Finally, you can short your house

Here's a stick I gotta get on. When I bought my house in the middle of 2005 - just minutes before the market peaked and started its long, sad decline - I spoke with many of you about my prediction that the investment would decline in value and my desire to short the investment. At the time, most people looked at me even funnier than they were already - after all, I was supposed to be celebrating the acquisition of a new home for my family in a wonderful community (it really is a wonderful community). But instead, I was warbling about designing a vehicle to short the investment, to protect myself against the declining value, much like one can short securities and commodities. Unfortunately, at that time, no nut-case thought any such possibility was sensible.

Roll forward a couple years. Now the idea has not only escaped the realm of my personal lunacy, but the product has been designed and is available on the Chicago Mercantile Exchange! Have a look here if you do not believe me. I have yet to figure it all out, but there is now the (theoretical) possibility for me to buy protection in the futures markets against my house's continued value decline. This is something that I plan to study. If I am going to lose my shirt, I may as well keep my shorts!

I guess we're not scared enough

What would the United States be if there were not some major threat for the population to fear aimlessly? 9/11 must be too distant, Iraq must have numbed to many, and Pakistan and Iran must be too complicated. Heck, even subjects like carbon emissions, starvation and slaughter in Africa, elimination of the rain forests, and natural disasters in Bangladesh and Indonesia all are a little thin for the US media. Yawn.

Good thing there's China. Those guys are trying to kill our kids, if you believe the media. Every week, there is another story about another Chinese-manufactured toy that has to be re-called. And their dastardly currency policy - when will the US persuade them to let the thing reflect what the US thinks it's worth? But most recently I was entertained by a couple headlines. Yahoo!'s front page ran a cover story over the weekend about satellites and how they avoid orbital collisions. Amusingly, the "sub-question" below the headline was "Will China shoot down satellites?" I guess I am so out of touch that I have missed the recent China policy of shooting down satellites** - good thing the ever-sharp editorial crew at Yahoo! was there casually to scare me out of my pants.

Also, the New York Times Sunday paper ran a story about rock concerts in China. Apparently, concerts are getting more profitable there, so stars are traveling there to perform. The photograph of the latest star to show up in China was amusing - a shot with the star at the center, on the stage in the distance, framed by massive close-ups of two police security guards. Thanks to the New York Times, I now know that concerts in China are tightly-secure affairs, and the presence of the police can overwhelm the concert itself. Never mind the state of security at public gatherings in the US - the Chinese are just so strange!

Reflecting on the stream of enemies that the US Government and media has had us all afraid of over the span of the 20th and 21st centuries, it is amusing to watch the commencement, in earnest, of the next chapter. Welcome to the China House of Horrors.

** It turns out that the Chinese have inexplicably tested a satellite missile. How much can we make of that over the next months? I can't wait to find out.

A World Diminished

The World was lessened substantially this week when scholar and Emory University Law Professor Harold J. Berman passed away in New York City. Professor Berman was a leading thinker in so many important fields, including Law and Religion, Russian Law, Chinese Law, his beloved World Law, ethics, history, culture. He was a true Renaissance Man, except that he did not just dabble in anything. He was excellent in everything he pursued. His many writings and their popularity go a long way to make that case.

But much more than what he wrote, for me, was his boundless personal energy and his pure desire to see his students fly. He was a teacher in every way. He carefully planned his lectures and his informal seminars so they were designed to bring out the best in the participants. He never retreated from difficult subjects that might have put off his audience. Instead he plowed forward until the students had become better people. He welcomed odd or left-field thinking, especially if it shed light on his topics that he had not seen before. And he profoundly respected those with whom he worked. He was far and away the single greatest influence on my education, having taught me central things about the world that I had missed throughout my youth and the plentiful opportunities in my liberal and earlier legal education.

I had not seen Professor Berman for a number of years. The last time was at his home on Martha's Vineyard. We joined a family dinner there, and the discussion was as expansive and enticing as his classes had been. The conversation was disciplined and challenging, and ultimately enlightening. All that at a picnic table over grilled steaks and apple pie. I will always treasure that memory. In this world cluttered with unimportant junk, mis-information, and lazy analysis, I will miss you dearly Hal.

The Chilly Mist of Sovereignty

It has been a couple years since I have had a direct window into the inner workings of tools of sovereignty in an emerging market country. But I had the opportunity again this month, and I am as convicted as ever about the "commercial" nature of the enterprise. I find it remarkable how, in every country, there are folks who are instinctively good at grabbing and pulling the levers of sovereign power. No matter how poor, how small, or how newly-emerged from sectarian violence a country, such people exist there, and they make it to the halls of government. They know how to dress, how to speak judiciously, how to demonstrate control over their subordinates - how to exude power. They generally also master the language of serving the best interests of their constituents.

In many places, however, they also know something else. They know how to work behind this imagery in a relentless pursuit of personal or business enrichment. While the public facade is all about subjects that would play well in any IMF consultation, UN General Assembly session, or press conference, discussions behind the scenes can quickly turn quite concretely to the subject of the personal or business "take" for the minister or other official in question. Of course, there should be no surprise in any of that behavior. This kind of "corruption" (as it is termed in the west) is all too-well understood. But seeing it up close and personal can be quite a shock, no matter how many times one has been through it before. It is very easy to become wrapped up in the language of helping a poor population, and considering what can be done legitimately to advance its health, education, and general welfare. Perhaps it is the heat of that excitement which exacerbates the shocking chill of the next part of the discussion. And, in my experience, an unwillingness to engage the chillier topic usually prevents any role in the warmer work.

I harbor no criticism, either of the system that creates the officials who behave this way, or of the system that has molded my thinking and that causes my reactions. I see vast numbers of people suffering deeply under both systems. And I see stark enrichment at the "top" of both systems. I suppose what I lament most is the persistence of the inaccurate mythology about sovereignty. It is fundamentally not about helping others; it is fundamentally about helping ones' self to the national cookie jar, whatever its size or contents, limited only by the strength of domestic political organization. Of course, I would prefer things to be different, and I would welcome global leadership that would work in practical ways to effect change. But until we at least openly recognize the current reality, change will never be possible.

Who's Afraid of Stephen Colbert?

What does it say about the US Presidential race and the media when comedian Stephen Colbert writes about his candidacy in Maureen Dowd's New York Times column in the heat of the campaign? - less than 13 months before the election! I can promise you that no small group of voters thought approvingly about a Colbert presidency upon reading the column. Heck, his, or John Stewart's, candidacy has been raised at more cocktail parties this year than I can remember.

The US Presidency is one of the most powerful offices in the world. And the New York Times is one of the most respected newspapers in the world. Together, these institutions embody enough gravitas for a black hole. How can it be that Stephen Colbert can switch all that off? What does the New York Times editorial board know about US voters' attitudes that enables a "thumbs-up" for publication of Colbert's ramble?

The editorial decision might just have been taken just so the paper could look "hip" by tossing a bone to popular culture. That doesn't sound quite on to me, but it is possible. More likely, the New York Times has had to acknowledge that Comedy Central is nipping at its heels. And Comedy Central has been doing much more than nip when it comes to the White House. So to decline to publish Colbert not only would make the New York Times seem uncool, it would make the paper seem out of touch. Imagine Colbert telling the story on his show of arriving at Dowd's place, writing his column, and having the paper decline to publish. Ouch.

George and Dick - Who Knew?

David Brooks and Thomas Friedman came to the same view within the past couple days in their columns on the New York Times editorial page, although neither was so bold as to state the ultimate conclusion in black and white:

George W. Bush is a screaming liberal.

So, therefore, is Dick Cheney, I say. And I use "liberal" in the same vitriolic way that Republicans do when discussing "tax and spend" Democratic candidates. David and Tom describe a pretty highly appealing version of conservatism. A conservatism that is learned in the ways of individuals and societies. That is pragmatic about how far societal goals pragmatically ought to be set outside of range of what has already has developed. Conservatives observe that which is proven over the course of a given history. Steeped in the failure of revolutions, but the abiding success of evolution(ary change - apologies to those on the religious right), thinking conservatives choose their objectives and their means carefully. They may have lofty objectives, and they may desire big change. But they choose to get there incrementally, as they recognize that is the way most likely to succeed, statistically at least.

Liberals, on the other hand, first have grand ideas. They observe injustices in the world, and they then go about evaluating what could be done to address those injustices. Romantic about revolution(ary change - apologies to those who would not want to associate their thinking with Chavez' or Castro's), liberals seek "to think outside the box" in designing solutions that others are not considering. Solutions that may have unforeseen costs and unpredictable consequences, given their new or non-traditional nature. Liberal ideas occasionally succeed in a very big way, and the afterglow drives another generation of big thinkers.

Using essentially this framework, both David and Tom describe how George and Dick have let down a good segment of traditional Republican support. Rather than assembling a considered set of goals and means, based on critical examination of societies and cultures, George and Dick have opted to let their administration be dominated by a war which was poorly planned in the extreme and which has always had nothing but idealistic goals, untempered by obvious realities. I could see 60's hippy personalities being quite proud of the Bushies' grand aspirations and desire to spread democracy (if not US petrochemical profits) all around the world, all at a revolutionary stroke.

