The Aleph Blog » Blog Archive » A Question of Cultural Failure (II)

A Question of Cultural Failure (II)

Good cultures balance short and long-term goals.  Focusing too much on the long-term can lead to overinvestment, and problems like Japan still faces.  Focusing on the short-run can lead governments and companies to focus on manipulating budget and earnings numbers to fulfill their own selfish ends.

At present, we have no surplus of long-termism, but a surfeit of short-termism.    Many economic players have decided that it is in their interest to play for time  — make things look good in the short run, and maybe a magical fix will appear for long run problems.

It seems that the EU thinks that if they can make Greece behave, that all will be right.  Well, tell that to those that protest in Greece.  Let each EU nation rather take a step back and ask, “What is cheaper in the long-run, bailing out Greece, or bailing out my banks with Greece exposure?”  The latter is probably cheaper, but not certainly so.  Given the lack of unanimity, the situation would lean toward bailing out domestic banks, because bailing out Greece requires the cooperation of separate nations, many of which have electorates that strongly oppose a bailout of Greece.

But, that could mean a virtual dissolution of the Eurozone.  Not necessarily.  You could end up with a lot of nations in default, and shut out of the bond markets (the PIIGS), while the rest do seemingly fine, as they quietly bail out their banks.

In that situation, the Euro would still exist, and might continue to be the currency of nations that are in default.  They just could not borrow any more at any rate in Euros, and perhaps not in any currency.

But the Eurozone itself would be in tatters, at least from a marketing standpoint.  What is good about being in the Eurozone?  Free trade?  Well Britain has that, even though they are a basket case, at least they control their own destiny, sort of.  The veneer that being in the Eurozone means that you are a high quality borrower is shattered.  Credit spreads over the German Euro benchmark will be high indeed for nations that have been undisciplined in their finances.

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People and governments like stasis.  No change.  Why?  It makes policy simple.  If something is in trouble, give it aid.  But — what if the trouble is an indication that people don’t want what is being produced by the one that is in trouble?  Capitalism is wonderful because it is dynamic. It can quickly adjust to changing conditions, unlike socialist bureaucrats.  Rather than volatility being a negative, with capitalism it is a positive.  It shows that the economy needs to change, that losses on prior bad investments should be recognized.  Failure to see things like this lessens the flexibility of the economy, and makes the eventual adjustments much larger than they would have to be if we did not interfere in the economy.

Now, this applies all over the world.  China is creating some of the biggest white elephants in history, so it seems.  Like Japan in the late 80s, they are building up useless industrial capacity.  Naive Keynesianism says that it does not matter what one spends money on, what matters is that the money gets spent, and quickly.

We may as well throw bricks at every window we see with that logic, knowing that GDP will record that glassman’s wages, but will not record the loss from a broken window.

Alas, we have too much automotive capacity, so we support automotive firms in the US.  We have too many bankers and too much capacity to build homes, so we support that as well.  Far better that we let firms fail, and let the assets be released to better uses.  Why waste your life or capital in an industry where there is not enough demand?

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In one sense, my claim of cultural failure boils down to not being willing to recognize losses.  In another sense, it is using the political process to invalidate economics.  Why should the government bail out company A and not company B?

The present political climate in the US could be summarized as a question of fairness.  Why should some benefit from bailouts, and not others?  There should be some answer here that doesn’t sound lame.  Lame answer: we were protecting the whole economy by protecting banks.  Better answer: we goofed in protecting the banks.  We should have let them fail, and bailed out depositors.  Don’t bail out anyone; let housing prices drop until ordinary people can afford them.  But if you must bail out, go down to the lowest level, and bail out those with mortgages, which will benefit not only them, but everyone above them.

This leaves aside moral hazard — all bailouts are a mistake.  Far better to let all fail, and let the system reset.  Run a hard culture where failure is punished.  That will cause people to avoid failure with greater assiduousness.

I will have more on this in the likely final segment for this topic.






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24 Responses to A Question of Cultural Failure (II)

  1. Robert says:

    David,

    IMHO, this is one of your best posts. People (and companies and governments) don’t make positive big changes until they feel pain. Look at what happened to gasoline demand when prices hit $4.00 per gallon.

