 to 22.33. On the basis of historical experience, I treat any indicator value above 20 as an orange flag and any indicator above 22 as a red flag. Thus the estimated March figure of approx. 22 is enough to prompt me to “head to the hills” i.e. seek refuge in high cash reserves.
Stated another way one might say that NYSE margin debt above $300b is a worry in and of itself but when combined with high levels of investor complacency as measured by a low VIX, the danger signal is magnified and intensified.
The fundamental ‘thesis’ of combining margin debt and investor complacency in one index (margin debt divided by VIX) is that a combination of high investor leverage and high investor complacency is a toxic mix indeed. As you know, margin debt figures are reported with a one month lag, so to try the make the indicator more timely, I estimate margin debt one month in advance.
Thus, for March 2012, I estimate NYSE margin debt could be in the range of $300-$305b. Dividing 300-305 by 13.66 (the VIX low in March so far, on Mar 16th) yields an indicator value of 21.96 to 22.33. On the basis of historical experience, I treat any indicator value above 20 as an orange flag and any indicator above 22 as a red flag. Thus the estimated March figure of approx. 22 is enough to prompt me to “head to the hills” i.e. seek refuge in high cash reserves.
Stated another way one might say that NYSE margin debt above $300b is a worry in and of itself but when combined with high levels of investor complacency as measured by a low VIX, the danger signal is magnified and intensified.
Monday, March 26, 2012
Gold standard
In reply to BB:
Lee Quaintance & Paul Brodsky
pbrodsky@qbamco.com
In today’s baseless monetary system labor cannot save its wages because banks may issue infinite credit that raises the general price level (GPL) above where it would naturally gravitate. If left to its own devices, prices would naturally fall, not rise, due to population growth, innovation, economies-of-scale, and productivity improvements. This would benefit all wage earners because a lower GPL would make wages more competitive vis-à-vis the goods, services and assets available for purchase. Affordability would rise for all economic participants, and would be especially beneficial to those at the lower end of the wage scale.
Obviously this is not the monetary system we have, which is premised on continually rising prices and policies that seek to ensure that. The current monetary regime issues credit and creates systemic debt. In this system asset price growth can outpace wage growth for long stretches of time. Asset prices, however, may be driven higher by the availability of credit, not rising demand or productivity. The debt build up that goes hand-in-hand with the credit build up creates a drag on demand and productivity. Unemployment rises. Debt cannot be serviced or repaid easily through wages.
Central banks must ultimately dilute the purchasing power of their currencies by manufacturing more currency with which debtors can repay their debts or with which creditors can extend new credit to debtors so they can roll over their debts. Any saved wages lose their purchasing power if held in that currency. This gives incentive to laborers not to save in the currency in which they are paid. Rather, they are forced to speculate in financial asset markets (directly or indirectly).
Lee Quaintance & Paul Brodsky
pbrodsky@qbamco.com
End of the Yen -- coming soon??
Clipped from "The Yen’s Looming Day of Reckoning" By Andy Xie, Caxen, 03.23.2012 and seen on TBP.
Japan is on an unsustainable path of a strong yen and deflation. The unprofitability of Japan’s major exporters and emerging trade deficits suggest that the end of this path is in sight. The transition from a strong to weak yen will likely be abrupt, involving a sudden and big devaluation of 30 to 40 percent. It will be a big shock to Japan’s neighbors and its distant competitors like Germany. The yen’s devaluation in 1996 was a main factor in triggering the Asian Financial Crisis. Japan’s neighbors must have a strong banking system to withstand a bigger devaluation of the yen.
Japan’s nominal GDP contracted 8 percent in the four years to the third quarter of 2011, and six percentage points of that was due to deflation. Without increased government expenditure, the contraction will be one percentage point more. Japan has not seen this kind of sustained deflation since the 1930s.
A strong yen, deflation and rising government debt form a short-term equilibrium that lasts as long as the market believes it is sustainable. The yen has seen a relentless upward trend since it depegged from the dollar in 1971, up to 83.4 from 360 again to the dollar. Japan’s nominal GDP peaked in 1997 and its nominal wages did too.
As Japanese institutions and households hold almost all of the government’s debts, their faith in the government’s creditworthiness is the mojo for Japan’s seemingly harmless deflationary spiral.