Perhaps those drug-infested days at Yale in the 1960s remain powerful influences in Bush's mind after all?

Who's creating these days?

7:35 am, express train to Grand Central Terminal. Leading luminaries of Wall Street and the New York City bar populate most every seat as far as one can see. All monthly commuters. All headed in to their high-flying, high-paying positions in the world's leading financial center. The financial center that has spread its ways and wares to all corners of the globe, in the form of debt and equity securities, syndicated bank loans, project finance and other structured financings, commodity and currency derivatives, and complex credit and equity derivatives, to name just a few high-lights. These structures have worked pretty well in the US market and legal system, but they have fared quite poorly in some other parts of the world.

With all the power and influence riding the train right next to me, what strikes me most is what these folks are reading. Almost to a person, they are all reading the Wall Street Journal, and a few are reading the New York Times business section. That's it - I can see scores of the papers, often open to the same page and read at roughly the same pace. Like lemmings. These people are all informing themselves, but only with the same data as their colleagues and competitors.

I have to imagine that such market behavior helps put a kind of frame around what these people create. All the time spent catching up on what your competitors are reading cannot be spent preparing to enter markets and build ideas and products that the competitors are not. Although my evidence is purely anecdotal, my clear sense is that most of these folks do not read other news sources that would inform them better about developments in other fields and from other countries' perspectives. OK, they all have Bloomberg terminals, so they can follow throughout the day whatever Bloomberg thinks is important - but that seems to be much of the same stuff as appears in their morning papers, only more hastily written.

Is it any wonder that this closed information loop leads to Wall Street products that so often merely replicate - culturally - what has been done in the past, even when those products have badly failed investors in parts of the world far away from New York. I have been there when many fixed income products failed investors in the wake of currency and political crises, so I am awed that the international finance products Wall Street and their lawyers still trot out today are complete replicas of the failed deals.

I am sure that institutional compensation structures drive this dynamic as much as anything - it is expensive and risky to adapt deal structures to other cultures, especially when the existing deals continue to sell so well - to a buy-side with complementary compensation structures, and informed by the same news sources. I expect there is opportunity out there for creative people to build new, more culturally-sensitive approaches to investments, approaches that will be more lucrative, even to the deal designers, in the longer term. But somebody will have break out of the "Wall Street Journal on Metro North" model of self-education first.

Sovereign Resurgence?

This post is only to re-direct you to a piece in last week's Economist (sorry for my delay) on the subject of my favorite "bone" - global liquidity. In this piece, Buttonwood helpfully introduces what has been going on in the credit markets of late. The author's final words are resonant in my mind.

Perhaps my bone is tastier than I knew. All gnawers are welcome.

Join me in Hell

In most human activity, hidden opportunities are plentiful. The world's most capable and effective people know how to seek out and capitalize on those chances. So it must also go in the game of international relations, US politics, and the war on terror. On the basis of that premise, leap with me into the abyss. Osama bin Laden is the most widely-recognized terrorist, and perhaps the most inhumanely savage murderer, in recent memory. There is no case for supporting anything that he does or supports, he must be stopped, and there can be no credible argument against that view. At the same time, however, responsible and thinking warriors on terror MUST consider carefully what Osama has to say. His chosen subjects and his choice of words almost certainly loom large in the minds of the terrorist enemy. So, if we are to prevail in the war on terror, we must understand his means and his meaning. We must learn from his tireless efforts to corrupt Islam and to coopt the world's Muslims, and we must deploy what we learn as an important weapon in the war. It cannot be that the war on terror is the sole form of human activity in which there are no hidden opportunities.

If you are still with me down here (is it hot enough yet?), let's have a quick look at important parts of Osama's latest. First, I think noteworthy the broad span of world and religious history that he recites in his speech. The fellow speaks to the world once every couple years, and he chooses to describe the details of centuries of relations among Islam, Judaism, and Christianity. He must know that the US population has little understanding of the subject, and perhaps even less patience for it, so he cannot seriously believe his words will persuade. Instead, he must know that these words will be described as "strange", if not outright offensive, and they will be perceived that way. In the western coverage I have seen, the point that is most frequently identified is his invitation for the US to convert to Islam. How odd, and what hubris!

Second, Osama goes to great lengths to inform the US population that their ways and means have led them astray from monotheism - the belief in one god. According to Osama, corporate wealth, consumerism, and democratic power have each risen to the level of a god in the western mind and in western pursuit. So today's Jews and Christians (those in power at the least) cannot rightfully claim to be monotheists. Instead, they have reverted to pre-Abraham paganism and idol worshiping (the idols being the latest country invaded, the latest pool of oil reserves controlled, the latest collection of corporate profits expanded). That such barbarians so completely rule the world today is seemingly Osama's greatest complaint.

Finally, Osama explains important similarities among Islam, Judaism, and Christianity. As many people know, all of these religions emanated from the same Abrahamic tradition in the middle east. Judaism was the first religion/tradition to form, based on what was revealed to Moses at Sinai. Christianity was a branch of Judaism whose rabbis were persuaded that Jesus Christ was the messiah who had been promised in Judaism's Torah. Islam came along five centuries or so after the birth of Christianity, and it came in the form of the Koran as revealed to the Jew Mohamed. Osama well understands this common history, and, it seems to me, he seeks a sympathetic ear by referring to it. Though his call is clearly for US conversion to Islam (the purest form of monotheism in his opinion), one could read his speech as stating that he would be satisfied were the world made up of pure and true monotheists (in his judgment) of any stripe. He even states that submission to the one and only god is the most important truth in human activity, even if the laws people use in that pursuit differ among themselves.

Hmmmmmm. So what do we make of all this? (Bear with me as I seek out the hidden opportunities and, for the moment, I ignore the truly offensive parts of his speech - particularly where he refers to his responsibility for 9/11 and where he reveals obvious antisemitism and disdain for Christians, etc., etc., etc., etc.) How do we think the Islamic world perceives his words (I imagine they are fairly well-received)? What opportunities exist for the warriors on terror to design countervailing messages that would be credible in the minds of those Muslims who are disposed to be sympathetic to Osama's words? I am no expert, though I certainly hope that the US Government is carefully wrestling with these questions and any related opportunities, from the White House on down.

Were I in the White House, I would consult my best Islam (and Islamic) experts to learn just how powerful Osama's words are among Muslims in various places and various traditions. I would ask if there are important sections of Islam that are receptive to a co-existence of Islamic tenets and human culture (business, society, democracy), and if so, what could be done to speak to the people in those traditions. I would ask if there are concrete investments that the US could make to become credible in that universe - whether re-constructing destroyed mosques in Iraq, promoting Islamic awareness within the US, strengthening the position of peaceful Islamic leadership in critical locations, etc. I would ask those and other experts whether an education campaign in the US about the deep commonalities among monotheistic traditions would be useful, whether a substantial education and re-direction of the western media on these subjects would be helpful in focusing the US on the opportunities for peace, and also the specific hot-spots where military engagement is completely unavoidable.

I contend that using Osama's speech against him, educating the warriors on terror so they can be smarter and more appealing and effective in the world's hot spots, must be the right thing to do. I am constrained by my limited knowledge of Islam and the details of the war on terror. But the way the western media presents the whole subject, I am left with the impression that the US Government is falling short and missing opportunities that may be in the best interests of the United States and international security.

Bush's China/Iraq framework, according to the AP

In what one can only hope was a rather hastily assembled (18 minutes ago!) AP headline story on Yahoo! yesterday, there was a discussion of the Bush administration’s current position on China and Iraq. It seems Bush would be concerned about the Chinese military, if China ever “turned hostile”, as he was explaining to the Australian Government. Bush said that his administration spends “a lot of time on China”. Would it be fair to wonder what the Bush administration is actually considering doing about China? What specific actions do you think the folks in the White House have in mind?

Remaining in a hopeful mood, one hopes that we glean nothing on this question from the AP reporter who did the story. Without transition, Bush is stated to have urged all countries considering pulling out their troops “to base their decision on restoring the country’s security”. Oh, that is a reference to Iraq. No need to worry that the Bush administration is promoting military options to address his concern about China turning hostile. Whew.

I imagine President Bush actually addressed China and Iraq in close succession at his press conference in Sydney. And perhaps Bush did so in a way that was somewhat confusing. But come on, the Associated Press ought to be able to find reporters and editors who can sift through the word salad and report something lucid about what the United States President has had to say at a meeting with another head of state. Right? The fact that this AP story is still on the web, largely uncorrected, is bad news indeed for the US media consumer. But do you think anybody cares, or will even notice?

Temasek's investment leadership

I have been thinking of late about the recently-published annual report of Temasek Holdings, one of Singapore's sovereign wealth funds. Temasek is boasting that it now has more than US$100 billion under management, making it a sizable investor by almost anybody's scale. My recent ramblings on this page have been based on the idea that sovereign wealth funds may, together, make-up the next massive wave of investment around the world. I have also long seen Singapore as a leader in investment-related matters. So I wonder what this report may tell us about Singapore's role in the future of global investment.

