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dimanche 27 mars 2011

Idiot operation of the week: earth hour!

Yesterday from 8h30 PM to 9h30 PM I proudly left all of my electrical appliances on and kept on enjoying the comfortable lifestyle that has been made possible by centuries of human progress.

Earth hour is a feel good measure devised by pseudo-scientists who wish to throw a scientific veil over objectives that are deeply ideological. The hell with it! The hell with this parody of science that is used to make defunct ideologies respectable again! The hell with this idea that human progress is unnatural and that human beings should feel guilty for being warm and well fed! The hell with those who criticize capitalism and scientific progress but take for granted the comfort that it provides them!

Nuclear energy, GMOs, free-trade, private corporations, modern science and all of the other things that are denounced by leftist do-gooders have lifted billions out of poverty, allowed us to feed over 6,5 billion human beings and have created living conditions that even our grandparents could not have dreamt of.

Throughout history, countless ideologies have predicted apocalypse, blamed the human race and modern science for the ills of the world and sought to put a stop to human progress. From Malthusianism to the idiocies of Paul Ehrlich, each and every single one of them has been proved false and has been relegated to the dustbin of history.

So let's focus on the very real problems that we have on our hands and quit fighting windmills! Like me, celebrate Human Achievement hour instead of condoning this utterly useless feel-good operation!

jeudi 24 mars 2011

Why failure matters

Being a libertarian is tough. Often times, people alarmingly ask me what would happen if we pulled the plug on agricultural subsidies, quitted supporting so called "national champions" and let treasury bonds depreciate as they should. They then proceed to answer their own question by saying with an air of great gravity that "failure would be the result. Firms would go bankrupt, people would lose their job and investors would take a shell-shaking". To that I inevitably answer "so what?".

One of the big differences between classic liberalism and other ideologies is that the ideas that we support are not absolute. Failure is a key part of our philosophy, one of the most important drivers of progress. We believe that it is through a constant process of trial and error that man becomes better and finds new, more efficient ways to satisfy his needs and aspirations.

Unfortunately, in modern societies, failure is no longer accepted as an immutable element of daily life and an indispensable component of any sound economic and social system. Prevalent ideologies are what I like to call absolute ideologies. What they implicitly promise is a society and an economy in which state intervention would have completely eliminated failure. Liberalism promises a better world but progressivism is selling us a perfect world in which individuals would be shielded from failure for their entire lives.

Failure is important because without it, there can be no responsibility and without responsibility, liberty is meaningless. Without failure, men have no incentive to be cautious, assess risk and make long term planning (Lehman Brothers anyone?). When the possibility of failure is gone, whether for real or because people are stupid enough to believe it, the human mind becomes corrupt and the longer we wait to let failure happen, the more devastating its consequences.

Most importantly, a system that does not allow for failure to occur can't evolve and become resilient. Failures allows us to learn from the past, they set examples and paves the road for innovation and progress. Without failure, societies become sclerosed, secluded, trapped in denial and focussed on preserving rather than creating.

Painful but necessary

The practical consequences of our aversion for failure should strike us: over-leveraged and under capitalized banks were given the signal that is was ok to take insane risks because in case of a crash, the Greenspan put would come into effect and taxpayer money would be there to cushion their fall. Global finance was trapped into a complicated corpus of regulations that completely wiped out every attempt at diversification and created an insane situation in which castles that were supposed to be invulnerable turned out to be made of sand and everybody had the same Achilles' heal. Inefficient firms that failed to make products that consumers wanted were propped up by governments because they were deemed of "national interest" or simply "too big to fail". Intolerable moral hazards were created and the customer/taxpayer was left to foot the bill. In western countries, people act like spoiled brats when faced with adversity: they closet themselves in denial, look for scapegoats, evade their responsibilities and ask for some outside force to give them what they feel entitled to. The crisis in the west is not economic, it is moral. Everywhere, we have created laws, regulations, subsidies, aid mechanisms and other such stopgap schemes with the aim of making our societies and economies failure free. The result is disastrous.

Bottom line: we need failure. Let banks fail! Let governments fail! Let investors lose money on treasury bonds! Instead of doing everything to prevent people from losing their jobs, focus on making it easy for them to find a new one! Let companies fail when consumers clearly don't want them around anymore! Quit keeping this artificial, unsustainable model alive! Let us try and let us fail because there is no other path towards material, intellectual and moral progress.

mardi 22 mars 2011

Time to panic (a little)

The last weeks have been cause for concern for people like me who hold dear the values of freedom and tolerance.

