Freaking Out for Congress

Thanks, idiots, for the carnage.

By “idiots,” I mean those members of the US Government who are unwilling to compromise because of some quasi-religious convictions about taxation and the role of government. I mean those members of the US Government who are using the debt ceiling to create a crisis, thereby scaring the bejeezes out of little old ladies.

Officially, the US debt ceiling “crisis” (which is completely artificial and unnecessary in the first place) is supposed to occur sometime next week. But, it’s already happening.

Little old ladies, sophisticated investors – everyone – are now getting out of US investments. They are selling their US mutual funds, closing their US bank accounts, and selling their US stocks. Today, I had millions of dollars’ worth of accounts cross my desk saying, “Sell all my US holdings and buy Canadian.” This selloff - which has already cost the country billions of dollars - will continue until the matter is resolved.

Of course, not everyone is upset about the situation. Citizen’s militia groups are apparently ecstatic about what they feel is the increased likelihood of finding practical use for their assault rifles and body armor.

Interestingly, tea party members are now calling for the resignation of John Boehner, saying that he is part of the “old guard” and not revolutionary enough.

It is likely that Congress will reach an agreement at the last minute, after scoring enough political points to satisfy their most maniacal constituents. Even so, many investors are not confident enough of this positive outcome to leave their life savings to the whims of fanatics.

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See also:




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“Some men just want to watch the world burn.”

Alfred the Butler, in the movie, The Dark Knight
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George Soros "Retires" from Hedge Fund Business

In a surprising announcement this week, billionaire George Soros – equity manager of one of the largest hedge funds in the world – said he will be returning his investor’s money and changing his hedge fund to a private fund for himself and his family.

Soros’ decision is primarily due to new regulations which will make hedge funds more transparent and trade-restricted than they used to be.

Like most great investors and traders, Soros spends a lot of time contemplating human psychology and logical thinking (or lack thereof), and making big bets based on his analysis. Recently, Soros noticed that although the price of gold had been rising for weeks, silver had not experienced the same boom. Recognizing that at some point silver would have to jump as well, Soros bought large quantities; and, he was right. After a parabolic rise in the price of silver Soros sold out, partially causing the subsequent drop.

Soros is for some a shadowy and mysterious figure. He has one of the most extreme cases of clinical narcissism I’ve ever seen, and in fact he recognizes this. Though he doesn’t actually say “I have a narcissistic disorder,” he does describe himself as having “messianic tendencies” (i.e. the tendency to think he’s god). To his credit, he realizes that this is a belief he should try to suppress, even if he is an internationally famous billionaire.

Soros’ main contribution to the world of investing is a semi-philosophical concept called “reflexivity.” In a nutshell, reflexivity is the idea that while facts and circumstances generally create results, expectations and interpretations of facts can create results of their own. For example, even if a company is in good financial condition, if everyone believes the company is on the verge of bankruptcy they will sell off the stock and cause the price to plummet, thereby causing the financial instability they were worried about in the first place. According to Soros, understanding reflexivity is key to making superior investment decisions: I don't disagree.

These days, Soros gives a great deal of money to philanthropic organizations, mainly those that promote human rights, logical thinking and open-mindedness.

Soros’ logical demeanour and flexible way of thinking tends to drive doctrine-following and/or illogical people absolutely insane. Dorky talk-show host Glenn Beck, for instance, considers Soros a mortal enemy (Beck calls Soros “Spooky Dude,” mocking his Eastern-European accent in a Dracula-like fashion). The fact that Beck regards himself as Soros’ intellectual equal only adds to the hilarity.

Hopefully, retiring from public investing will give Soros more time to write and lecture. If so, I am looking forward to it.

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Lecture on Reflexivity (starts at 16:45 - prior is introduction).

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See also:

Glenn Beck "exposes" George Soros


Jon Stewart mocks Glenn Beck

Boner's Crisis

Strategic oil wars and bailouts are expensive. During his presidency, George W. Bush raised the US debt ceiling 7 times.

Now, with a Democratic president in office, some Republicans have suddenly decided that deficits are bad, and to use the debt ceiling as a pawn in a game of brinkmanship.

Failing to raise the debt ceiling would raise US probability of default, which would in turn cause an increase in interest rates (investors buying US debt would wish to be compensated for the increased risk), and the economy would suffer hugely as a result. Those who are downplaying the repercussions simply don't know what they are talking about.

Personally, I don’t think it matters whose politics you believe, or whether you think taxes should be raised or not. Using a routine matter from one administration (raising the debt ceiling) to manufacture an artificial crisis in another is deplorable. Make no mistake, this "crisis" is as artificial as Boehner's tan.

