Public Policy – Page 16 – The Aleph Blog

Book Review: Taking Down the Lion

Posted on 8 July 2014 by David Merkel

This is a tough book for me to review. ?The credit distress of Tyco caused me considerable stress, and let me explain to you how that was.

I was the leading corporate bond manager at the fastest growing life insurance company 2001-2003. ?We had a significant position in Tyco bonds, and as thy fell, we were concerned. ?As a new corporate bond manager, I drew upon all of my analysts and portfolio managers, and asked them, “Who can give me the bear case here?” ?I did my own analysis as well. ?No one could come up with a way that Tyco could go broke.

So I asked the next question: Is there anyone on Wall who thinks Tyco could go broke? ?We found one. ?We read the analysis. ?We thought the argument was ridiculous, and so we wanted to buy more. ?We had a problem: our client was under pressure from the rating agencies to decrease our exposure to Tyco.

We had a large block of two-year Tyco bonds that were trading near par, and I sold them, and reinvested into a smaller market value of 30-year Tyco bonds. ?Problem solved, but we were now taking more risk in Tyco debt, a bet that we would win.

The Book

Taking Down the Lion takes the view that Kozlowski had a subpar legal team which made many blunders in representing him. ?It also notes how the informal management culture played against Kozlowski as things that were formal at many other corporations, and thus could not be argued, were not so at Tyco.

If the book is correct, this was a perfect storm for Kozlowski, leading to an unjust conviction and sentence. ?Having worked at firms that were informal, I can believe that Kozlowski was framed during a witch-hunt era that produced the dreadful Sarbox law. ?Few legislators think of what the side-effects will be from their legislation.

My Thoughts

Tyco as a corporation was not a fraud. ?Yes, Kozlowski was tone-deaf regarding some conspicuous consumption that he did, or was done on his behalf. ?There is no crime for being a vulgar consumer. ?Supposedly Kozlowski paid for it all, but still he got judged for it in court.

Truth, ?don’t know whether Kozlowski was guilty or not, but the company was well-run, and what company could you not find a few things that have some taint?

Summary

I think it is a good book, and I lean toward the idea that Kozlowski should not have been convicted, ?If you want to, you can buy it here:Taking Down the Lion: The Triumphant Rise and Tragic Fall of Tyco’s Dennis Kozlowski.

Full disclosure:?The PR flack asked me if I would like a copy, and I said yes.

If you enter Amazon through my site, and you buy anything, I get a small commission.? This is my main source of blog revenue.? I prefer this to a ?tip jar? because I want you to get something you want, rather than merely giving me a tip.? Book reviews take time, particularly with the reading, which most book reviewers don?t do in full, and I typically do. (When I don?t, I mention that I scanned the book.? Also, I never use the data that the PR flacks send out.)

Most people buying at Amazon do not enter via a referring website.? Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.? Whether you buy at Amazon directly or enter via my site, your prices don?t change.

Pity the Multiemployer Pension Plans

Posted on 2 July 2014 by David Merkel

Most of the efforts to encourage defined benefit pension plans in the US have been an exercise in wishful thinking. ?Then there are the efforts to discourage defined benefit plans, which came about because the IRS felt that they were losing too much tax revenue to overfunded plans. ?Thanks, IRS… many plans were not really overfunded, but you discouraged a healthy funding of DB plans.

But if things are bad with corporate DB plans, it is much worse with Multiemployer Pension Plans. ?These are plans meant to cover union laborers in a given industry. ?What led me to write this evening were the problems with pensions in the coal-mining industry. ?From the article:

Union miners are among the 10.4 million Americans with retirements tied to?multiemployer?pension plans, the large investment pools considered low risk because they don?t rely on a single company for financing. Two recessions, industry consolidation, and an aging workforce have the multiemployer funds facing a $400 billion shortfall. Dozens already have failed, affecting 94,000 participants.

Strong investment returns helped lift the average funding level of pension plans by three points, to 88 percent, from 2013 to 2014, according to?Segal Consulting, which advises multiemployer trust funds. Yet, more plans were added to the ?endangered? or ?critical? lists that require fund managers to take steps to improve their financial status, including adding cash or adjusting future benefits.