Japanese culture is group-oriented. This psyche was the reason that Japan’s property bubble became so big in the 1980s, five to six times the size of the bubble in the United States. After the property bubble, the group psyche shifted its power to a strong yen, pushing Japan’s economy onto the path of a rising yen, deflation and rising government debt.
A yen collapse will impact China and South Korea most, just like in 1998.
Japan is on an unsustainable path of a strong yen and deflation. The unprofitability of Japan’s major exporters and emerging trade deficits suggest that the end of this path is in sight. The transition from a strong to weak yen will likely be abrupt, involving a sudden and big devaluation of 30 to 40 percent. It will be a big shock to Japan’s neighbors and its distant competitors like Germany. The yen’s devaluation in 1996 was a main factor in triggering the Asian Financial Crisis. Japan’s neighbors must have a strong banking system to withstand a bigger devaluation of the yen.
Japan’s nominal GDP contracted 8 percent in the four years to the third quarter of 2011, and six percentage points of that was due to deflation. Without increased government expenditure, the contraction will be one percentage point more. Japan has not seen this kind of sustained deflation since the 1930s.
A strong yen, deflation and rising government debt form a short-term equilibrium that lasts as long as the market believes it is sustainable. The yen has seen a relentless upward trend since it depegged from the dollar in 1971, up to 83.4 from 360 again to the dollar. Japan’s nominal GDP peaked in 1997 and its nominal wages did too.
As Japanese institutions and households hold almost all of the government’s debts, their faith in the government’s creditworthiness is the mojo for Japan’s seemingly harmless deflationary spiral.
Japanese culture is group-oriented. This psyche was the reason that Japan’s property bubble became so big in the 1980s, five to six times the size of the bubble in the United States. After the property bubble, the group psyche shifted its power to a strong yen, pushing Japan’s economy onto the path of a rising yen, deflation and rising government debt.
A yen collapse will impact China and South Korea most, just like in 1998.
Dave Birch "The Future of Money" 24 Nov 2011
I blogged this once before.
Re-listened today, which brought some fresh perspective.
Money has different functions (store of value, medium of exchange, unit of account). Technology affects each of these differently.
Checks, for example, transform a store of value (bank account) into a medium of exchange.
The Tally Stick government debt market discounted debts across both time and space.
Cash money is a stealth tax, since what is really exchanged is government debt.
The Euro is a doomed currency. So what about the "galactic credit" of science fiction fame?
Tech again puts money creation into everyone's hands.
Should a currency be resource-based (gold standard) or reputation-based (debt standard).
Payments and banking are two seperate functions which our current monetary model conflates.
In a world without cash, what happens to prices?
Re-listened today, which brought some fresh perspective.
Money has different functions (store of value, medium of exchange, unit of account). Technology affects each of these differently.
Checks, for example, transform a store of value (bank account) into a medium of exchange.
The Tally Stick government debt market discounted debts across both time and space.
Cash money is a stealth tax, since what is really exchanged is government debt.
The Euro is a doomed currency. So what about the "galactic credit" of science fiction fame?
Tech again puts money creation into everyone's hands.
Should a currency be resource-based (gold standard) or reputation-based (debt standard).
Payments and banking are two seperate functions which our current monetary model conflates.
In a world without cash, what happens to prices?
Sunday, March 25, 2012
Thursday, March 22, 2012
LEYF, social entreprenurship -- June O'Sullivan
June O'Sullivan talks about LEYF at the RSA.
The lady knows her buzzwords, and uses them well. Fast speaker. The buzzwords capture key concepts-- they are not just buzz when coming from her lips.
She heads LEYF, the london early years foundation:
LEYF nurseries mix across social levels/income brackets. Variable pricing means more well-off families subsidize childcare for their less well off neighbors. Note that London has the best mixing of rich and poor of any city in the world. The London buroughs are (historically) built around a central estate belonging to the wealthy, with concentric rings of decreasing poverty around it, in the back mews, etc. If a London nursery draws from a 5-block radius, the lowest/highest income ratio for people living in that circle is the highest in the world.