In his native German, “Boehner” is pronounced, “Boner.” These days, it just seems so appropriate.

Stop the political posturing. Get it done.

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“I can end the deficit in 5 minutes. You just pass a law that says that anytime there’s a deficit of more than 3% of GDP, all sitting members of Congress are ineligible for re-election. Now you’ve got the incentives in the right place.”

Warren Buffett
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Related Link: (as often happens, The Onion describes the situation better than the real news).

Congress Continues Debate Over Whether Or Not Nation Should Be Economically Ruined

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See also:

Tan Stewie from trevor on Vimeo.

Ghost Cities of China

A short post...because this Australian documentary describes the situation in pictures better than mere words ever could.




See also:

Fear and Soap in China

China's Housing Bomb

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Conversation with a Chinese Property Developer

A week ago, the Chinese government instituted a new set of anti-corruption rules, specifically aimed at local government officials.

Of course, giving bribes and other forms of corruption were always illegal, but about as enforced as copying DVDs. Under the new law, officials will annually vote on each other's trustworthiness: how does one say "backstabbing" in Chinese?

Today's article is a short excerpt from a conversation with a property developer from Nanning, and a few of the problems (or opportunities, depending on your point of view) with regard to bribery and business in China. For obvious reasons, the name of the developer is not revealed. The conversation took place on July 17th, 2011.

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Frost Report: "First off, how does one go about doing business - that is, securing a contract - in China? I've heard that it's all about 'who you know,' rather than about a good reputation or good pricing."

Property Developer: "It's tough. You have to bribe officials 1-2 years in advance of a (major) project, when you put in your bid. A year later, all the officials may have changed, and you have to start all over again."

Frost Report: "So, when you give a bribe, do you just hand someone a red envelope?"

Property Developer: "That's too obvious. But, you can't just give a gift, either. It's not enough. You have to hide money inside a gift."

Frost Report: "So basically, whoever gives the biggest bribe gets the contract, is that right?"

Property Developer: "Yes. Sometimes you sign everything - all the papers are signed. Then, a few weeks later, you find out that the contract went to someone else."

Frost Report: "So after you signed the paperwork, someone came along with a bigger bribe?"

Property Developer: "Right. This business is like (American) football. You get one big play and it changes everything. It's not like basketball, when you keep getting points one at a time."

Frost Report: "What if the official won't take a bribe from you? These days, I guess they are careful. How do you win the contract then?"

Property Developer: "There are always ways. If you can't get in touch with the officials directly, sometimes you can give money to their kids. For example, at New Year, you can give a kid an envelope with 2000 yuan (equivalent to a month's salary in rural China). Holidays you have to give away a lot of money."

Frost Report: "Do you think that things will change as a result of the new laws?"

Property Developer: "No."

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See also:

China issues anti-corruption regulation targeted at village officials

More Chinese cities see property prices fall as result of cooling policies

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“Few men have virtue to withstand the highest bidder.”

George Washington

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China's SEC Visit

Just two posts back, I wrote about a problem of Chinese publicly-listed companies; namely, that many of them don't exist.

Well, it seems like their party is one step closer to ending.

The American Public Company Accounting Oversight Board (PCAOB) and Securities and Exchange Commission (SEC) is sending over a delegation to establish oversight of Chinese auditing firms. At the same time, Canada's Ontario Securities Commission (OSC) will be "reviewing" emerging market companies listed on Canadian exchanges.

Although China forbids US auditors from exposing, um, I mean, inspecting Chinese companies directly, the US auditors are hoping to create a list of companies willing to be inspected voluntarily with Chinese government consent. Presumably, most of those willing to be inspected would be legitimate.

When I was in India a few years ago, I saw a "steel products manufacturing company" that consisted of one skinny guy with a small pile of coal, a bellows, a hammer, and an anvil. He was seated inside a cubicle made of sheet metal at a New Delhi marketplace, hammering out a kitchen knife. A sign behind him proudly announced that his company was publicly-traded on an Indian stock exchange.

Companies in China already hire white people with no qualifications or job descriptions, so that their offices can look international and important. Predictably, shell companies will hire people off the street to play the roles of office employees during the audit visits; or, they will just try their luck with red envelopes full of cash. Nonetheless, I suspect that the paperwork will not be so easy to fake. Since the Chinese government cannot afford to lose face, many more companies will be de-listed.

Yet another nail in the coffin of the bloated Chinese market.

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"The superior man understands what is right; the inferior man understands what will sell."

Confucius

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