The Economist has a great essay about history, morality and progress called “Onwards and upwards“.

But Ms Neiman thinks that people yearn for a sense of moral purpose. In a world preoccupied with consumerism and petty self-interest, that gives life dignity. People want to determine how the world works, not always to be determined by it. It means that people’s behavior should be shaped not by who is most powerful, or by who stands to lose and gain, but by what is right despite the costs. Moral sensibility is why people will suffer for their beliefs, and why acts of principled self-sacrifice are so powerful.

The moral argument is a very interesting one. Originally Einstein didn’t want his theory to be called “relativity”, he was concerned that people would use it as an argument for moral relativism. I liked the movie Fight Club precisely because it was dealing with the lack of moral sensibility in modern consumer culture.

There are no guarantees that the gap between is and ought can be closed. Every time someone tells you to “be realistic” they are asking you to compromise your ideals. Ms Neiman acknowledges that your ideals will never be met completely. But sometimes, however imperfectly, you can make progress. It is as if you are moving towards an unattainable horizon. “Human dignity”, she writes, “requires the love of ideals for their own sake, but nothing requires that the love will be requited.”

Living in Shanghai, “be realistic” is one of the favorite phrases for local people. Right up there with “but there are too many people”, “but this is China”, and “but our 5,000 years of history”.

I was checking my email tonight and saw a google alert come in about “Erwin” on GoneTooSoon. My name isn’t that common.

Erwin
1981 – 2009

Location Battle Creek, Michigan
Age 28 years
Murdered
Born Jan 27th 1981
Death July 27th 2009

Erwin was loved by everyone who ever got the chance to truly get to know him. He was a very talented rapper and enjoyed being around his friends and family. He was very intelligent, taking college courses in sociology and psychology and reading self improvement books. He leaves behind his loving mother Kim, father Raymond, grandma Edeith and grandpa Norman and his brother Deon along with a host of cousins, aunts and uncles and friends along with Sandy a family friend. To carry on his legacy he has a son, whom he cherished. Erwin is greatly missed but will NEVER be forgotten. We love you Erwin.

Please accept my sincerest condolences. I hope the Erwin family of Battle Creek, Michigan is able to be together during this holiday season.

I was recently surprised to hear that Macau gambling revenues have overtaken Las Vegas. The explanation is that Chinese people love to gamble, and when they hit the tables they simply play much bigger than people in America. There is some truth to this. In the USA, the overall rate of “pathological gambling” is 1.8% for Chinese Americans, and 3% for Chinese immigrants. However, that doesn’t seem to explain the entire picture.

One trip to Macau and you’ll probably be asking yourself what the numbers really mean. In typical China Fashion, it means less than you think.

'07 Gambling Revenues: Macau  $7.0B   Vegas   $6.5B

VIP Rooms:             Macau    65%   Vegas      0%

Slot Machine Revenue:  Macau     5%   Vegas     60%

Gambling % of Revenue: Macau    95%   Vegas     40%

Length of Avg Visit:   Macau      1   Vegas       4

Hotel Rooms:           Macau 13,000   Vegas 130,000

65% of money bet in Macau is in the “VIP Rooms”, which typically equals money laundering. Without that, Macau is at about $2B/year. In terms of pure table games, Macau and Vegas are nearly equal – around $2B/Y, but Slot Machines contribute more than double table game revenues, and the vacation/convention business accounts for 2.5x the gaming total. In summary:

Macau: $2.5B (less money laundering)

Vegas:  $16B (including slots and retail)

Those numbers basically match what you feel when you’re in Vegas.

You may be wondering how VIP Rooms work. James Fallows’s new book “Postcards from Tomorrow Square” explains.

The Chinese government doesn’t allow rich people to take their money out of the country easily, it allows them to convert only small amounts of renminbi each year. So a factory owner from the Pearl River Delta or a corrupt public official who has grown wealthy, will head to Macau.

One Western banker with extensive experience in Macau pointed out that the city functions as one big, quasi-official money-laundering site via the numbers gold dealer’s shops on either side of its border with mainland China.

Chinese visitors buy bold with RMB from shops on their side of the border and then sell to dealers on the Macau side for Hong Kong dollars – a ‘hard’ currency that can be converted into U.S. dollars or euros and sent anywhere in the world.

