Chinese plans for world technology domination foiled again. For now.


It all seems to be going wrong for Chinese-American relations when it comes to technology. Late last month Tsinghua University’s purchase of a minority stake in Western Digital was referred to CFUIS, the panel determining if global M&A involves a US national interest. This, contra lots of commentary at the time, wasn’t business as usual, rather the US government drawing a very thick red line around China and saying no nationally significant technology, in this case semiconductor memory, crosses this. And this week the US kicked the feelings of the Chinese People in the goolies by sticking it to ZTE, one of their national tech champions, for selling stuff to supposedly Bad Countries like Iran.

The net effect of this in the near term is bad news for much of the listed semiconductor equity in the US, as a potential purchaser of last resort is removed. Longer term, no-one knows, not even Baruch.

Continue reading “Chinese plans for world technology domination foiled again. For now.”

The Beginning of the End of the Euro Crisis?

Baruch has been a student of the wondrously dysfunctional Greek
political system long before it became fashionable, and is surprised at the
sudden relevance of what he had always thought to be rather interesting, but
not particularly useful. No longer – Greek politics is currently at the centre
of the world. What is upsetting, however, is that most everyone inside and outside Greece seems to disagree with him about what happened last week. Far from being a calamity exposing the weaknesses of the latest bailout package, Baruch thinks the ramifications of the call by Papandreou for a referendum are deeply positive. Merkel and Sarkozy, and the rest of us, should actually be grateful to him for heading off in Greece what is frankly the
biggest risk Europe and the global economy faces – political risk; specifically
“austerity ennui” on the part of the population, and pandering politicians
eager to exploit it.

Baruch is also unamused by the people who are watching what appears
a train wreck with barely disguised glee, rubbing their hands in anticipation
of the Euro’s supposedly imminent demise, starting of course with the ejection
of Greece. Your celebrated correspondent has no particular love for the common
currency, not least the silly name (“Euro-“ is a prefix, he has always thought),
but once in, the likely costs of leaving are so awful as to make it imperative
to stay in. In the case of Greece, were it to drop out of the Euro, we would be
talking about the instant impoverishment of a modern democracy, whose citizens’  life savings would be wiped out (apart from the  very rich who are able to have accounts abroad, take that, Gini co-efficient!) and the bankruptcy of every exporting enterprise. There would be mass unemployment. Imports such as energy and medicines would skyrocket in price, creating shortages; basic services would likely break down. People would die. It would be less like Argentina, more like post WW1 Germany, or maybe Eastern Europe after the collapse of communism.

Within the living memory of politically active people Greece has fought a bloody civil war, and flirted with fascism. European leaders should probably pause before inflicting this sort of stress on one of the most politically dysfunctional and divided states in Europe, a relatively big fish in the Balkan backwater, itself no stranger to conflict.

Seriously, I wouldn’t want this Pandora’s box opened even
if I was short the Euro, which I am not and which I happen to think may be a
quite bad idea if you want to make money in the near future. Yet never mind the
Eurosceptics who are actually looking forward to it, everyone else seems to be
fairly resigned to it as well. Even clever people. Felix, for instance, sees a “chaotic collapse” of Greece as “inevitable”. Josh Brown cheers him on.

I think the very awfulness of what will happen if Greece is ejected from the Euro in a messy way (and until the treaty is changed there isn’t really another way it can happen) actually makes it more likely that it doesn’t happen. No matter how nasty a generation of austerity may be, it is a walk in the park in comparison with the likely alternative.

And that realisation may just have dawned in Greece last week. Continue reading “The Beginning of the End of the Euro Crisis?”

Forget Twitter and Facebook; this is a satellite TV revolution

Baruch, today’s lesson: The internet and mobile telephony are not robust technologies when it comes to withstanding state intervention. States can and do pull the plug on them when they sense an existential threat. China turned off the Internet in restless  Xinjiang for 9 months in 2009-2010, and Iran and other countries turn off sms and mobile internet use when it suits them. Today, Egypt’s authorities tried to dampen a popular uprising by shutting down both its Internet and mobile telephony.