    The only exception to the “no bailouts” rule that I could justify was the Fed’s support of the commercial paper market following Lehman’s collapse. There is a point where the entire system could have melted down.

  2. JRH says:

    Not quite on the main point of the post, but couldn’t you argue that China is planning well for the long term, along the lines of the US interstate highway system under Eisenhower? Granted there are other issues, but wrt investment, I’m not sure they are building bridges to nowhere.

  3. Saloner says:

    Excellent post Mr.Merkel.

    As for JRH’s query about China planning for the long term, I think the investment boom there isn’t just confined to roads or such first order developments. Commercial space and factories seem to constitute a substantial part of the current growth.
    Given the current uncertainties, global in scope, aggressively building capacity in anticipation of future demand, calculated on whatever premiss, seems extremely perilous. The time taken for demand to activate all that capacity apart, the nature of such future demand itself, a product of technological developments and such other compulsions, seems to be sufficiently complicated an issue to render any bold calibration risky. Under use and obsolescence might turn to be bigger facts than reckoned.
    There is a certain amount of forecasting that’s inevitable in installing capacity no doubt. But Chinese behaviour seems to render the entire crisis of the past two years irrelevant: they seem to be behaving as though the thing never happened. That, to me, is worrisome.

  4. Kolya says:

    The US Government’s capacity to bail out failure is finite. At some point the entire system can fail – then there are no more bail outs or they become politically much more difficult.

  5. Greg says:

    Another excellent post David… but I must echo “Koyla”s comment that you (and most in government) are assuming that bailout funds are infinite, when they are clearly not.

    Our country, the US, was created in essence because colonists refused to bail out the British King’s numerous ill fated wars. That was a monarch with (theoretical) “devine right” to rule… a pseudo democracy run by lobbyists has even less call on the nations resources. The history section of every library is filled with evidence that government resources are actually very finite.

    I would suggest the notion of government debt being “risk free” is another academic mistake, along with CAPM, perfectly efficient markets, rational man, and all the other nonsense. It all sounds great on paper — but outside academia one must compare theory against evidence.

    The evidence is irrefutable: government debt is just like mortgage debt, “risk free” only until someone looks behind the curtain or under the rug

    The German people are not going to bail out Greece, no matter what stupid proposal comes out of the EU bureaucracy. And I should point out that the American people just put a Republican into Ted Kennedy’s former seat, and I don’t think it was Mr Scott as much as it was a full scale rebellion against a government induced Keynesian bankruptcy

    I think the Greek bailout decision has already been made by the only people who’s vote counts (the German populace). Brussels has no authority and really no legitimacy. Continued talk of a bailout is just prop desks and bureaucrats playing for time before they have to admit no bailout is coming.

    The interesting question I think is still California — which is not alone in insolvency but appears to be lining up as the test case for what happens when (not if) a US state is bankrupt.

    IMHO, academia is already intellectually bankrupt. A group that depends on tuition increases 2-3 times the rate of inflation, year after year and decade after decade, is not a group that can speak about money management (even before we remember how badly they screwed up on CAPM, efficient markets, etc).

    California must be allowed to fail in order to save the US. Forcing people in other states (who didn’t benefit from CA’s spendthrift ways) to pay is grossly unfair, and may lead to civil war. Before you scoff at that notion — ask yourself if you want to feed your family or bailout the Baywatch cast? Because that is what bailout supporters will be asking many Americans to do.

    Then again, leaving California to its own devices may also pull the country apart, given CA’s large economy.

    We can’t afford to bail them out, and it is morally wrong to do so. But we can’t allow them to fail completely either…

    So does it work out like the bankruptcy of New York City? National taxpayers bail out California, but impose serious austerity measures?
    California loses whatever “sovereignty” it has within the republic?

    Or do the clowns in Washington bail out everything and just print money — letting future politicians manage the collapse?