It all started when a series of opinion polls showed alarmingly high levels of support for the Front National, France's largest far right party. In most of the scenarios tested, Marine Le Pen, who recently replaced her father as head of the party, managed to squeeze into the second round with a vote share between 16% and 22%. People quickly dismissed these results as temporary anomalies that were explained by Sarkozy exceptionally low popularity and the Socialist Party's lack of a candidate for the 2012 elections.

But I saw something else, something much more worrying. In my last "Idiot of the week" post, I explained the reasons for which I believe that the FN rise is no temporary blip and has deeper roots than is commonly thought.

In normal times, what differentiates the FN (and other extremist parties) from mainstream political organization is that the former practices a very crude and un-evolved form of politics. Its appeal relies (amongst others) on fear, anger and an idealization of the past. Mainstream parties, on the other hand, propose practical and realistic solutions to the problems of the time. However today, this distinction is blurred because nobody in the French political sphere seems to have the slightest connection to reality. Sarkozy's UMP adopts a strategy of putting somewhat peripheral and populist issues such as secularism, the burqa and polygamy at the center of the debate. On the other side of the spectrum, the Socialist Party is absorbed in internal power struggles and is incapable of formulating any sensible proposition beyond ludicrous plans to increase the number public servants by 300 000 and bring the minimum wage to 1 500€ per month. So what is basi
cally happening is that we are all playing the same game that the FN: populist politics based on fear and supported by completely unrealistic propositions.

In such an environment, it's kind of hard to marginalize the FN and confine it to the fringes of the political debate. (...) The UMP is only making things worse by making the FN's stance mainstream.

Last week, my view was (alas) confirmed when the FN scored over 15% of the vote during the Cantonnales elections. The Socialists's score was 25% and the UMP's 16%.

I believe that we are at a turning point in the history of the French political system. For decades, the far right was radioactive. It was too deeply associated with anti-semitism, fascism, overt racism and reactionary nationalism. The FN, however hard it tried, was confined to a niche market and was structurally incapable of going mainstream. All in all, it was condemned to be a nuisance. A vocal nuisance but a nuisance nonetheless. This is no longer the case and we need to realize this very quickly if we want to avoid a disaster in 2012.

The basic problem with our approach to confronting the FN is that we are fighting yesterday's wars. We are still stuck in paradigms inherited from the 80s and 90s and fail to acknowledge that the political scene has evolved and that we are facing a different FN whose image in the public mind has changed.

Our defense against the FN needs to be rooted in the realities of the moment. There were times when public perception of the FN beyond its small group of core followers was overwhelmingly negative, when the name Le Pen was enough to scare and disgust most French voters. But these times are now gone. We can longer address the new FN like we addressed the old. Derision, condescendence and simplistic accusations of racism are no longer enough. In short: the FN has stepped up its game, it's high time we stepped up ours. The reasons for that have to do with both the party's re-branding operation and the deplorable state of the political debate.

Extreme makeover

Like I wrote earlier, as mainstream parties sink into internal warfare or populist politics, the superficial nature of the FN's rhetoric is not as glaring as it used to be. No longer is its total incapacity to present a coherent project for government a problem. Meanwhile, Marine Le Pen has managed to shed her father's demons and has re-branded the FN in a spectacular way. Unlike her father, she is an excellent communicator capable of appealing to the masses and making bigotry and intolerance look like simple common sense. She represents a more modern FN, younger, more democratic too and less reactionary. We need to address her as a politician in her own right and not as a copycat of her father.

The FN also has an incredible knack for posing itself as a real alternative when in fact its policies are nothing but a mix of old fashion souverainisme, economic dirigisme and plain isolationism. There is nothing new with what the FN proposes. It is only because we allow it to adopt the posture of the victim and hide behind vague principles and grandiloquent tirades about the lost grandeur of France that it manages to pass as a credible force in the political game.

All in all, by perpetuating the old strategy of linking the FN to fascism and constantly deriding it instead of confronting it on concrete issues, we are fighting windmills and giving traction to its claim that the media and the rest of the political class are a caste disconnected from reality. Instead of fighting yesterday's wars, we most confront the enemies that we have and acknowledge that different threats require different answers.

samedi 19 mars 2011

Idiot of the week: Claude Guéant

After Peter King, the "Idiot of the week" award goes to another politician who distinguished himself through bigoted comments about ethnic and religious minorities.