They work to bridge communities. It isn't just leaving your kids from 8-5.They open their locals for wider hours, offereing courses and activities into the evening.
June spoke about social ROI. Wanting to get LEYF completely off of government funding, yet with profit as a secondary objective. Glossed over that England does not yet have a legal form of incorporation which allows this; technically LEYF is still a non-profit. Discussed in more detail that because non-profits people generally have a hard time talking about making money, they almost universally have poor business skills. She feels this needs to change.
She also has problems scaling up her vision. She wishes to franchize the LEYF model, which presents a number of difficulties. But franchizes better allow for local control, which is a key component of the LEYF vision-- each LEYF center MUST be a vital part of its local commmunity. Further, she is keenly aware that local control provides a better test-bed for innovation-- good ideas often come from the fringes, and can be tested there with much lower risk.
She wants the children who pass through LEYF to develop social capital. Trust networks, etc, the things which count for as much success in life as money capital.
And I reflect on the franchise model as a species type form for social evolution.
The lady knows her buzzwords, and uses them well. Fast speaker. The buzzwords capture key concepts-- they are not just buzz when coming from her lips.
She heads LEYF, the london early years foundation:
Established in 1903, we are the UK's leading childcare charity and social enterprise; our ambition is to build a better future for London's children, families and local communities through a commitment to excellence in Early Years education, training and research.
LEYF nurseries mix across social levels/income brackets. Variable pricing means more well-off families subsidize childcare for their less well off neighbors. Note that London has the best mixing of rich and poor of any city in the world. The London buroughs are (historically) built around a central estate belonging to the wealthy, with concentric rings of decreasing poverty around it, in the back mews, etc. If a London nursery draws from a 5-block radius, the lowest/highest income ratio for people living in that circle is the highest in the world.
They work to bridge communities. It isn't just leaving your kids from 8-5.They open their locals for wider hours, offereing courses and activities into the evening.
June spoke about social ROI. Wanting to get LEYF completely off of government funding, yet with profit as a secondary objective. Glossed over that England does not yet have a legal form of incorporation which allows this; technically LEYF is still a non-profit. Discussed in more detail that because non-profits people generally have a hard time talking about making money, they almost universally have poor business skills. She feels this needs to change.
She also has problems scaling up her vision. She wishes to franchize the LEYF model, which presents a number of difficulties. But franchizes better allow for local control, which is a key component of the LEYF vision-- each LEYF center MUST be a vital part of its local commmunity. Further, she is keenly aware that local control provides a better test-bed for innovation-- good ideas often come from the fringes, and can be tested there with much lower risk.
She wants the children who pass through LEYF to develop social capital. Trust networks, etc, the things which count for as much success in life as money capital.
And I reflect on the franchise model as a species type form for social evolution.
Tuesday, March 20, 2012
Weeks when decades happen -- shameless cut and paste
A cut/paste of a cut/paste. How's that for internet freedom?
My source is http://www.ritholtz.com/blog/2012/03/weeks-when-decades-happen/
Key point: the three trends which will shape markets for the next decade? are
Internationalization of the RMB
Rise of robotics
Cheap energy in the US
Weeks When Decades Happen
By Louis Gave
March 14, 2012
Talking about the Russian Revolution, Lenin once said that “there are decades when nothing happens and there are weeks when decades happen.” The last quarter of 2001 looks in retrospect like one of those exciting periods: three events occurred which set in motion the main economic trends of the ensuing decade. Successful investors latched on to at least one of these trends. The problem is, all three trends are now over. The investment strategies that worked over the past decade will not continue to work in the next. What comes next?
The three big events of 2001 were:
• The terrorist attacks of 9/11. This unleashed a decade of bi-partisan “guns and butter” policies in the US and produced a structurally weaker dollar.
• China joined the WTO in December 2001. China’s full entry into the global trading system signaled a re-organization of global production lines and China’s emergence as a major exporter. Export earnings were recycled into the mother of all investment booms, which drove a surge in commodity demand and a wider boom in emerging markets.
• The introduction of euro banknotes. The introduction of the common currency unleashed a decade of excess consumption in southern Europe, financed unwittingly by northern Europe through large bank and insurance purchases of government debt.
