To ease global liquidity, the International Monetary Fund’s executive board hasbacked the allocation of US$ 250 billion worth of special drawing rights (SDRs) to member countries, the IMF said in a statement on July 20.

China, with its current IMF share quota, will receive US$ 9.4 billion worth of SDRs, pending the approval of the Fund’s Board of Governors.

The allocation is part of a US$ 1.1 trillion relief measure to fight the global economic crisis, as agreed to by G20 member states at a London summit in April. From wires.

Source: http://english.caijing.com.cn/2009-07-22/110201717.html

This is a brilliant move move by the PRC! By opening the door to getting foreign US dollar debt converted into SDR debt (converting those dollars to a basket of euros, pounds, yen and dollars) the PRC can begin pressuring the USA to stop devaluing the dollar. Eventually the USA could be forced to issue debt denominated in SDRs, which would immediately end (or bankrupt?) the USA.

If the chess game of international relations, the guys in Zhongnanhai are saying “Check!” right about now.

You should read this… Export Credits are back.

[From Exporters get sops to fight crisis]

Interesting. Perhaps the real cause of the trade barriers in 1929 were more Political than Economic. On the eve of the Great Depression, the USA had large trade surpluses and was attempting to maintain those surpluses going into the depression, effectively driving up unemployment across the rest of the world. Trade Barriers around the world were erected to level the playing field – and prevent America from exporting it’s unemployment problem.

In 2009, we could be seeing the same thing, but this time China may be the one exporting the unemployment problem. All I can say is: I hope we don’t see the return of protectionism!

See James Fallows of the Atlantic’s take on this: This does not bode well

Money is a Medium of Exchange (交易媒介), a Unit of Account (赊账标准), and a Store of Value (价值储存). The USD has been doing an excellent job as a medium of exchange (dollars are without a doubt the most widely accepted currency on the planet). The liquidity (流动性) of the dollar is absolutely unmatched by ANYTHING else on earth today. Not by gold. Not by silver.

Liquidity of the USD is guaranteed because of OPEC agreement in 1971 that all oil sold must be sold in USD. Every economy requires oil to survive. Even if you wanted to store all of your assets in Euros, Yen or CYN, you’d have to trade them for dollars every time you another oil tanker shows up at the port. During some periods, currencies have been pegged to gold or silver. Since 1971, the USD has been backed in oil. Prior to American occupation, Iraq started selling oil in Euros. In Dec 2007, Iran stopped selling oil in USD. The only strong ally of the US in Iraq was the UK, who is not a member of the Euro.

Unfortunately, the USD as a Store of Value (保值) is becoming more of a problem. More nations aren’t terribly concerned because their dollar holdings are just held in the treasury and not actively managed to maximize return.

The People’s Bank of China (中国人民银行 AKA 中行 AKA PBC) is more active in asett management and is the single largest holder of USD. When the Financial Crisis hit last year, the PBC increased it’s speed in using some of those dollars to acquire mineral reserves and other basic commodities around the world. Most notable deals have been in Australia, Africa and South America.

Short term, nothing will change. China has raised Export Rebates 7 times in 2007 attempting to re-ignite export growth with the US.

The Euro had a shot to become the global reserve currency, but the American showdown against Euro oil trading in Iraq helped prevent it, and now the Euro is showing signs of weakness. The needs of the member countries are diverging and it won’t get the boost anticipated boost belonging to the world reserve currency. The Yen doesn’t have a shot because Japan’s already got it’s own problems. However, the CYN is positioned to become the next global reserve currency.

Eventually, central banks will choose between using an oil backed currency backed a deeply indebted economy, or a commodity backed currency backed by a economy with large currency reserves.

If you owe the bank $1MM the bank owns you, but if you owe the bank $100T, you own the bank. This is also true of the US/China relationship. Short term movement away from the status quo would destroy both China and the US’s economies.

Short term, China will continue to be the land of tax avoidance, fake bookkeeping, and financial lies that may even make the USA look good by the time that they come to the surface. Short term, you’d have to be crazy to invest your central banks assets into the Black Box of China – which can only favorably compare with places like Russia – because we have no idea how good or bad the real numbers are. At the same time, you’ve have to be crazy to invest your central banks assets in dollars, because we do know how bad the numbers are.

Medium term, since China is working to re-ignite export led growth, and the US is printing dollars like they are going out of style, so nothing will change.

But one morning a few years from now Central Bankers are going to wake up in the morning and say, do I really want to store my money in rapidly devaluing oil backed paper, or in relatively stable commodity backed paper?