?In 2001, only 15 plans covering about 80,000 participants were under 40 percent funded,? the government pension agency reported June 30. ?By 2011, this had grown to almost 200 plans covering almost 1.5 million participants.?

The pension plan for union miners had about $5.8 billion in liabilities in 2012 and was only 71.2 percent funded at the end of 2013, according to?Labor Department filings.

The trouble with multiemployer plans is that as some employers fail, the remainder of the employers have to pick up the bill for pensions. ?In a declining or cyclical industry, that is a recipe for disaster. ?As a result UPS spent $6.1 billion to exit the multiemployer plan, while still guaranteeing benefits to its own employees. ?The $6.1B was the ransom payment to escape something far worse in an underfunded multiemployer plan.

Though average multiemployer plan may be better funded, the average hides a lot, as there are more people expecting benefits from plans that are dramatically underfunded. ?What’s worse, is that those in multiemployer trusts have a maximum guarantee that is around 30% of what a single-employer plan would receive.

As such, to the degree that unionized industries as a whole suffer, so will benefits to unionized laborers, present and past. ?People need to understand that pensions aren’t magic.

Adequate contributions need to be made.
Investment returns must be adequate.
Benefits promised must be reasonable relative to contributions.
Anti-selection should be limited in multiemployer trusts. ?Perhaps employers need to put up extra capital that they would forfeit if they wanted to leave the collective industry pension promises.

As it is, participants in the worst multiemployer pension plans will suffer losses, and the PBGC will guarantee small amounts of the benefits, and that is as it should be, because the ability to drag money out of a shrinking industry is hard, very hard.

So pity participants?in multiemployer defined benefit pension plans. ?A significant portion of them will get far less than they expected.

Book Review: The Big Con

Posted on 29 June 2014 by David Merkel

This is an unusual book for me to review. ?This is a book about Confidence Men, first published in 1940, and recently republished in 1999. ?It was written by David W. Maurer, who was a professor of linguistics, and used his skills to analyze the slang of the underworld.

This book deals with Con Men — men who try to gain the confidence of another man in order to get him to hand over money to them.

I have often said, and many grifters would agree, that it is very hard to cheat an honest man. ?Honest men know that there are no easy pickings in life, and if there are some holes in the system, no one will share them with you for free. ?Grifters trick those who think that the world is unfair, and want to be cut in on the inside action.

Sam Israel was tricked in that way in the book “Octopus.” ?Clever actors convinced him that there was easy money to be made, and they milked him and his hedge fund clients, while he lost it all.

This book takes you through the human systems that con men create in order to convince their targets that they can make easy money, until the con men fleece them. ?The two key characters are ropers, who attract victims, and the insiderman, who is the boss and is the one who directs the whole scam.

They design a system that delivers a few small wins to the victim, who gets greedy and puts up a lot of money, and then the rigged system delivers a loss, cheating him of his money. ?Mot often, since the victim was an willing participant in an illegal scheme, even though he was cheated, he will not be willing to press charges, even though was cheated, because he wants to protect his reputation.

The book describes the many players involved as actors, to make the enterprise look legitimate. ? It also describes the?games that they played, and how they would entice a victim?into an unfair scheme in which they would profit off others, but end up cheating the victim. ?The book talks about how the justice system was often bought by the insiderman, thus protecting the activities of those he employed.

It also describes how the ropers would figure out whether a victim would go along with a scam or not. ?It gives the history of confidence games — how they developed, and how some faded, and others grew, at least for a time.

Along with all of that, it describes the lives of the grifters, and how few of them truly prospered. ?Most wasted the money that they earned in riotous living. As Proverbs 13:11 says, “Wealth obtained by fraud dwindles, But the one who gathers by labor increases it.” [NASB]

To the Modern Era

Breaking from the book review, is our era so much different, or do we have the same problems in different ways?

I’ve been down enough roads in the investing world to know that there are a lot of parties who try to get people to take bad deals. ?It can be as simple as guys who use the “straight-line” pitch to get people to invest with them. ?It can be institutional investors who try to trick naive institutions.