But today, all three trends have stalled—and this perhaps accounts for the discomfort and uncertainty we find in most meetings with clients. Indeed:
• US guns and butter spending is over. For the first time since 1970, real growth in US government spending is in negative territory:
• Chinese capital spending is slowing. China still needs to invest a lot more, but future growth rates will be in the single digits.
• Excess consumption in southern Europe is done. Money is clearly flowing out to seek refuge in northern Europe.
Thus, like British guns in Singapore, investors whose portfolios still reflect the above three trends are facing the wrong way. Instead of lamenting over the past, investors should be coming to grips with the trends of the future: the internationalization of the RMB, the rise of cheaper and more flexible automation, and dramatically cheaper energy in the US.
1- The internationalization of the RMB
China is now the centre of a growing percentage of both Asian, and emerging market trade (a decade ago China accounted for 2% of Brazil’s exports; today it is 18% and rising). As a result, China is increasingly asking its EM trade partners why their mutual trade should be settled in US dollars? After all, by trading in dollars, China and its EM trade partners are making themselves dependent on the willingness/ability of Western banks to finance their trade. And the realization has set in that this menage à trois does not make much sense. Indeed, for China, the fact that Western banks are not reliable partners was the major lesson of 2008 and again of 2011.
As a result, China is now turning to countries like Korea, Brazil, South Africa and others and saying: “Let’s move more of our trade into RMB from dollars” to which the typical answer is increasingly “Why not? This would diversify my earnings and make our business less reliant on Western banks. But if we are going to trade in RMB, we will need to keep some of our reserves in RMB. And for that to happen, you need to give us RMB assets that we can buy”. Hence the creation of the offshore RMB bond market in Hong Kong, a development which may go down as the most important financial event of 2011.
Of course, for China to even marginally dent the dollar’s predominance as a trading currency, the RMB will have to be seen as a credible currency—or at least as more credible than the alternatives. And here, the timing may be opportune for, today, outshining the euro, dollar, pound or even yen is increasingly a matter of being the tallest dwarf.
Still, China’s attempt to internationalize the RMB also means that Beijing cannot embark on fiscal and monetary stimulus at the first sign of a slowdown in the Chinese economy. Instead, the PBoC and Politburo have to be seen as keeping their nerve in the face of slowing Chinese growth. In short, for the RMB to internationalize successfully, the PBoC has to be seen as being more like the Bundesbank than like the Fed.
Following this Buba comparison, China has a genuine opportunity to establish the RMB as the dominant trade currency for its region, just as the deutsche mark did in the 1970s and 1980s. But interestingly, China seems to consider that its “region” is not just limited to Asia (where China now accounts for most of the marginal increase in growth—see chart) but encompasses the wider emerging markets. How else can we explain China’s new enthusiasm in granting PBoC swap lines to the likes of the Brazilian, Argentine, Turkish and Belorussian central banks?
China’s attempt to move more of its trade into RMB is interesting given the current shifts in China’s trade. Indeed, although the US and Europe are still China’s largest single trade partners, most of the growth in trade in recent years has occurred with emerging markets. And China’s trade with emerging markets is increasingly not in cheap consumer goods (toys, underwear, socks or shoes) but rather in capital goods (earth- moving equipment, telecom switches, road construction services, etc; see China Bulldozes a New Export Market). In short, yesterday China’s trade mostly took place with developed markets, was comprised of low-valued-added goods, and was priced in dollars. Tomorrow, China’s trade will be oriented towards emerging markets, focused on higher value-added goods, and priced in RMB.
This would mark a profound change from China’s old development model: keeping its currency undervalued, inviting foreign factories to relocate to the mainland, transforming 10-20mn farmers into factory workers each year, and triggering massive labor productivity gains—gains which the government captures through financial repression and redeploys into large-scale infrastructure projects. But China’s change in development model may be less a matter of choice than of necessity.
2– Virtue from necessity: the rise of robotics
The first harsh reality confronting China is that the country is now the world’s single largest exporter. Combine that impressive status with the reality that the world is unlikely to grow at much more than 3% to 4% over the coming years and it becomes obvious that the past two decades’ 30% average annual growth in exports just cannot be repeated.