This is sobering, but points the way to how such draconian measures can be circumvented by those intent on accessing independent news: By not relying at all on terrestrial infrastructure such as cell towers and Internet cabling, falling back instead on direct satellite communications.

By necessity, this set-up reverts to a broadcast/receiver relationship, with international broadcasters like the BBC and Al Jazeera able to invest in satellite video phones as a back-up in case authorities turn off other means of broadcasting live. The Egyptian people, meanwhile, have ubiquitous access to satellite television — as anyone who’s been to Cairo can attest after just a brief glance across the rooftops:

Satellite dishes on Cairo rooftops.

There is no way to restrict the reception of such broadcasting — there is no way for Mubarak to prevent Egyptians from watching satellite broadcasts of Al Jazeera short of turning off the electricity. This fall-back on satellite reception is not something widely available in all countries. In China, for example, it is cable television that is ubiquitous, a terrestrial mode of communication, that can and is blacked out at will by the Chinese authorities — most recently whenever CNN broadcast news of Liu Xiaobo’s Nobel Peace Prize.

While I am sure that much of Egypt’s older cohorts are glued to their televisions tonight, I wonder if turning off the Internet and mobile telephony earlier today didn’t have an effect opposite to what Mubarak’s regime intended: Egypt’s urban youth, suddenly without their main means of diversion or entertainment, had only the streets to go to. For once, there was no Twitter or Facebook or YouTube to distract them. All that was left to do was to go out and vent their rage.

Baruch: big in Japan

Imagine what Baruch found in his daily Abnormal Returns troll last thrusday, Bento! It seems 2 academic dudes, one Yuqing Xing and another Neal Detert at the Asian Development Bank Institute in Japan, took a look at the iPhone and the US-Chinese trade deficit, and realised that high tech products such as the iPhone, which are merely assembled in China, distorted the picture. Very little of the value of the iPhone comes from, or remains in China, yet the full value of the iPhone is counted as a Chinese export for the purposes of deficit calculation. The official numbers are wrong, therefore, and the “real” deficit is much lower.

All well and good, and jolly interesting too. So much so that it was picked up by the WSJ, Paul Kedrosky, and of course, Tadas at AR.

Baruch certainly found the article interesting, as these were thoughts very similar to those he set down over one year ago in a blogpost here called What’s an export? Seriously. In it, after examining the supply chain of the iPhone* in some detail, he concluded that high tech products which are merely assembled in China distorted the picture. Very little of the value of the iPhone comes from, or remains in China, yet the full value of the iPhone is counted as a Chinese export for the purposes of deficit calculation. He wrote

Presumably to work out the real trade balance in terms of where trade flows, or where the wealth generated by iPhones goes, classifiying it as a {Chinese} export for the purposes of assessing a trade balance is misleading . . . Where there are totally integrated global supply chains, I suspect that the definitions of “import” and “export” begin to lose meaning.

Baruch was confused: why did economists and politicians harp on about the trade deficits like this when it  assessing the true value of the deficit was so obviously problematic? The post ended with a plea:

If there are any professional economists left reading UB, please help.

“Help” in this case, did not mean “purloin my idea and publish it in your own name for the glorification of your career without so much as citing poor old Baruch.”

What do you think Bento? Can I sue?

*happily, Xing and Detert also make a hash of the foodchain of the iPhone. Toshiba does NOT make the touchscreen and display module of the iPhone, though may be implicated in the NAND memory; touch module is left to an obscure-ish Taiwanese company called TPK, the screen could come from a whole passel of suppliers, but probably not Tosh; the apps processor is only “fabbed” by Samsung but is a design owned by Apple, Infineon does not make the “camera module”, though does make the baseband and some other stuff. Etc etc.

Baruch the political football

James Suroweicki is using Baruch’s (rather good) line, the “undead homicidal zombie market”  as grist to his anti-anti QE2 mill.

What’s most striking about the attacks on QE2 is how hysterical they are. People aren’t just suggesting that the Fed’s policy—which is quite modest relative to the size of the U.S. economy—might be ineffective or mildly inflationary. Instead, they’re accusing the Fed of “injecting high-grade monetary heroin” into the system, pursuing a policy that “eviscerates” the middle class, and potentially giving birth to an “undead homicidal zombie market.”

