Tuesday, June 30, 2009

Seven NYC Valedictorians

The Metro section of Sunday's New York Times featured brief profiles and a group interview with the seven NYC valedictorians pictured above ("In Uncertain Times, Valedictorians Look Ahead"). The print edition of the paper had the above photo on the front page of the section, and another group photo on p.6, where the article continued. The second group photo listed SAT scores and other info for each of the valedictorians. I showed Cheryl the first photo and asked her to guess which kids had the highest and lowest SAT scores, respectively. She guessed them both, based on the names and photos.

From the article,

These seven valedictorians — the five from public schools ranked highest in their class; Mr. Monsalve and Adrienne Edwards of the elite Spence School were selected to give the valedictory — are a tableau of American ideals1. Four are from immigrant families — Uzbekistan by way of Armenia, Colombia, the Dominican Republican and Lebanon. Their parents include an elevator mechanic, two hotel banquet servers and a limousine driver, along with the chairman of the neurology department at Mount Sinai Medical Center. They speak Spanish, French, Russian, Arabic, a little Hebrew.

Like all good New Yorkers, they bemoan the subway system, the hordes and the city’s willful indifference to personal boundaries.

Although these young men and women all bemoan the subway system, none of them plans to do anything about it when they grow up: none plans to be a civil engineer, urban planner, politician, or work in another field where one might try to improve it. I find it interesting, too, that the writer notes the valedictorians all bemoan "the hordes and the city's willful indifference to personal boundaries". Something tells me that if a non-New Yorker expressed similar sentiments, a New York Times reporter would take offense.

Look at the profile of the young woman second from right:


LIVES IN St. Albans, Queens

COMING FROM Spence School, 49 seniors

GOING TO University of Pennsylvania

HOPES TO be a litigator


Outspoken and assertive, Adrienne commuted 90 minutes by bus and train to Spence, where she enrolled in 7th grade and was head of the hip-hop dance group and the multicultural awareness club. “I don’t think I’ll be able to function at my highest anywhere else but New York because I’ve met all my challenges and had all of my progressions here.”

Might Ms. Edwards be a nominee for the Supreme Court in 2040?

The photo above, of, from left, Jenae Williams, Jordano Sanchez, Adam Sealfon, Kristina Arakelyan, Christian Monsalve, Adrienne Edwards and Muhammad Safa, accompanies the article and is credited to Béatrice de Géa.

1At the risk of seeming picayune, am I the only one who finds this sentence poorly written? I think what the writer is trying to say is that two of the seven valedictorians (Monsalve and Edwards) tied for that top honor at the same school. She could have explained that clearly and simply in a brief parenthetical comment.

2These scores include the new SAT essay section. Unlike the SAT, the GMAT, which also has an essay section, lists the essay score separately: test-takers can earn a maximum score of 800 points on the objective, standardized test portion of the GMAT (the part schools care the most about) and on the essay section, get a separate score of 0-to-6, which is the average of the subjective assessment of two readers. The GMAT's approach makes more sense, in my opinion. Adding the score of a subjectively-graded section to the scores of two objectively-graded sections, as the SAT now does, seems to muddy the waters a bit.

Saturday, June 27, 2009

"Yes we Khan"

The other day, when the local Barnes & Noble was sold out of Rolling Stone, it happened to have Monocle as its new, featured title. I'd been curious to see an issue of Monocle since reading its editor Tyler Brûlé's semi-ridiculous Saturday columns in the Financial Times, which generally focus more on the minutia of his globetrotting than on why he's traveling in the first place.

For example, one column described his early-morning routine at a Hyatt in Seoul: ordering a Mandarin orange juice and a cappuccino from room service, before running for an hour on a treadmill, then scrubbing himself with a brush while sitting on a chair in the hotel's fancy shower/sauna, etc. Another column detailed how he ordered a lackey to fly from London to some town in Switzerland to pick up the wallet Brûlé left there, and hop on a train to Paris to get Brûlé his wallet before his scheduled flight to Tokyo.

In any case, Monocle, as it turns out, is chock full of content (an inch thick) and an interesting read. In one feature, an analyst from Jane's Defense Weekly was asked what aircraft he'd buy if he had $15 billion and were tasked with building an air force from scratch for a mid-sized G-20 country. Another article reported on the nascent commodity- and energy-driven boom in Mongolia, "Yes we Khan". The online version of the article is restricted to subscribers, unfortunately, but it offered some color on the situation in Mongolia. There seem to be a lot of opportunities for natural resources companies there, given the amount of resources in Mongolia and its proximity to China, but how much of that money will filter down to ordinary Mongolians is a question the article raises.

The article also reminded me of the joint venture Alloy Steel International (OTC BB: AYSI.OB) was negotiating with Mongolian conglomerate Geomandel last year. Last I heard about this from Alloy Steel's CEO (this was last October, well before he took the "Run Silent, Run Deep" tack toward shareholder communications), he said,

We have shelved Mongolia for at least 6 Months till this madness subsides.

Maybe when the company releases its next quarterly filing in August it will provide an update on this.

The photo above, of the outskirts of Ulan Bator, accompanied the Monocle article and was credited to Andrew Rowat.

Friday, June 26, 2009

Matt Taibbi versus Goldman Sachs

Here's Matt Taibbi's Rolling Stone feature article on Goldman Sachs, via Zero Hedge, "The Great American Bubble Machine: From tech stocks to high gas prices, Goldman Sachs has engineered every major market manipulation since the Great Depression - and they're about to do it again". And here is Goldman Sachs's response, via Felix Salmon: "Goldman Sachs responds to Taibbi".

Incidentally, when I tried reading Matt Taibbi's article at Zero Hedge yesterday, the Scribd application wouldn't load, perhaps because it was overwhelmed with hits. So I headed to the Hackensack Barnes & Noble. I couldn't find Rolling Stone on the magazine rack, so I asked one of the Barnes & Noble clerks where it was. "Sold out," he said, "There was something important in it, I don't know what". I just started reading the article, so I don't have more to say about it, but you've got links to both sides of the story above. Feel free to add your thoughts in the comment thread.


A few thoughts, now that I've read Taibbi's article and Salmon's post on Goldman's response:

- There's some truth in Taibbi's article, but it's padded with a good measure of exaggeration. Goldman certainly participated in all the bubbles Taibbi mentions, and profited from them, but the dot-com bubble, the housing bubble, etc., would have happened without Goldman Sachs.

- Taibbi takes the hedge fund manager Masters at his word re: the commodities spike last year. Goldman is an enormous player in commodities, but one problem with blaming the commodity spike on paper speculation, or on firms such as Goldman getting pension funds to pour money into commodity index funds, is that the prices of commodities that aren't traded on futures markets or included in commodity indexes (for example, certain metals) spiked as well.

- Where the actions of Goldman employees and alumni deserve the most scrutiny is in relation to the bailouts of last year (and also the non-bailout of Lehman Brothers).

- Regarding this bit from Felix Salmon,

[Goldman Sachs public relations officer Lucas] Van Praag told me that in the wake of the events of the past year or two, Goldman’s partners have pretty much lost their appetite for going into public service. Maybe that’s for the best. They are generally smart and talented and knowledgeable people, and I daresay that many of them have done a lot of good after leaving the firm and joining government. At the same time, however, we’re supposed to have a government of the people, not a government of multimillionaire Goldman Sachs technocrats.

Two points: 1) I'd hate to think that any Goldman partners have soured on public service, but if they feel the need to do something altruistic, I'm sure no one will object if they decide to teach a high school math class or something after they retire with their managing director money. 2) Contra Salmon, I see no problem with multimillionaire technocrats in key positions in the Treasury department -- most knowledgeable finance types will have accumulated some wealth along the way, (even via side projects and consulting if they are academics). The problem is when so many of these multimillionaire technocrats come from the same firm. This is one case where there would be some inherent value in a little diversity.

Keeping a Casual Eye on ASUR

As I mentioned in a previous post, I closed out my Asure Software (Nasdaq: ASUR) positions at about .25 last week. Today I got a half dozen copies of the hard copy version of this notice from ASUR management, asking shareholders to support the current management in its impending proxy fight with the activist hedge fund Red Oak Partners. My guess is that Red Oak will win this proxy fight, given the current management's track record, poor relationship with shareholders, and the recent defeat of the current management's go-private plan. I am curious to see if Red Oak succeeds in unlocking some shareholder value here. If so, it might be worth considering piggybacking on their next venture in micro cap shareholder activism.