Beyond the limits to export growth, the other challenge to China’s business model is the second step, namely the transforming of farmers into factory workers. Not that China is set to run out of farmers (see The Countdown for China’s Farmers). But the coming years may prove more challenging for unskilled workers as robotics and automation continue to gather pace. Over the coming decade, cheap labor may not be the comparative advantage it was in the previous decade, simply because the cost of automation is now falling fast (see The Robots Are Coming).
Of course, factory and process automation is hardly a new concept. What is new is the dramatic recent shift from fixed automation to flexible automation. For decades we have had machines that could perform simple repetitive tasks; now we have machines that can be reprogrammed easily to perform a wide range of more complicated functions. With improved software and hardware, robots can do more, in more industries; and the purpose of automation has shifted from improving crude productivity (making more of the same things at lower cost) to more sophisticated targets like adaptability across product cycles, and improved quality and consistency.
One consequence of cheaper and more flexible automation is that some manufacturing that fled the developed world for cheap-labor destinations like China may return to the US, Japan and Europe, as firms decide that the benefits of low-cost labor no longer outweigh the advantage of better logistics and proximity to customers. Even if this does not occur, factories in places like China may become ever more automated (e.g.: electronics assembler Foxconn, Apple’s main supplier and one of the world’s biggest employers with some 1mn workers, has started to talk about building factories manned with robots). This then raises the question of what China’s hordes of manufacturing workers will do should Chinese factories automate and/or re-localize to the developed world. One obvious conclusion is that China’s leaders will thus have to deal with slowing growth through further deregulation, rather than stimulus and currency manipulation. The remedies of 2008 (large fiscal and monetary stimulus) will not work again.
This dilemma implies that the robotics trend dovetails with the RMB internationalization trend. To understand just why, it is important to recognize one aspect of policymaking which makes China unique: the country’s leaders wake up every morning pondering how to return China to being the world’s number one economy and a geopolitical superpower in its own right (few other world leaders harbor such thoughts). And ever since Deng Xiaoping, the answer to that question has typically been to sacrifice some element of control over the economy in exchange for faster growth.
Today, China faces the imperative of making just such a trade-off between control and growth: the old model of cheap labor and vast capital spending is near exhaustion, so the only way to sustain growth is to go for more efficiency, especially through financial sector reform. For China’s leaders, reform will be painful but the cost of missing out on the global power that comes with further growth would be even more painful. Hence we are convinced Beijing will eventually bite the financial reform bullet, and RMB internationalization is the leading edge of that reform. In that light, the creation of the RMB offshore bond market is an event of much greater significance than is currently acknowledged by the general consensus.
3– Cheap US energy
Along with the possibility of manufacturing returning to the developed world from China and other low labor-cost countries, another key trend of the coming decade should be the gradual achievement of energy independence by the US. Given the discoveries of the past few years in the exploitation of shale gas and oil, and assuming the existence of political will to invest in reshaping US energy infrastructure, such a development is now within reach.
These large natural gas discoveries have two potential global impacts. First, the combination of low-cost automation and low-cost energy could encourage manufacturers to locate their plants not in countries with the lowest labor cost, but in those with the lowest energy cost. For example, on a recent visit to Germany we kept hearing how chemical plants would have a tough time competing with American plants if the price of US natural gas stayed below US$2.50. In fact, with Germany having decided to pull away from nuclear and bet its future on high-cost wind power, energy- intensive industries in the country could be in for a challenging decade.
Second, the return to manufacturing and energy independence should lead to sustained improvement in the US trade deficit. Energy imports account for around half of the US trade deficit (while the other half is broadly manufactured goods from China). Today the US, through its trade deficit, sends roughly US$500bn worth of cash to the rest of the world every year. This money helps grease the wheels of global trade since more than two-thirds of global trade is still denominated in dollars. But what will happen if, in the next ten years, the US stops exporting dollars, thanks to its new strengths in manufacturing and cheap energy? In such a scenario, the dollars would run scarce.
In fact, this may already be happening. This would explain why the growth of central bank reserves held at the Fed for foreign central banks has been in negative territory for the past year—and why, over the past two quarters, the Fed has been exceptionally generous in granting swap lines to foreign central banks (notably the ECB).