    US history supports the NYC scenario, but most of humankind’s history supports the banana republic scenario

  6. najdorf says:

    David: I like how you bring a lot of morality to financial topics, since financial markets participants generally have a big problem with defining strategies before defining goals (e.g. “We need to bail out the banks” comes before “What are the goals of a government-sponsored banking system?”). In this case I wonder whether full-scale abolition of moral hazard is as economically rational as you believe. Sure people need incentives to succeed, but we know there’s not a 1:1 correlation between incentives and outcomes, given human folly, short-sightedness, greed, etc. Isn’t there a point at which you’d say “Yes, X made mistakes, but helping X in his time of need makes economic sense, will be socially beneficial, and doesn’t create excessive moral hazard because X will still suffer and the bailout comes on stern terms”?

    Woah there Greg – NYC didn’t go bankrupt and didn’t get a federal bailout – hence the famous headline “Ford to City: Drop Dead” (note: he didn’t actually say that, but he did deny federal aid). NYC made it out of the 70s fine, because the city had residual merits that attracted new residents and jobs. You need to get out of your own all-or-nothing head filled with dubious “facts” and think realistically about history and what default means. A California default is not the end of the world – it’s California saying to lenders that it made some mistakes, restructuring some debts, giving some haircuts, and agreeing to be better in the future. It has happened before in the United States and will happen again. California would be one of the biggest entities to default, and it would throw some shockwaves into the municipal bond and insurance sectors, but the state is by no means doomed – there are still a lot of nice people, houses, institutions, and jobs in California, and they will continue to be there as long as California contains some of the best land and innovation centers in the U.S. The U.S. economy has survived events like the Civil War, two World Wars, a great Depression, 70s stagflation, etc – it can survive the process of adjusting to excessive debt creation and over-capacity in the auto and housing industries.

  7. I don’t think that I have suggested that infinite bailouts are possible. I think I have implied, if I haven’t said it outright, that it is better to take more pain sooner, than less pain later.

    As for California — it is interesting. If L.A. fails, it goes into Chapter 9 restructuring. Their budget gets taken over, principal and interest gets deferred, and eventually gets repaid.

    But if California defaults, there is no Chapter for them. They would just get shut out of the bond markets. Bondholders could get permanently stiffed, like Peru. Perhaps some would come begging to the US government — both California and creditors, but the precedent it would set is horrific. Illinois, New York and more would be quick to follow.

    Personally, I think the best thing the US government could do would be to stand aside, and let California fail. They can’t survive without issuing new debt, so they would have to take the hard actions necessary to balance their budget. Given that taxes are already high there, that means cutting programs that will make some people scream.

    I know what I would cut, but a clever politician says “We will have to start laying off policemen,” or something else that is necessary, in order to scare voter into accepting higher taxes.

    Some people might say the cuts to come are cold-hearted — I would simply say in response, “Do you want the system as a whole to fail, and the chaos that will ensue from that?”

    The US was created in part to promote the general welfare. Many have twisted that to mean their own interests.

  8. Indy says:

    What is going on now is a lot of faith being placed in “managed” re-equilibrating, in the hopes that government shock-absorbers will produce a slow adjustment with prolonged sluggishness that is better than a rapid, panic-inducing deflationary shock.

    At least, that’s the claim. I’m not so sure. Japan’s last 20 years doesn’t look all that great to me. I think I’d prefer a two-year reset as opposed to a two-decade one.

    The thing about delaying the taking of inevitable losses is key. The FDIC itself has warned banks about carrying almost-certain total-loss second-mortgages of highly underwater properties on their books at face value – but all indications are that the “new accounting” is permitting the majority of institutions to do just this. A multi-year steady-stream of “surprise” but assured losses is inherently built into our system now.

    What additional drop would it take without the many forms of government support for the average monthly payment for housing stock in, say, San Diego, to come down to a reasonable 1/3 of the average local household income? I’m guessing a real decline of about another 25%.

    There’s two ways to achieve that:

    1. Down 25% tomorrow
    2. Delayed, say, 5.6% annual real decline for five years or something equivalent. Small, “gentle”, and politically palatable steps.

    It’s clear that the government has chosen option 2. Whether or not we’ll be in a better position in 2015 than we would have been without this policy, I’m not sure, but I’m not looking forward to a long period of mediocre economic performance while we slowly clear out all the cobwebs that we’ve allowed to remain in the system.