"Tilting at Green Windmills"

In a post last fall ("A Green New Deal?"), we mentioned Van Jones's explication of the idea, advocated by many progressives, that government subsidies for solar and wind energy would spur job creation. In his Washington Post column yesterday ("Tilting at Green Windmills"), George Will draws on research from a Spanish economist who suggests otherwise. An excerpt:

WASHINGTON -- The Spanish professor is puzzled. Why, Gabriel Calzada wonders, is the U.S. president recommending that America emulate the Spanish model for creating "green jobs" in "alternative energy" even though Spain's unemployment rate is 18.1 percent -- more than double the European Union average -- partly because of spending on such jobs?

Calzada, 36, an economics professor at Universidad Rey Juan Carlos, has produced a report which, if true, is inconvenient for the Obama administration's green agenda, and for some budget assumptions that are dependent upon it.

Calzada says Spain's torrential spending -- no other nation has so aggressively supported production of electricity from renewable sources -- on wind farms and other forms of alternative energy has indeed created jobs. But Calzada's report concludes that they often are temporary and have received $752,000 to $800,000 each in subsidies -- wind industry jobs cost even more, $1.4 million each. And each new job entails the loss of 2.2 other jobs that are either lost or not created in other industries because of the political allocation -- sub-optimum in terms of economic efficiency -- of capital. (European media regularly report "eco-corruption" leaving a "footprint of sleaze" -- gaming the subsidy systems, profiteering from land sales for wind farms, etc.) Calzada says the creation of jobs in alternative energy has subtracted about 110,000 jobs from elsewhere in Spain's economy.

Wednesday, June 24, 2009

The Atlantic's Fifteen Ideas to Fix the World

The July/August Atlantic magazine offers this modest collection of brief essays, on ideas that range from reasonable to stupid, "15 Ways to Fix the World". One of the reasonable ones comes from Andrew Bacevich1, "Give Up on Democracy in Afghanistan". Here's the key excerpt:

[T]he attempt to create a cohesive nation-state governed from Kabul (something that has never existed in modern times) is a fool’s errand. Better to acknowledge and build on the Afghan tradition of decentralized governance. Let tribal chiefs rule: just provide them with incentives to keep jihadists out. Where incentives don’t work, punitive action—U.S. air strikes in neighboring Pakistan provide an illustrative example—can serve as a backup. Denying terrorists sanctuary in Afghanistan does not require pacification—and leaving Afghans to manage their own affairs as they always have will reduce internal instability, while freeing up the resources to allow our own country to tackle other challenges more pressing than the quixotic quest to modernize Afghanistan.

A couple of the stupider ideas come from Thomas Toch, co-director of a think tank called Education Sector, and Kerry Howley, a contributing editor at the libertarian magazine Reason. In Toch's essay, "Tell the Truth About Colleges", he offers these revelations,

Tuition has been skyrocketing for years, with little evidence that education has improved. Universities typically favor research and publishing over teaching. And influential college rankings like the one published by U.S. News & World Report measure mostly wealth and status (alumni giving rates, school reputation, incoming students’ SAT scores); they reveal next to nothing about what students learn.

Shocking, no? Toch must be wracking his brain wondering why so many students are desperate to apply to elite schools such as Harvard, which favor research and publishing over teaching. Apparently, no one has explained to Toch the signaling value of a diploma from an elite school.

On to Kerry's howler, "Welcome Guest Workers",

Say you’re a Bangladeshi taxi driver struggling to survive on your daily wage in Dhaka. A couple of nongovernmental organizations have offered you help, but you can pick only one form of assistance: access to microcredit[2], or a chance to work in the United States. What’s the better deal? According to a recent analysis by the Center for Global Development, microcredit loans might net you an extra $700 over the course of a lifetime. Working stateside, you’re likely to make the same amount in a month.

Howley goes on to describe a grand plan by Harvard economist Lant Pritchett to achieve "economic justice"3 by having every rich country "hand out enough work visas to increase its labor force by 3 percent" so that Bangladeshi taxi drivers can work as taxi drivers and such in developed countries such as the United States. It's tough to decide where to begin in responding to this one. The first thought that comes to mind is how politically tone-deaf Howley is to bring this plan up when the unemployment rate here is the highest it's been in a quarter century (Howley at least admits in her essay that the timing for implementing this plan would be a tad inauspicious now). That political tone-deafness must be common among libertarians, which may help explain why they never seem to win any elections. My next thought is to wonder whether Howley has ever considered why countries such as Bangladesh are poor in the first place. Is it really because not enough of their citizens have gotten guest worker visas to drive taxis in the U.S.? Has there ever been a country that pulled itself up to affluence by cashing in on the remittances of its citizens working as guest workers in rich countries?

If Kerry Howley cares about Bangladesh, she ought to donate some of her own money to WaterAid, the charity mentioned in this Financial Times article from last year, "How toilets transformed a Bangladeshi village". An excerpt from this article will demonstrate, I think, that Bangladesh has bigger fish to fry before worrying about getting its taxi drivers a temporary raise overseas:

It was 16 days since the chairman of the local council had been murdered by militants who swept in under the cover of a travelling circus to erase one of their political enemies. Now, as the Professor sat in his dried-mud dining area, eating a breakfast of last night’s rice, he was told that a group of strangers had arrived.

He headed to Mosmoil’s sole strip of asphalt, a road bisecting the riot of vegetation that has otherwise recolonised the village’s 63 iron-roofed homes in a tangle of crawling stalks and fat leaves.

The strangers had arrived on a motorcycle rickshaw. They carried documents and pens. They did not wear coloured lungis – the dress of men in rural Bangladesh – but the dark trousers of city dwellers.

“I suspected that because the murder had taken place, they were either government spies or members of a terrorist group,” the Professor recalls. Instead, they pursued an unexpected line of questioning. “Where do you defecate?” they asked him.

“It was the first time I’d heard such a thing,” he says. Overcoming his surprise at the question, he forgot his initial fears, allowed his curiosity to be tweaked, and gave an honest answer.

He told them that sometimes he used a “hanging toilet”, a metre-high bamboo structure built on the banks of a pond, where users climbed up a rickety ladder to a squat hole that was shielded imperfectly from view by a sack cloth cubicle. Other times he ventured into the paddy fields and betel groves that surround the villages of west Bangladesh and squatted, preferably out of the sight of others, over the soil.

“Do you know that you eat this goo?” one of the strangers asked, using a Bengali word for human waste, which spans the English spectrum of social acceptability from the scientific right through to “shit”. “If it rains now, it will wash some of the goo into the pond,” the stranger continued. “Then you bathe there, you wash your dishes there, and you wash your food with water from the pond, so you are eating it.”

The Professor was stunned. “That was the first time we realised we were eating our own goo and I felt something very strange inside,” he recalls. “Not hatred but disgust.”

That article goes on to explain that the "Professor" is, as you may have already suspected, not a real professor; he earned the honorific "Professor Goo" (i.e., "Professor Shit") by becoming an evangelist for the use of the composting toilets introduced by the NGO WaterAid. A nation that shits where it eats has some remedial work to do before it can waste time worrying about any of Kerry Howley's or Lant Pritchett's grand plans. Would Bangladesh be better off if Professor Goo were driving in a taxi in New York instead of teaching his countrymen how to safely and profitably4 dispose of their waste?

1Bacevich, a professor at Boston University, former Army officer, and Vietnam War veteran, had a son who was an Army officer as well. His son was killed in action in Iraq two years ago. Bacevich, who opposed the war in Iraq, wrote this Washington Post op/ed about it at the time, "I Lost My Son to a War I Oppose. We Were Both Doing Our Duty."

[2]This is more commonly called microfinance. We've blogged about its limitations in the past, e.g., here.

3I've long been skeptical of any phrase in which "justice" is modified by an adjective. "Justice" should stand alone. Once you put an adjective such as "economic" or "social" in front of it, you're really talking about a form of redistribution. If justice demanded redistribution, there would be no need to call for "economic justice"; it would be implicit in the term "justice". Since it isn't, it's up to the advocate of redistribution to demonstrate that redistribution is just. Saying it doesn't make it so.

4The article notes that the compost derived from human waste increases the villagers' vegetable yields, earning them more money at the market.