Moving things around - "intermediation" may be the more technical term - is among Singapore's core skills. Singapore's deep history is rooted in its being the mid-point - by sea - between major ports in India and China. As a port, Singapore has long made a living getting things in and out of the place. This trans-shipment tradition continues today, as Singapore remains the busiest container port in the world. Singapore intermediates other things as well. Perhaps most importantly these days, oil and money. The amount of money that makes it into Singapore's financial institutions (and tax coffers) is just enormous. In many senses, Singapore is the Switzerland of Asia for Southeast Asia's Overseas Chinese. In its own way, which is quite different from the loud and machismo ways of Wall Street, Singapore serves a very important function in keeping funds flowing throughout Asia from investors to businesses in need.

Temasek is undoubtedly a core part of that activity. US$100 billion, and look at where its annual report tells us Temasek is busiest - China, India, and Vietnam. These are places where intelligent capital is very much in demand. Temasek says it plans to play an expanding role in these places. I also think it is fascinating to note in what industries Singapore invests. Unsurprisingly, 74% of Temasek's investments are in financial services, telecom/media, and transport/logistics - classic intermediation industries. Talk about money that knows what it's doing!

Large sums. Managed quietly. Deployed in businesses the fund's management well understands. These are fundamentals that are becoming more attractive again these days, as we watch Wall Street's labyrinthine financial structures come apart at a few seams. No wonder Temasek sees the Barclays/ABN deal as an opportunity. Expect to see much more of that, if you are alert.

Second Hand Litter

What is it about smoking? Full disclosure: I am not a smoker, but I am not maniacally opposed to others smoking. I do wonder though, about one aspect of the behavior of many smokers I observe: littering. For most folks I observe, littering is taboo. When the seventies passed by, so did the tacit consent society gave to the litterer. Aside from the occasional apple core or peach pit hurled out a car window, how often do you see somebody just throw their trash on the street these days? Wouldn't it jar the senses to see that?

Now think about smokers. How often do you see them toss their butts to the ground? I see it probably every day, certainly every week. I just saw it again this morning as I was entering my town's train station. A perfectly lovely lady, chatting about her children's affairs, took her last drag, and flicked the rest of her cigarette to the street. She gave no thought to it at all. Perfectly natural. For some reason it jarred me today. So I started looking around. Before I could board the train, which was only about 90 seconds later, I counted four other cigarette butts and an empty package of Marlboro lights flung around the place. No other litter, just this cigarette waste.

What gives? Why should this behavior be OK? There has to be an answer that a non-smoker cannot immediately appreciate. At least for the lit cigarette butts, it could be that disposing them in the normal trash is a fire hazard? So the process of disposing of the butt would include throwing it down, stepping on it, and then (indignity!) bending over to pick it up again before placing it in the trash. Sounds like a lot of work, I have to admit. And perhaps the avoidance of all this work leads folks to be more liberal about disposing anything to do with cigarettes, such as empty boxes.

I wonder if there is any upside in inventing a portable cigarette extinguisher? Ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha!

Dog with a Bone

Like the Captain of the Titanic, I cannot bring myself to the life boats just yet. Yes, I am back to my old favorite: global liquidity. Now, Nouriel Roubini is adding his booming voice to the likes of Edward Altman. We are apparently experiencing a true crisis in the credit markets these days. Not just a liquidity issue, but a fundamental insolvency problem. Reciting the melting subprime mortgage industry, the hurting US consumer/homeowner, and contracting credit availability emanating from there, Nouriel is persuaded we are at the beginning of something big and terrible.

I still wonder. Not because I disagree about the loony levels of corporate (and sovereign) debt that have been slapped on the books in recent years. I am not under under the impression that these unprecedented debt levels are magically sustainable by business or government operations when they have never been sustainable before in human history. I agree that credit issuances are badly matched against the fundamental businesses of the issuers. And so I also agree that a crunch must be coming, and that the longer it takes to get here, the worse it will be.

Where I disagree - or more likely, fail to understand - is in the timing. Nobody that I have read makes a well-crafted connection between the weaknesses that Nouriel describes on the one hand and the huge sums of capital that remain in the global system on the other hand. It seems clear to me that the recent build-up of over-indebtedness is a direct result of massive global liquidity. (Does it perhaps matter whether such liquidity is due to central banks' addition of money to the system, whether the liquidity is merely credit, or credit derivatives-related, or something else, or some combination?) Every problem that an issuer could encounter of late has been resolvable by the introduction of more liquidity - more money at cheaper prices, and with fewer restrictions.

Assuming that is a fair way to see things, what the heck has changed? From what I can tell, massive amounts of money are still on the side-lines, much of it sitting in sovereign wealth funds, whose aggregate size dwarfs the size the global hedge fund industry. Not so, I am told, when one considers the leverage that hedge funds bring to bear - with that leverage, hedge funds are a much heavier influence on the globe. But, I wonder, what happens when the sovereigns begin to deploy such leverage on a similar scale? And where are the fleeing investors going anyway - are not sovereign obligations, like T-Bills, more appealing to investors these days? Does that begin to sound like sovereigns expanding their ability to lever their investments?

OK, I'll slow down. But is it not the case that there is at least the strong possibility of further rescue financing or further opportunistic asset purchasing by these sovereigns? And if not, where will all that money go? Has anybody worked this stuff through? Because I am lost. But I cannot see the logical path to concluding that today is the beginning of the insolvency crisis.

John, You're Killing Me

It was a very warm feeling, at least at first. I was watching John Stewart on the Daily Show the other day, and he was doing the entire pre-guest show by himself. No bit from any of the other usuals. And the subjects he chose to examine (ridicule) were two subjects that I had just noticed and pondered a great deal as well, in the previous days.

He first focused on the piece in The Economist last week reporting on Dick Cheney's initial observation of the small silver box that had sworn to secrecy, on pain of death, the interpreter who was aiding Dick's exchange with Morocco's King Hassan. According to The Economist and John Stewart, Dick's thought was "damn, I need one of those". John's message here was, as is often the case, "You don't know Dick".

John second focused on the recent exchange between Barak Obama and Hillary Clinton in which Obama, somewhat refreshingly, pointed out that the US's not speaking to foreign leaders was not much by way of punishment for them. Accordingly, Obama would undertake, in the first year of his presidency, to speak with folks like Castro, Kim Jung Il, and Ahmadinejad. Hillary, based on the depth of her alleged foreign policy experience, said she would not commit to meet these folks in the first year of her presidency. The ever sharp US media has blown this difference into a huge and fundamental policy divide between the two candidates, which seems odd when one considers what each candidate apparently said. Both would seriously consider talking; one thought the first year was the right time and the other was not so sure. John's message here was, as is often the case, in what orifice is the US media's head?

Although many of you may also have seen and thought about these stories as well, I felt as if I had written the script for John that evening (OK, not the humorous approach that only John can deliver). But is that a good or a bad feeling? At first, I felt like I was "in touch" in some sense; close to things that this thinking media powerhouse also finds important. On longer reflection, I felt somewhat redundant. Who needs a poorly followed blog when John is broadcasting well enough to young folks? Even this post, how redundant can you get?

In search of a new train.....

Contrarian Optimism

Mostly because it's fun, I am going to stick by my liquidity guns for a while longer. This has been a scary week for those who follow the credit markets. Many of my friends who run fixed-income portfolios are not even returning phone calls, they are so busy managing their affairs, presumably looking for exit ramps and downside protection. We have seen stories cascading out of the US sub-prime mortgage lending debacle: LBO financing arrangements are stalling en masse, credit default protection for large investment bank debt is getting much more expensive, US Treasury bill prices are sky-rocketing, emerging market spreads are widening drastically. Everybody is fleeing to quality, we are told.

Other developments are making the media and investors even breathier. Stock markets are plunging. US housing sales are way off. Government officials and market gurus are telling us that these developments may be the beginning of a serious market correction. People reading about these developments are getting even more scared, which must be causing even more selling and even more price declines.

I cannot deny that these developments are large and important. I doubt that my limited window into the credit markets makes me smarter than the experts and the investing herd. Still, being a contrarian type, and seeing nothing that has changed my earlier-posted liquidity analysis, I am going to remain of the view that these developments are not (yet) the beginning of a major correction. I am not sure where all the sovereign wealth funds are going to deploy their vast sums in the next months and years. But I have to imagine that the relatively recent trend of these sovereigns pursuing greater investment diversification will continue. I imagine that diversification may slow somewhat, as sovereigns may find that greater sums need to be invested - say in US treasuries, even at the newly inflated prices - in order to pursue policy goals, such as currency pegs.

But all that money, not to mention the amount of private capital that is also on the side-lines at the moment, has to go somewhere. And the recent market dips must have some appeal as buying opportunities. If not, I have a large mattress at home that I might be able to roadshow successfully in Beijing, Singapore, and Dubai.

