China's High Speed Railway

And the economic war with Japan



China’s high-speed railway serves as a reminder that China is still a single-party (communist) country, where central planning and pride can result in disaster.

A few weeks ago, one of China’s shiny new bullet trains crashed into another, killing 40 people. The story hardly made the news in North America, but for Chinese and Japanese the story was huge.

Immediately after the crash, the Chinese government took the lead rail car and literally buried it. Outraged citizens demanded that the car be exhumed and an investigation launched, though few expect that this investigation will be thorough. Later, it was found that rail employees had been warning their relatives not to use the trains, since their operators had insufficient training and the trains were being run too fast.

The question is, why did China not give their operators sufficient time to train? And, why did they run the trains so fast? The answer: Japan.

Due to an ongoing rivalry with their historical archenemy, China’s rail lines had to be opened on time and had to run faster than Japan’s - no matter what. Running the trains at higher speeds than their Japanese counterparts was seen as integral to defeating Japan’s copyright infringement claims, since China claims to have improved upon Japanese technology.

Just weeks before the crash, the Chinese government released Japan-bashing reports about how their train technology was superior to Japan’s, and how Japanese patent infringement claims were groundless. China’s ministry of railways was quoted as saying that “The Beijing-Shanghai high-speed railway and Japan's Shinkansen line cannot be mentioned in the same breath, as many of the technological indicators used by China's high-speed railways are far better than those used in Japan's Shinkansen.”

Despite being furious, the Japanese transport minister responded calmly, saying merely that “a heated verbal battle” was not advisable.

To the gross embarrassment of the Chinese government, the Beijing-Shanghai rail line has now been recalled for safety reasons.

At present, China has 13 high-speed railways in operation. At present, few people trust them enough to travel on them.

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"While responding to media questions concerning the safety of traveling on the high-speed line, he (chief engineer of the Ministry of Railways) said that he is fully confident in the safety of the travel link and that the passengers' safety is guaranteed."

Xinhua news, June 27, 2011

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For more information, see:

China's high-speed rail technologies better than Japanese Shinkansen

China denies Japanese rail patent infringement claims

Trains fly on Beijing-Shanghai high-speed railway

China recalls bullet trains in new blow to technology
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Culling the Sheep - again

This week marked the single biggest wave of selling by retail investors ever recorded.

On Monday Aug 8th 2011 alone, Swiss bank UBS recorded retail outflows of 1.3 billion dollars! No wonder the markets crashed.

In The Intelligent Investor’s Mind, I speak about "myopic loss aversion" – the tendency for people with long-term goals (such as retirement) to focus on short-term events, especially the gyrations of the stock market. Myopia literally means “shortsightedness.” Such shortsightedness typically beds with "recency bias" – the tendency to think that the current situation (good or bad) will last forever. This week’s market activity shows just how strongly these cognitive errors can destroy people’s financial well-being: usually their own.

If you doubt the intensity of this week’s retail investor freakout, check out these choice quotes:

"Investing in U.S. Markets is DEAD....DEAD… and it is NOT COMING BACK!!"

"Yeah, it's different all right, as in it is ALL coming down."

"Their plan is to get rid of paper currency and go to digital currency so they can make you a slave."

"666, whatever you'd like to call it is coming."

Yet the market rollercoastered, showing that as much as retail investors were frantically selling, professionals and value investors were swooping in to pick up the spoils. Bloomberg reported that insider buying by S&P 500 company executives reached levels not seen since March 2009.

This week also revealed some great moments in calm and cool leadership. First was Barack Obama’s matter-of-fact speech regarding the S&P debt downgrade, where he basically said (I’m paraphrasing), “I didn’t need a downgrade by S&P to tell me that our government had a dysfunctional moment. We need to fix the way our government works.” The second was from Federal Reserve chairman Ben Bernanke, who said that he would keep interest rates low (which makes it easy for businesses to expand & develop), but other than that, the markets just need to grow up and get on with it. The final moment was an interview with Bank of America’s Jamie Dimon, who demonstrated the sensibility of long-term thinking (see video below). Interestingly, all of these great moments were regarded negatively by the public, who just wanted their leaders to DO SOMETHING!

As usual, the counterintuitive nature of the stock market is at work: those who are fearful of losing their money are losing their money; those who are unafraid of losing their money are making more.

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"There is no comparison between fear and greed. Fear is instant, pervasive and intense. Greed is slower. Fear hits."

Warren Buffett, Aug. 11, 2011

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Musings about the Debt Crisis

The market activity of the last week has been nothing short of amazing. It wil, no doubt, provide fuel for several year's worth of analysis by investment psychologists. Consider these amazing facts...

1) The Debt Debate. For almost two weeks, the U.S. government debated spending measures to reduce the deficit. After they had reached an agreement, the markets crashed (see my earlier post, "The Market Gets Ugly," for a full explanation).

2) The Downgrade. Standard & Poors downgraded U.S. debt, meaning that S&P feels the probability of the government defaulting on its loan obligations is now higher. As a result of this downgrade and the subsequent market crash, investors... (wait for it, this is really good) bought hordes of U.S. treasuries! That is, they escaped the crisis of a U.S. debt downgrade by buying into the safety of U.S. debt.

3) Scapegoating and Fundamental Attribution Errors (forms of logical fallacy) in the media. Pundits are taking to the airwaves to say that the crash would never have happened, if only they been in power. This includes Sarah Palin and Donald Trump, whose opinions almost symbolize rhetoric over logic. Investors, demanding an explanation for what they cannot understand, are listening to anyone who seems to have one.

4) Ignoring Statistics. Just as they do on the upside, emotional investors are now completely ignoring fundamentals. There are many profitable companies in the U.S. that are once again trading at low single-digit P/E ratios! The average investor is looking at the equivalent of a $.10 slice of homemade apple pie and saying, "I'm sure not eating that s**t!"


I have to admit, I'm finding this all terribly fascinating. And I love buying stocks that others are throwing away.

Fear is here.

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"If stupidity got us into this mess, then why can't it get us out?"

Will Rogers

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