  9. najdorf says:

    Indy: Based on your comments, I would guess that more likely than not you are a mobile young person with high future earnings potential and not a lot of invested assets (not that there’s anything wrong with that – we have some things in common). But don’t mistake your individual self-interest with social economic rationality. Of course you want a rapid adjustment – then everything you buy with your earnings become cheap and you can move into a nicer house right now. People who are 55 with a mortgage, a retirement account they’re depending on, and a job that they’re locked-in to don’t want to see chaotic crashes, because when their house gets foreclosed on and their employer goes out of business they can’t adjust. They need some time to figure out how to work their debt burden down, reduce how much stock-market risk they’re taking, and figure out how they can maximize their earnings in the latter years of their career. Also economics are not fully rational – there are reflexive effects to sudden drops, where animal spirits cause greater losses than would have occurred in a slower decline as people flee all risk in a disorganized fashion and cocoon in order to avoid further losses (thus worsening losses and lengthening the downturn).

    I agree we don’t want to follow Japan and create zombies, but there are good reasons that most Americans don’t want to live in an unfettered capitalist state that lets everything fail as fast as the market will allow. We’re going to fall somewhere on the spectrum between zombie socialism and completely free markets. I tend to agree with David that letting the top-level come apart would be a great step – there’s no reason to allow AIG holding company to continue to exist as something with equity value when the subsidiaries could be profitably operated by others who are less foolish and AIGFP needs to be run-off (either through bankruptcy or through government resolution authority).

  10. Excellent post. The problem of maximizing particular economic variables is underconstrained without specifying the appropriate time horizon.

    But what if we say that we want to maximize subject to the additional constraint that the variable vary only within some range over any period? Now again we have the ability to optimize, but this time over various time horizons weighted by the relative frequency of events (buying and selling) relevant to the variable.

    The lack of both time and frequency measurements in many economic indicators is a blindspot in managing the system.

  11. crocodilechuck says:

    David

    An absolute cracking post. I echo your views – I regard a lot of what has happened since August, 2007 as ‘killing capitalism’. Why The notion of a company originally was that of an uncorporeal entity with the rights of people. Now, with so many of them domiciled in tax havens, they a) effectively do not pay tax, and b) have achieved a kind of state assisted ‘immortality’,eg Citi, GM. So much for ‘death and taxes’…and Nietzche’s/Schumpeter’s ‘creative destruction’.

  12. Greg says:

    najdorf — you need to read a lot more carefully before you comment. At no time did I say the Federal Government bailed out NYC. Go read my comment again and if necessary a third time. I never said that.

    As for NYC’s bankruptcy, the cities lawyers were in the NY state superior court with the papers signed, and just as they were about to hand them in — NYC unions agreed to pension and pay cuts. Literally, the last and only thing between NYC and “formal” bankruptcy was the court clerk’s stamp.

    If you weren’t so careless in reading my comments, I might accuse you of being a lawyer. While NYC might not have been bankrupt “legally”, it was in every economic sense. Only a ambulance chasing lawyer wants to argue what the definition of “is” is (and that lawyer got disbarred for perjury by the way)

    In the weeks that followed NYC’s economic (but not legal) bankruptcy, the city agreed to have its finances monitored by and subject to NY State over-ride. That arrangement is still in force today. Go look it up before you make a fool of yourself again.

    Mayor Koch barely kept the city going (barely is being charitable). Later NYC mayors made many people wonder if NYC was “ungovernable”. Read any New York City paper you want — liberal or conservative — they all said the city was ungovernable. You really have a short attention span or a lack of history knowledge.

    As to the instant post — a state cannot monitor / subject itself to its own over-ride. Hence an arrangement SIMILAR to NYC would involve a Federal government oversight of California’s finances. Given how poorly run the Federal government is, such an arrangement would be the fox guarding the hen house.

    California is insolvent now. No one has said the state doesn’t have nice people or nice houses or nice institutions. That isn’t the problem. The state is insolvent. Nice people can and do get insolvent, and California has done just that. Your reading comprehension skills are lacking.