Tuesday, June 23, 2009

What the Iranian Government Could Use Now

A U.S. embassy to sic 'students' on, to distract the attention of Iranian anti-government protesters. If only the ayatollahs didn't shoot their bolt with that strategy 30 years ago. Here are a few tweets from Iranian protesters, courtesy of Andrew Sullivan's Atlantic blog (the photo above is from his blog as well):

- reports of large pro-Gov Baseej militia in front of UK embassy Tehran

- Khamenei indicate in last Friday prayers that Gov relationship with UK will become bad

- we expect that Gov will arrange for demo outside UK embassy to become serious - maybe cut diplomatic ties with UK

- Gov demos outside UK embassy in Tehran today shouting 'death to England' - 'death to BBC'

"Death to England"? "Death to the BBC"? What red-blooded Iranian Islamic revolutionary can get excited about that? Another Iranian Twitterer notes,

- Today is aniversary of raiding of USA embassy in Tehran 1979 - #Iranelection - today Gov planning anti UK demo outside UK embassy!!!!

Somehow, I doubt that stirring up the pot with the U.K. is going to help the Iranian establishment much. At this late date, using the U.K. to stir up revolutionary, anti-Western, or anti-imperialist sentiment sounds as archaic as cries of "Perfidious Albion" -- probably, even to Iranians, who seem especially sensitive about past perceived slights to their national honor. In any case, the U.K. has already started to evacuate the families of its diplomats. What happens if it evacuates its embassy too? What's Khamenei going to do, have his 'students' lay siege to the Canadian embassy? I doubt even the most zealous Islamic revolutionary would get excited about that. Khamenei and Ahmadinejad would be better off hoping that the Stratfor's George Friedman is right, and that the anti-government protesters represent only a vocal minority, with the current Iranian establishment enjoying broader popular support. Time will tell, I guess.

The "Lipstick Economy"

Dr. Mark Perry has blogged about this before, but since I haven't mentioned it here before, it's worth noting his most recent post on the topic, from his Carpe Diem blog on Sunday, "Happy Father's Day; Welcome The "Lipstick Economy" And Major Jobless Rate and Degree Gaps". Below are the charts Dr. Perry used to illustrate the gender gaps in jobless rates and college degrees, followed by a quote from him.

Dr. Perry speculating on the implications of these trends:

On this Father's Day, we should maybe recognize that we are witnessing what might possibly be a permanent structural change in the labor market and higher education, which will have profound and lasting implications for family roles, career choices, divorce settlements and child custody decisions by family courts, public policy, etc.

For example, just thinking out loud here, would it be possible in the future that a college-educated, professional woman working full-time would pay alimony to her unemployed ex-husband who hasn't found employment since the Great Mancession of 2008, and he might also get primary custody of the children and be paid child support?

The photo above, of the Lipstick Building in Midtown Manhattan, comes from Laura's NYC Tales. Incidentally, this is the building in which Bernie Madoff's ponzi operation was headquartered.

Monday, June 22, 2009

Alan Blinder on the Inflation Debate

In recent posts (e.g., this one) we noted the views of Paul Krugman, John Taylor, and others on whether the Fed's responses to the financial crisis might lead to high inflation in future. Yesterday, Alan Blinder, the Princeton economist, former Fed governor, and long-time Democratic policy adviser weighed in on the debate in his Sunday New York Times Business Section column, Economic View: "Why Inflation isn't a Danger"). Blinder's argument essentially boils down to this: The Fed is aware that if it doesn't rein in the money supply in a timely manner as the crisis abates, this will lead to inflation. The Fed has planned for this, and has the competence to pull this off. Further, bond market participants appear to support this view. Blinder wrote,

[The Fed] has committed itself to an inflation target of just under 2 percent. Of course, none of that assures us that the Fed will hit the bull’s-eye. It might miss and produce, say, inflation of 3 percent or 4 percent at the end of the crisis — but not 8 or 10 percent.


SKEPTICAL? Then let’s see what the bond market vigilantes really think.

The market’s implied forecast of future inflation is indicated by the difference between the nominal interest rates on regular Treasury debt and the corresponding real interest rates on Treasury Inflation Protected Securities, or TIPS. These estimates change daily. But on Friday, the five-year expected inflation rate was about 1.6 percent and the 10-year expected rate was about 1.9 percent. Notice that the latter matches the Fed’s inflation target. I don’t think that’s a coincidence.

But if the inflation outlook is so benign, why have Treasury borrowing rates skyrocketed in the last few months? Is it because markets fear that the Fed will lose control of inflation? I think not. Rising Treasury rates are mainly a return to normalcy.

In January, the markets were expecting about zero inflation over the coming five years, and only about 0.6 percent average inflation over the next decade. The difference between then and now is that markets were in a panicky state in January, braced for financial Armageddon; they have since calmed down.

Saturday, June 20, 2009

Senate Apologizes for Slavery

On his Atlantic blog, Ta-Nehisi Coates notes that the Senate passed a resolution apologizing for slavery. The comment thread below this post included the following exchange:

Apparently, a lot of members of the CBC [Congressional Black Caucus] aren't happy with the verbiage. They say it allows the State to dip out of any further responsibility. My hometown's Rep was quoted...

"The language is unacceptable," said Rep. William Lacy Clay, D-Mo., "I'm a reparations man — how else do you repair the damage?"

I have to admit that this made me shudder a bit.

Yeah I was hoping there'd be a legal opening for civil action also.

No, this makes me shudder for St. Louis. The town is ass backwards when it comes to race relations. Gotta be one of the worst in the country. That comment is not going to go over well, but Clay doesn't need the white vote to win...

I aint payin a dime for 'reparations' and I'd say the same thing if I was white.

Well you're not sitting on the Board of Directors for companies like Aetna which has direct ties to slavery and still exists today, either. If you were, I'd be putting your company in the crosshairs and rightfully so.

After reading that last comment by Juba, curiosity prompted me to look up the board of directors of Aetna. Aetna's board includes three African American directors -- one of whom, Ronald A. Williams, is the company's CEO. Pictured above are, from left, Mr. Williams, and Aetna's other two African American directors, Frank Clark, the CEO of Commonwealth Edison, and Earl Graves, the publisher of Black Enterprise magazine.

Friday, June 19, 2009

A Colombian Tradition Comes to NJ

An article earlier this week in the Record of Northern NJ ("Stupidity on Wheels") mentioned that Bergen County police pulled over a multicolored bus after they saw debris being thrown out the windows of the bus, causing drivers of other cars to swerve. The bus, it turned out, was outfitted with a dance floor, deejay booth, and bar, and was full of high school students for Morristown partying after their prom. A Record column today by Mike Kelly explains the origin of this tradition:

The bus, owned by La Chiva Way, is a “chiva” – a term that describes rolling party buses that are common in rural Columbia. The firm’s website advertises itself as the “best party on wheels.”

Kelly also notes an immigration angle to this story:

A few hours later, the phone range at the home of Diana Mejia, a Morristown-based immigration advocate. The caller was one of the students on the bus – and here the story takes an intriguing turn.

Mejia says the student – and others who called later — were not so much concerned about the penalty for underage drinking, though Mejia adds that the students said they did not drink. Rather, Mejia said the students worried that the attention from the prom bus might lead police to discover that some of their relatives in Morristown were illegal immigrants.

Many of the students, were from Morristown’s burgeoning Latino community, said Mejia, who works the American Friends Service Committee and the Wind of the Spirit immigration group.

“Some of the kids may be documented,” said Mejia, using a term that refers to a person’s immigration status. “But their parents may not be. Remember, these are mixed families.”

The photo above, of disc jockey Ricardo Silva, left, of Jackson Heights, N.Y., and party bus promoter Jean Balcazar of College Point, N.Y., waiting to be called in municipal court in Hackensack, accompanied Mike Kelly's column online and is credited to Elizabeth Lara of the Record. The two men were smiling in the photo of them that accompanied Kelly's column in the dead tree edition of the paper today.

Things to Come

A few things I'm considering posting on that I haven't gotten around to writing yet, due to time constraints:

- What the conservative NJ firebrand Steve Lonegan and the liberal D.C. blogger Matt Yglesias have in common.

- The challenges of predicting default for financial firms: why the Altman Z-Score model isn't recommended for financials and the limitations of alternative, market-based models.

- Looking at a couple of recent bankruptcies, e.g., that of Eddie Bauer: would the Altman Z-Score model have predicted bankruptcy two years ago?

Wednesday, June 17, 2009

Edelheit versus Buster on PNDMF

Reader N.L. draws my attention to an exchange between Aaron Edelheit ("issambres839") and "buster736" on PNI Digital Media (formerly PhotoChannel; OTCBB: PNDMF.OB) on the Value Investors Club. Below are a few excerpts from this exchange.