There is something about the position of interior minister that makes people say stupid things. Mr Guéant's predecessor, Brice Hortefeux, was famously caught saying about Arab people that "it's ok when there is only one but when there are to many of them, it creates problems". This week, Mr Guéant kept the tradition alive by declaring during a radio interview that "because of unbridled immigration, French people don't feel at home anymore".

I can't believe it's not FN!

The statement in itself is stupid but not scandalous. What is truly troubling is that this was no blunder, it was a deliberate attempt to counter the recent rise of Marine Le Pen's Front National party. This week, I participated in a weekly radio show about politics organized by the student radio of my business school. During the talk show, I argued that the reason behind the FN's rise was simple: it is no longer a fringe party.

In normal times, what differentiates the FN (and other extremist parties) from mainstream political organization is that the former practices a very crude and un-evolved form of politics. Its appeal relies (amongst others) on fear, anger and an idealization of the past. Mainstream parties, on the other hand, propose practical and realistic solutions to the problems of the time. However today, this distinction is blurred because nobody in the French political sphere seems to have the slightest connection to reality. Sarkozy's UMP adopts a strategy of putting somewhat peripheral and populist issues such as secularism, the burqa and polygamy at the center of the debate. On the other side of the spectrum, the Socialist Party is absorbed in internal power struggles and is incapable of formulating any sensible proposition beyond ludicrous plans to increase the number public servants by 300 000 and bring the minimum wage to 1 500€ per month. So what is basically happening is that we are all playing the same game than the FN: populist politics based on fear and supported by completely unrealistic propositions.

In such an environment, it's kind of hard to marginalize the FN and confine it to the fringes of the political debate. What's sad is that recent opinion polls could have acted as a wake up call and pushed the UMP towards behaving more like the sophisticated grown ups that they claim to be. Instead, Guéant is simply further legitimizing the FN's stance by making it mainstream. After all, if the UMP becomes a watered down version of the FN, why not simply vote for the real thing?

vendredi 18 mars 2011

What we may be doing wrong about Libya

I'm pretty glad that we are finally going to bomb Kadhafi with the very planes he didn't want to buy from the French. However there is one question that nobody has truly answered yet: why are we going in?

Military operations usually fail when they are open ended, when they are launched without a vision and a clear objective in mind. Such an objective is very important because it determines from the beginning the shape and scope of the military, diplomatic and humanitarian components of the operation. When leaders focus on urgency and don't take the time to think about the road ahead, the risk is to implement the wrong strategy, adopt the wrong tactics and deploy means of action that are unadapted to local needs and conditions. The two Gulf Wars provide us with great examples of why such a vision matters. Operation Desert storm was a resounding success because there was a clear plan and everybody stuck to it. George Bush 1 courageously resisted calls to go further and capitalize on the momentum to topple Sadam. Operation Iraqi Freedom on the other hand was launched based on fallacious evidence and with no clear objective. Was the goal to topple Sadam and get out? Establish a democracy? Of what kind? Was securing the country and kicking out Al Qaeda part of the plan? What about Pakistan? Nobody took the time to answer these questions and we all know the result: a dead end war that can't be won but still costs America billions of dollars and thousands of lives (not to mentions those of Iraqi civilians).

With Libya, the dream scenario would be for Kadhafi loyalists to abandon the ship and create the right conditions for the regime to finally die. However what happens if Kadhafi hangs on and intensifies repression on the ground? Is a ground intervention on the table? If so lead by who? With what forces and what objective? We need to answer these questions now otherwise we risk finding ourselves with a pretty difficult situation on our hands and images of western soldiers killing civilians may replace those of Libyan rebels waving French flags in Benghazi.

French diplomacy under the limelight

As a write these lines, the UN has given the green light to the use of force against Mouamar Kadhafi's regime in Libya. The situation is still very unclear. Aerial strikes seemed imminent but the recent cease fire declared by the regime (but denounced by the rebels as nothing but a smokescreen) may have put things on halt for a while.

Whatever the outcome of this entire affair, one thing is quasi certain: France is back in the game.