Something similar can go on when wealthy Chinese visit a VIP room. The room’s operator lends them money for gambling – often large sums, worth thousands or millions of U.S. dollars. The loan is in Hong Kong dollars, the main betting currency of Macau (its own currency is the pataca). If the Chinese gambler wins, he now has hard currency. If he loses, he settles the debt back in China, in RMB. A related practice is “doubling down” which the bets are made in one currency, say Hong Kong dollars, but the players agree to settle later in another, like U.S. dollars. Exactly how the debts are paid, and just where the touts get their substantial operating capital, is obscure. But the rooms and other Macau-based services are assumed to be a major channel for money flowing illegally out of China – and North Korea.

Fallows also wrote one of my favorite quotes ever summarizing doing business in China:

“These standards include such vague-sounding principles as rule of law, transparency, and accountability, which in practice mean: Can you trust a contract? Can you win a lawsuit? Do you know who’s really making a decision? Will the decision be made in favor of whoever provides a “red envelope” containing the biggest bribe? How many sets of books should a company be keeping, anyway? How much money laundering is too much?”
“Postcards from Tomorrow Square” p108

“The Great Recession is receding, according to our measure of global GDP” [Economist]

We don’t have rational markets. Market ups and downs aren’t straight lines. Prices rise too high on the way up and fall too far on the way down. If you want to understand how the market really works, read George Soros classic “The Alchemy of Finance“.

In most of the countries that have published third-quarter figures, GDP was lower than a year earlier. The exceptions were mostly in Asia: China and India recorded the fastest growth, followed by Indonesia. Only one European country, Poland, reported higher GDP in the third quarter than a year earlier.

If the rebound is being led by China, then I’d be very concerned about the sustainability of the rebound. Perhaps the China of 2050 will be placed well to lead the rebound, but the current Chinese economy is based on: Exports (in trouble), Real Estate (empty houses are “gold bricks” in the mind of chinese investors), and massive State Spending (but where is the tax base to support the spending).

Bottom line, I don’t think this is anywhere near over. More like a sunny day in the winter.

Boston Consulting recently put together a survey of “China’s Luxury Market in a Post-Land-Rush Era”. The complete PDF is available online here (free).

Perhaps more interestingly, the chart clearly shows LV and Gucci are by far the most popular luxury brands out here.

The Litmus Test: If you are truly enriching someone’s life, they will typically miss you in their past. They think their lives would have been even better if they had met you earlier.

You are only as rich as the enrichment you bring to the world around you.

The quote is from Silicon Valley entrepreneur Rajesh Setty, compiled as part of a book by Seth Godin. You can check out the book here.

This summer Foreign Policy posted an article called saying “The whole Chinese economy’s getting ready to burst“, comparing the growth of China’s export model with Lucent technologies in the 90′s. The article is long on adjectives and short on numbers. The premise isn’t necessarily wrong though.

China’s fortunes over the past decade are reminiscent of Lucent Technologies in the 1990s. Lucent sold computer equipment to dot-coms. At first, its growth was natural, the result of selling goods to traditional, cash-generating companies. After opportunities with cash-generating customers dried out, it moved to start-ups — and its growth became slightly artificial. These dot-coms were able to buy Lucent’s equipment only by raising money through private equity and equity markets, since their business models didn’t factor in the necessity of cash-flow generation.

Funds to buy Lucent’s equipment quickly dried up, and its growth should have decelerated or declined. Instead, Lucent offered its own financing to dot-coms by borrowing and lending money on the cheap to finance the purchase of its own equipment. This worked well enough, until it came time to pay back the loans.

Personally I would make more of a comparison to Enron once the internal debt to GDP number gets shown to be 3x higher than the commonly accepted numbers. However, unlike Enron China doesn’t actually report these numbers – all finance numbers are considered State Secrets (国家机密), fortunately they don’t show up on Danwei’s list of state secrets.

CNN put together a story about Christmas shopping in Yiwu, the worlds largest wholesale small commodities market, 300km south of Shanghai. That’s a 2.5 hr ride from Shanghai’s South [Train] Station (南站) Additionally, Yiwu also functions as a sort of ‘Wall Street’ for the counterfeiting industry, where 100,000 counterfeit products are openly traded daily. Take a look at the CNN article for some fun pictures.