    There is no bankruptcy code for states, so unlike a city, California will never be a court clerk’s stamp away from LEGAL bankruptcy. But it is already economically bankrupt — aka insolvent.

    How the country handles California’s insolvency is the question. There is no precedent for a US state being bankrupt, and no set of laws covering such an event.

    Either Californians will accept austerity measures — spending cuts they seem unwilling to make on their own; or else the other states will be asked to pay for California’s spendthrift habits (directly or via the Federal government is a moot economic distinction).

    najdorf — your comments are really ignorant. All my facts are well researched, and your insults were uncalled for.

  13. Greg says:

    @najdorf — You need to get out of your own all-or-nothing head filled with dubious “facts”

    Where the hell do you get off?!?!?!

    I asked for David’s opinion on how things might play out — how is that ‘all-or-nothing’???

    Where are the dubious ‘facts’???

    Your ignorance, lack of reading comprehension, and unsubstantiated insults illustrate why the country is in such trouble. Fools like you vote

  14. David-

    I enjoyed the post and linked to it on my first tweet ever. In briefly reviewing the content of the rest of your blog, I found your profession of faith to be interesting. While I am a supreme identity guy (in the parlance of Alan Watts), I commend you for subscribing to the best of morals — based on this post — in your Supreme Being universe.

    Matt

  15. Mike C says:

    David: I like how you bring a lot of morality to financial topics, since financial markets participants generally have a big problem with defining strategies before defining goals

    Is that you COL?

  16. najdorf says:

    It’s not my intention to start a flame war on David’s comments thread, but I will point out that bankruptcy is a legal term. There’s no such thing as “natural” bankruptcy. When you legally enter bankruptcy court, you are in bankruptcy. When you resolve your financial difficulties outside of bankruptcy court, you are not in bankruptcy.

    There is simply no option of California failing. It has the power to tax and there’s no way you can say that the state as a whole is insolvent since there’s no good way to value the assets of a state with power to tax. The players involved (creditors, state taxpayers, state employees, federal taxpayers, federal regulators) will divide the pie as it actually exists. None of these players has any power or incentive to attempt to demolish the entire institution. Since we live in a federalist society, the federal government will help. This process will almost certainly lead to pain for all involved, but it won’t be anywhere near the worst thing that ever happened or a total failure.

  17. jdmckay says:

    David:

    I read your blog assiduously, one of best readings anywhere on financial matters. Been reading for couple years now, and I really appreciate your writing.

    I also agree w/others, that this was a great post. However, I take issue w/several assertions.

    First, you extol the virtues of capitalism. Fine, I’m all for free markets.

    But our (and now the world’s) mess is a direct result of capitalism gone amuck. You hit the common virtues: ability to redirect capital, make adjustments, self correct etc.

    I haven’t seen evidence of that this decade, just the opposite. Capital has not been directed where it’s needed: energy, infrastructure, manufacturing expertise, meeting technology w/engineered materials required for as yet un-built needs (fusion for ex.) for an increasingly smaller pool of available natural resources… not only has capital not been directed to much of any of this, where it has been parked has largely been for quick profit and long term health be damned.

    And when the quick profits didn’t materialize, they lied to make it look like they were.

    So I don’t know… there’s just too many crooks out there in high places, w/no means for most folks to evaluate the quality of their products.

    I think we’ve got much bigger problems than redirecting a few resources, which is a big reason why I liked your post so much: your “cultural” descriptions are most relevant, yet from where I sit there has been little or no inertia to change these cultural phenomena. If anything, the worst of it seems to be re-energizing for another run of bubbles, false euphoria etc.

    2ndly, I do not agree at all w/your ongoing characterizations of China. You’ve written repeatedly in the past you would not invest there… fair enough.

    I’ve been 7 times since the millenium. My wife was a native speaker (born/raised in Beijing), so I’ve had benefit of her intercession on my behalf in the native toungue.

    I’ve seen over and over, from (IMO) credible econ/finance people, describe China as a Japanese Mercantile clone.

    I don’t see it.