Until recently, it seemed like French diplomacy was in the toilet. Since Sarkozy's accession to power, the Elysée Palace, under the influence of the president's all powerful advisors Claude Guéant and Jean David Levitte, has been steadily sucking power away from the foreign office. Under Bernard Kouchner, the Quai d'Orsay has sunk into irrelevance and disgrace. The Arab revolts only made matters worst by highlighting France's tendency to cozy up to any autocrat that guarantees stability and helps it stem the flow of migrants wishing to reach European shores. In the earliest stage of the crisis, then minister Michèle Alliot Marie even offered Tunisian authorities France's help in managing (ie: squashing) the nascent protests. Then came Libya and awkward memories of Mouamar Kadhafi planting his tent in the gardens of the Hotel Marigny in Paris during a grandiloquent state visit came back to haunt French diplomats. As it turns out, some of the weapons used by Kadhafi to decimate his own population are made in France and things could have been even more embarrassing had France managed to make Libya the first (and only) country to import its much flaunted Rafale fighter plane.

That was SO 2008!

But yesterday, all of that seemed forgotten when Alain Juppé (France newly appointed minister of foreign affairs) lead the charge against Kadhafi and spearheaded the effort to convince the UN general assembly to approve a motion that would allow the use of force against the Libyan dictator. From a strategic point of view, this push was a very adroit (and necessary move). After it's poor handling of the Tunisian and Egyptian revolutions, France decided that it would not be left behind this time and was amongst the first nations to formally recognize the rebel government in Benghazi. Sarkozy even held talks with the leaders of the rebel movement at the Elysée palace, much to the displeasure of Germany whose cautious stance on the issue could later place in on the wrong side of history and prove an embarrassment to Merkel's fragile government already weakened by recent electoral defeats. However as Kadhafi's forces regained lost ground, it appeared that Sarkozy and Juppé might have overplayed their hand and rushed into this entire thing without really thinking it through. Nonetheless, thanks to Juppé's active lobbying, France now looks like the big player in the game and has successfully rushed to fill the leadership void left by America.

For France, recent events mean 2 things:

1- It has shaken off the Irak syndrome: you may not expect a country who so fiercely resisted the American led operation in Irak to adopt such a bold and adventurist posture. And yet it has. Does this usher in a new era of French activism in world affairs? Too soon to tell. But with America busy keeping its head down and incapable of (or unwilling to) leading the way, France may smell an opportunity to play a bigger role on the world scene, especially if the coming military operation is a success. After all, it still has a pretty powerful and well organized diplomatic presence around the world, is less divisive than America and knows the Arab world like its own backyard since,well, it used to be just that.

2- Juppé was a good choice. Only a man of Juppé's stature and intelligence could lead such as effort. With such a heavyweight at its head, the Quai d'Orsay will regain some of its former power, especially as Sarkozy enters campaign mode and focusses on domestic issues. This is a good thing for France's political system and for it's influence in the world.

mardi 15 mars 2011

The other story about Japan

As eyes are turned towards Japan's nuclear power plants, our thoughts and prayers go to the victims of this terrible tragedy. However I believe that the biggest implications of the disaster that struck Japan a few days ago will be economic.

Let's start by addressing one of the most idiotic statements of the week: that this event, as tragic as it may be, will in the end have positive repercussions and boost the Japanese economy. The misguided idea that destruction is somehow the best way to stimulate economic activity is as old as the econ profession. You would just think that by 2011 it would have gone away... Sadly it has not. To see newspapers around the world channel the moronic claims of such economists as Larry Summers is quite frankly sad. French philosopher and economist Frederic Bastiat brilliantly demonstrated the absurdity of this kind of thinking in his well-known "Parable of the broken window":

Have you ever witnessed the anger of the good shopkeeper, James Goodfellow, when his careless son happened to break a pane of glass? If you have been present at such a scene, you will most assuredly bear witness to the fact that every one of the spectators, were there even thirty of them, by common consent apparently, offered the unfortunate owner this invariable consolation—"It is an ill wind that blows nobody good. Everybody must live, and what would become of the glaziers if panes of glass were never broken?"

Now, this form of condolence contains an entire theory, which it will be well to show up in this simple case, seeing that it is precisely the same as that which, unhappily, regulates the greater part of our economical institutions.

Suppose it cost six francs to repair the damage, and you say that the accident brings six francs to the glazier's trade—that it encourages that trade to the amount of six francs—I grant it; I have not a word to say against it; you reason justly. The glazier comes, performs his task, receives his six francs, rubs his hands, and, in his heart, blesses the careless child. All this is that which is seen.