Almost as large as the city’s downtown, the day market will take more than a day to cover in its entirety. And be prepared to buy lots of gifts this year; the traders in Yiwu sell in bulk. Trains to Yiwu leave from Shanghai South Railway Station.

“Chinese people don’t always bargain these days,” says Wang Fei. “Sometimes they want to know the price for quality. It was not always like this and we had to bargain a lot.”

“The market is the town,” says Mrs. He. “Other towns are far away. It takes time for products to get there. Here, it’s always Christmas.”

“The Yiwu market is old California,” says Zhou Zheng, a local merchant. “There are prospectors everywhere. They’re all panning for gold. Some of them find it.”

“People in Yiwu have a saying,” Zhou Zheng continues, “‘Mei you zui pianyi, zhi you geng pianyi.’ This means: there is no cheapest [price]; only cheaper.”

The sun goes down and the Yiwu night market comes out

FT put together an excellent interview with Zhang Yimou (张艺谋), China’s leading feature film director. Some very interesting points come out during the interview, showing the artist inside is alive and well.

Zhang uses a modest apartment in an anonymous Beijing suburb as his office – and there is a back-to-basics quality about the two films he is working on, one a remake of a Coen Brothers movie. Although he does not quite put it this way, it feels as if he is trying to re-establish himself as an independent filmmaker. When Zhang describes his work he takes a slightly defensive tone, a sign that fame and wealth have come at a critical cost.

“I am still an independent artist. I am not a member of the Chinese Communist Party or the Communist Youth League,” says Zhang. “I am still working hard to make one new film after another. My life has not changed at all.”

He smiles at the label and says he is not bothered. “I am not a person out of the official regime. I was engaged to do the Olympics and because the state leaders were very happy, they used me again for the national day celebrations. These were just assignments,” he says. “The more independent an artist is, the more special or unique his or her work is.”

Perhaps most importantly, Zhang Yimou sure uses a lot of RED in his films.

A decade later, he was making powerful films that many thought of as allegories for authoritarian rule under the communists, including Red Sorghum (1987) and Raise the Red Lantern (1991), a claustrophobic examination of the life of a concubine that meshed his talent for intimate detail with a luxuriant use of colour. He has also dabbled in grand theatrical events, staging Turandot in Beijing’s Forbidden City palace a decade ago. In recognition of his status, he has just been announced as Martin Scorsese’s successor in the Rolex mentoring scheme, which each year matches distinguished filmmakers and other artists with up-and-coming protégés.

In regards to his direction of the opening ceremony for the Olympic Games:

“I am very proud of myself,” Zhang says. “Everyone knew they were going to get a show about traditional Chinese culture, but … I was able to find a way to use multimedia to demonstrate the new, modern China.”

When he and his film school colleagues started making movies in the 1980s, he says, they were still angry about their suffering during the cultural revolution. “At that time, lots of Chinese people were thinking about the tragedy of the cultural revolution. The work of most film directors reflected this,” he says. (“I never had a mentor,” he grumbles. “At that time, the biggest issue was whether you had enough to eat.”)

This is a bit more wholesome than a lot of the sales in China than I’ve seen. I hope local companies start operating more along these lines.

Once staffers went through training, Sullivan found it beneficial for them to go out on sales calls in pairs. Indeed, the Wolters Kluwer sales team in China has adopted a very team-oriented approach, right down to the way the salespeople are compensated. “In other countries we don’t bother with a team incentive,” Sullivan says. “In China, a nice chunk of the commission is based on how the team does.”

Check out the complete story (about one page) on CNN Money.

Patrick Chovanec at Tsinghua has put together some excellent research on the current property bubble in China.

In China, however, “flipping” is not the problem. Some people may be engaged in short-term ”flipping,” but as I’ve described in my FEER article “China’s Real Estate Riddle,” a lot more are buying residences — in many cases multiple units — and holding them vacant indefinitely as an unproductive ”store of value,” like gold. As I mentioned in my article, the Financial Times estimates that there are 587 million meters of apartment space that buyers have purchased over the past five years only to leave lying empty (for a concrete notion of what this statistic means, take a look at Al Jazeera’s report on Ordos). This puzzling phenomenon is due to the fact that Chinese citizens have relatively few investment options, and China’s real estate sector (unlike its stock market) has never experienced a sustained downturn since the country converted to private home ownership in the mid-1990s. The fact that China has no annual holding tax on property means there is little penalty for letting property lie idle, in the hope that it will appreciate or at least retain its value. The result is an inflated market where the demand for property as a pure investment vehicle far outstrips the demand for affordable, usable space.