The main problem with this of course, is that this last bit never happened. No-one ever accused the Fed of potentially creating an undead homicidal zombie market.

What Baruch actually wrote (my emphasis) was:

“I’m not saying we’re in an undead homicidal zombie market,”

And there we could let it lie.

Although to be fair, I did add “though we may be” as quite frankly I was not very sure of anything at that particular moment. Communicating this lack of certainty was the point of the post, which was about feeling confused and worried. But nevertheless, in the offending line above, Baruch was trying to stop going too far down the path of a metaphorical flight of fancy about undead cats. To avoid, if you like, hysteria.

So James S. has it completely arsy-versy. Clearly he hadn’t actually read Baruch’s post, and by the way James, in the unlikely event you ever read this one, if you do choose to misquote me disapprovingly the least you could do would be to drop us a link, no? Probably you have an outdated editorial policy that prevents you from doing so, but still, this is the 21st century.

Calling one’s opponents “hysterical” is, moreover, quite a cheap rhetorical shot, a debating tactic much used by Straussian neo cons and WSJ op ed writers to close off a reasoned argument they are on the wrong side of. Different words that do the same job are “partisan”, and (Baruch’s favourite) “shrill”. If someone is hysterical it is much easier to ignore the points they make. Rather, the word implies, they just need a hard slap and a good shake. The word has the stench of politics about it.

That’s the wider context here, which I think we need to put James’ article into. QE2 has become politicised, and this is a mark of just how demented US political discourse has become. Domestic bond purchase programs elsewhere don’t generally create similar levels of controversy between parties; most politicians realise their central bankers are just following through with their mandates, as the Fed clearly is, without any regard for political advantage. Baruch thinks the blame for the politicisation lays squarely at the feet of congressional republicans. He also finds it highly amusing to find himself somehow lumped in with this lot, however indirectly, as he has yet to contemplate a more priceless, ill-intentioned, irresponsible and ignorant set of economic baboons.

But the worry is that if the republican baboons don’t like QE2, then it follows that those on the other side of the aisle will start to like it, not on the basis of a reasoned weighing up of pros and cons, rather because it gives them good talking points. The result will be the vaguely uncritical lumpen thinking we see in the New Yorker article, and at its worst, an item of pragmatic economic policy which should be debated on its merits will join the pantheon of topics of almost theological controversy in the US such as abortion, gun control, flag burning and gay marriage. Pretending that QE2 is a well established economic policy without risk of externalities is frankly as absurd as saying it is an unmitigated evil.

Felix, whose own position is not far from Baruch’s, does a much better job of tackling the article in this post. As he puts it, “the weird thing is that Surowiecki and I actually agree on most of the issues here.”

Indeed. As things stand right now, Baruch is very rapidly coming to terms with QE2: not particularly astonishingly, the thing might actually be working! There are green shoots everywhere he looks , from an apparent increase in volume at transaction processing companies, to semi makers guiding for much lower seasonality in the next quarter, to positive 2011 GDP revisions by the economists, to strategists telling me to buy cyclicals, etc etc. The price of gold even dropped a bit on thursday. He is pretty optimistic, certainly much more than he was last month, when his problem was that he could see the sufficient reasons for stocks to rise (QE2), but not the efficient ones (forward EPS estimates going up). That’s been solved, confusion lifted. Things are great!

Then again, that’s exactly what I’m supposed to feel, isn’t it? There’s nothing like turning up to a party with a hangover (swearing you’ll only stay for a bit), having that first drink and realising how much fun you’re going to have if you stick around. Thoughts of a potentially much worse hangover yet to come are far away.

Quantitative Queasing

So we have been having Quantitative Easing already, and Baruch doesn’t  like it.  The stockmarket is up (or was), the data seems to be improving; QE has done its work and for all we know it will continue. But there is a special unhealthy quality to it all. It feels like a “wrong” rally, like the cat from Pet Sematary was clearly a wrong kind of cat.