But if, on the other hand, you come to the conclusion, as is too often the case, that it is a good thing to break windows, that it causes money to circulate, and that the encouragement of industry in general will be the result of it, you will oblige me to call out, "Stop there! Your theory is confined to that which is seen; it takes no account of that which is not seen."

It is not seen that as our shopkeeper has spent six francs

upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way, which this accident has prevented

What Bastiat shows us is that the process of destruction and reconstruction may generate some activity but in no way does it lead to the creation and accumulation of wealth at the micro level, and this is what truly matters when gauging economic activity. When we think about economics, we focus on what we see and forget what we don't see: what we see in Japan are billions that will be spent on re-building but what we don't see are the billions that without this disaster would have been spent on other goods and services and would have contributed to actual wealth creation as opposed to reconstruction. If destruction has such beneficial effects, why wait for nature to cause it? Why not destroy or cities and monuments on a regular basis, why not solve the problem of unemployment by digging ditches only to fill them up again? Oh and FYI, the Kobe quake barely had any effect on Japanese GDP growth.

Then there is the problem of Japan's public finances: the government already has a debt equal to over 220% of its GDP. The debt level is so high that it doesn't even fit on regular charts (see bellow...). Japan manages to pull this of because it's debt is almost entirely held by domestic actors, which allows it to borrow at incredibly low prices: it's 10 year bonds pay a 1,3% coupon vs 2,5% for Germany! But even at such low rates, interests alone already eat up 25% of tax revenues. As the population enters old age and draws money from its retirement accounts, saving rates will plunge and domestic sources of capital will dry up. Japan will be forced to borrow on international markets where it will pay at least 5% on 10 year bonds. This is a disaster waiting to happen. In the words of Société Générale analyst Dylan Grice "It's like the Titanic has already hit the iceberg and you know it's going to sink, you just don't know how long it will take to go down". If Japan had to borrow on international markets, its cost of debt would spiral out of control and default would be inevitable.

The other meltdown

Unfortunately, the quake and tsunami may have accelerated Japan's descent into the fiscal abyss. The BOJ has already injected over $170 billion in the markets to keep them afloat. Add that to the massive spending that will be required to compensate the thousands of people whose houses are either collapsed or under water and what you have is a pretty dire picture of the road ahead...

samedi 12 mars 2011

Idiot of the week: Peter King!

I would like to start a new feature called "idiot of the week" in which I will reward individuals who stood out through their recklessness, craziness or general stupidity.

I originally wanted to give this week's award to Mouammar Kadhafi for a lifetime of service to the causes of shamelessness and idiocy. But then came US Representative Peter King whose incendiary attacks on Muslim Americans caught my attention.

If you don't know the story you can check this article. Here is the condensed version: New York Representative Peter King decided that it was high time to raise his public profile and score political points with the Republican base. To do so, he decided to go after an easy target: the US Muslim community. His problem: US Muslims are getting more and more radical, have ties to terrorist groups and are not cooperating enough with law enforcement agencies. Citing dubious statistics that he most likely made up on the spot, he basically singled out an entire community and called for the organization of congressional hearings on "The extent of radicalization in the American Muslim community and that community's response". Oh and did I mention that it was subsequently discovered that King used to be a vocal supporter of the IRA (the Irish terrorist group that routinely bombed civilian targets)? Even funnier than the inconsistency was King's justification. He defended his position by saying that "the IRA never attacked America" (yeah, who cares about the British after all?) and that "it was a force that was there" (so, to paraphrase Jon Stewart, it's ok to be a terrorist if you occupy time and space).

King con

With these hearings, King risks turning his allegations into a self fulfilling prophecy. Extreme ideologies feed on people's craving for a cause, a sense of belonging of whatever kind. This craving appears when individuals feel alienated and rejected by one of the most basic communities of all: the nation. When people loose the feeling that they belong to a nation of equals, a community of men and women who adhere to the same basic principles and moral values, it creates a void. It is this void that extreme ideologies strive to fill.

Therefore what King is doing is not only despicable, it is also highly dangerous. The implicit message he is sending is that Muslims are second rate Americans that are guilty until proved innocent. At a time when Al Qaeda is fading into irrelevance in the Arab world, King is basically strengthening its claim that the Western democracy and Islam are fundamentally incompatible.