Sovereignty's Dirty Laundry

Have you seen the excerpt from J.M. Coetzee's new novel, Diary of a Bad Year, which is forthcoming in January 2008? Pretty interesting stuff. I have to confess as somebody who does not read a lot of novels that the format is a bit confusing to me. Large swaths of non-fictional observations are interspersed with short bursts from a fictional exchange in a laundry room. I could not connect all the dots, although the novelty was captivating.

Mostly, what strikes me about the excerpt is the collection of observations about what the state is, how it is established, and how it evolves. At bottom, Mr. Coetzee observes that most of us are born into a territory where a state has long asserted sovereignty, so the state's structure is hard-wired into our psyche and our behavior. The concept of removing the state (or, I imagine he would agree, drastically altering it) is not something that occurs to most folks or that we would be capable of achieving in any event. "It is what it is", and we are generally content with the marginal tools available to us for effecting marginal change.

These tools include the (false) choices presented in elections - candidate A v. candidate B. We have very little say in which candidates are presented to us, we have even less ability to provide a fair shake in the elections to a candidate C, and we have almost zero ability to drive toward something completely different (e.g., a new form of government, or no government at all).

Even more insightful I think are Coetzee's comments about how a state is born. He cites to the Kurosawan movie "The Seven Samurai", in which a population accepts the samurai's services in ousting a harmful group of bandits who were demanding excessive tribute. Once the samurai succeed, they then offer to serve as the new "protectors" of the population for a price. The population declines their offer, and the samurai leave. I am not sure what happens after that - I have not seen the movie. But the text Coetzee uses at this point in the excerpt is very insightful:

"The Kurosawan story of the origin of the state is still played out in our times in Africa, where gangs of armed men grab power—that is to say, annex the national treasury and the mechanisms of taxing the population—do away with their rivals, and proclaim Year One. Though these African military gangs are often no larger or more powerful than the organized criminal gangs of Asia or Eastern Europe, their activities are respectfully covered in the media—even the Western media —under the heading of politics (world affairs) rather than crime."

I like to consider this subject globally as something of a spectrum that includes both politics and crime. Certainly, there are similarities between (legitimate) governments and armed gangs. Both are groups that provide protection to a population in exchange for a fee, and both maintain power through a combination of superior weapons and mythology (i.e., nationalism, loyalty, fear of outside evil forces). It is a spectrum I have long wrestled with, and I am gratified by Coetzee's text. I look forward to reading the full book next year.

How Liquid Is That?

This post is just to note another piece of evidence in support of my earlier post on the likelihood that the global liquidity glut may last a while longer yet. Usual caveat: nobody can predict cataclysmic change, and I have to confess that the huge and growing notional amount of the credit derivatives market has been troubling me a good deal of late. Check out this post on the Seeking Alpha page for a chilling report on that subject.

But I could not suppress a smile when I read this story on Bloomberg yesterday. It seems that the same week as the ratings companies are finally realizing the US sub-prime mortgage market disruption means related mortgage-backed paper should be down-graded, US HUD Secretary Jackson is in Beijing urging the Chinese Government to invest more heavily in US mortgage-backed securities.

I am sure I am wrong, but it sounds like somebody is asking the Chinese to provide liquidity to help revive a deflating market in the US. The story didn't say what the Chinese reaction was, although I imagine if Secretary Jackson had been laughed out of the room, Bloomberg would have mentioned it.

Being Hugo Chavez

You're Hugo Chavez, what do you do now? The world is on edge, quite uncertain of which direction you may go. You seem hell-bent on a vague socialist agenda, nationalizing major industries in Venezuela and ousting foreign investors. You espouse anti-"northern" values, in an effort to consolidate power around you in the "south". You close down domestic media which disagree with your agenda, leading to frequent accusations of your impairing freedom of the media. You accuse foreign governments of meddling in your internal affairs. You proudly hold summits with other national leaders who are at least at verbal war with the United States (e.g., Cuba and Iran, perhaps North Korea will be next?). You co-issue bonds with the Government of Argentina on the heels of that Republic's messy and forced 70%+ haircut on their previous external debt. You threaten to pull out of the IMF.

But you don't pull out of the IMF, after it seems that you realize such a step would cause a default on your outstanding external debt. You don't stiff those external creditors, but instead, you keep paying them, likely from the deepened revenue base the higher oil prices provide you. You don't seek to sever ties with the "imperialist" United States, but instead you invite a new ambassador who is serious about your country. You continue to use the global media, wherever possible, to advance your domestic, regional, and global agenda. You cautiously navigate the claims of the investors whose assets you expropriate. You declare that entrepreneurs have a critical role in the development of the socialist economy.

Although I am certain that you have a clear set of goals and a rational game plan, you have confused much of the world. On the one hand, we could readily believe that you are about to slip into Argentina's behavior pattern in the wake of its currency crisis, limiting foreign exchange flows and defaulting on or effectively repudiating external debt, with an added dose of 20th century-style, poorly compensated expropriations. Especially if oil prices trend downwards significantly, or if you locate another, non-US export target for your crude, we could probably already write the speeches for you - as you have been doing for Morales in Bolivia and Correa in Ecuador - about how the interests of your citizens must come before the interests of anonymous foreign investors.

On the other hand, we could readily believe that you consider an unblemished relationship with investors, even imperialist investors, to be the best Bolivarian example of how to build and transition to a responsible, 21st century socialism, and we could see you honoring contractual obligations and negotiating expropriation compensation in good faith. Especially if oil prices remain steady or rise, and if you continue to need the US as a primary export target for your crude, we could see your speeches describing the establishment of socialism without any reliance on the financial resources of the imperialists. Distinguishing yourself from the violent tactics of Argentina and yet also from the pandering tactics of Brazil.

Of course, there are many other possible outcomes as well. But if we cannot predict which of these two extreme paths is more likely, you have accomplished a great deal of deception. The resulting uncertainty could give you a meaningful edge. So again, what do you do now?

Fourth of July Homework

It's the Fourth of July, the birth date of the United States. I am planning on purchasing a paper copy of the New York Times today and reading a re-print of the Declaration of Independence again, imaged in its original script. Somehow that full-page run of the document on July 4 always adds an intimacy to the text. One can feel quite close to the authors. If you haven't recently, I urge you to check it out and read through the whole thing methodically.

No matter how cynical you may be, you have to admit that the thing is well drawn. Well conceived from the perspective of drumming up support among the population of North America and from the perspective of explaining the thinkers' rationale to other countries. In many senses, the document is evidence of some truly transformative thinking, and it is a crisp articulation of the means for implementing the transformation. I haven't read it yet today, so my memory will be less crisp. But I am looking forward to even the introduction - "When in the course of human events...." And "We hold these truths to be self evident...."

These men were capable of placing their lives and fortunes in a global context, and they drew on their thorough understanding of government and related philosophy. The world can be proud of their accomplishments, and it can learn from them. As I have written before on this page, my intuition tells me that the world is now in need of another transformation in the conception and deployment of sovereign power. I have not yet fleshed out what that transformation should be or how it should be driven. But I consider that the US Declaration of Independence will be powerful guidance for those who want to think "outside of the box" in repairing the world.

So for all you US presidential candidates and campaign teams so breathily criticizing each other for the same old things, please take some time today to think about the Declaration. Not just as another school book text that was shown to you and explained generically as the United States' founding document. Not just as another image and sound bite proving your patriotism once again. But as a continuation of your education and training in governing creatively and conceiving solutions that exceed anything ever seen before.

I would happily vote for the candidate who takes this path of self-education and is able to propose and to drum up US and global support for the next welfare-enhancing transformation. As for those of you who prefer to bicker about whether it is more evil to pardon Scooter Libby for criminally outing a CIA agent or to pardon Marc Rich for criminally avoiding the tax laws, I think I'll take a pass.

My Celebrity-Induced Summer Vacation

Well I think I can take a break for a while. There's nothing I can do on this page - by way of getting folks to think about the world and its real inter-connections - that can't be accomplished better by a celebrity or two showing up in some far-flung land. It might be Richard Gere relentlessly forcing a tonsil-hockey kiss on an Indian Bollywood star a few weeks ago. Or it might be Cameron Diaz showing up in Peru's Machu Pichu yesterday carrying a bag with the Maoist slogan of the Shining Path Guerrilla Movement plastered on it. Either way, the related headlines make the point, and they do so in a way that resonates with the majority of folks who follow pop culture.

I could produce pages of drivel, post after post, about the importance of understanding other cultures and other business and political environments, and about ways to interact with them productively. I could recite many examples, including counter intuitive (for the US audience) proposals for addressing many global issues. I could explain the success and failures of inter-governmental relations and cross-border business dealings. I could draw from liberal arts education and practical business experience. I could really dazzle.

But let's be honest. Nothing that comes from my pen will ever hit as hard as the images and footage of Richard awkwardly bending that actress over backwards or Cameron blankly looking around, flashing a deadly terrorist slogan on her in-vogue shoulder bag. Not that I am bitter or jealous or anything. You know me, progress is good, regardless of how incremental and regardless of its source. No I'm just fine with these realities. I do think I am ready for a summer break though.