The problem as I see it is this: QE lowers overall interest rates and makes all the stocks go up when they wouldn’t have normally. It raises their valuations, which you can also express by saying it makes for higher PEs. This makes people feel richer. They will go and buy more stuff like LCD TVs, making the companies who make the stuff they buy richer too. They will invest more, and buy more stuff from companies who make stuff not for people, but for other companies. Eventually all the companies grow into their higher stock valuations, and we are all fine.

The key word here however, is “eventually”. What happens in the bit between the 2 points:  after all the stocks have gone up, and before the fundamentals improve to justify their new valuations? Because I think that’s where we are if stocks have stopped going up, or where we will soon be.

Now, my tech stocks aren’t exactly expensive. Lots of them are to be had for PE multiples in the low teens, which really isn’t bad. But there has been no fundamental improvement in their businesses since the summer, as far as Baruch can tell, and yet their stocks have absolutely zoomed to levels I frankly have difficulties buying them at, at least on the charts. Baruch was astonished last week to see that the NASDAQ 100 was basically back to its pre-crisis high!! You get that? That index is telling you that things are as good as they were before the Great Unwind.

I can’t short them either, at least not on past form. That’s been a mug’s game; the subtext of QE is “kill all the shorts” — another way of making sure stocks go up. Returns on short books have been pretty brutal, and most long short guys in the past couple of months have learned to be mostly long, or if they have to stay balanced, then long stocks, short indices.

So, now what? If stocks are now disassociated from their fundamental realities, however short a time that disassociation is supposed to last, non-fundamental realities are going to rule, and I have no idea what that means. Will we get stasis, a crunch in volatility and volumes? Will we have vast nauseating unexplainable swings in stocks, huge moves in the VIX? Will we crash? Will we carry on straight up? Will we pause and rally? Who can say? We’re in a period where anything is possible, as I’ve said before, a world of unintended consequences coming down the pipe. Some may be good, and some may be bad.

This is why in his darker moments that Baruch thinks a very good analogy for where we are right now is Pet Sematary. The people who buried their cat (and later their son) in the Indian burial ground to bring it back to life got something which looked ostensibly like a cat, but was so only on the outside. On the inside their little puddy tat  was really an undead homicidal zombie cat, as became clear through its increasingly odd behaviour. Unintended consequences followed (mayhem, murder, horror, the Wendigo — all that Stephen King stuff).

The Bernank is like the guy who buried his cat, but in this case instead of a resuscitated cat he wanted his rally back, a healthy stock market and the wealth effect that would bring. I worry we have got something else.

I’m not saying we’re in an undead homicidal zombie market, though we may be. But here’s an example of what the Pet Sematary market is capable of in terms of unintended consequences: QE inflates all asset prices, including commodities. This pressures the Chinese consumer, who we are relying on to pull us all out of this mess, who can suddenly not afford his new LCD TV because his Moo Shu pork is costing 20% more than it used to. Changes in commodity prices have a much greater impact on his consumption than Joe Schmoe in Idaho, with his low cost high fructose corn syrup and processed trans fat diet. The BoC has to raise rates to offset the inflation this is causing, hurting Chinese growth even more, and global GDP growth drops 50bp. Bravo the Bernank. With your Quantitative Easing you just killed off the only good thing in this market which was working naturally without outside interference.

OK, Baruch may be exaggerating, but a big part of today’s selloff is driven by fears of commodity prices in China and a collapsing Shanghai stockmarket. It’ll probably turn out to be nothing, a damp squib. But if it doesn’t, you heard it here first. I feel sure there is a wider point here to make about the bad things that happen when you mess with the signalling mechanism of the stockmarket. After all, the stockmarket does not exist solely to make us richer, does it? But that’s probably for another post.

Just say no to bonds

In these pages we have often defended equities against their naysayers in the great bonds vs stocks debate that seems to be currently raging. But defence is only half the job. It is time to go on the attack! Note well, dear reader, that I know very little about bonds, and I don’t want to know any more in case I have to change my views. However knowing very little about an asset class doesn’t stop bloggers from talking about it with authoriteh, especially if it is bond apologists harping on about equities. So I, Baruch, am going to give them a dose of their own medicine.

OK, so some of the stuff below is a bit tongue in cheek. But tell me if any of it is actually untrue: Continue reading “Just say no to bonds”