It can be seminars with shills and other accomplices like Rich Dad and their ilk. ?We still have Nigerian Scams and other Scams on the Internet, many of which involve identity theft. ?We have promoted penny stocks, structured notes, and Ponzi schemes. ?I have written about all of these. ?Is the current era less prone to con men than the era from 1890-1940?

I would argue no, though it was more colorful and personal in the past. ?Today’s scams are more virtual and anonymous, leaving aside Madoff’s Ponzi Scheme which was highly personal, and psychologically design to harvest money from those that wanted a high yield with safety.

Why you should consider this book

By reading about all of the ways that people get cheated, you will be deterred from greed, and distrust those who incite greed. ?These problems are alive and well today. ?Can you learn that there are no free lunches, and no free money? ?If you can learn that, you are well on the way to not being cheated.

Quibbles

The book is repetitive. ?It does not condemn the grifters for the sins they commit against others. ?The book is almost amoral. ?At least, it posits a human morality, where there is a code of honor among thieves, but thievery is not in itself wrong if the victim is a greedy person.

Summary

This is a classic book that if you read it should make you more skeptical about “sure things,” and “get-rich-quick schemes.” ?Away from that, it is a commentary on the human condition, showing how many men are willing to compromise their ethics in order to make a lot of money. ?Anyway, if you want to, you can buy it here:?The Big Con: The Story of the Confidence Man. ?It’s not expensive for what you get, and it is a colorful book.

Full disclosure: I bought a copy with my own money.

A Stream of Hot Air

Posted on 28 June 2014 by David Merkel

Let’s roll the promoted stocks scoreboard:

Ticker	Date of Article	Price @ Article	Price @ 6/27/14	Decline	Annualized	Splits
GTXO	5/27/2008	2.45	0.022	-99.1%	-53.9%
BONZ	10/22/2009	0.35	0.001	-99.8%	-72.7%
BONU	10/22/2009	0.89	0.000	-100.0%	-83.4%
UTOG	3/30/2011	1.55	0.001	-100.0%	-90.7%
OBJE	4/29/2011	116.00	0.083	-99.9%	-89.9%	1:40
LSTG	10/5/2011	1.12	0.011	-99.0%	-81.6%
AERN	10/5/2011	0.0770	0.0001	-99.9%	-91.3%
IRYS	3/15/2012	0.261	0.000	-100.0%	-100.0%	Dead
RCGP	3/22/2012	1.47	0.080	-94.6%	-72.4%
STVF	3/28/2012	3.24	0.430	-86.7%	-59.3%
CRCL	5/1/2012	2.22	0.013	-99.4%	-90.7%
ORYN	5/30/2012	0.93	0.026	-97.2%	-82.2%
BRFH	5/30/2012	1.16	0.620	-46.6%	-26.1%
LUXR	6/12/2012	1.59	0.007	-99.6%	-93.3%
IMSC	7/9/2012	1.5	1.000	-33.3%	-18.6%
DIDG	7/18/2012	0.65	0.047	-92.8%	-74.2%
GRPH	11/30/2012	0.8715	0.077	-91.2%	-78.6%
IMNG	12/4/2012	0.76	0.025	-96.7%	-88.8%
ECAU	1/24/2013	1.42	0.047	-96.7%	-90.9%
DPHS	6/3/2013	0.59	0.008	-98.7%	-98.3%
POLR	6/10/2013	5.75	0.051	-99.1%	-98.9%
NORX	6/11/2013	0.91	0.110	-87.9%	-86.8%
ARTH	7/11/2013	1.24	0.213	-82.8%	-84.0%
NAMG	7/25/2013	0.85	0.087	-89.8%	-91.5%
MDDD	12/9/2013	0.79	0.097	-87.7%	-97.8%
TGRO	12/30/2013	1.2	0.181	-84.9%	-97.9%
VEND	2/4/2014	4.34	2.090	-51.8%	-84.5%
HTPG	3/18/2014	0.72	0.090	-87.5%	-99.9%
6/27/2014	Median	-96.7%	-87.8%

My, but aren’t they predictable. ?Onto tonight’s loser-in-waiting Windstream Technologies [WSTI]. ?This is another company with negative earnings and net worth, though it has a modest amount of revenue.