    I have watched an evolution there, from pretty much exploited lax enviro/labor laws for outsourced manufacturing to development of very hi tech stuff in multiple domains… all at break neck speed.

    It’s dizzying, and not like anything I’ve seen here (US) in my lifetime (I’m 55). They have surpassed us in manufactured materials of all sorts, from building to custom designed alloys, even carbon fiber. They’ve passed us in clean coal technology, and are either advising/selling/building that stuff in real time all over the globe… at a fraction of what western biz offers at far reduced effectiveness.

    Their efforts at cleaning their air/water etc. are move very, very fast and effectively.

    They are capturing emerging markets, much of it hi tech, w/world class products… all while we’re arguing about tea parties and debating as yet unimplemented corrections which, from everything I’ve seen, do not include even addressing the core problems we have here: dilapidated 2ndary ed, media incapable of seeing beyond it’s own interest, much less even admitting we’ve got growing/aging population with major water problems throughout the country, yet… nothing on that front. nothing.

    We’ve got somewhere +/- 60-70yrs of fossil fuel left, and despite repeated scares from shortage, we have literally no committment in private or public enterprise to plan beyond that. Nothing.

    Socialism, like a lot of other terms, has lost most it’s meaning through misuse of the term: it is no longer descriptive AFAIC. We have on this planet very successful socialist nations: Norway, Germany, even Singapore. There models, however, do not comport w/much of what those who attack socialism hold up as examples.

    There’s more than one way to skin a cat IMO.

    From where I sit, I’m not really sure we have a democracy on US shores any more. Nor do I have much faith in our ability to correct at this point, as the problems are so massive, so entrenched in ignorance and/or misinformation, w/no political or moral courage from the people in position to affect change… where’s our correction going to come from?

    China’s leadership is not your father’s communism. These guys go doctorates from Harvard & MIT. They are building world class universities, and in some cases they’ve already caught up w/our best here. I’m sure you’ve read of some of Chinese US citezens, at top of their various respective fields, who have chose to go back to China (some after several generations here) to join effort in building something worthwhile there.

    I think their leaders have done far better job in this decade of directing resources than US free markets have. And I think also, just in last year, they’ve done a far better job making corrections that matter.

    So yes, anytime you have an elite few yielding authority of current Chinese leadership there are risks… history says huge risks. But China is re-writing a lot of history right now.

    And frankly, given exploitation of their labor until not so long ago, and given how much of US imagined wealth was built on their backs, if I was Chinese finance/currency managers I’d do exactly what they’ve done: maintain the peg, and keep the global currency traders out.

    With all the problems we have here in US… especially financial fraud, my POV that’s it is a pathetic last cry of hubris hearing all this blame on China’s peg for our problems when we have really not addressed any of these problems face up & directly.

    So anyway, again… love your blog. Just my $0.167 worth (and temporarily rising before next big slide).

  18. jdmckay — a lot to think about here. Thanks for posting.

    Have you interacted with the views of Michael Pettis on this? He knows a lot more than me.

    When China floated the Yuan, I could tell within a month that they had really done a dirty crawling peg. They control their exchange rate; to do that, they must suck in dollar claims to make the books balance if they are net exporters to the US. They can trade the claims away, but someone has to hold them.

    I have my own connections inside China; probably not as good as yours — but I hear tales of building capacity for which there is no markets, and empty commercial buildings.

    Yes, some socialistic models can do well for a time, but they don’t correct well.

    I agree that capitalism is sick in America. Our markets have been steered by those that favored more debt, so long as it boosted prosperity in the short run. I have long been a critic of that, even before my days of writing at RealMoney.

    This is why I am talking about cultural failure — there is a failure to think beyond the short-run, and it is not limited to the US. I can’t think of anyplace in the world that really has a long-term mindset at present, and that includes the elites in China.

  19. Greg says:

    jdmckay: But our (and now the world’s) mess is a direct result of capitalism gone amuck.

    China does have a lot going for it, but I have to take issue with your implication that “capitalism” in the west has a problem.