The Yen carry trade is over for now, but there’s a new carry trade in town. For those (like me) not terribly familiar with a carry trade, it’s:

Strategy in which an investor sells a certain currency with a relatively low interest rate and uses the funds to purchase a different currency yielding a higher interest rate.

Basically, it’s a type of arbitrage where you borrow one asset, and use it to buy another asset assuming that exchange rates WILL NOT CHANGE. When the Bank of Japan set interest rates near 0%, speculators would borrow Yen, trade them for dollars, and then buy dollar denominated assets. The new carry trade is: USD -> RMB -> Commodities.

2009 US federal budget deficit will be $1.75 TRILLION or more.
Not even Bank of China can lend this money, it has to be borrowed.

US dollar bear leads to commodities bull.
People and nations will hoard physical goods to preserve wealth, hence generate demands higher than immediate needs and higher than available supplies.
China is on a big natural resources shopping spree around the world lately, in order to divest its huge foreign currency reserves.

Both events are occurring as people have noticed: Capital is escaping American soil; and China is on a global shopping spree of raw materials.
But people who notice these two things explain it as simply market behavior driven by speculative forces.
They fail to see a more direct, conscious and deliberate reason behind what’s going on, because no one noticed one quiet fact…

That is because for the past one year, trading between USD and CNY is equivalent to exchange one dollar into four quarters, nothing is gained or lost.

[From China, Shipping and the Great Commodity Carry Trade -- Seeking Alpha]

But the interesting part is that: As the flood of US dollars flows in, China merely cranks up its own money printing press to print more RMB Yuan to exchange for the US dollars. It then uses some of the dollars to buy US Treasury bonds and prop up the value of the dollar, maintaining a constant USD/Yuan exchange rate. But China’s real goal is not to support the dollar in long term, but to buy time to allow it to divest the huge dollar assets it is holding, in exchange of physical assets: natural resources, raw commodities, foreign mining companies and other physical assets. It costs China nothing to print more Yuans to buy more US dollars and then use the dollars to buy up the whole world.

There are a few conditions that are important to point out and make changing the current status quo (exchange rate) very difficult in the next 12-36 months.

• Speculators are dumping USD because of financial policy that is not helping to preserve wealth, but those dollars could be used to buy assets anywhere – so why in China?
• Speculators are dumping dollars and buying CYN due to the long term positive fundamentals in the Chinese economy (large inexpensive labor force, good infrastructure, large trade surpluses)
• 4 years ago, exchange rates were 8.3:1, for the last 12 months it’s been 6.84:1 (that’s a 17% rise)
• This 17% rise is partially responsible for the closure of many export oriented businesses here in China — many were already struggling to survive before softening demand in western markets destroyed them.
• The population in China Mainland is not nearly as productive or as well educated as the populations in Taiwan or Hong Kong, where wages are approximately 2x higher but trade barriers (import tariffs) are lower/non existent.
• China Mainland Gov’t has raised Export Rebates (to manufacturers) 7 times in 2009 — making the official policy clear – the current export oriented growth is to be salvaged and preserved for the foreseeable future (rather than moving to fill domestic demand)

There are also very practical considerations though. If you own raw materials all over the planet, you must have a way to maintain peaceful seas to ensure delivery of those materials.

Basically, the US economy and the CYN economy are locked together for the foreseeable future – a pair of codependents, but the relationship has the impact of long term strengthening the CYN at the expense of the USD, migrating intellectual property, skilled labor, entrepreneurs, and assets from the US to China. The breakup will be rough, but when the dysfunctional couple is finally ready for a divorce, China is walking away with much more than 50%.

Interesting article about the dollar’s reserve currency status:

1. There’s not enough gold to replace China’s dollars
2. Investors are taking on more risk
   
3. Borrowing dollars is still expensive
   
4. We can’t change the reserve currency overnight
   

Perhaps the most interesting is when going on to talk about SDRs:

Doing the shopping in SDRs

But is there another way? Part of the speculation about the dollar’s future came after Zhou Xiaochuan, the governor of the People’s Bank of China, published a paper arguing for an end to the dollar standard.

He argues that any system in which a reserve currency is also a national currency is flawed. Instead we should use a super-sovereign reserve currency managed by a global institution. In particular, he suggests Special Drawing Rights (SDRs), which are essentially an internal unit of account at the International Monetary Fund (IMF) and a handful of other international institutions.

Most economists rejected this idea outright. Now, it’s fair to say that economists don’t have a great track record when it comes to spotting how major shifts in the financial system will play out. Take the 1970s, by when decades of growth in crossborder capital flows had made it impossible to sustain the Bretton Woods system, in which the dollar was pegged to gold and other currencies were pegged to the dollar.