So congratulations Mr King! You efforts to alienate what was and remains one of America's most well-integrated minorities are nothing short of remarkable. This fine display of bigotry and inconsistency earns you the very first "idiot of the week" award and I have the feeling that it won't be your last.

vendredi 11 mars 2011

Why China's economy may be in for tough times

I've always have mixed feelings about China's economy. Long term, I have no doubt that it has tremendous potential and that China will be capable of producing leading corporations and cutting edge business practices. Short term however I believe that China is due for a crisis.

Last year, I wrote an essay about China's economy. In it I exposed my general point of view about the middle kingdom’s economy: that it is a house of cards and that its model is unsustainable and inefficient. In this article, I will come back on what I wrote and try to see if the current situation corroborates the points I made back then (spoiler alert: it does).

Since 2004 china has devoted an average of 40% of its GDP to investment. This figure far exceeds that of South Korea or Taiwan at the height of their investment led development. These investments derive directly from China’s development strategy based on exports and manufacturing. All in all, industrial output accounts for nearly
half of china’s GDP and services for a mere 40%. As of today, if we look at the structure of its economy, China looks more like a communist country than a capitalist one. What’s mor
e, the stimulus plan is likely to raise the share of investment to over 50% of GDP in 2009, thus accentuating the imbalances the government was trying to correct before the crisis started.


It is troubling to see that household consumption represents a paltry 35% of GDP while this figure is 67% in India. If it is to join the club of advanced economies, China must go beyond industry and exports and evolve into a service-based economy
relying on its domestic market.

Today, consumption still represents barely 36% of China’s GDP! We see there the effects of a stimulus plan that basically consisted in showering large state owned industrial companies with money, launching boondoggle infrastructure projects (example there) and nationalizing entire swaths of the economy. China’s economy is still experiencing artificial short-term growth driven by massive over investment. It may look good on paper, but it will certainly not last.

The government has also addressed the crisis by ordering banks to lend virtually limitless amounts of money to SOEs. Analysts agree that co
nsidering the
number and size of the loans granted, banks cannot have conducted proper risk analysis an
d will most likely find themselves with an increasing share of Non Performing Loans in their portfolios.

Massive lending also fuels investment bubbles. The th
is aggravated by the intrinsic volatility of China’s markets (the Shanghai stock market is often nicknames “the great lottery”). Lack of credible information from companies (especially state owned) and the government (many figures often differ whether you look at central government or local government figures) encourages blind speculation and makes man
y economists fret about the consequences of the investment boom.

I could write dozens of pages about Chinese banks. These things are time bombs and I wouldn’t touch them or their stock with a 10-foot long stick. Fitch Ratings recently put the probability of a Chinese banking crisis before 2013 at over 60%. According to Asianomics Ltd, bad loans could total more than 400 billion. Even more troubling is the fact that the PBOC (China’s central bank) is having a very hard time putting a lid on bank lending. Year after year it kept overshooting its lending quota by so much that it got rid of it altogether. The reason for all this is quite simple: Chinese banks are primarily political tools whose role it is to channel as much money as possible towards industrialists to ensure that whatever growth objective Beijing has set is achieved. When loans are granted based on political criteria, it is hard to have sound banking system and I believe that China will learn this lesson soon.

Furthermore, there is plenty of capital flying around but it’s not going to the right companies. Over regulated and over politicized financial markets make it very difficult for smaller companies to gain access to the capital they need to develop their activity. That’s one of the main reasons why it will be very hard (if not downright impossible) for China to produce the next Facebook or the next Google (please don’t tell me Baidu proves me wrong or I will hunt you down and hit you with a shoe Lybian style).

As of today, the burden of taxation is on consumption while many companies pay little taxes and thus over invest in new production capacities

Things have not changed since I wrote these lines. A fatal combination of generous tax laws, artificially cheap capital and crony capitalism is still leading companies to massively over invest in production capacities. In too many industries, capital expenditures are through the roof despite falling sales and margins. Many investors are starting to smell danger and things will not end well if nobody takes the punch bowl away (very good presentation about this here).

These are only some of the points I raised in the original paper I wrote. But on top of the problems I highlighted now comes that of inflation. Latest figures put year on year inflation at 4,9% but there a reasons to believe that the real figure is higher. Inflation is the logical result of artificially cheap capital, an ever-expanding monetary base (necessary to keep the Yuan for appreciating) and a lack of private property rights in the countryside that prevents the apparition of large, efficient farms capable of producing cheap foodstuff. I believe that stopgap measures such as price control schemes will only make the situation worst by creating shortages.