This does not make for a stable situation. And given that the RMB is unlikely to replace the dollar as the principal global trading currency for many years to come (see History Lessons and the Offshore RMB), the likely combination of expanding global trade and a shrinking US trade deficit should mean that either the dollar will have to rise, or US assets will outperform non-US assets to the point where valuation differnces make it attractive for US investors to deploy dollars abroad (since US consumers won’t).
4– Conclusion
Obviously, we do not claim to have identified all the big trends of the coming decade. The next several years will doubtless deliver many more important changes and investment opportunities (monetization of Japan’s debt and a collapse in the yen? Demographic challenges in numerous countries? Reform and modernization in the Islamic world? Political upheaval and regime change in Iran? Water shortages in China, India and other Asian countries? Possible energy independence for India through thorium-based nuclear energy plants?). But we are nonetheless confident on these main points:
• The three key macro trends of the past decade have come to a screeching halt. This explains why financial markets seem to lack conviction and direction.
• The internationalization of the RMB and the birth of the RMB bond market is likely to be one of the most important developments of the decade. The closest analogy is the creation of the junk bond market by Michael Milken in the 1980s. Interestingly, just as in the early 1980s, few people are taking the time to work through the ramifications of this momentous event. Understanding this new market will prove essential to understanding the world of tomorrow.
• The likely evolution of the US from record high twin deficits to much smaller budget and trade deficits should help push the dollar higher over the coming years. And this in turn will have broad ramifications for a number of asset prices.
My source is http://www.ritholtz.com/blog/2012/03/weeks-when-decades-happen/
Key point: the three trends which will shape markets for the next decade? are
Internationalization of the RMB
Rise of robotics
Cheap energy in the US
Weeks When Decades Happen
By Louis Gave
March 14, 2012
Talking about the Russian Revolution, Lenin once said that “there are decades when nothing happens and there are weeks when decades happen.” The last quarter of 2001 looks in retrospect like one of those exciting periods: three events occurred which set in motion the main economic trends of the ensuing decade. Successful investors latched on to at least one of these trends. The problem is, all three trends are now over. The investment strategies that worked over the past decade will not continue to work in the next. What comes next?
The three big events of 2001 were:
• The terrorist attacks of 9/11. This unleashed a decade of bi-partisan “guns and butter” policies in the US and produced a structurally weaker dollar.
• China joined the WTO in December 2001. China’s full entry into the global trading system signaled a re-organization of global production lines and China’s emergence as a major exporter. Export earnings were recycled into the mother of all investment booms, which drove a surge in commodity demand and a wider boom in emerging markets.
• The introduction of euro banknotes. The introduction of the common currency unleashed a decade of excess consumption in southern Europe, financed unwittingly by northern Europe through large bank and insurance purchases of government debt.
But today, all three trends have stalled—and this perhaps accounts for the discomfort and uncertainty we find in most meetings with clients. Indeed:
• US guns and butter spending is over. For the first time since 1970, real growth in US government spending is in negative territory:
• Chinese capital spending is slowing. China still needs to invest a lot more, but future growth rates will be in the single digits.
• Excess consumption in southern Europe is done. Money is clearly flowing out to seek refuge in northern Europe.
Thus, like British guns in Singapore, investors whose portfolios still reflect the above three trends are facing the wrong way. Instead of lamenting over the past, investors should be coming to grips with the trends of the future: the internationalization of the RMB, the rise of cheaper and more flexible automation, and dramatically cheaper energy in the US.
1- The internationalization of the RMB
China is now the centre of a growing percentage of both Asian, and emerging market trade (a decade ago China accounted for 2% of Brazil’s exports; today it is 18% and rising). As a result, China is increasingly asking its EM trade partners why their mutual trade should be settled in US dollars? After all, by trading in dollars, China and its EM trade partners are making themselves dependent on the willingness/ability of Western banks to finance their trade. And the realization has set in that this menage à trois does not make much sense. Indeed, for China, the fact that Western banks are not reliable partners was the major lesson of 2008 and again of 2011.