It seems that most analysts thought that switching to floating rates would reduce cross-currency flows – a conclusion that seems hopelessly misguided given our hyperactive modern foreign exchange markets. According to economic historian Charles Kindleberger in Manias, Panics, and Crashes:

“Most economists had thought that the adoption of floating exchange rates would kill the movement of interest-sensitive capital and that once currencies were floating central banks would be able to follow independent monetary policies without untoward external effects. Economists differed about whether speculative capital movements would be stabilizing or occasionally seriously destabilizing; the general view was that fear of exchange losses would deter capital flows. That view proved mistaken; many banks regarded currencies as a new asset class to be traded for a profit.”

Still, it certainly looks like there would be a lot of issues with adopting something like the SDR as a reserve currency. The issues with the renminbi apply on an even larger scale. There are no assets priced or traded in SDRs; not even bank accounts in SDRs. While we can never be certain about these things, the prospect of SDRs – or anything else – replacing the dollar in the next few years look very remote.

[From The Dollar Is Safe for Now -- Seeking Alpha]

China Mobile – 7th most valuable global brand. Interested to know what the measurement criteria was here.

[From Google Tops List of Top 100 Global Brands -- Seeking Alpha]

My obligatory post over at SeekingAlpha…

This is very enlightening. “In 1966, $1 dollar of debt boosted GDP by $.93. But by 2007, $1 dollar of debt lifted GDP by less than $.20″. Most on SeekingAlpha would agree that “Savings and Investment (rather than borrowing and spending) are the sure recipe for a strong economy.”

Regarding housing starts and job losses, I think that a difference in perspective can help us to better conceptualize the scope of this correction.

Think of the free market as a natural law like gravity as it applies on the surface of the earth. We can jump, we can fly, we can temporarily “defy gravity”, but every effort to do so uses a tremendous amount of resources, and in the end will eventually fall back to the ground.

In the late 90′s, we had a bubble in technology companies. The bubble burst in 2000 and Obamma successfully attacked in 2001. The Fed responded by lowering interest rates.

Low interest rates and favorable borrowing terms fueled a housing boom, which created jobs in finance and construction.

Demand creates Supply. The demand for Internet Stocks in the Tech Bubble created a distortion in the economy – a deviation from the natural law. Too many IT jobs were created and after the bubble burst, we had to re-allocate those people into jobs based on where the market required them.

Unfortunately, the boom in housing created a much bigger distortion in the economy, this time in both Finance and Construction. The housing boom lasted longer, grew larger, and affected a bigger sector of the economy (housing and finance vs/ IT) so it’s going to be much more difficult to recover from.

Instead of thinking of these adjustments as “job losses”, would it be more productive to think in terms of rebalancing the economy along the lines of competitive resource allocation?

[From Jim Welsh on the Economy: Past the Point of No Return -- Seeking Alpha]

It’s a little funny to see an article like this. Just outsource everything… just focus on strategy and marketing. But look at what companies in the west are successful right now, in spite of the economic downturn. Apple comes to mind. Does Apple outsource everything? No – Apple controls and manages the entire customer experience. Assembly and production are outsourced to Foxconn, but Apple still keeps a close eye on the process to manage quality.

How to be profitable? Just need to be innovative. You need to create things that people are willing to pay you for.

Is there any evidence that suggests with a 1:1 exchange rate between the USD and CNY that the Chinese way of manufacturing would be competitive with the American one? Or more importantly, man-hour per man-hour does anyone believe that Chinese manufacturing can compete with manufacturing in Japan or Germany?

Schooled by China and India
What US tech companies can learn about innovation from abroad. Hint: it isn’t just about cheap labor.

NEW YORK (Fortune) — It would be a groundbreaking deal if consummated: According to press reports, telephone operator Sprint is in serious discussions with Telefon AB L.M. Ericsson to outsource management of its wireless network to the Swedish equipment maker. If finalized, the arrangement would make Sprint (S, Fortune 500) the first major U.S. wireless operator to cede total maintenance of its network to a third party consultant.

But in parts of Asia, outsourcing whole swaths of a tech business is old hat. India’s leading wireless operator, Bharti Airtel, for example, does little more than set strategy and handle marketing and sales of phones and service. Contractors, including Ericsson (ERIC) and IBM (IBM, Fortune 500), take care of running and upgrading the actual phone network, operating call centers and other day-to-day operations.

Global consultant John Hagel expects to see more U.S. companies plucking ideas from their international counterparts. Hagel, co-chairman of Deloitte Consulting’s Center for Edge Innovation, says Asian companies have started to implement some innovative management ideas that could resonate in the United States. And while many of these ideas on the surface seem like cost-cutting initiatives, Hagel says they also give tech companies flexibility and leverage, two things that benefit companies in good times and bad. “Chinese and Indian entrepreneurs understand that the only way to get scale is to be very modular in terms of how you define activities,” Hagel says.