Think of it for a moment: this company has a “breakthrough technology,” and yet they were a hotel company within the last year or two. ?That’s not how real businesses work. ?I you have an incredible technology, but little capital, private equity investors will happily fund you. ?You won’t try to do it in some underfunded corporate shell which tempts crooked financial writers to write fantasy.

Now, you might look at the disclaimer in the glossy brochure which came to my house, which in 5-point type takes back all of things that they about in bold headlines and readable text. ?For example:

It begins with:?DO NOT BASE ANY INVESTMENT DECISION UPON ANY MATERIALS FOUND IN THIS REPORT.
The Wall St. Revelator is neither licensed nor qualified to provide financial advice. As such, it relies upon the “publisher’s exclusion” as provided under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws.
The Wall Street Revelator and/or its publisher, Andrew & Lynn Carpenter, dba The Wall Street Revelator has received a total amount of twenty five thousand dollars [DM: $25,000] in cash compensation to assist in the writing of this Advertisement, as well as potential future subscription and advertising revenues, the amount of which is not known at this time with respect to the publication of this Advertisement and future publications.
Mandarin Media Limited paid nine hundred thousand dollars [DM: $900,000]?to marketing vendors to pay for all the costs of creating and distributing this Advertisement, including printing and postage, in an effort to build investor and market awareness.
Mandarin Media Limited was paid by non-affiliate shareholders who fully intend to sell their shares without notice into this Advertisement/market awareness campaign, including selling into increased volume and share price that may result from this Advertisement/market awareness campaign.
The non-affiliate shareholders may also purchase shares without notice at any time before, during or after this Advertisement/market awareness campaign.
Non-affiliate shareholders acted as advisors to Mandarin Media Limited in this Advertisement and market awareness campaign, including providing outside research, materials, and information to outside writers to compile written materials as part of this market awareness campaign.

The disclaimer exists to cover the writers from legal risk, and what it tells us is that there are largish shareholders looking to profit by running up the stock price as a result ?of the advertisement, enough to cover the $925,000 cost.

Such it is with a pump and dump. ?One thing is virtually certain, though. ?This is not a stock to hold onto. ?Look at the stocks in the table above. ?No winners, and most are almost total losses in the long run. ?Manipulators love working with stocks that have no earnings and no net worth, because they are impossible to value for the grand majority of people. ?New buyers, if they come in a group, can create a frenzy that raises prices.

That’s the goal of the advertising campaign: a short term “pop” that the sponsoring shareholders can sell into, letting a bunch of muppets take losses.

Again, never buy promoted stocks. ?If they have to buy the services of others to promote the stock, it is a fraud. ?Good stocks do not need promotion. ?It’s that simple.

PS — the pretentiousness of the word “revelator” should be replaced by the simpler “revealer.”

But They are not Actuaries, nor CFAs

Posted on 27 June 201427 June 2014 by David Merkel

I am grateful that risk managers inside banks have more clout these days. ?That said, I want it to persist, and the best way to do it is to have risk managers beholden to an ethics code, like actuaries or CFAs.

This is valuable, because the risk manager can point to a body of ethics that says to his manager, “I am sorry, but those of my discipline say that this action is unethical,” when line managers complain that the risk manager is killing business by insisting that certain risk standards should be maintained.

Actuarial risk models cover the life of the business, unlike Wall Street models that measured risk in terms of days. ?Cash flows mater, and the ability to meet the demand for cash matters. ?Long-term risk models tend to surface risks better than short-term models because an intelligent businessman can ask what are the odds that we will have a crisis over the duration of our existing business?

Once on a task force of the Society of Actuaries, when discussing non-traditional actuaries going to Wall Street, I said, “Great idea, but the line managers will eventually kill anyone that gets in their way. ?They don’t want people who have an ethics code. ?It inhibits business.” ?After that, there were some nervous chuckles on the phone, and the conversation moved on.