As a result, China is now turning to countries like Korea, Brazil, South Africa and others and saying: “Let’s move more of our trade into RMB from dollars” to which the typical answer is increasingly “Why not? This would diversify my earnings and make our business less reliant on Western banks. But if we are going to trade in RMB, we will need to keep some of our reserves in RMB. And for that to happen, you need to give us RMB assets that we can buy”. Hence the creation of the offshore RMB bond market in Hong Kong, a development which may go down as the most important financial event of 2011.
Of course, for China to even marginally dent the dollar’s predominance as a trading currency, the RMB will have to be seen as a credible currency—or at least as more credible than the alternatives. And here, the timing may be opportune for, today, outshining the euro, dollar, pound or even yen is increasingly a matter of being the tallest dwarf.
Still, China’s attempt to internationalize the RMB also means that Beijing cannot embark on fiscal and monetary stimulus at the first sign of a slowdown in the Chinese economy. Instead, the PBoC and Politburo have to be seen as keeping their nerve in the face of slowing Chinese growth. In short, for the RMB to internationalize successfully, the PBoC has to be seen as being more like the Bundesbank than like the Fed.
Following this Buba comparison, China has a genuine opportunity to establish the RMB as the dominant trade currency for its region, just as the deutsche mark did in the 1970s and 1980s. But interestingly, China seems to consider that its “region” is not just limited to Asia (where China now accounts for most of the marginal increase in growth—see chart) but encompasses the wider emerging markets. How else can we explain China’s new enthusiasm in granting PBoC swap lines to the likes of the Brazilian, Argentine, Turkish and Belorussian central banks?
China’s attempt to move more of its trade into RMB is interesting given the current shifts in China’s trade. Indeed, although the US and Europe are still China’s largest single trade partners, most of the growth in trade in recent years has occurred with emerging markets. And China’s trade with emerging markets is increasingly not in cheap consumer goods (toys, underwear, socks or shoes) but rather in capital goods (earth- moving equipment, telecom switches, road construction services, etc; see China Bulldozes a New Export Market). In short, yesterday China’s trade mostly took place with developed markets, was comprised of low-valued-added goods, and was priced in dollars. Tomorrow, China’s trade will be oriented towards emerging markets, focused on higher value-added goods, and priced in RMB.
This would mark a profound change from China’s old development model: keeping its currency undervalued, inviting foreign factories to relocate to the mainland, transforming 10-20mn farmers into factory workers each year, and triggering massive labor productivity gains—gains which the government captures through financial repression and redeploys into large-scale infrastructure projects. But China’s change in development model may be less a matter of choice than of necessity.
2– Virtue from necessity: the rise of robotics
The first harsh reality confronting China is that the country is now the world’s single largest exporter. Combine that impressive status with the reality that the world is unlikely to grow at much more than 3% to 4% over the coming years and it becomes obvious that the past two decades’ 30% average annual growth in exports just cannot be repeated.
Beyond the limits to export growth, the other challenge to China’s business model is the second step, namely the transforming of farmers into factory workers. Not that China is set to run out of farmers (see The Countdown for China’s Farmers). But the coming years may prove more challenging for unskilled workers as robotics and automation continue to gather pace. Over the coming decade, cheap labor may not be the comparative advantage it was in the previous decade, simply because the cost of automation is now falling fast (see The Robots Are Coming).
Of course, factory and process automation is hardly a new concept. What is new is the dramatic recent shift from fixed automation to flexible automation. For decades we have had machines that could perform simple repetitive tasks; now we have machines that can be reprogrammed easily to perform a wide range of more complicated functions. With improved software and hardware, robots can do more, in more industries; and the purpose of automation has shifted from improving crude productivity (making more of the same things at lower cost) to more sophisticated targets like adaptability across product cycles, and improved quality and consistency.
One consequence of cheaper and more flexible automation is that some manufacturing that fled the developed world for cheap-labor destinations like China may return to the US, Japan and Europe, as firms decide that the benefits of low-cost labor no longer outweigh the advantage of better logistics and proximity to customers. Even if this does not occur, factories in places like China may become ever more automated (e.g.: electronics assembler Foxconn, Apple’s main supplier and one of the world’s biggest employers with some 1mn workers, has started to talk about building factories manned with robots). This then raises the question of what China’s hordes of manufacturing workers will do should Chinese factories automate and/or re-localize to the developed world. One obvious conclusion is that China’s leaders will thus have to deal with slowing growth through further deregulation, rather than stimulus and currency manipulation. The remedies of 2008 (large fiscal and monetary stimulus) will not work again.