The way I read these figures is that an immense amount of new housing is being purchased and accumulated (in a vacant condition) off-market. Nobody has any idea what it is actually worth because there is little urgency to offer it, to end users, on the secondary market and actually see it priced based on their demand. If investors were at least trying to “flip,” we might find out, but they’re not, and so prices for new residences (especially on the high-priced luxury end) continue to rise without anything to bring them back down to earth.

If China’s real estate sector were experiencing a typical bubble, where assets are being rapidly flipped higher and higher until the music suddenly stops, China’s new property sales tax would make eminent sense. But this new policy misdiagnoses the problem, which is that property is being accumulated and left idle, indefinitely, as a store of value. As long as that property remains off-market, and is not compelled to be priced based on actual demand for affordable usable space, the asset price illusion will continue and the bubble will grow. If China wants to bring it real estate market back to earth — and that’s a big “if” — it should be offering investors a reason to use, rent, or sell. An annual property holding tax does this. A higher property sales tax, while well intentioned, only makes things worse.

Read the full article.

Chovanec also had an article in the June ’09 issue of the Far Eastern Economic Review called “China’s Real Estate Riddle“.

A modest annual tax may not be the only factor shaping these behaviors, but it’s emblematic of an important difference in outlook. There’s an old story reported by an American journalist in Shanghai after the end of World War II. Ravaged by hyperinflation, locals had turned to using tins of sardines as an alternative currency. One recent arrival opened his “proceeds” from a sale only to find the sardines inside were spoiled. He complained to the other trader, who cried, “You opened them? My God, man! Those sardines aren’t for eating, they’re for buying and selling.” Apartments in China aren’t for living in, they’re for investing. That is the real source of demand.

One problem is that using luxury condos as currency is immensely wasteful, compared to sardine tins or tiny amounts of gold. Construction of all these useless high-end units consumes huge quantities of labor and materials that could go into creating, rather than merely representing, useable wealth. And without adequate maintenance (recall the need to minimize holding costs), any practical utility these units might have had as residences will deteriorate rapidly.

The other challenge is psychological. A useless asset like gold or vacant apartments can only serve as a store of value so long as people have collective confidence it will continue to perform that function and thus retain its value. China’s property market may well crash. The point is that if it does, it won’t be because the supply of apartments outstrips the practical need for affordable living space, as it has for many years now. It will be because the Chinese lost faith in real estate as a form of tangible savings, or found a better alternative.

And last up, an article concerning China’s “Quality” of GDP

My concern is how even true-blue GDP figures can sometimes paint a misleading picture of the real health of an economy.

When smart analysts look at companies, they don’t just look at the announced profit figure and accept it at face value. Even if they have no reason to doubt the accounting, they try to apply a concept called “quality of earnings” to get a better sense of how the company is really doing.

Back in March, I was asked on Chinese TV whether I thought China could achieve its target of 8% GDP growth for 2008. I said I didn’t see any reason why it couldn’t. All the government had to do was take all the laid off migrant workers and hire them to dig a hole in the ground one day and fill it up the next. Since the total would be added to National Income, the government could simply pay them enough to hit whatever GDP target it had in mind. The more important question, I said, is whether China is preparing itself for the next phase of economic growth. Focusing exclusively on GDP, as a number, is a distraction.

The example I gave may have been a little bit extreme, but it gets at an interesting and important point. GDP tells you how much the economy is producing; it doesn’t tell you whether that production is actually creating real value or not. In a free market, where people are making voluntary exchanges based on supply and demand, presumably it is, otherwise they would behave differently (unless, of course, there are major externalities that market prices aren’t taking into account, see Stiglitz, below). But when the State is either directing economic activity without regard to prices, or when it is artificially influencing the conditions of supply and demand in a way that distorts prices, the conclusion doesn’t necessarily follow. Production may actually consume more value than it creates, destroying wealth, or divert resources from more productive pursuits, yet in the short term, still count positively towards GDP.