Ethics codes are needed when the disparity of knowledge between the designers and ultimate consumers/investors/regulators is so great that there are many ways that the consumers/investors/regulators could be cheated.

My view is controversial but simple. ?Every professional?in investing and finance needs to have an ethics code, making them more sensitive to their clients. ?The easy solution is that every investment/finance professional needs to hold?a CFA charter. ?The three exams are pretty minimal, and can be passed by most people with some study. ?Give the actuaries a pass, their exams are far harder — far, far, far harder.

But set some boundary for ethics and examinations of competence, to clean up finance and send the flim-flam men to the edges of the market, where they belong.

A Few Notes on Bonds

Posted on 25 June 2014 by David Merkel

My comments this evening stem from a Bloomberg.com article entitled?Bond Market Has $900 Billion Mom-and-Pop Problem When Rates Rise. ?A few excerpts with my comments:

It?s never been easier for individuals to enter some of the most esoteric debt markets. Wall Street?s biggest firms are worried that it?ll be just as simple for them to leave.

Investors have piled more than $900 billion into taxable?bond?funds since the 2008 financial crisis, buying stock-like shares of mutual and exchange-traded funds to gain access to infrequently-traded markets. This flood of cash has helped cause prices to surge and yields to plunge.

Once bonds are issued, they are issued. ?What changes is the perception of market players as they evaluate where they will get the best returns relative expected future yields, defaults, etc.

Regarding ETFs, yes, ETFs grow in bull markets because it pays to create new units. ?They will shrink in bear markets, because it will pay to dissolve units. ?That said when ETF units are dissolved, the bonds formerly in the ETF don’t disappear — someone else holds them.

But in a crisis, there is no desire to exchange existing cash for new bonds that have not been issued yet. ?Issuance plummets as yields rise and prices fall for risky debt. ?The opposite often happens with the safest debt. ?New money seeks safety amid the panic.

Last week, Fed Chair Janet Yellen said she didn?t see more than a moderate level of risk to financial stability from leverage or the ballooning volumes of debt. Even though it may be concerning that?Bank of America?Merrill Lynch index data shows yields on?junk bonds?have plunged to 5.6 percent, the lowest ever and 3.4 percentage points below the decade-long average, the outlook for defaults does look pretty good.

Moody?s Investors Service predicts the global speculative-grade default rate will decline to 2.1 percent at year-end from 2.3 percent in May. Both are less than half the rate?s historical average of 4.7 percent.

Janet Yellen would not know financial risk even if Satan himself showed up on her doorstep offering to sell private subprime asset-backed securities for a yield of Treasuries plus 2%. ?I exaggerate, but yields on high-yield bonds are at an all-time low:

Could spreads grind tighter???Maybe, we are at 3.35% now. ?The record on the BofA ML HY Master II is 2.41% back in mid-2007, when interest rates were much higher, and the credit frenzy was astounding.

But when overall rates are higher, investors are willing to take spread lower. ?There is an intrinsic unwillingness for both rates and spreads to be at their lowest at the same time. ?That has not happened historically, though admittedly, the data is sparse. ?Spread data began in the ’90s, and yield data in a detailed way in the ’80s. ?The Moody’s investment grade series go further back, but those are very special series of long bonds, and may not represent reality for modern markets.

Also, with default rates, it is not wise to think of them in terms of averages. ?Defaults are either cascading or absent, the rating agencies, most economists and analysts do not call the turning points well. ?The transition from “no risk at all” in mid-2007 to mega-risk 15 months later was very quick. ?A few bears called it, but few bears called it shifting their view in 2007?– most?had been calling it for a few years.

The tough thing is knowing when too much debt has built up versus ability to service it, and have all short-term ways to issue yet a little more debt been exhausted? ?Consider the warning signs ignored from mid-2007 to the failure of Lehman Brothers:

Shanghai market takes a whack (okay, early 2007)
[Structured Investment Vehicles] SIVs fall apart.
Quant hedge funds have a mini meltdown
Subprime MBS begins its meltdown
Bear Stearns is bought out by JP Morgan under stress
Auction-rate preferred securities market fails.
And there was more, but it eludes me now…

Do we have the same amount of tomfoolery in the credit markets today? ?That’s a hard question to answer. ?Outstanding derivatives usage is high, but I haven’t seen egregious behavior. ?The Fed is the leader in tomfoolery, engaging in QE, and creating lots of bank reserves, no telling what they will do if the economy finally heats up and banks want to lend to private parties with abandon.