The real estate bubble is also a major cause for concern. Real estate investment now represents over 10% of Chinese GDP (vs only 6% and 9% for Japan and the US at the height of their investment cycles). There are more than 70 million apartments in China that are unoccupied. Large Chinese companies have poured billions in highly speculative real estate investments (a practice known as Zaiteku), which grossly inflates their balance sheets and increases market volatility. Moreover, with deposit rates so low (the spread between lending and deposit rates is at an astonishing 3,5 percentage points), real estate is also the only investment with a good enough pay-off for ordinary folks. With so many loans directly tied up to the housing market, there is no telling what will happen when the party stops…

So can China change? Yes but it will take some painful readjustments. Premier Wen Jiabao recently declared that the aim of the 12th five-year plan would be to rebalance the economy and “improve people’s livelihood”. That may sound lovely but that has been the government's stated goal for some time and was already at the center of the last 5-year plan. Top officials have been talking about re-balancing for years but so far have little to show for it. The truth is that the Chinese authorities are way too dependent on growth no matter of what kind or at what price. Even if the central government acknowledges the need to cool things down (which I think it does), local authorities still have growth objectives that are way too high to be sustainable on the long term. So this unstable, unsustainable and inefficient (it takes $7 of government spending to generate $1 of output) model stays alive. But beware, the longer China waits, the more painful the rebalancing will be and the more the wider world economy will suffer. One cause for hope is that many in the regime are aware of the dangers they face, the only question now is will they be able to match their words with actions? Only time can tell.

mercredi 9 mars 2011

Facebook is awesome

My, my, my... I can't believe how much Facebook has changed during the year and a half I spent in Shanghai.

When I left France for the middle kingdom, Facebook was still a big question mark. Sure it was fun, allowed you to stay in contact with your friends and (most importantly) mess up their status while they were away from their computer but could it turn into something more?

A year and a half later, Facebook is the subject of an Oscarized movie, is valued $74 billion on private markets, just struck a much publicized partnership with Goldman Sachs based on a $50 billion valuation (lead underwriter anyone?) and is eating everybody's lunches from Google to Netflix.

But above all, Facebook is no longer a social network: it is a platform. Having just finished a 6 month internship in strategy consulting during which I worked on many tech-related projects, I am genuinely impressed by the strategic vision the people at Facebook demonstrate day after day. These guys know where they are going and I can't wait for them to go public so I can get me some of that Facebook stock!

The first excellent strategic move they made was to focus on mobile. Facebook is by far the most downloaded app on all major app stores. Early on, Zuckeberg and co made clear their attention to be one of the driving forces behind the rise of mobile internet. This is an excellent move for many reasons. First, it increases the value of using Facebook for existing users (economic theory calls this phenomenon "network effects"). Moving Facebook from PCs to cellphones means more people connected at all times and the possibility for real live interaction between users. But more crucially, a strong position in the mobile scene opens up myriads of possibilities for the social network to develop news services such as location based services (ie: Facebook places), live photo sharing, mobile payment etc... It also allows the firm to capitalize on its strong position in social networking and vast user base to go against firms such as Foursquare and saturate the market for mobile services.

Then, Facebook's focus on mobile means that they are ideally positioned to profit from the rise of the internet in developing countries. For us westerners, the internet means PCs. It took time and a lot of learning for us to fully embrace mobile networks. In China, India and other such developing markets, people are integrating mobile networks in their daily life and consumption habits faster than anybody had predicted. I could write for hours about how mobile internet in developing markets will completely change the rules of the game from a business strategy standpoint and lead to the emergence of news business models and consumption habits unlike anything we have seen before. In these countries, PCs are still expensive and as smart phones get more and more affordable, millions of people will go from no internet at all to mobile internet. This will, I believe, be the big business story of the 2010s, stay tuned because it's going to be ground breaking! Here a few numbers about China and India just to give you a taste of the magnitude of the phenomenon:

Internet users in China

Note: I know that FB is blocked in China but my point remains: mobile networks are big in developing markets. Plus Zuckeberg has been talking with people from Baidu recently and I wouldn't be surprised if the two struck a deal to launch some kind of China friendly version of Facebook. Baidu does not have a strong position isn social networking and might be interested in going after Xiaonei and Kaixing101 (the two leading SNSs in China).