The “resilience” of the Chinese economy right now is based, at least in part, on several factors that I find cause for concern:

construction of large-scale luxury condo developments that go entirely unoccupied and serve merely as investment vehicles, on the expectation of future appreciation;
easy state-provided credit that has kept businesses — many of them poorly run and financed — from exiting sectors (such as steel) that have chronic excess capacity;
a massive shift in resources towards the State Owned sector and away from private enterprise (including the acquisition by the State of controlling stakes in successful private companies);
misdirection of business loans into stock market and real estate speculation, fueling bubbles in both markets;
direct investment by government ministries in order to speculate in — and thereby prop up – the real estate market, on the misconception that a rising real estate market is a “driver” of growth (rather than a result of real demand for more and better usable space driven by business expansion and rising living standards);
the possibility of “channel stuffing,” where wholesalers and retailers are forced to build up unsold inventories to keep factories (particularly state-owned factories) running. Ironically, this shows up in China’s official statistics as “retail sales” because in China, retail sales are counted when the manufacturer ships, not when the products is sold to a consumer.

Developing a vibrant service sector, improving quality and safety in manufacturing, building recognized and well-respected brands, developing more efficient and transparent capital markets, providing a social safety net that lubricates labor markets and liberates savings, moving towards full convertibility of the Renminbi, learning how to manage and grow businesses in political and social environments beyond China’s borders — these are the challenges China must master to take its economy to the next level. But I don’t see anything in the “8% growth” story that is moving China in that direction.

I’ve read a lot of photography books and spent a lot of time on set, but found this New York Times about being a better dSLR shooter on vacation.

Q: For D.S.L.R. photographers, what lenses are best for vacation shots?

A: Zoom lenses are obviously a good choice for vacations. I’d recommend a 28-105-mm zoom, which will provide you a lot of versatility. You might also consider a telephoto zoom lens (maybe a 70-200 mm), which gives you the ability to pull in the subject and use techniques that act to compress or isolate the scene. If, for instance, you are photographing a portrait of someone who is 15 or 20 feet away and shoot with a 150-mm lens at a wide aperture, the background will be out of focus and your subject will be isolated.
Also, having a really wide lens — 28 mm or wider — is great for landscapes. I use my 16-35-mm zoom often when traveling because it allows me to capture the scene –- whether it is all of the Brooklyn Bridge at sunset or a mountain range in prime fall colors — in an exciting way.

Q: Do you recommend any additional equipment?

A: Rather than buying a second lens, consider a 2X extender [teleconverter], which doubles the focal length of that 28-105-mm lens, to 56-210mm. So for a very small physical space, and much less cost, you effectively double the lens. The downside, however, is that you lose two stops of light. A small tripod is also a great investment that pays you back with better and sharper images.

A: What about sunsets? They can be beautiful but are difficult to capture.

A: Underexpose it a lot. That will help you capture the incredible reds, rich oranges and yellows. I use the manual mode to underexpose, usually about two to four stops. The exposure compensation features on most cameras have only three stops, and some have only two stops. Manual mode provides the best way to reduce the light level.Read the whole article and the comments too.

Read the whole article and the comments too.

Digital Photography School also has an excellent article on taking better portraits, and the article includes some beautifully composed shots that are included nice and big inside the article.

Last up, LifeHacker has a survey of the “Most Popular Photography Hacks of 2009” that is links to several entire collections of photography information. Take a look and see which one(s) appeal to you.

I’ve used a lot of “Note” apps over the years, but “Notational Velocity” is by far my favorite. It loads into memory instantly, and it operates without the mouse.

Personally, I used it for years to store account numbers, unix commands, and anything else that I need to LOOK UP QUICKLY, but didn’t feel comfortable posting online.

Think of NV as a compliment to Evernote, where Evernote is the 400-lbs Gorilla that can do everything, but does it slowly and sucks up a lot of memory in the process. For your “Permanent Archive”, Evernote rocks, but for fast note lookup, you’re better off with NV.

Perhaps best yet, NV now supports key features such as:

• Multi-Computer Synchronization (via RTF files and Dropbox)
• Rich Text Formatting (bold, italic, underline)
• Open Source Code via GitHub

Notational Velocity (http://notational.net/)

The New Yorker put together an interesting discussion about Chinese consumption.