Seen any good movies lately?

Regulating Corruption

Not all of you were thrilled with my post on corruption in China, where I essentially asserted that corruption IS the market in many places, and businesses and investors would do well to consider it that way. I think corruption may be one of those lightning rod topics where folks' worldview drives a given conclusion. So I am not all that hopeful that skeptics can be swung round. But I was intrigued by an editorial on the subject that I saw in The Moscow Times today (some of you have asked, so here's the link to a soft re-print of the editorial).

The author's gist is that corruption in Russia's Government runs deep, but the leadership has started down a praiseworthy path to address it. That is, the Government has sought to reduce the effects (net cost to the Government's customers) of corruption by consolidating the services whose bureaucrats command corrupt payments. The thought seems to be that a single mafioso pyramid-like power structure is less expensive to the customer than would be a disparate collection of uncoordinated corrupt forces. According to testimony the author cites, businessmen are confirming that the Government's consolidation efforts in this area will indeed be useful.

Somehow the consolidation is a part of President Putin's "dictatorship of law" (think "rule of law" with a Russian flair?). Of course, the Russian leadership's motives and means are not seen as pure, and the author cites the Government's own interference and apparent corruption in the huge Yukos saga. But the author appears philosophical and pragmatic about these dichotomous aspects of the Government's focus on corruption. As I see it, the conclusion appears to be that official corruption IS the market in Russia, and the solutions to corruption-qua-problem should be constructed to be effective within the cultural history and operation of that market. Incremental change in the right direction is a good thing.

I am sure a saner mind could make more sense out of this confused editorial - draw something that is philosophically purer when it comes to eradicating corruption. I just wouldn't want to be in Moscow with the owner of that mind.

OK, Iraq again - Zoloft News

With apologies to my readership (both of you), this is another (brief) post on Iraq. Hey, as somebody who tracks the wonders of the Western media, a fellow has to go with what's covered.

Today, I note the remarkable stupidity that the Western media assumes its readership brings to the morning paper. The rambling AP story about today's repeat bombing at the Shiite Askariya Mosque drove the point home again, mostly through its omissions. The bit contained lengthy descriptions that gave the clear impression of strange religious sects who battle and kill each other for no apparent reason. Because the author included no explanation of the philosophical differences, the real estate tensions, or the global context, the reader could only conclude the Shiites and Sunnis must just be savage nut-cases.

On the other hand, the same criticism could not be levelled at the US forces who are in Iraq. The story quizzically noted that many Iraqis refer to the US military presence as an "occupation" - yes, the writer actually used quotation marks, as if the meaning was lost on him. Hundreds of thousands of uninvited foreign military forces in a country. How could anybody ever see that as an "occupation"? Sheeeeesh.

Also worthy of nothing more than a brief mention was the promise from the US military in the aftermath of the 2006 bombing at the Askariya mosque to re-build it. The author dryly noted that the US has taken no steps at all to fulfill that promise, and then he moved on to the next topic. Not at all possible, I suppose, that such a broken promise looms large in the minds of the "unoccupied" people. Gracious folks indeed - thanks for taking it all in stride.*

* Credit to Family Guy's Stewie.

Women in Saudi

OK, even more so than usual, I am way, way out of my league on this one. But I have to mention it. One of the gripes I most frequently hear about Islamic countries is that women are deeply suppressed. The accusation rings true to me, I have to admit, based on my limited knowledge and experience. And I wrestle with the subject as I seek to consider how the apparent divide between between Islamic cultures and non-Islamic cultures might be bridged.

Not that I believe the US or Europe has addressed women's rights all that well, mind you. My experience is that women in the West do live and work under very thick glass ceilings (glass, yes, but ceilings nevertheless). And as a guy, I hear much more (subtly) anti-female commentary from other guys in the workplace than I would have thought possible based on the West's superior equal rights mythology. But it does seem to me that the language of equality has come a long way in many parts of the West - that suppression of women's rights has become more marginalized than it was, say, before the 1960s.

Against that backdrop, I was intrigued by links on a Saudi news website, http://www.arabnews.com/. Check out the story from today (June 8) on women's futures, and the links on this webpage from earlier this year on the Top 20 Saudi Businesswomen and their successes. I suppose it is easy to put blurbs on the internet without effecting any real change. But if language and mythology are part of the way to advance a rights agenda, as I submit the West has seen, then perhaps these webpages are to be praised, at least a little? After all, it would be just as easy to effectuate no change without these webpages.

Advantage Malaysia

The Star (of Kuala Lumpur) today reports that the Malaysian Government has offered to provide assistance to the Afghan Government in economic development. Malaysian PM Badawi spoke from Putrajaya via video link with Afghan President Karzai in Kabul. The occasion was a conference on the role of the private sector in Afghanistan's economic development. The PM suggested that the Malaysians have experience in transitioning an economy from agriculture toward manufacturing and hi-tech, and that experience may be valuable to Afghanistan at this stage. So many angles to examine here. Interesting that Malaysia is offering such aid in a land still so heavily populated with US military forces. Interesting that such an offer will receive zero attention in the Western media. Interesting that there probably is a good deal of merit to the PM's premise. I have long wished that Malaysia would take advantage of its history and position and exert some global leadership.

Think about it. Malaysia is a fascinating confluence of Southeast Asian culture, equatorial climatic influence on economic development, Islam, English colonization and legal/commercial tradition, Chinese slave importation and subsequent business dominance, and rejection of western prescriptions in the wake of the 1997-1999 Asian currency crisis. From one standpoint, one could see Malaysia along with Indonesia as a large swath of post-colonial territory located in a harsh climate, populated by Muslim people who tend to be much less well-off than the tiny non-Muslin country they surround (Singapore). That tiny, non-Muslim country is the product of maps and emigration policies of the former colonists, and the tiny country's population is dominated by an incredibly business-savvy group of people, many of whose families came from elsewhere. Sound familiar? If you were to learn that Malaysia has in fact come a very long way, that it has a thriving and growing private economy, and that its Government is increasingly savvy about its image at home and overseas, would you sense the same possibilities I do?

In the wake of 9/11, I was hopeful that then-PM Mahathir would seize the opportunity for Malaysia - from its Islamic perch overlooking an increasingly western-style economy - to be a moderating force throughout the world. I envisioned him traveling, conveying a message of confluence and moderation, a message touting his country's own ability to manage cross-cultural tension as perhaps holding lessons for the rest of the world. None of us would have liked it. Malaysia is still much too centrally controlled and politically dominated for western tastes. And it is much too religiously casual and indifferent for much of core Islam. But Malaysia has paved a kind of third way of its own that may yet hold value for people in places like Afghanistan. If Malaysia can have some success there, perhaps it would not be too silly for the rest of the world to notice.

I don't know about you, but The Star has re-kindled a spark of hope for me. What the heck, I'm feeling naive.

Purple Haze

Janet Elder's piece in the New York Times today about the "middle" of the US electorate incites thought. The theme is that the US is really not as politically divided as the popular "red-state-blue-state" model would lead one to believe. I do have to confess to falling into the trap of envisioning the country as two couple hundred mile-wide "blue" strips along the west coast and the northeast coast, with the rest of the country essentially being "red". But Janet says that it ain't really so - that US voters are all much closer than that on issues that matter, and presidential candidates would do well to recognize the similarities.

I wonder though. I have been in red and blue states a good bit over the past several years, and I have had occasion to discuss what I would consider to be important issues in both places. During my conversations, I am usually quite struck by differences that seem to me to be almost cultural, they are so stark. I can reflect on discussions with folks whose stomachs turn at the thought of the US activities in Iraq since 2003. And I can think of discussions with folks who think that the Iraqi operation is a laudable and altruistic attempt to export the American way of life to people who desperately need it. I remember discussions with businessmen who think of China as the next great frontier and as a country we should engage adroitly and from commercial strength. And I can remember discussions with businessmen who see China, and ongoing Asian and other immigration, as the greatest threat to US jobs and commerce in recent memory.

I can think of people who are awake nights worrying about what we are doing to the planet and whether it will be inhabitable for our kids' kids. And I can think of people who consider global warming to be a political ploy, only harmful to US commercial interests. I can think of conversations in which people were persuaded in their bones that Clinton should have been impeached for all of the shame that he brought on the White House and the USA with "that woman". And I can think of conversations in which people scream that Bush's pattern of perpetual blunders - linguistic or military - are cause for his impeachment. In each of these conversations, my counterparties were persuaded that the President in question is among the greatest national embarrassments in the history of the country.

I could go on and on. The differences appear to me to run the gamut of local to global, commercial to social, critical to mundane. And the differences appear to be wide indeed. And my perception is that the red/blue model is indicative and somewhat helpful, if not perfect. Janet, on the other hand, thinks this perception is distorted. To make her case, she focuses on polls (admittedly better than my anecdotal evidence, of course), and she focuses on issues like abortion, environment, and immigration. Really, she just discusses abortion; perhaps she has actually been having the same discussions I have on the subject of the environment and immigration. She suggests that folks in red and blue states are not as far apart as we might think.