This dilemma implies that the robotics trend dovetails with the RMB internationalization trend. To understand just why, it is important to recognize one aspect of policymaking which makes China unique: the country’s leaders wake up every morning pondering how to return China to being the world’s number one economy and a geopolitical superpower in its own right (few other world leaders harbor such thoughts). And ever since Deng Xiaoping, the answer to that question has typically been to sacrifice some element of control over the economy in exchange for faster growth.
Today, China faces the imperative of making just such a trade-off between control and growth: the old model of cheap labor and vast capital spending is near exhaustion, so the only way to sustain growth is to go for more efficiency, especially through financial sector reform. For China’s leaders, reform will be painful but the cost of missing out on the global power that comes with further growth would be even more painful. Hence we are convinced Beijing will eventually bite the financial reform bullet, and RMB internationalization is the leading edge of that reform. In that light, the creation of the RMB offshore bond market is an event of much greater significance than is currently acknowledged by the general consensus.
3– Cheap US energy
Along with the possibility of manufacturing returning to the developed world from China and other low labor-cost countries, another key trend of the coming decade should be the gradual achievement of energy independence by the US. Given the discoveries of the past few years in the exploitation of shale gas and oil, and assuming the existence of political will to invest in reshaping US energy infrastructure, such a development is now within reach.
These large natural gas discoveries have two potential global impacts. First, the combination of low-cost automation and low-cost energy could encourage manufacturers to locate their plants not in countries with the lowest labor cost, but in those with the lowest energy cost. For example, on a recent visit to Germany we kept hearing how chemical plants would have a tough time competing with American plants if the price of US natural gas stayed below US$2.50. In fact, with Germany having decided to pull away from nuclear and bet its future on high-cost wind power, energy- intensive industries in the country could be in for a challenging decade.
Second, the return to manufacturing and energy independence should lead to sustained improvement in the US trade deficit. Energy imports account for around half of the US trade deficit (while the other half is broadly manufactured goods from China). Today the US, through its trade deficit, sends roughly US$500bn worth of cash to the rest of the world every year. This money helps grease the wheels of global trade since more than two-thirds of global trade is still denominated in dollars. But what will happen if, in the next ten years, the US stops exporting dollars, thanks to its new strengths in manufacturing and cheap energy? In such a scenario, the dollars would run scarce.
In fact, this may already be happening. This would explain why the growth of central bank reserves held at the Fed for foreign central banks has been in negative territory for the past year—and why, over the past two quarters, the Fed has been exceptionally generous in granting swap lines to foreign central banks (notably the ECB).
This does not make for a stable situation. And given that the RMB is unlikely to replace the dollar as the principal global trading currency for many years to come (see History Lessons and the Offshore RMB), the likely combination of expanding global trade and a shrinking US trade deficit should mean that either the dollar will have to rise, or US assets will outperform non-US assets to the point where valuation differnces make it attractive for US investors to deploy dollars abroad (since US consumers won’t).
4– Conclusion
Obviously, we do not claim to have identified all the big trends of the coming decade. The next several years will doubtless deliver many more important changes and investment opportunities (monetization of Japan’s debt and a collapse in the yen? Demographic challenges in numerous countries? Reform and modernization in the Islamic world? Political upheaval and regime change in Iran? Water shortages in China, India and other Asian countries? Possible energy independence for India through thorium-based nuclear energy plants?). But we are nonetheless confident on these main points:
• The three key macro trends of the past decade have come to a screeching halt. This explains why financial markets seem to lack conviction and direction.
• The internationalization of the RMB and the birth of the RMB bond market is likely to be one of the most important developments of the decade. The closest analogy is the creation of the junk bond market by Michael Milken in the 1980s. Interestingly, just as in the early 1980s, few people are taking the time to work through the ramifications of this momentous event. Understanding this new market will prove essential to understanding the world of tomorrow.
• The likely evolution of the US from record high twin deficits to much smaller budget and trade deficits should help push the dollar higher over the coming years. And this in turn will have broad ramifications for a number of asset prices.
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