    Alan Greenspan is not a free market. Interest rates set by academics in defiance of free markets is not capitalism

    A government official, who was formerly CEO of a bank, using taxpayer funds to bail out said bank after that bank fails is not capitalism.

    Paying hedge fund managers many millions when they make money is capitalism. Paying hedge fund managers when they make accounting slights of hand is not.

    Capitalism compares the cost of debt/capital with the expected returns of an investment — and only invests when the latter is greater than the former.

    Taking out trillions in debt to promote home ownership, regardless of ability to pay, is not capitalism.

    I could go on and on, but every single example you could possibly give about “failure” in the US (or western countries) is simply not an example of capitalism at all. Most are the antithesis of capitalism.

    Sorry — but capitalism did not fail the west. our leadership did.

    Now these losers are trying to blame capitalism, “the system” or some “unforseeable 10 sigma event” — pretty much anything they can think of to avoid admitting their own failure.

    The west is having a failure of leadership. Period.

  20. jdmckay says:

    David,

    Just too much there to properly address w/out going into detail/specificity necessary to paint an accurate picture. I’ll put together detailed response as time permits, and respond to what you say point by point.

    Briefly, though, you say:

    but I hear tales of building capacity for which there is no markets, and empty commercial buildings.

    2 things:

    * yes… over building (especially warehousing & non-specialty industrial space) is significant. Good parts of Shang Hai currently look like a Ghost town, and air quality there worse than Beijing. So that is so. It is also only part of the story, and I’ll adress that when I post later.

    * the “for which there is no markets” part of that statement is separate entirely, and (IMO) should not be tied together… particularly because they are not tied together in reality. Huge portions of both currently un/under used industrial space but also well used space has been technology & product in progess for some time. And a whole lot if it is just now maturing: I’ve mentioned a few (energy/engineered materials), but there is other stuff as well. Again, I’ll give you more detail in next post (when I can), but I think it is demonstrable that China is addressing markets which most of the rest of the world has ignored. This is the emerging-China, not the plastic-crap-generic-consumer-goods China.

    I’d really like to hear details from people to whom you refer, as to what exactly they have in mind (and on what scale) when they say “no market”.

    Ok, thanks again for good post and interesting discussion.

    But that’s only part of the story.

  21. Mark says:

    Hi,

    I have a question for you. Can you define a quantitative investor. I invest based on screens. I use the ones in quantitative strategies for achieving alpha, what works on wall street, and at the aaii site. I thought that was quantitative investing, but now I am not so sure. Can you give me a definition, and recommend some books, which might help me.

    Thanks in advance.

    Best,

    Mark

  22. john says:

    Can someone tell me when we lived in a capitalist economy? One that let companies fail; didn’t write tax laws to favor minority interests; where sink or swim for all individuals and corporations was the rule; blah, blah, etc. I don’t think it’s been in my lifetime.

    Then, does anyone outside the those in the top 10% of household wealth want to live in a capitalist society? One that, where left unchecked, all sorts of things happen in the commons and to people?

    I’m beginning to believe that capitalism is every bit as much a utopian ideal as communism.

    In the meantime, why can’t government and/or any corporation or industry realize that it can get too big and be pared back?

    Finally, since I’m on a typing roll here, I’ll believe those who say they believe in smaller government when they advocate for a freeze (a freeze, not even a cut) on military spending.

  23. IF says:

    I greatly admire what the Chinese have done economically in the last 20 years. The old generation can still remember living in dirt huts and working the fields. What they have no in infrastructure and production ability is so infinitely better than one or two generations ago, that even a major depression (as the westerners keep predicting) seems like a minor setback in the historical picture. What *really* can happen to China? Japanese style “depression”? – I mean, compare that to the civil war and great leap.

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David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at RealMoney, Wall Street All-Stars, or anywhere else David may write is an invitation to buy or sell any particular security; at most, David is handing out educated guesses as to what the markets may do. David is fond of saying, "The markets always find a new way to make a fool out of you," and so he encourages caution in investing. Risk control wins the game in the long run, not bold moves. Even the best strategies of the past fail, sometimes spectacularly, when you least expect it. David is not immune to that, so please understand that any past success of his will be probably be followed by failures.


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