I continue to view this as a mispriced growth stock. I can make a credible case that if they continue to grow organically, get Wal-Mart and some of their existing initiatives start to work, in 2011, this stock could easily earn $1 per share. I'm guessing the stock would be close to $15 or higher. The risk/reward in this situation seems very attractive.

P.S. 2010 numbers could be low.


With all due respect, In your original write up about PNI in 2007 you had the company earning 1.09 in 2009. The company is going to be lucky to show a profit this year. Now you are saying that you believe they will do $1 in 2011. The company has gotten both Sam's club and costco as you originally postulated, yet earnings have been no where close to what you estimated in the past and your estimates have been pushed out at least two years. What has differed from your model to what the company has actually done (why haven't the earnings been there?) Have transactions been lighter? have you wat to low on your costs? What gives you confidence that this model even scales and you estiamtes will be anywhere close this time?


You are absolutely correct that my estimates have been wide off the mark from my original report. A couple of things happened that ruined that estimate:

1)They bought a money losing operation in Pixology that they thought they could easily turn around. That was wrong, but it helped get them Costco.

2)They underestimated what it would take to get Costco up and running.

3)CVS uptake has been very slow and most uptake of online uploading versus walking into the store has not met my expectations.

4)The economy fell off a cliff last year and their core biz which was growing organically at 50% plus is now 15-20%.

Those are the main reasons, also my estimating of earnings was a bit high. I don't think looking back I did a good job estimating how expenses would ramp.

That said, I have been saying pretty consistently that I expect $0.25 a share in cash EPS for 2009. This has not changed for some time now. Remember that this excludes amortization.

Also, when I talk about over $1 a share in eps for 2011 or in the future, I try now to be much more cautious, and use words like "could." I mention that number only in the context of winning Wal-Mart.

I encourage you to do your own research and come up with your own estimates. I have made plenty of mistakes in the past year, that's for sure, but I think that I'm trying to my best to estimate a fast growing company that has gone through some growing pains.

I think there is still a tremendous amount of opportunity and the company is now profitable, EBITDA positive and cash flow positive and is growing despite one of the worst economies in decades.

I hope that helps.

Penny Ante Arbitrage V: Conclusion

In previous posts (e.g., "Penny Ante Arbitrage" and "Penny Ante Arbitrage Update") I mentioned that I bought 749 shares of Asure Software (Nasdaq Capital Market: ASUR) at between 17 and 18 cents per share in several different accounts, in the hopes of getting them cashed out at 36 cents each after the company's proposed 750-1 reverse split (the first step in the company's plan to go private). In my last post on this, I mentioned that this go-private plan was foiled. Yesterday, I set GTC limit orders at .24 on each of my ASUR positions (not knowing, of course, that the stock would spike higher today). Today those orders filled at an average price of .25, so these positions have all been closed out.

George Friedman on the Iranian Election

Interesting column on the Iranian election by George Friedman of Stratfor, "Western Misconception Meets Iran Reality" (Hat Tip: RealClearWorld). Below are a few excerpts:

There are undoubtedly people who want to liberalize the Iranian regime. They are to be found among the professional classes in Tehran, as well as among students. Many speak English, making them accessible to the touring journalists, diplomats and intelligence people who pass through. They are the ones who can speak to Westerners, and they are the ones willing to speak to Westerners. And these people give Westerners a wildly distorted view of Iran. They can create the impression that a fantastic liberalization is at hand — but not when you realize that iPod-owning Anglophones are not exactly the majority in Iran.


Some still charge that Ahmadinejad cheated. That is certainly a possibility, but it is difficult to see how he could have stolen the election by such a large margin. Doing so would have required the involvement of an incredible number of people, and would have risked creating numbers that quite plainly did not jibe with sentiment in each precinct. Widespread fraud would mean that Ahmadinejad manufactured numbers in Tehran without any regard for the vote. But he has many powerful enemies who would quickly have spotted this and would have called him on it. Mousavi still insists he was robbed, and we must remain open to the possibility that he was, although it is hard to see the mechanics of this.

It also misses a crucial point: Ahmadinejad enjoys widespread popularity. He doesn’t speak to the issues that matter to the urban professionals, namely, the economy and liberalization. But Ahmadinejad speaks to three fundamental issues that accord with the rest of the country [piety, corruption, and an assertive national security posture as a salve for Iranians still bitter over their country's pyrrhic draw in the Iran-Iraq War -- Friedman elaborates on each of these issues in his column].


Perhaps the greatest factor in Ahmadinejad’s favor is that Mousavi spoke for the better districts of Tehran — something akin to running a U.S. presidential election as a spokesman for Georgetown and the Lower East Side. Such a base will get you hammered, and Mousavi got hammered. Fraud or not, Ahmadinejad won and he won significantly. That he won is not the mystery; the mystery is why others thought he wouldn’t win.

The image above, of a post-election protest, comes from Andrew Sullivan's Atlantic blog, where he is posting the tweets of some of those tech-savvy Anglophones who Friedman notes are not exactly representative of the broader Iranian society.

Tuesday, June 16, 2009


In an op/ed in yesterday's Financial Times, Michael Hudson, an economics professor at the University of Missouri, ventriloquized the thoughts of foreign opponents of the United States, while warning of ominous consequences from the summit in Russia this week of the BRIC countries (Brazil, Russia, India, and China) ("Washington Cannot Call all the Shots"):

Many foreigners see the US as a lawless nation. How else to characterise a country that holds out a set of laws for others – on war, debt repayment and the treatment of prisoners – but ignores them itself?


It is no mystery to other countries how the US remains above the law. Foreigners see a financial system backed by American military bases encircling the globe. The IMF, World Bank, World Trade Organisation and other Washington surrogates are seen as vestiges of a lost American empire no longer able to rule by economic strength, left only with military domination. They see this hegemony cannot continue without adequate revenues and are attempting to hasten the bankruptcy of the US financial-military world order.


US officials wanted to attend Yekaterinburg as observers. They were told no. It is a word that Americans will hear much more in the future.

Mark Chandler, Global Currency Strategist at Brown Brothers Harriman, had a slightly different take on this summit recently ("Bric or Crib?"):

Brazil, Russia, India and China, now collectively known as the BRICs, will hold a summit in Russia on June 16th. Besides the Goldman Sachs invented moniker, these countries have very little in common except for the fact that they believe, to seemingly varying degrees of intensity, that they deserve greater influence in the conduct of world affairs than they currently have. And given the enormity of US power, as hard-core realists, they know any increase in their power and influence will come at the expense of America’s.


One of the most important reasons why the BRICs do not have the economic clout that they would like is frankly they don’t deserve it. Goldman-Sachs had a story (and more) to sell with its BRICs concept, but those same letters spell a real word, CRIB. The point is that the countries, outside of China, are not among the largest.

According to Bloomberg data, at the end of last year, China was the fourth largest economy ($3.2 trillion), behind the US, Japan, and Germany. This of course takes the Chinese data at face value, and given the often large gaps between energy production and reported GDP growth, as well as the amazing consistency of the pace of growth, many often cast a suspicious eye on Chinese data.

With a GDP of $1.3 trillion in 2008, Brazil was the 10th largest economy, though it is roughly half the size of France, which is the 6th largest economy. Russia and India were neck-and-neck for 11th and 12th places with each having produced about $1.2 trillion of goods and services last year. Spain’s economy is nearly 20% bigger than Russia’s and India’s, and it is the 8th largest economy. Together the BRICs account for a little more than 12% of the world’s GDP, and China alone accounts for half of that.

Monday, June 15, 2009

How to Borrow Money and Network at the Same Time

The Styles section of Sunday's New York Times featured an article about Unithrive, an organization founded by the three Harvard alumni pictured above to connect students seeking small loans with alumni lenders, "I’m Going to Harvard. Will You Sponsor Me?". The maximum dollar amount of the loans is fairly small: $2,000 -- an amount a college student could accumulate with a part-time job, or put on his credit card, if need be. Money isn't the main issue here; bonding with alumni is. As the article notes,

The appeal of direct donor-to-student loans, Unithrive’s founders say, is that alumni will have a personal connection to current students: those requesting loans list hometowns, majors and classes they have taken. Alumni can lend to students with whom they feel a bond. They are promised updates three times a year from students they support — not unlike the letters that sponsors of poor children in Africa receive through the Christian Children’s Fund.