I would agree that the American political spectrum is rather narrow - there are many globally important issues that Americans do not discuss. In that way, from a global standpoint, there may be merit to seeing US voters' attitudes as more similar than different, even if the issues I have observed are hotly debated within the US. Within that American landscape, however, I find Janet's assertion to be less than persuasive, though I admit I do not discuss abortion all that often. But one thing is for sure: I would love to be at the cocktail parties Janet attends. Kumbaya.

Let's get this bubble started

China is investing $3 billion in Blackstone's IPO. What do we make of that? Well, the US media is intrigued by what the deal signals about the power of Blackstone's game plan. And, of course, tremendous amounts of ink have been dedicated to whether the development means China plans to take over the US, just as the US feared about Japan in the 1980s. I wonder, though, whether the US media ought to get out of its usual, parochial rut, and consider whether the development signals something much more important (and less paranoid).

Something about global liquidity. Global financial players have been commenting on global liquidity excesses and potential asset bubbles for the past several years. I have yet to hear any rational, defensible explanation for all this liquidity. Where is it coming from, and why? Is it connected to a glut of savings from the about-to-retire baby boomers? Is it connected to huge hard currency reserves in oil producing nations and elsewhere? Is it connected to China's protection against a precipitous rise in its currency's value? This novice couldn't begin to explain the liquidity excess, but nobody has been arguing that it isn't there and growing.

Among the recited ramifications of all the liquidity have been (a) increases in housing prices, (b) inflated share markets, (c) booming corporate debt issuances, (d) red-hot private equity / M&A markets, and (e) extremely low corporate default rates. In the markets that the Western financial media follows, the past years have been a wide-spread asset boom that would have been hard to imagine beforehand. Investors have been chasing yield in an increasingly crowded and competitive marketplace. (Never mind that huge swaths of the earth's population continue to live in abject - and often worsening - poverty. And never mind that the liquidity glut will almost certainly not be used to address their plight in any meaningful way. That subject will have to be another post's.)

A debate my friends and colleagues often engage in these days is what might burst this liquidity bubble, and, of course, when. People who well understand finance and global markets argue forcefully from experience that what goes up must come down. These people recite the irrationally high P/E ratios on which shares trade and the incredible EBITDA multiples that companies can finance these days. The argument is that these levels are not sustainable, and a melt down is nigh. Since mid-2003, in my experience, this meltdown has constantly been stated to be six-nine months away.

Perhaps. The arguments certainly are sensible, and they are rooted in historical trends that surely teach us much. But is the China/Blackstone deal perhaps meaningful in this discussion as well? I think it is, and it is huge. For months, the Chinese have been quietly (and occasionally openly) considering how to deploy their $1.2 trillion in hard currency reserves in assets that are higher-yielding than the US T-bills which they buy in bulk.

Imagine the effect on today's asset bubbles of the addition of that much money to the yield-chasing investor pool. While nothing is certain, and unpredictable events can cause markets to tumble precipitously, it seems to me likely that China's investment diversification will only expand and extend current trends. Mark my words, the Blackstone deal is only the tip of the iceberg. Don't be surprised to see China and Singapore team up as investors, to see India and oil producing countries' more openly and frequently investing hard currency reserves into private markets, to see Chavez' Bank of the South take off and become a player, and to see other non-US pools of funds collaborating in the same spaces. And don't be surprised if the six-nine month window extends to several more years. Plan and hedge accordingly.

Google ain't seen nothing universal yet

So Google's search engine will now produce a wider variety of results than before in response to a simple query. No longer any need to search separately for text, photos, video, etc. For those of us who no longer have much patience for the video format - too much waiting around for somebody else's views, largely at their speed - the development doesn't necessarily sound all that helpful. (I assume that Google will not slow down production of faster search results while slower videos load - a technology that I am certain is easy.) But this development is headline news today.

Makes me wonder though. My view of the future of the web is so much farther afield, that I must work to restrain a yawn today. Ready? Here goes. All the mobile tech folks will inevitably spend years and huge sums trying to perfect the mobile device that works best for humankind. None of them, so far as I know however, have focused on the most obvious mobile device of all - the human body.

No, I am not some Luddite who advocates that we drop the tech madness and allow our natural abilities to flourish and be challenged again. Heavens no. Though I do blame the advent of technology for my increasingly lazy and incapable memory - it can't be my advancing age. No no, go the other direction. Within our lifetime, there will be surgery that will install the machinery for web surfing right into our flesh. If virtual reality games are as advanced as they are today, and if we can train fighter pilots to operate their aircraft and weaponry with eye muscle movements, this day is not far off.

Think about the utility. Every day, I tap the web for knowledge - things I once knew and have forgotten as well as things I never knew. Things that people mention to me over the phone, which I can search and appear quickly to understand, if only in a rudimentary way at first. The only reason I don't do the same in person is because it is rude. Imagine though, if that pensive look during a conversation were also an opportunity to locate relevant contextual data on the internet, as projected clandestinely onto your retina?

Now that could be universal, and it would certainly make the headlines. Mark my words, we will get there. You saw it here first.

Four score and seven years, the Cheney version

"There's a lot going on. This is a very important time. There's a lot to talk about."

Stirring words indeed from VP Cheney during his surprise visit to Iraq today, as quoted on Yahoo! News at least. I need help, as I have a terrible middle-aged memory. So for those of you with more retained perspective: is it me, or has the quality of folks who are attracted to the leadership of the United States of America (the most powerful sovereign nation on the planet) fallen off the cliff somewhere?

I have this fanciful notion that the nation once attracted people worthy of deep respect, in many dimensions. People who could incite a revolution, including by drafting an amazing declaration of independence - read it again some time when you have a few minutes. People who could lead resolution of a huge civil war. People who spoke with dignity and sincere emotion about times of world wars. People who had a clear plan for dragging a country out of deep economic depression. People who called upon citizens' innate desire to serve. People who were eloquent about the equal rights of all humans.

Then I think about people like Mr. Cheney, Messrs Bush, the Bush cabinet, Mr. Kerry, and the gaggle of candidates now campaigning for the Presidency. In the estimation of thinkers, who among these is even in the same universe as those who went before? Can we just stop and be candid for a minute - would you want any of these people teaching your children, or managing your business, or serving your legal needs? Would you trust their instincts and effectiveness?

I am hoping here that at least some of you are answering "yes, we would". But I am not. I have such (silly?) hopes for my kids and their future, that these people can't even make it to the testing table, much less pass. On the other hand, I meet people regularly in my daily life and affairs who I would gladly trust in this way. Elementary school teachers, economists, hedge fund managers, lawyers, heck even diplomats and bureaucrats. People who are passionate about their goals, who are persuasively articulate, and who exude competence. People whom you would want by your side if you were starting a business or lost in the desert.

What do we make of all this? Could it be that the rewards of leading the USA are so diminished that quality people just do other things? Could it be that the post-Nixon White House is so sullied that we should generally expect buffoons "to lead" us? Am I perhaps just unable to preserve perspective in the shadow of the current administration's shocking incompetence and lunacy? I really need some help. Because Cheney's dolt-like remarks remind me that I once thought the US Government could be a force for powerful benefits in this world. I suppose I still want to believe that, notwithstanding the general tone of this weblog. But thankfully Dick is constantly there to prod me to my senses.

Technology of Sovereignty

Everything changes, nothing can remain the same for long if it is to succeed for any extended period. Today, I was in Philadelphia's museum dedicated to the Constitution of the United States. The Queen of England was a few hundred miles away, visiting Jamestown, the first English colony in North America. Seems like the day might expose something about how sovereignty has been evolving and succeeding near the North Atlantic ocean in the past few hundred years.

Well, in Philly, I was reminded of the roots of American independence - largely in the goal of the inhabitants of the colonies to keep more of the monetary fruits of their labors onshore, as opposed to sending them to the English Crown. I was reminded of the honorable goal of establishing a new continental government whose powers minimally trampled on the fundamental human rights of the governed, instead of taxing them without regard to taxpayer views. The technology of sovereignty was seen as advancing in the name of that goal, through a careful separation of sovereign powers so as to minimize the concentration and potential abuse of such power by one mind or one political party.

Those developments of course succeeded only in spite of powerful and fiery opposition from England. But the Queen today reaffirmed the close kinship and mutual respect that subsists between England and the United States. The US Vice President wholeheartedly agreed. Against the trappings of apparently deep policy and military cooperation between the two sovereigns today, the platitudes do not seem worth much ink.

But are we missing something, both in the development of sovereignty as well as in how that development is perceived and reported? Could it be that England's 18th century (and current?) over-stretched view of the extent of its sovereignty has become the current bad habit of the US Government? Not that the US is "taxing without representation" in the same way. But could the US be assuming, even when it might be incorrect, that its means, power, and influence are always beneficial for foreign lands?