That concern is also revealed in BlackRock Inc.?s pitch in a paper published last month that regulators should consider redemption restrictions for some bond mutual funds, including extra fees for large redeemers.

A year ago, bond funds suffered record withdrawals amid hysteria about a sudden increase in benchmark yields. A 0.8 percentage point rise in the 10-year Treasury yield in May and June last year spurred a sell-off that caused $248 billion of market value losses on the Bank of America Merrill Lynch U.S. Corporate and High Yield Index.

Of course, yields on 10-year?Treasuries (USGG10YR)?have since fallen to 2.6 percent from 3 percent at the end of December and company bonds have resumed their rally. Analysts are worrying about what happens when the gift of easy money goes away for good.

With demand for credit still weak, it is more likely that rates go lower for now. ?That makes a statement for the next few months, not the next year. ?The ending of QE and future rising fed funds rate is already reflected in current yields. ?Bloomberg.com must be breaking in new writers, because the end of Fed easing is already expected by the market as a whole. ?Deviations from that will affect the market. ?But if the economy remains weak, and lending to businesses stays punk, then rates can go lower for some time, until private lending starts in earnest.

Summary

Is too much credit risk being taken? ?Probably. ?Spreads are low, and yields are record low.
Is a credit crisis near? ?Wait a year, then ask again.
Typically, most people are surprised when credit turns negative, so if you have questions, be cautious.
Does the end of QE mean higher long rates?? Not necessarily,?but watch bank lending and inflation. ?More of either of those could drive rates higher.

Q&A with The Forbidden Game Author Dan Washburn

Posted on 22 June 2014 by David Merkel

For anyone interested in learning more about Dan Washburn, author of The Forbidden Game, ?you can consult his blog here. ?Aside from that, you can read my Q&A with him here. ?Hey, thanks for reading — I’m not a golfer, though I did it as a child, and was a caddy for some years. ?It is a phenomenon is society, and should be understood.

Anyway, here is the Q&A. ?In general, I say to authors that they don’t have to take all of my questions, and thus, you will see gaps in the numbers. ?Here it goes:

1.???????From the book?Prisoner of the State, Zhao Ziyang, even while in captivity was allowed to go golfing.? Now, many in the Party distrusted Zhao because he had adopted too many Western habits and modes of thought.? Has golf been legitimized for Party members to partake in, so long as they aren?t too flamboyant about it??

I don’t think so. Golf remains a taboo topic for China’s political elite, perhaps even more so now than in years past thanks to Xi Jinping’s ongoing crackdown on government corruption. Simply put, Chinese officials shouldn’t be able to afford to play golf in China. Their salaries are modest (last year, it was reported that President Xi’s annual salary is just $19,000) and golf in China is extremely expensive (it can cost $150, often more, to play 18 holes). So, while most Chinese assume that all government officials have other sources of income, playing golf on a regular basis would be a rather conspicuous admission of double-dealing. We all know some Chinese officials are filthy rich, and some indeed do play golf ? but they still need to do so on the sly.

4.???????In the US, golf is usually thought of as a rich man?s game.? Your book seems to indicate that it is also true in China, but is it more so, or less so than in the US?

Golf on average is much more expensive in China than in the United States. There are no public courses, per se, so you’re stuck having the pay a hefty fee to get on a so-called “private” course. Those on a budget usually stick to the driving ranges, which are often quite crowded.

5.???????You got me to root for each of your main characters, Zhou Xunshu, Wang Libo, and Martin Moore.? It?s a much more interesting book as a result, than say a straight golf history of China book.? How did you settle on this structure of the book?? How many other characters did you try out before settling on these three?