This is a clever idea, based on an old, counter-intuitive principal of human nature: the quickest way to make someone your friend is not to do him a favor, but to ask him to do a favor for you. That this was the brainchild of Harvard alumni isn't surprising considering that Harvard seems to have the most effective alumni network of any elite school. Perhaps that's because it attracts students who are savvier and more aggressive about networking than those who attend other schools. Other elite schools may have similar academic prestige (e.g., MIT) or a similar Ivy League pedigree (e.g., Penn), but their alumni don't seem to have a network in the same league. If they did, then, presumably, an MIT alumnus wouldn't have had to resort to wearing a sandwich board in Midtown Manhattan to get a new job, and Atlantic blogger and Penn (and University of Chicago GSB) alumna Megan McCardle wouldn't have recently posted her latest lamentation about how she couldn't afford to go out with her friends while she was unemployed after earning her MBA.

As smart as this idea is, Unithrive co-founder Joshua Kushner, whom the article describes as "a scion of a wealthy real estate family", may get some heat from some New York Times letter writers for his apparent disdain for the sort of jobs many college students work part time for extra cash:

Mr. Kushner noted that the college still asks scholarship students to contribute a few thousand dollars a year from summer and school-term jobs.

“I have friends who would spend 10 hours a week when they are not in class working at a coffee shop or in the dorms,” said Mr. Kushner, 24, referring to time that he considered wasteful. “I think the most special thing about college is not just what you do in class, but what you do out of class.”

I doubt Mr. Kushner will be troubled by any opprobrium from lumpen letter-writers though, and he may be right not to be troubled by it: working a mundane part-time job might teach a college student humility, but what Harvard student needs humility when he can get the money interest free for 5 years and build a bond with potential alumni mentors at the same time?

The image above, of Unithrive founders Nimay Mehta, left, Joshua Kushner and Tanuj Parikh, accompanied the article and was credited to Michael Falco.

Sunday, June 14, 2009

Puerto Rican Day Parade

The National Puerto Rican Day Parade is taking place today in New York City. A few years ago, we headed into Manhattan on a Sunday without realizing it was Puerto Rican Day. We figured it out as soon as we were jammed in traffic on the 79th Street transverse, as Puerto Ricans waving their flags filtered by us. I had forgotten about this until I hit Google while writing this post, but there was a Seinfeld episode that featured the main characters stuck in traffic due to the Puerto Rican Day Parade. From The New York Times:

Faced with criticism from the leader of a Puerto Rican organization who found the ''Seinfeld'' episode on Thursday insulting, NBC apologized yesterday, saying it had not intended to offend anyone.

The second-to-last ''Seinfeld'' featured Jerry, Elaine, George and Kramer driving back from a Mets game and getting stuck in a traffic jam created by the Puerto Rican Day parade. At one point, Kramer tossed a sparkler and accidentally lighted a Puerto Rican flag on fire. He tried putting out the burning flag by stomping on it.

Angry paradegoers then began chasing Kramer. When they lost him, the mob began shaking Jerry's empty car and threw it down a stairwell. Kramer remarked that ''it's like this every day in Puerto Rico.''

The scene was an ''unconscionable insult'' to Puerto Ricans, said the president of the National Puerto Rican Coalition, Manuel Mirabal.

''It is unacceptable that the Puerto Rican flag be used by 'Seinfeld' as a stage prop under any circumstances,'' Mr. Mirabal said.

The Bronx Borough President, Fernando Ferrer, who is Puerto Rican, said the ''Seinfeld'' episode ''crossed the line between humor and bigotry.'' Mr. Ferrer said it was a slur to depict men rioting and vandalizing a car and suggesting that it happens every day in Puerto Rico.

As long as they keep holding the parade on the second Sunday each June, we won't make that mistake again. That's not a certainty, because the date of the National Puerto Rican Day Parade was chosen somewhat arbitrarily, as it's not based on any particular historical date. It isn't held on the anniversary of Puerto Rico's independence, because Puerto Rico isn't independent. That point was made, pithily and humorously, by The Onion a few years ago.

Saturday, June 13, 2009

Octopus Dough Balls

Cheryl and I had a late lunch at Mitsuwa today: soup with bean curd and soba noodles from Kayaba, followed by black sesame ice cream cones from one of the other stores. On the way over to the supermarket side to pick up a case of Asahi beer, we saw a rope line of customers that snaked around for about 100 feet. Curious, we walked over to see what everyone was waiting in such a long line for. Octopus dough balls, apparently, as the English-language sign at the store called them. Octopus fritters might be a better translation. Given their apparently huge popularity, I expected to find a description of these octopus fritters at Japanese Snack Reviews. No such luck, though.

The image above comes from the Chinatown Eats blog.

Friday, June 12, 2009

Lesson's from The European Parliament Elections

I meant to post a link to this earlier this week, but didn't get around to it. From Salon, here is Michael Lind's take on the victory of rightist parties across Europe in the European Parliament elections last week: "A warning for Democrats? The right just won all across Europe, thanks to nationalism, populism and recession. It could happen here too.".

Below is an excerpt from Lind's essay, followed by a few thoughts by me.

[I]t has become something of an orthodoxy among bien pensant progressives on both sides of the Atlantic that territorial nation-states are immoral because they privilege the identity of one cultural nation over others (the nation part) and because they favor the well-being of their citizens over foreigners who may be poorer (the territorial state part). Most progressives favor ending agricultural subsidies in Europe and the U.S., claiming that this would help poor peasant farmers in the global South export their way to prosperity (of course this would really benefit multinational agribusiness, not romanticized peasant farmers, but never mind). In debates about immigration, as in debates about trade, elite progressives whose own positions and incomes are secure frequently demonstrate their altruism by suggesting that it is acceptable if immigration somewhat lowers the wages of their less-fortunate fellow nationals, as long as poor foreign immigrants and receivers of remittances are thereby made better off. How generous of them!

The new pro-capitalist, anti-nationalist center-left finds allies in investment banks and college campuses but has little to offer ordinary people who view the nation-state as their agent and protector in a dangerous world. Nobody should be surprised when, in a period of economic crisis, significant parts of the population should turn to unabashed nationalists of the right, as opposed to progressives who fret that helping out their fellow citizens might be a form of discrimination against more deserving foreigners. It's true that toxic forms of racism and illiberal nationalism drive the anti-immigrant politics of the far-right parties that have benefited from protest voting in Europe. But the economic case for limiting the inflow of new workers into an economy at a time of mass unemployment is likely to seem commonsensical to many non-racist voters who do not share the new center-left's unease with national patriotism.

Lind makes some astute observations here, and Republicans can draw some lessons from this if they are willing to part company with Democrats on some of their shared orthodoxies (e.g., embrace of large scale unskilled immigration). The way to do this would be to acknowledge the challenges posed by globalization to the American middle class and offer some constructive solutions. In a recent post ("How Not to Create Broad-Based Prosperity"), we mentioned one Democrat (Matt Miller of the Center for American Progress) who acknowledged these challenges but didn't offer constructive solutions to them (e.g., Miller's proposed replacement for manufacturing jobs lost to outsourcing was to replace them with service jobs such as hospice aids; Miller proposed this without acknowledging the extent to which these jobs are currently filled by immigrant workers). I've made these points before, but two specific areas where Republicans can draw a contrast with Democrats are on immigration policy and energy policy.

On immigration policy, Republicans would be smart to buck the Chamber of Commerce's demands for cheap unskilled immigrant labor and advocate a transition to an immigration system similar to those of Australia or Canada, one that selects for immigrants with high levels of human capital. While unemployment is high, immigration should perhaps be further limited to foreign entrepreneurs who have the capital and intent to start businesses here and create jobs for American workers. To counter the inevitable accusations that anyone advocating an economically rational immigration policy is advocating it because of racism, Republicans ought to do two things. First, they ought to scrupulously distance themselves from anyone who advocates restricting immigration based on race. Racist immigration restrictionists may win elections in Europe, but they will be the kiss of death to any plans to institute a Canadian- or Australian-style immigration policy in America. Second, Republicans ought to point out that it is often minorities who are most harmed by the effects of our current immigration system. Let Democrats explain why we should import more unskilled immigrant laborers when, for example, 39.4% of African American teens are unemployed (Hat tip to Dr. Mark Perry for the chart below).

On energy policy, Republicans would be smart to continue advocating efforts to develop more domestic sources of oil, gas, and coal, while advocating an increase in nuclear power as well. Increasing domestic supplies of energy would create more high-paying jobs in the energy sector, and ensuring a large supply of relatively inexpensive energy would facilitate the creation of jobs in energy-intensive industries such as manufacturing (we noted the effect of lower energy prices on employment in a post last fall, "A Tale of Two States: Utah versus Rhode Island").