Those who were present with the Queen today refrained from using the word "celebration" in order to respect the sorrow of the lost lives of the native Americans whose fate was controlled by the commercial and political machinations of the (largely) English settlers. Today's event was therefore instead termed a "commemoration", and I do not think the Vice President's office protested this nomenclature. But I remain discouraged. I doubt the Vice President (or others in his administration) truly appreciates that the US is now widely seen as the globe's current abuser of sovereign power. That revolutionary forces are arrayed against the US, and its Boston Tea Party mythology. And that the pride amongst those so arrayed runs as deep as it did among the colonials who defeated the English in North America after declaring independence.

I'd like to think that these tensions will be ancient history several hundred years hence, when there could be a Jamestown-style back-patting session amongst former enemies. But there may have to be another US Constitution-style upheaval in the management and constraint of sovereign power if the road to that session is to be paved.

Spectator Sports

April 2007 has been the month of lucky number 13,* at least for New York City. The Yankees' A-Rod (whose jersey is #13) has been the hottest thing they have, with more than 13 home runs already and hits in most every game this season, while all else about the team is seemingly going to seed. And the Dow Jones Industrial Average has finally hit 13,000. Wow, amazing stuff.

For those in the game. I have never understood people's patience - neigh lust - for following the victories, trials, and tribuations of others' sporting efforts. Think about the amount of content in the US media dedicated to sports and to the results of folks gambling in the financial markets. That stuff truly sells, pretty much as well as any other soap opera. Then consider how much of your friends' and colleagues' idle banter relates to the same subjects.

I am lost in this universe. I absolutely love playing sports (baseball, football, tiddlywinks, etc.), and I follow my investments more closely than any rational being should follow anything. But I have never much enjoyed following or discussing the similar efforts of the rich and famous, unless there is something to learn that I can actually use.

I really do not like being this out of touch with most folks' delights, however. I have $13 for the person who can enlighten me and interest me in the New York Daily News.


* 4 + 2 + 0 + 0 + 7 = 13. Coincidence? I think not.

"Corrupt" - "Altered from the Model" or "Morally Depraved"?

Caution: if you believe that Western means of government are the best, you will likely find this post patronizing.

China is often said to be corrupt. It is widely agreed that unpublished and therefore unpredictable fees - bribes - must often be paid to government officials if businesses wish to obtain results (e.g., licences, concessions, approvals, etc.). There are laws against this kind of behavior, within China, in the USA, and elsewhere. And violation of these laws in practice is certainly an alteration from the model.

But is it morally depraved? And could the answer to the latter question depend on the culture from which one comes? If one is willing to consider that sovereignty is a commercial enterprise, then how could one consider that a government official - say, one in charge of a particular agency whose approval is needed - should not be able to charge whatever price for the requested approval that the prevalent conditions will bear? In fact, that is just how things have long been viewed and worked in many parts of the world.

But, Western minds generally consider that sovereignty is not a commercial enterprise (query what it is then), and they elevate governments to a different plane. A plane where it is somehow morally depraved to demand a market-clearing price for a requested approval or other service. The best argument that occurs to me for this position is that the government has a kind of monopoly - it sets the requirements and also administers them, and it should not be able to command such concentrated power without published constraint. It is for this reason that no self-respecting Western society would countenance anything close to such a concentration of power in commercial markets, aside perhaps from the odd minor exception like the energy industry or the defense industry.

When the WTO joined the PRC, it took on a cultural integration project, and mutual understanding of longstanding business and bureaucratic attitudes and practices is critical - in both directions - if the team-up is going to work. The PRC states that it wants to tackle "corruption" in the Western sense, though I doubt the Chinese have attributed a "morally depraved" aspect to their definition. As we should well understand by now, that tackling process will evolve very slowly, growing out of the previous system. To expect sudden change to the Western model is silly. And to label thousands of years of customs as "morally depraved" is not constructive.

Caveat Emptor

Very interesting letter to The Economist from James Hutchin published in the April 14th-20th 2007 volume. Mr. Hutchin asks if it is rational for US taxpayers to support a further investment in the Iraq war, an enterprise "without a business plan, and with no targets and deadlines". How many folks think of their tax payments to the goverment in the same way they think of their other large investments? But why should things not be as he articulates them? Would you spend 15, 20, 30% or more of your gross income on anything else without critical study of what the investment was getting you? Think how carefully you track your home's value, your 401(k) plan's returns, or just your houshold budget for most folks.

Most people seem to send checks to their government - not without complaint often, mind you, but without requesting any direct accountability. The most folks might do is tune in to the public debate on the media-selected "political" issues of the day and consider which side of those force-fed issues they take. Usually the talking heads present two of the many possible views as the two "sides". That way, we barely have to think. To appear knowledgeable and interested in a government's activities to our similarly-behaving friends and family, all we have to do is know and chat about what's on the front page of our newspaper or in the lead stories on the national TV network news program.

Here's an idea. Challenge yourself to track your investment in your government as closely as you track your other large investments. Investigate how much gets spent on what, and how successful the effort is. Focus on the subjects that concern you the most, regardless of what the media has decided is hot. And understand how other governments are dealing with the same issues. For US taxpayers, the OMB publishes these charts, which make for a fascinating start.

Bush's accelerated Iraq pullout

Don't believe what the White House says. Not only is the White House unopposed to a scheduled withdrawal from Iraq. In fact, the US has effectively already withdrawn. As it stands today, a major Baghdad bridge over the Tigris can be brought down and a suicide bomb set off in the heavily-protected Parliament building (killing legislators) within hours of each other. And these things can be done with all the force and surge of the US military seeking to prevent them from happening.

In what sense, then, is the US "there"? To the distant observer, only two sad answers appear. First and foremost, US children are putting their lives at risk, and they are dying "there". Second, the US is seen throughout the world as the military force that is unable to control security "there" in any real way.

Acknowledging that these are HUGE ways to be "there", I am unwilling to consider that these are the goals of the Bushies in their stated opposition to scheduled withdrawal. So perhaps the latest events will persuade the Bushies that we have already withdrawn under the current strategy. If not, the world should give up any remaining hope that the reality of the at-risk kids (US and Iraqi) can ever match the Bushies' reckless and inexplicable fantasies.

Connect the China Dots

The Economist ran a special report on China last week. A couple articles buried separately toward the back of the issue were as helpful as the report itself. These articles alone would tell a very useful story were somebody to connect them. The first article asks whether multinational corporations are really investing as much in China as one would expect given all the hype about China's increasing commercial importance. The article states that multinationals' revenues and especially business growth potential in China far outstrip their infrastructure and human resources in China.

The second article points out how corporate borrowers globally these days command ever more leverage in negotiating debt terms with their lenders. The article describes the evolution of the world's commercial lender base from multinational banks to multinational funds of various stripes, and it points out that fewer lenders seem to be bothered with loan terms that regulate borrowers' business activities in any way at all.

Spot the connection? Neither did The Economist. A very real and important story here, though, is how much money is flowing into China (and elsewhere) on the kinds of terms that have proven so dangerous in the past - institutionally and anonymously, without regard for investor-investee (eg, lender-borrower) relationships or commercial leverage points. Post-Asian currency crisis, it should be clear that the first kind of investor to be forgotten in a time of stress is the anonymous investor who has nothing further to offer a struggling business - and no ability to hurt it. On the other hand, that business' critical and ongoing commercial/trading relationships are treated better longer. But these relationships require resources "on the ground".

Multinationals are over-weighting the known-to-be dangerous kinds of investment in China and under-weighting the more secure. And they likely haven't done enough homework even to notice. But Chinese business owners must be delighted.

Oh Dick

So Dick Cheney remains a dog with a bone. Saddam was cooperating with Al-Qaeda, no really. Really, he was.

This latest pronunciation comes on the heels of yet more DoD evidence that Saddam was in fact not cooperating with Al-Qaeda. Dick, that's your own DoD. If you ain't got them, who have you got? And what is the limit on your perception of the stupidity of the US voters?

That Dick could engage in this 1984-speak, without material consequence - other than appearing utterly out of touch to anybody who is thinking (a trivial loss) - is just amazing. That he would choose to pursue the subject some three-four years after the idea was discredited wholesale is also pretty amazing. There must be something for Dick to gain from the step. Who among us knows what it is?

Let the People Divide Themselves

Everybody except maybe the Bush administration is drowning in the seemingly endless deluge of stories about death and destruction in Iraq. (Fortunately for Bush, there is Justice to worry about.) But when does it become acceptable for those in power to ask if we have been looking at the problem the wrong way? The US Government and the US media clearly define success by whether there is peace within the post-colonial borders. "Can we avoid all-out civil war?"

When do we consider, however, that the West's historical division of the region by borders drawn on a map may have been at the root of the current issues? The West wants folks the world over to be excited by, and loyal to, a map and a flag (and a finance ministry and a UN seat), just the way the West has been since Westphalia. Is it possible, however, that other regions of the world may naturally prefer to divide themselves differently? That there may be other measures - say religious, business, or familial - that other people prefer to consider in determining who is "one of us"?