That’s great to hear, David. I always envisioned this as a character-driven book, narrative non-fiction that keeps you turning pages like a novel. Originally, the book was going to focus solely on Zhou, with other stories related to golf’s development in China branching off from his underdog narrative. But eventually my editor and I decided, I think wisely, to add two more characters that readers could become invested in. The first people who came to mind were Martin and Wang. They were good people with very interesting stories to tell, and they allowed us to explore aspects of golf’s rise in China that Zhou on his own did not.

6.???????Why did the Chus, running Mission Hills in China insist that they had to build the largest golf course complex in the world, not just once but twice?? Were they that way in all of their business dealings?

I’m not quite sure where the drive to be the biggest and best at everything stemmed from, but the Chus certainly weren’t alone. I recall at one point during my time in China that Shanghai had plans to be home to the world’s fastest train, the world’s tallest building, even the world’s largest ferris wheel. As China has emerged in recent decades, it has become a nation of superlatives. Mission Hills fits right in.

8.???????As you wrote the book, what thing or things surprised you the most?

When I started covering golf tournaments in China in 2005, I knew little about the issues surrounding the development of the game there. But the more I dug, the more I realized that golf, and the complex world that surrounds it, is really a microcosm of China at the moment. The story touches on everything: the booming economy, the widening gap between rich and poor, rural land rights, environmental concerns, wild west development, and political intrigue. Golf, surprisingly, seemed to be perfect lens through which to view China during the first decade of this new millennium.

9.???????Why did the book?s title change from?Par for China, to?The Forbidden Game?

It was a natural evolution.?Par for China?was always my working title, but the publisher really fell in love with?The Forbidden Game, which was the title of a related story I wrote for?Slate?a few years ago. And it works on many levels. Golf was, in fact, forbidden in China for some 35 years after the Communists came to power (2014 marks the 30-year anniversary of the opening of modern China’s first golf course). Playing golf was also forbidden for Zhou when he worked as a golf course security guard. And today, building new golf courses is supposedly forbidden in China ? and we all know how well that’s working.

10.???How long were you at work on the book?? 6-8 years?

Yes, it’s been a labor of love. I first met Zhou late in the summer of 2006, and I found his story so fascinating I immediately started formulating a book in my mind. Of course, it took me another four years to actually sell the book, and a few more after that to write it. Those extra years allowed be to add a lot more depth to the story, though, so it all worked out in the end.

11.???How avid of a golfer are you?

I’m not. So, it’s a good thing this isn’t a how-to book. I took some lessons while in China, but quite honestly couldn’t afford to be an avid golfer there. Once I moved back to the U.S., all of my free time was spent writing. So, now that I have completed my golf book, now maybe I can finally take up golf!

Book Review: The Forbidden Game

Posted on 22 June 201422 June 2014 by David Merkel

I’m not a golfer, but I really liked this book. ?The charm of the book is that it takes us through the lives of three men, and a host of lesser characters, and shows us how the growth of golf in China shaped their lives. ?Two of the protagonists are?Chinese, and one American.

The American, Martin Moore, was a promising golf course designer who did increasingly well designing courses in the US, Thailand, and China. ? He learned how to get things done amid demanding bosses and ambiguous regulation. ?Is building a golf course forbidden or not? ?What if we call it a “health club?” ?What if many locals object to their land being expropriated?

He succeeded amid many obstacles. ?The next protagonist, and the one who had the most dramatic success was Zhou Xunshu, a man who went from not knowing anything about golf — an industrial worker, a common man, to being a golf professional. ?His efforts were significant, and he underwent many hardships as he pursued his dream.

Then there is Wang Libo, a man who gets displaced by his home getting taken from him to build a golf course, and he takes the opportunity and builds a store/bar/restaurant near the complex to profit from the opportunity.

Three engaging characters amid the ambiguity of changing regulations, and whether it was legal to build new courses or not.

You will learn a lot about China in the process… what it is like dealing with an all-powerful Party whose machinations are secret. ?And yet, one where if enough people protest, you can’t do anything, even if you have all of the permits in place.