A third area where (some) Republicans may be able to draw a favorable contrast with Democrats, if they are willing to do so, is by running against Wall Street, or more accurately, running against the incestuous relationship between some major Wall Street firms and Washington. I suspect New Jersey's GOP gubernatorial nominee Chris Christie will try a version of this while running against our incumbent governor, former Goldman Sachs CEO Jon Corzine. Republicans would be smart to look for economic advisers from among the smart bankers and investors who haven't required government rescues. I don't know what John Hussman's politics are, but to the extent his policy prescriptions (e.g., making big banks eat some losses) have been ignored by the current administration, I bet Dr. Hussman would welcome a chance to advise a Republican candidate willing to listen to him. Another potential economic adviser might be Andy Beal, the self-made billionaire Texas banker who successfully navigated the credit bust.

Thursday, June 11, 2009

On the Value Added by Excellent Salesmen

A conversation elsewhere about sales reminded me of this essay written a couple of years ago by Thomas Lifson of American Thinker. Below is the relevant excerpt.

When I entered the business world and actually got to know not only some really excellent salesmen (and women) and developed an appreciation for the ways they contribute not just to the bottom line but to their customers' operations, my respect for the sales profession grew and grew. The best sales professionals have a bit of nobility to them, doing what's right for the customer, even if it costs them or their employers in the short run. They build trust and personal bonds and actively help their customers succeed, bringing far more than a shoeshine and a smile. The best sales professionals are all problem-solvers and dedicated to their customers. They deserve the big bucks they earn.

I will never forget a conversation with a former colleague of mine at Columbia University who left teaching to take a job in business, where he was in charge of marketing certain big ticket products for a major company whose name you would instantly recognize. He spoke movingly of his deep admiration for the dealers of his company's products, many of whom were self-made millionaires. "They created entire businesses out of nothing," he said with awe in his voice, selling and servicing important tools that made life better for millions. We commiserated over the deeply flawed views of business and entrepreneurs (and life itself) so common in the academic world he left and from which I was departing. Both of us quite voluntarily, I might add.

Wednesday, June 10, 2009

My Questions for Joel Greenblatt

GuruFocus announced it will be hosting a question and answer session with Joel Greenblatt and solicited questions from readers. Below are the questions I submitted for Greenblatt. For others' questions, click the link above.

Why did you set the minimum market cap to $50 million on your new Magic Formula screener, when users used to be able to enter a market cap as low as $1 million on your original screener? Did you find that the Magic Formula does not work as well for stocks with market caps below $50 million? If so, would you mind reimbursing me for the money I've lost buying Magic Formula stocks with market caps below $50 million1?

In your book The Little Book that Beats the Market, you alluded to the dramatic under-performance of a certain investor's2 strategies in the few years after he published a book on those strategies. Do you think it's a coincidence that the few years following the publishing of your book have been difficult times for adherents of the Magic Formula as well? Is it possible that, by the time someone decides to write a book on an investment strategy, that strategy is typically due for a period of under-performance?

1A joke, Prof. Greenblatt. I find that having a sense of humor helps in handling market losses.

2You didn't mention this investor by name, but I believe you were alluding to James O'Shaughnessy.

The photo above of Joel Greenblatt is from GuruFocus.

PNI Digital Media (formerly PhotoChannel)

Reader N.L. was kind enough to share his correspondence from earlier this week with Simon Cairns of PNI Digital Media (OTC BB: PNDMF.OB). According to Cairns, one of the PNI's retail partners will soon announce an iPhone application that will allow users to take photos and send them to the retailer for printing. Below is an excerpt from Cairns's e-mail to N.L.:

We’re now in a position to add an iphone app that would live on your iphone and would help consumers take photos and then send that photo to the retailer for printing (in many cases in as little as one hour). Think of it as another “on-ramp” to the retailer’s system that is run by our company. So, what you have written below is very accurate. We will do a co-announcement with one retailer shortly, but exactly when that will be is up to the retailer because they are trying to figure out when is the best day or event to announce that. It should be soon though.

N.L. also speculates that the "new thing" alluded to recently by PNI may be an application similar to the one described above, except for short videos taken with an iPhone.

N.L. also reminded me of PNI's recent ranking by Canadian Business as Canada's fifth fastest-growing company (in terms of revenue growth) over the last five years.

Zinc Again

The collapse in zinc prices last year lead to some mining companies closing their zinc mines. Yesterday, Reuters reported that Hudbay Minerals (TSX: HBM.TO) was considering reopening a zinc mine, "HudBay eyeing restart of Chisel mine-CEO":

TORONTO, June 9 (Reuters) - HudBay Minerals (HBM.TO) could restart its Chisel North zinc mine in Manitoba if the metal's price increase another 10 or 15 percent from its current level, the company's chief executive said on Tuesday.

HudBay shut Chisel North and its Balmat zinc mine in New York last year after zinc prices fell below 50 cents a pound late last year, after topping $2 a pound in 2006.

Cash zinc MZN0 was around 71 cents a pound on Tuesday.

"We think a 10 to 15 percent increase from that price and we will be looking seriously of reopening Chisel, which can be done very quickly indeed," Jones said at a mining conference in Toronto.

That suggests a zinc price of 78 cents to 82 cents a pound would be needed to consider reopening the mine.

Hudbay was prudent enough to have accumulated large war chest of net cash (equal to about a third of its market cap at the time) by the time commodity prices collapsed last year, so it has been able to weather the downturn.

The (modest, so far) rebound in zinc prices this year may be another data point in support of James Kynge's "China Continental" thesis.

Tuesday, June 9, 2009

Chrysler Sale to Go Forward

According to the AP, the Supreme Court declined to review the appeal brought by those Indiana funds: Supreme Court to let Chrysler sale go forward. From the press release,

the automaker's secured debtholders would get $2 billion in cash, or about 29 cents on the dollar, for their combined $6.9 billion in debt. Some of the debtholders balked at the deal, saying as secured lenders they deserved more. The Indiana funds involved in the Supreme Court appeal hold about $42.5 million, or less than 1 percent, of Chrysler's $6.9 billion in secured debt. They bought it in 2008 for 43 cents on the dollar.

Why didn't any of the bondholders who hold the other 99% of Chrysler's secured debt appeal to stop the deal? I wonder if they bought the debt at low enough prices that they'll still come out ahead with a payoff of 29 cents on the dollar.

Given the extent to which the bankruptcy deals for GM and Chrysler favor the unions over the bondholders, it will be interesting to see if unionized manufacturers will have to pay offer higher coupon rates to attract buyers of their debt in the future. We may find out soon enough1. According to Tony Jackson in his Financial Times column yesterday ("GM shows gravity of pension challenge"):

In the thunderous collapse of General Motors last week, one detail seems to have gone almost unnoticed. The old GM’s US pension fund, with its near-$100bn (£63bn) of liabilities, is being transferred lock, stock and barrel to the new entity. As a direct result, the new GM could be bankrupt again in a very few years.


GM’s US fund is, of course, in deficit, but the company has made no contributions since 2003. Back then, it put in $18.5bn, which it raised through a bond issue. Since this counted as a pre-payment, GM is not obliged to pay any more for the next year or two. However, it will then have to start plugging the gap, under the new rules set down by the Pension Protection Act of 2006. This, [independent UK consultant John] Ralfe calculates, would involve diverting $1bn to $2bn annually from operating cash flows. If GM cannot do that, bang it goes again.

We do have a government-sponsored organization designed to take over the pension funds of bankrupt companies, of course: the Pension Benefit Guarantee Corporation (PBGC). Had the PBGC taken over GM's pension, the new, post-bankruptcy GM wouldn't end up saddled with these liabilities, but that would have required GM's pensioners to take a significant haircut, since many of them earn higher pensions than the PBGC's maximum guarantee. Jackson offered the following numbers by way of example in his column,

Its maximum annual payment is $54,000 for a 65-year-old, but only $20,000 for a 50-year-old. And in Detroit, it is commonplace for car workers to retire on full pension at 50.

The PBGC has calculated that if it took over all the auto industry’s pensions, members would lose 40 per cent on average.

A 50-year-old GM pensioner with a $54,000 annual entitlement, Mr Ralfe reckons, would lose 60 per cent. Add that all up, and GM’s annual $9bn pension bill would be cut by $3.5bn.