By introducing wealth along with its means for dividing, the West has enticed people everywhere to adopt, or at least to appear to adopt, the legitimacy of the Western style of division. But how many deaths will it take before we consider that the world may not yet have truly bought the West's global map? That systems empowered by Western wealth will break down, and when that happens, people's innate means for division will re-awaken, often wreaking havoc after having been suppressed and supplanted? I say until we wrestle thoroughly with this possibility, we will never even understand the problems, much less commence a successful solution in Iraq.

Zbigniew, Where've You Been?

Zbigniew Brzezinski's piece in today's Washington Post is stuff to think about. Z goes to great lengths to point out that the "War on Terror" is primarily a tool designed to augment a culture of fear. Z argues this tool enables ever more questionable activity by the US Government, and it makes the US voters ever more complacent.

In the end, Z argues that the USA's go-it-alone approach to this so-called war has been at the core of the greatest current national security threat. Z is spot on - more so than than most Americans will ever know, since most of them rarely or never leave the USA, and most of them limit their information sources to US-based media. That US voters would want to know so little about the perceived (foreign) sources of the ubiquitous terror threat is amazing, but apparently quite true. So a good piece, thanks Z.

Where he loses me is at the end, where Z urges that America stop the hysteria and paranoia and instead be true to its traditions. Has Z been living in the US during much of the last 40 years? (Think USSR, China, East Germany, Cuba, Korea, Vietnam, Iran, Nicaragua, Afghanistan, Panama, Grenada, Kuwait, Afghanistan again (for different reasons), Iraq and Iraq, Iran again (for different reasons), Korea again (for different reasons), Venezuela, etc. - and that list is just off the top of my head at midnight.) Because only a lengthy absence from the country - or a dogged limitation of information sources to the US media - could enable a thinking person to put both of these urgings into the same paragraph and miss the irony. There may be more work to do than Z realizes.

John John

Stewart had Bolton on the Daily Show last night, and wow. That was nine minutes of worthwhile television. The two appeared diametrically opposed on the subjects they hit, and their repartee was informative and entertaining. Stewart jabbed with whether Bolton's "fox in the hen house" appointment as UN ambassador was emblematic of Bush hubris and failure to understand and utilize compromise as a resource with Congress and other countries. Bolton countered with the need for an elected administration to remain true to its stated policies, even if that means putting people in places where they will seek to effect fundamental change, even creative destruction (OK, I am tossing that last part to Bolton).

Though he didn't say all that much, Bolton had the most interesting lines. Following up on the "true to stated policies" point, he asked, if administrations have to compromise as Stewart suggested, what is the point of having elections? And was Stewart challenging what Bolton called "democratic theory"? I will sound off on elections in another post, but for now, let's just remind Bolton that the President is not the only elected official in the US Federal Government. And Congress was designed to be a check and balance on the executive branch, if I remember my civics correctly.

But, surprisingly, Bolton unknowingly answered his own question a bit later. He stated that elected officials should be judged by their effectiveness. In other words, the point of having elections may be to have the people choose which policies their government should effectuate. Not to have them choose which policies their government will shout about while utterly failing to advance. Recognizing the thin ice onto which he had skated, and after the audience chuckled, Bolton changed his wording ("effectiveness" became "actions"), and returned to the voter loyalty point etc.

Smartly, Stewart retorted "if you you'll give us the first part of that, we'll let you have the rest of it". Bolton was as deer in the headlights as Bush would have been. Then the show ended. Too bad.

It's Justice, After All

I for one hope the Dems get to the rock bottom of US Attorney-gate. Allegations are that the Justice Department might have been infected with -- oh no! -- politics, which might have influenced decision-making about who should serve in what office and what they should do. If the Dems are on track, we may discover that US Attorneys sometimes hear from their appointers (at whose pleasure they serve) about legal work programs and priorities. Of course, this will be just shocking news when it breaks, though you won't be surprised to learn that only Republicans ever engage in this kind of activity. No way would Dems ever be so political, I am sure.

Once again, I am thrilled that the US Government is so wisely using taxpayer dollars. Lord knows where the USA would be if the Government did not occasionally tell folks what they already well know (or should know) about governmental deviation from stated policy. And we certainly would not want the folks at Justice to be spending too much of their time on legal matters that may heavily affect the future of the USA, such as Guantanamo, corporate fraud, and official dealings with nuclear-capable nations.

Look, I get that we need Justice to be as pure as it can be, and politically-motivated investigations at least work toward ensuring that Justice is minimally corrupted. But it sure is unsettling to pay taxes which are supposed to be used (a) to get the job done, but instead have to be used (b) to screw-up the job, (c) to investigate the screw-up, (d) to fight with political opponents about the screw-up and the investigation, (e) to figure out how to present the screw-up and investigation to the media and the public, and then (f) maybe, if we're lucky, to get some part of the job done. That litany's old news, for sure, I understand.

And though I want politics out of my Justice as much as the next guy, the fact that it is in there surely ain't news either. The wasted resources and diverted energies, however, now that's a story. Who's been covering that one again?

Leadership, finally

It seems the Bushies may have caught on to what Chavez has been building in the Western Hemisphere for a number of years. W took his recent trip through Latin America. And though I suppose it is better for him to go than not (Andy Rooney, what do you think?), being a casual observer of the headlines, I can't escape the sense of W as a kind of late tag along, showing up on the playground only once Chavez' ballgame is well underway.

Does anybody think W knows what Chavez has underway in Bolivia and Ecuador? How about in the Eastern Caribbean? Argentina? I would bet that Cuba gets more airtime in the White House discussions of Chavez than all the rest of the region combined. (At least we're not ignoring Cuba, though, as those concerned with the war on terror might have feared.)

Now, don't get me wrong. W's trip was all about leadership - showing the Brazilians a thing or two about the alternative energy industry - and persuading the region that we care - confirming to the Mexicans that the US is really quite keen for more traders to cross the border (this one is a "strong view").

I'd say Chavez is squarely in check now. A good expenditure of US taxpayer dollars. Thanks W.

Who's Thinkin' at Microsoft?

I can't be alone. I am sure that Internet Explorer 7 is much improved over previous versions in many ways. Must be a heck of a lot less vulnerable to viruses or re-directs or trojans or something. But when it comes to user friendliness, OUCH! A very simple thing - on all other browsers I know of, the basic five navigation buttons (back, forward, stop, refresh, home) are all located in the same place on the browser. Upper left is good. Easy to remember, easy to get to.

Which genius decided that these buttons ought to be scrambled all over the page, in different rows, on different sides of the screen? And then which brighter genius decided that the user should not be able to move these buttons from their pre-set locations, so we are forced to adjust to the new scattering?

I am sure that Microsoft knows something on this subject that I am missing. Something about more efficient web-surfing if I could just get my head out of my a#$ and learn the new, more intuitive way to move the mouse over more real estate to do the same old things. But I wish they would tell me what it is, because I have been at it for weeks (months?) now, and it is totally lost on this sorry surfer. I still sigh every time I open IE7.

Insider Trading Redux

Insider trading. Just terrible. That folks would use what they have learned to their personal benefit. Imagine. And that we would tolerate such filth in a selfish, capitalist society is almost beyond comprehension. So I have an idea. Those in governments who enforce the rules against insider trading should have to explain publicly (not just to insiders) their parameters for deciding who to investigate and how. Bankruptcy Judge Allen Gropper, presiding over the Northwest bankruptcy, seems game (see below).

As I imagine it, whole swaths of trading activity go completely unnoticed by the authorities, even though the activities could be described (at least by us amateurs) as "insider trading". For example, hedge funds, particularly those that invest in emerging markets, have all but perfected the art of buying and selling securities in advance of, or on the heels of, significant events that they themselves drive or create, sometimes in cahoots with management of the companies that issued the securities. These events can materially alter trading prices, and those who drive the events can profit nicely since they know when the events will happen or when they will end. It's so easy, any average investor (or Rooney soldier) can try it. And the authorities are blissfully unaware, right?

Not so much, one would think. At least if one considers the ivy (and better) qualifications of the regulators. But the lowest hanging fruit for our esteemed regulators seems to be those stories that involve traditional features like management trading or big broker-dealer information leaks. Or disposable cell phones and other made-for-movies sex appeal. The fact that our retirements are these days heavily and increasingly counting on emerging markets yields, which can be masterfully and unaccountably driven by hedge funds, is much too dull - or too important? - for now.

Judge Gropper made an interesting move this week, ruling that members of an ad hoc committee of distressed investors in Northwest's shares (is this an emerging market?) have to disclose their holdings and their purchase prices. Such disclosure is anathema to the secretive hedge funds, who thrive on information about others and who abhor sharing information about themselves. Sharing information about their investments and investment strategies would, after all, reveal more about the event-driven aspects of their business, making it more difficult.

Judge Gropper has taken a reasoned, if uncomfortable and debatable, stand on an issue that may be more core than folks appreciate. Will his Federal brethren be able to take similar steps? I would guess not, but hey, why not hope? After all, this place is "for the people" too, no?