You will get a behind-the scenes look at creating the world’s largest golf course twice, and the ambition of those who wanted to see it done quickly.

You will also experience the Chinese Dream, as the book’s subtitle suggests… the dreams and goals of those who want to live a life similar to middle-class Americans, but all the more poignant, because the path to getting there is often unclear.

To those reading me at Amazon.com, please Google “Aleph Blog Washburn” and you will be able to read a special Q&A with the author that I will post after writing this post.

This was an enjoyable book to read, and I think most people would learn something from it.

Quibbles

None.

Summary

This is a great book. ?It will make a great gift to friends of yours who are golfers. ?If you want to?you can?buy it here:?The Forbidden Game: Golf and the Chinese Dream.

Full disclosure: The PR flack?asked me if I would like a copy and I said yes. ?She invited me to write a Q&A also. ?Hey, look at the next post.

To the Fed: A Picture is Worth 1000 Words

Posted on 19 June 2014 by David Merkel

The FOMC statements are much longer than they used to be, and as such, are less clear, giving faulty signals to the markets. ?If language is not likely to change much ?for a while, why not drop the language ?entirely, especially in cases where it affirms ideas that are obvious.

We may?all know people in our lives who will say more and more if you don’t agree with them, because if you don’t agree with them, you don’t understand. ?More words will bring clarity to you, and you will understand. ?But what if they are nuts, and you are a sane person? ?This is how I think about the FOMC — they are bad forecasters, and they don’t understand how weak monetary policy is in a period where there is too much debt.

So let’s try some pictures to replace the words of the FOMC:

As I have said before, the FOMC is composed of overly optimistic neoclassical economists, who don’t know that their theories don’t work when and economy is too indebted. ?They think: Real growth is our birthright, and price inflation promotes growth. ?Neither are true.

Note that they have been consistently pessimistic on the unemployment rate, flawed measure that it is. ?Thus they think they need to keep monetary loose.

Their views of PCE inflation reflect a view that monetary policy can easily achieve a 2% rate of inflation in the long run. ?Pray tell, when have actions of the FOMC ever led to an equilibrium result?

Aside from that, the PCE index does not fairly represent inflation for the average person in the economy. ?Maybe it reflects what the rich experience.

This is a study in contrasts. ?They were once more optimistic that Fed Funds rates would rise sooner, and that has not happened. ?That said, they are now more certain that the Fed Funds rate will rise significantly in 2016. ?As for the long run they are getting more pessimistic about?economic growth, at least in their Fed Funds forecasts.

This is another example of where the FOMC should take a step back, and not try to interpret every short-term wiggle. ?As a group, they whipsawed in their view of when tightening would happen over the last three datapoints, when I would not have changed much.

To the Fed I say, “Say less, and provide more graphs.” ?I understand that you don’t want to discredit yourselves because you are bad forecasters, but maybe you could get your points across in a more potent way by not diluting your message by many needless words.

Redacted Version of the June 2014 FOMC Statement

Posted on 18 June 2014 by David Merkel

Comments

Small $10 B/month taper.? Equities and long bonds both rise.? Commodity prices rise.? The FOMC says that any future change to policy is contingent on almost everything.
They shaded household spending down, and raised their view on business fixed investment.? Don?t know they keep an optimistic view of GDP growth, especially amid falling monetary velocity.
The FOMC is ignoring rising inflation data.
The FOMC needs to chop the ?dead wood? out of its statement.? Brief communication is clear communication.? If a sentence doesn?t change often, remove it.
In the past I have said, ?When [holding down longer-term rates on the highest-quality debt] doesn?t work, what will they do?? I have to imagine that they are wondering whether QE works at all, given the recent rise and fall in long rates.? The Fed is playing with forces bigger than themselves, and it isn?t dawning on them yet.
The key variables on Fed Policy are capacity utilization, unemployment, inflation trends, and inflation expectations.? As a result, the FOMC ain?t moving rates up, absent increases in employment, or a US Dollar crisis.? Labor employment is the key metric.
GDP growth is not improving much if at all, and much of the unemployment rate improvement comes more from discouraged workers, and part-time workers.