1Or not, if the now-bankrupt auto companies end up going to the federal government for more money in the future, instead of trying their luck in the capital markets.

Monday, June 8, 2009

A.O. Scott on Sam Mendes

Sam Mendes (of "American Beauty" fame) apparently has a new movie out (one I have no intention of seeing), based on a story by Dave Eggers, about an expectant hipster couple's search for a place to raise their child: "Away We Go". In his review of "Away We Go" in Friday's New York Times, A.O. Scott calls Mendes out ("Practicing Virtue, and Proud of It").

Of Sam Mendes's protagonists, the hipster expectant parents Burt and Verona (played by Jon Krasinski and Maya Rudolph, pictured above) Scott writes,

Their conversation is carefully poised on the boundary between facetiousness and sincerity, and they do things like turn unlikely words into adjectives by adding the letter Y (Burt wants a “Huck Finn-y” life for their baby) and pretend to argue about the difference between cobbling and whittling.

To observe that they inhabit no recognizable American social reality is only to say that this is a film by Sam Mendes, a literary tourist from Britain who has missed the point every time he has crossed the ocean. The vague, secondhand ideas about the blight of the suburbs that sloshed around “American Beauty” and “Revolutionary Road” are now complemented by an equally incoherent set of notions about the open road, the pioneer spirit, the idealism of youth.

Or something. Really, “Away We Go” is about the flight from adulthood, from engagement, from responsibility, even as it cleverly disguises itself as a search for all those things. But the dream of being left alone in a world of your own making, far from anything sad or icky or difficult, is a child’s fantasy. Not an unattractive or uncommon one, it must be said, and for that reason it is tempting to follow Burt and Verona into the precious, hermetic paradise that awaits them at the end of the road. You know they will be happy there. But you should also understand that you are not welcome. Does it sound as if I hate this movie? Don’t be silly. But don’t be fooled. This movie does not like you.

The comment thread on the version of this article on the New York Times website even includes some comments backing up Scott on his review. Below are two of them.

Eggers doesn't work on the screen

The story is the same kind of innocents-in-the-storm tale that a much-younger Eggers became famous on back those many years ago. But this is a variation on a now-tired Eggers theme and Scott gets that completely - to use the language of the film, a hipstery, politically correcty, don't-want-to-grow-uppy couple who can too easily see the faults in everyone else and prescribes a cure that has an icy condescension within its professed simplicity. The story, like Eggers, is getting too old.

Ed, Rhode Island

Watch an Apple-vs.-PC ad instead

You'll be watching the same plot: Young, hip, cool-o and pretentious triumphs over old, dysfunctional and clownish. And it won't cost you anything in cash or nearly as much in time.

A.O. Scott's review totally nailed it. In addition to the smugness and condescension I'd add affectation and treacle. Another example of filmmakers who seem to assume that all they have to do is anoint certain characters as "hip" or "offbeat," and use "edgy" colors and graphics in the posters, and the Angelika Film Center crowd will start lining up with open wallets.

But if you ask me, Eggers never worked on the page, either. Always makes me think of Tevye belting out a Mad magazine version of his Fiddler showstopper: "Pre-ten-tion!!"

TMJ, Kent, CT

If only Peggy Noonan read this blog. She could take Scott's rejection of the Mendes/Eggers weltenschauung, combine it with some personal observations about Americans wading through the Great Recession, and throw in an anecdote from her Reagan years for contrast. Then she could let it all marinate for a few days, and microwave it just before the deadline for her weekly Wall Street Journal column.

The publicity photo of Jon Krasinski and Maya Rudolph accompanied Scott's review and is credited to François Duhamel/Focus Features.

Saturday, June 6, 2009

James Kynge's Thesis: "China Continental"; John Authers's Follow Up

James Kynge laid out his thesis for China's continuing growth in the wake of declining exports in a recent Financial Times column, "China Continental". Excerpt:

China is going continental. Just as the US during the 19th century underwent a transition from export-oriented growth to a greater reliance on inner dynamism, so China is looking inwards for the engine to drive its economy.

In China’s case it is still early days, but evidence suggests the conventional view of an export-dependent, river delta-driven economy no longer matches the reality. The argument here is not that trade has somehow become unimportant to China, but rather that the energy generating the world’s fastest economic growth rate this year is increasingly coming from within.

A series of indicators reveals the shift to “China Continental” – the transition of the world’s most populous country into an increasingly self-propelling economic force.

Kynge lists a few different specific metrics to back up his case, including increases in China's retail sales and domestic cargo traffic, and survey results on consumer spending intentions, before addressing China skeptics in his conclusion:

Sceptics argue that China’s performance this year has come through huge but ultimately unsustainable government intervention. Such spending, they say, will boost growth for a time but achieve little but industrial overcapacity in the longer run. These arguments are not without merit, but they miss a newer, more interesting prospect; that Chinese growth is increasingly self-generating and continentally driven.

Recent moves in the commodity markets support Kynge's thesis, as John Authers noted in his Financial Times column today ("China's health gives rise to fresh growth theory"):

Industrial commodities, that benefit most from economic growth, have surged, with lead and copper up more than 50 per cent in three months. Gold, an inflation hedge, has barely gained.

Authers went on to summarize the debate about China's economy (both sides of which have been fleshed out by Kynge and Zeihan, respectively):

As a whole, even before yesterday's strong headline to the US jobless report, world markets were plainly working on the assumption that China has saved the world from Depression. Is the market right to do so?

There are two camps. The optimistic side, laid out by James Kynge in the Financial Times last week, is "China Continental"; like the US in the late 19th century, China can turn itself into a great economic power, by building links to its interior and unleashing its buying power.

The pessimistic side suggests China has poured money into the public sector, and will merely form excess capacity. The huge demand for industrial metals may be artificial.

Electricity generation is down year-on-year. Supply managers surveys show new export orders are barely expanding. So maybe China is caricaturing the US in the 1930s, and paying some people to dig holes and others to fill them in.

If so, the gains could soon be in for another ugly recoupling. Either way, nothing just now is more important than the health of the Chinese economy.

Geography as Destiny? Zeihan on China

Below is an excerpt from the China-related part of Peter Zeihan's column The Geography of Recession.

China's core is the farmland of the Yellow River basin in the north of the country, a river that is not readily navigable and is remarkably flood prone. Simply avoiding periodic starvation requires a high level of state planning and coordination. (Wrestling a large river is not the easiest thing one can do.) Additionally, the southern half of the country has a subtropical climate, riddling it with diseases that the southerners are resistant to but the northerners are not. This compromises the north's political control of the south.

Central control is also threatened by China's maritime geography. China boasts two other rivers, but they do not link to each other or the Yellow naturally. And China's best ports are at the mouths of these two rivers: Shanghai at the mouth of the Yangtze and Hong Kong/Macau/Guangzhou at the mouth of the Pearl. The Yellow boasts no significant ocean port. The end result is that other regional centers can and do develop economic means independent of Beijing.

With geography complicating northern rule and supporting southern economic independence, Beijing's age-old problem has been trying to keep China in one piece. Beijing has to underwrite massive (and expensive) development programs to stitch the country together with a common infrastructure, the most visible of which is the Grand Canal that links the Yellow and Yangtze rivers. The cost of such linkages instantly guarantees that while China may have a shot at being unified, it will always be capital-poor.

Beijing also has to provide its autonomy-minded regions with an economic incentive to remain part of Greater China, and "simple" infrastructure will not cut it. Modern China has turned to a state-centered finance model for this. Under the model, all of the scarce capital that is available is funneled to the state, which divvies it out via a handful of large state banks. These state banks then grant loans to various firms and local governments at below the cost of raising the capital. This provides a powerful economic stimulus that achieves maximum employment and growth — think of what you could do with a near-endless supply of loans at below 0 percent interest — but comes at the cost of encouraging projects that are loss-making, as no one is ever called to account for failures. (They can just get a new loan.) The resultant growth is rapid, but it is also unsustainable. It is no wonder, then, that the central government has chosen to keep its $2 trillion of currency reserves in dollar-based assets; the rate of return is greater, the value holds over a long period, and Beijing doesn't have to worry about the United States seceding.