“[In China]consumption accounts for just thirty-five per cent of G.D.P., significantly lower than for most Asian countries and only half the rate in the United States. Chinese households set aside a quarter of their disposable income…

This makes the economy more dependent than ever on exports and investment, creating an imbalance in the global economy. It also means that Chinese consumers aren’t really reaping the full fruits of their labor.

China’s policy of holding down the value of its currency means that consumer prices are higher than they would otherwise be, which obviously discourages spending.

The inadequacy of the social safety net forces the Chinese to engage in “precautionary savings,” buffering themselves against disaster.

There is a point at which you can oversave, and overinvest, and that’s where China seems to be.

Complete Article.

Long term (40+ Years) I am an absolute bull on China. It’s a big country and it’s going to get bigger. If you can close your eyes and wait 40 years to look at your investments, don’t read this. Just buy China.

However, if you’re concerned about rate of return over the next 10 years or so, I would bet on the downtrodden USA market. When everyone already agrees on something (whether positive or negative), that is usually the time to ask if the traditional wisdom has finally gone too far and we’re ready for a correction.

When thinking about current asset valuations, remember that the “Rise of China” was the biggest online story of the DECADE, outpacing the number two story (Iraq War) by 400%. See the full list.

Burton Malkiel, professor of economics at Princeton did an interview on FOX Business TV called “Betting on China”. Malkiel is a leading proponent of the efficient market hypothesis. If this guy is bullish, that might be reason enough to short. Reasons for bullishness include:

Large Labor Force: With a population exceeding 1.3 billion people, China has plenty of labor available to expand GDP (Gross Domestic Product).

However, China’s had a big population for a long time, but it’s been poor for a long time. India has a large population (1100M) but per capita numbers are still low. Russia has 140M people and the workforce is highly educated, but they’re only exporting natural resources. Japan has around 130M with GDP per Capita of $33K. The USA has over 300M with a GDP per Capita over $47K., and Singapore slightly above the USA average with $51K, though only 4M people.

No Nonsense Government: An authoritarian government has its advantages. While pornography and unrest may be problems, infrastructure projects are not.

Thoreau first said that”The Government That Governs Least is the Government That Governs Best”. How did the Central Planers in the USSR perform? What happened to the magic of METI (Ministry of Economy Trade & Industry) in Japan? How would we expect central planners in a bureaucracy even larger to do a superior job?

Both Markets and Planners allocate resources. Do you trust the few or the many?

Education: Chinese culture values education. As a result, China is slowly moving away from its roots as the globe’s manufacturing and piracy capital. Intellectual property is appreciated more now that China is becoming a leader in emerging technology areas, such as solar power.

Most of the Profit in exports from China is derived from Design, Process Management, Quality Production Standards and Marketing managed by firms from developed nations. With the exception of a few State Owned Enterprises, purely Chinese products marketed to Chinese people are typically very poor quality and not ready for competition on international markets.

Trade Surplus & Currency Reserves: Must be nice to have trade surpluses and massive currency reserves (~$2.3 trillion). This is what happens when you are in a position to export more than you import.

Manageable Debt: China’s Debt/GDP ratio is less than 25%. You can compare that to the U.S. approaching 100% and Japan at over 200%. Disciplined fiscal management provides the Chinese government with more options in dealing with the global slowdown (e.g., stimulus).

This is the big hidden issue with China. The numbers we read are that there’s only 25% Debit/GDP ratio, but there is way too much infrastructure investment in glamourous conference centers, hotel high rises, vacant luxury apartments and bridges to nowhere for this number to be real. The real number is likely 75-150% of GDP.

Long Runway of Growth: China’s long runway of growth has allowed it, and should continue to allow it, to grow at above average growth rates – in the 3rd quarter of 2009 the Chinese economy grew at a very healthy +8.9% rate.

Interesting that consumption numbers for China are down. Sales of gasoline are down. People everywhere are spending significantly less money, and yet GDP will grow at 9%. Growth numbers during the Great Leap Forward looked great too! However, 2005-2009 will likely prove to be China’s Great Leap Backward.

Newsweek’s Why China Won’t Rule the World ended with the apt:

Of course, the Chinese are thrilled that everyone thinks they’re the biggest winner. The truth, however, is that they’re more like the least-bad losers—and they know it.