[From What US tech companies can learn from China and India - May. 5, 2009 ]

经济学家杂志(The Economist)刚完成了个国际政治家背景的调查。总共查了各个地方的五千政治家。 发现：

• 非洲：很多军人做政治家
• 西方国家（法国，德国，美国）：大部分是律师
• 中国：大部分是工程师
• 埃及：秀才
• 韩国：政府职能部门的人
• 巴西：医生

当然，全球的商人做为政治家频率很高。参考英语原文。

1/2 of 2009 revenue was raised by “buy-out funds”… With so many fewer buyers and fewer dollars in the system, should be a good time to go asset shopping. Expect to see a turn around in asset prices when credit in the west loosens up again.

Good friend of mine emailed me the following:

much social unrest beginning to brew, tax protests popping up nationwide…the seeds of a possible revolution of sorts in america
seeing lots more stuff like this: “Is it NBA OR NFL” joke about congress.

Unrest and revolution. That’s not a bad thing. It’s apathy that’s unacceptable. Even a representative republic requires the participation of the people if it is to work.

The people of the USA are (of the large nations) the wealthiest, best educated and best governed on the earth. The system is not perfect, but it is the best that is available now.

Longer term, I think the USA will most likely continue to be the highest per capita large nation on the planet — there are a few small nation/states with large supplies of natural resources that can have very high GDP per capita levels, but very difficult to achieve on a large scale.

Foremost problems in the USA are:

• Debt has been used to finance consumption rather than investing in productive capacity (usa debt vs/ china debt)
• Unskilled labor wages are too high to be competitive with world markets
  • Basically, an american “non-professional rank and file worker” isn’t fundamentally any more productive than a chinese peasant farmer, but their labor wages are at least 8.5x higher ($300/month vs $2550/month). This discrepancy creates large distortions throughout the rest of the economy. The american gov’t should work to close this gap, both by increasing the prices of 3rd world laborers and letting american blue collar labor be correctly valued.
• Gov’t is too large a % of the economy
• Social safety net removes the classical motivation from society – if you produce nothing, you eat nothing

Additionally, consider this. The federal debt of the usa is $10,802,000,000,000. ($10.8T) if this $10.8T would have been invested in automation technology. For comparison, from 1961 – July 1969 (first lunar landing) we invested $23 billion USD (compared to the soviet investment of $10.1B). For only $10B we were able to get men on the moon. if we invested 100x that amount – heck, even 10x that amount, is it possible that complete factory automation (and elimination of high blue collar labor cost) would not be solved? Additionally, the USA would be the largest exporter of such technology thereby helping the current accounts deficit.

The problem was apathy. A little revolution is a good thing. Perhaps the revolution will even be televised…

10 Years of Dollars

Focus on the last 4 Years (Bush’s 2nd Term)

Same Period Against the Japanese Yen

And against the EURO

Since “The Alchemy of Finance” was getting poorly reviewed on SeekingAlpha, I’ve decided to weigh in on one of my favorite books ever. The short review is simply: Go Read It. It’s even available in Chinese: 索罗斯《金融炼金术》.

I didn’t read the Alchemy of Finance for the first time until sometime during 2003, and since it’s been one of my favorite books – perhaps my favorite in the entire finance/economics/inve… category.

The corollary of reflexivity that stuck with me the most was that:
Credit expansion leads to a contraction in value of the underlying collateral.

Sorros also made some interesting philosophical points – somewhat dialectic:
– Progressive society longs for the stability and relationships
– Conservative society long for the freedom and individualism
– Western society measures everything, and will therefore overvalue measurement itself
– The magic of the market can’t be separated from the madness of the market
– The very success of the Bretton Woods agreement sowed the seeds of it’s own disaster
– Freely floating exchange rates based on fiat currencies are not sustainable

Sorros isn’t god, but he’s smart and wise. As an investor, he’s been both more accurate and more brave then most of us. His recent work has much evidence of self-aggrandizement, but so did StarWars 1-3…

Whether or not “reflexivity” is an idea that has merit, good to remember that Howard Aiken said: “If your ideas are any good, you’ll have to ram them down people’s throats”

A 20% share of Little Sheep (小肥羊）was purchased by KFC/Pizza Hut parent company YUM brands for $64MM USD.

The numbers:
- ’07 Gross Rev: $1.4B HKD ($180MM USD)
- ’07 Net Profit: $146MM HKD ($18MM USD)
- More than 350 restaurants across China
- Approx. 25 restaurants outside China