Because the domestic market is considerably limited by the poor-capital nature of the country, most producers choose to tap export markets to generate income. In times of plenty this works fairly well, but when Chinese goods are not needed, the entire Chinese system can seize up. Lack of exports reduces capital availability, which constrains loan availability. This in turn not only damages the ability of firms to employ China's legions of citizens, but it also removes the primary reason the disparate Chinese regions pay homage to Beijing. China's geography hardwires in a series of economic challenges that weaken the coherence of the state and make China dependent upon uninterrupted access to foreign markets to maintain state unity. As a result, China has not been a unified entity for the vast majority of its history, but instead a cauldron of competing regions that cleave along many different fault lines: coastal versus interior, Han versus minority, north versus south.

China's survival technique for the current recession is simple. Because exports, which account for roughly half of China's economic activity, have sunk by half, Beijing is throwing the equivalent of the financial kitchen sink at the problem. China has force-fed more loans through the banks in the first four months of 2009 than it did in the entirety of 2008. The long-term result could well bury China beneath a mountain of bad loans — a similar strategy resulted in Japan's 1991 crash, from which Tokyo has yet to recover. But for now it is holding the country together. The bottom line remains, however: China's recovery is completely dependent upon external demand for its production, and the most it can do on its own is tread water.

James Kynge of the Financial Times has an entirely different take on China's near-term economic prospects. We'll save Kynge's thesis for the next post, to keep this one from getting too long.

The image above comes from Zeihan's column.

Geography as Destiny?

John Mauldin's latest "Outside the Box" piece is a column by Peter Zeihan of Stratfor, The Geography of Recession. In a time when many of us are thinking about the challenges the U.S. faces, Zeihan reminds us of some of our geographic blessings, and contrasts American geography with that of some other powers. Below are a couple of excerpts.

The most important aspect of the United States is not simply its sheer size, but the size of its usable land. Russia and China may both be similar-sized in absolute terms, but the vast majority of Russian and Chinese land is useless for agriculture, habitation or development. In contrast, courtesy of the Midwest, the United States boasts the world's largest contiguous mass of arable land — and that mass does not include the hardly inconsequential chunks of usable territory on both the West and East coasts.

Second is the American maritime transport system. The Mississippi River, linked as it is to the Red, Missouri, Ohio and Tennessee rivers, comprises the largest interconnected network of navigable rivers in the world. In the San Francisco Bay, Chesapeake Bay and Long Island Sound/New York Bay, the United States has three of the world's largest and best natural harbors. The series of barrier islands a few miles off the shores of Texas and the East Coast form a water-based highway — an Intercoastal Waterway — that shields American coastal shipping from all but the worst that the elements can throw at ships and ports.

The real beauty is that the two overlap with near perfect symmetry. The Intercoastal Waterway and most of the bays link up with agricultural regions and their own local river systems (such as the series of rivers that descend from the Appalachians to the East Coast), while the Greater Mississippi river network is the circulatory system of the Midwest. Even without the addition of canals, it is possible for ships to reach nearly any part of the Midwest from nearly any part of the Gulf or East coasts. The result is not just a massive ability to grow a massive amount of crops — and not just the ability to easily and cheaply move the crops to local, regional and global markets — but also the ability to use that same transport network for any other economic purpose without having to worry about food supplies.

The implications of such a confluence are deep and sustained. Where most countries need to scrape together capital to build roads and rail to establish the very foundation of an economy, transport capability, geography granted the United States a near-perfect system at no cost. That frees up U.S. capital for other pursuits and almost condemns the United States to be capital-rich. Any additional infrastructure the United States constructs is icing on the cake.


The United States has exited each decade since post-Civil War Reconstruction more powerful than it was when it entered it. While there are many forces in the modern world that threaten various aspects of U.S. economic standing, there is not one that actually threatens the U.S. base geographic advantages.

Is the United States in recession? Of course. Will it be forever? Of course not. So long as U.S. geographic advantages remain intact, it takes no small amount of paranoia and pessimism to envision anything but long-term economic expansion for such a chunk of territory.

Zeihan doesn't mention the impact of demography in his column, but, in the most extreme example, it's worth remembering that what is now the U.S. had all of the same geographic advantages but wasn't an economic power before European settlement.

Zeihan's comments on China's geography are worth excerpting too, but to keep this post from getting too long I'll do so in a separate post.

The image above comes from Zeihan's column.

Friday, June 5, 2009

More on the Inflation Debate: Hussman and Wolf Weigh In

In his market commentary this week, "Anything But Academic", John Hussman weighed in on the debate between Paul Krugman and John Taylor. Dr. Hussman first summarizes Dr. Krugman's thesis:

Krugman's argument boils down to the recognition that "monetary velocity" is currently very low - that is very accurate. The problem is that unless it remains low indefinitely, the more than doubling of the U.S. monetary base over the past year, along with the additional issuance of Treasury debt, leaves a far larger quantity of government liabilities to be absorbed until and unless those liabilities are extinguished by fiscal surpluses. The only way to absorb them without driving up the price level is to hold down velocity indefinitely, or to have an equal expansion in real economic output without any further expansion on the monetary side.

And then summarizes Dr. Taylor's thesis (while parenthetically noting his personal connection to Taylor):

In the other academic corner is John Taylor, an economics professor at Stanford (and more to the point, one of my former dissertation advisors), who wrote in the Financial Times last week “To bring the debt-to-GDP ratio down to the same level as at the end of 2008 would take a doubling in prices. That 100 percent increase would make nominal GDP twice as high, and thus cut the debt-to-GDP ratio in half, back to 41 from 82 percent. A 100 percent increase in the price level means about 10 percent inflation for 10 years[1], but that would not be smooth – probably more like the great inflation of the late 1960s and 1970s, with boom followed by bust and recession every three or four years, and a successively higher inflation rate after each recession.”

Dr. Hussman seems to agree with Krugman's benign view of inflation in the short-term (i.e., the next few years) but share Taylor's view of a doubling of the price level within the next 10 years. Hussman also included an entertaining anecdote in his column which I'll quote below.

There's an economists' riddle that goes “Why are the debates in academia so bitter?” – the answer – “Because the stakes are so low.”[2] Now, very often, that's true. I remember a presentation that Paul Krugman gave at Stanford where he was talking about a model of economic development. Paul drew a diagram on the board, and as he described it, he drew a few little arrows indicating migration of businesses from one area to another. A respected economic theorist at Stanford, Mordecai Kurz (who never drew an arrow without a differential equation), immediately jumped up and shouted “You haven't described the dynamics!!” to which Paul responded that he was indicating a general movement of economic activity toward one place to improve efficiency. Dr. Kurz pounded the table and screamed “Then erase the arrows!! ERASE THE ARROWS!!” and then stormed out of the room and slammed the door behind him. I think that was probably the exact moment that I decided to go into finance.

Martin Wolf also weighed in on this debate in his Financial Times column earlier this week, "Rising government bond rates prove policy works". It's worth reading in its entirety, as is Hussman's commentary, but here are the most salient excerpts:

Is the US (and a number of other high-income countries) on the road to fiscal Armageddon? Are recent jumps in government bond rates proof that investors are worried about fiscal prospects? My answers to these questions are: No and No. This does not mean there is no reason for worry. It is rather that there are powerful arguments against fiscal retrenchment right now and strong reasons for welcoming recent moves in the bond markets.


People need to believe that the extraordinarily aggressive monetary and fiscal policies of today will be reversed. If they do not believe this, there could well be a big upsurge in inflationary expectations long before the world economy has recovered. If that were to happen, policymakers would be caught in a painful squeeze and the world might indeed end up in 1970s-style stagflation.

The exceptional policies used to deal with extreme circumstances are working. Now, as a result, policymakers are walking a tightrope: on one side are premature withdrawal and a return to deep recession; on the other side are soaring inflationary expectations and stagflation. It is irresponsible to insist either on immediate tightening or on persistently loose policies. Both the US and the UK now risk the latter. But their critics risk making an equal and opposite mistake. The answer is both clear and tricky: choose sharp tightening, but not yet.

The illustration above, by Ingram Pinn, accompanied Martin Wolf's column.

[1]Here Dr. Hussman, a former options mathematician, repeats the basic math error Dr. Taylor made in his Financial Times column: due to compounding, it wouldn't take 10 years for 10% annual inflation to double the price level; it would only take about 7.3 years. This error was noted by an FT letter writer earlier this week, who in turn made his own mathematical error in his letter, which was corrected by a subsequent letter writer. All of this raises the question of why one of the world's leading business newspapers didn't have a numerate enough editor to catch Taylor's error in the first place.

[2]Dick Armey, the economics professor and former GOP House Majority Leader once shared this same quote when asked by a reporter if the debates in academia were more civil than those in Congress.