I mentioned earlier in this post that Facebook had gone from being an social network to being a platform. This is, to me, the other key element that explains Facebook's success and convinces me that it is not a one trick pony that will go bust when the next bubble bursts. Facebook has managed to create an awesome eco-system of apps and other product and service offerings that tack themselves on its platform. Think of it as some kind of hub from which you can do nearly anything from playing games to sharing files, edit pics, look for a job and so much more. Facebook has also blurred the boundary between virtual and physical with its virtual money (Facebook credits) that can be used to buy virtual goods but also real stuff. Now you can even rent movies via Facebook!

I'm very enthusiastic about this because what Facebook is doing is truly remarkable. It has put itself at the center of our Internet usage habits and is creating new ways of surfing the web and consuming content. This is disruptive innovation at its finest.

Finally, Facebook's "platform" strategy allows it to leverage its user base to make companies such as Craig's list, Groupon, Foursquare (as I said earlier), Netflix (whose share took a dive after Facebook announced its movie deal with Warner Brothers) , LinkedIn and many more far less relevant. It may not always work (Foursquare's users doubled since the launch of Facebook places) but it's sure making life very difficult for them.

So what's next? I foresee a deal with Baidu in China (if the political climate allows for it), a push in location based services and an ambitious attempt to make Facebook credits usable in physical stores. Sounds fun but Facebook must nonetheless be very careful not to over stretch itself and go AOL's way trying to be everything to everybody at the expense of quality. Facebook can be plenty of things but it can't represent the whole web. So I'll try to temper my enthusiasm and consider how Facebook could crash in a later post.

samedi 5 mars 2011

The IMF Papa and the Hockey Mom

2012 will see two high impact presidential elections: in France, Nicolas Sarkozy will try to win another five year term while in the US Barack Obama will have to convince people that he still has what it takes to lead the country.

In both countries, the pre-campaign circus has been dominated by one strong figure that everybody expects to run and supposedly presents a tremendous challenge to the incumbent. In France, FMI Director and former finance minister Dominique Strauss Kahn was the focal point of attention while in the USA, Sarah Palin was the name on everybody's lips.

At first glance, the über smart economist (who once dreamt himself a Nobel Laureate) and former finance minister of one of the world's largest economies has little in common with the former mayor of Wasilla who famously failed to name a single newspaper she read on a regular basis.

But both personalities have some things in common:

1- They both have a big problem with a certain fringe of the electorate. In order to conquer the presidency, both Palin and DSK will have to first seduce members of their own party and then go on to show a majority of the global electorate that they are the men or women for the job. Clearing that double hurdle might be tough... Palin is strong with Tea Partiers and Republican voters but scares the hell out of pretty much everybody else. Instead of polishing her edges to appear more presidential, she has spent the last few years creating controversies and is now more polarizing a figure than ever. And then there are the numerous gaffes and blunders that make the prospect of her sitting in the oval office quite scary to say the least... Strauss Kahn on the other hand is widely respected by the general electorate but has a problem with his own party. This is not new, DSK (despite having imagined the 35 hour work week) has always been somewhat of an alien in a Socialist Party that regularly flirts with the far left and still officially supports ludicrous policies such a 200€ check for people who can't afford holidays away from home and a 1 500€ minimum wage. In the last primaries, DSK was trounced by Segolene Royal and his chances don't look any better this year: the left wing of the Socialist Party is calling the shots right now with personalities such as Benoit Hamon and Arnaud Montebourg (whose essay about "real equality" is a fine piece of leftist demagogy of the type only France is still capable of producing) gaining importance at the expense of more moderate types such as Manuel Valls. Plus, party leader Martine Aubry exhibits all the sings of somebody who wants to run and even former party chairman François Hollande (whose recent weight lose generates more noise than his ideas) is making a comeback. All in all: winning the primaries will not be easy for the man from Washington.

2- They are the opponent incumbents dream of facing. A Palin victory in the primary would be the best thing Barack Obama could dream of. It would virtually ensure him to stay in the White House for another 4 years. Primaries are about seducing the base, the general election is about shooting to kill but using a big gun. Palin is absolutely incapable of doing that. She is too controversial to have a broad appeal, too much of a loose canon to manage a good campaign and, quite frankly, way too dumb to challenge Obama. (To those who would like to read about what Palin actually looks during during a campaign, I recommend the excellent book "game change" by Halperin and Heileman). DSK is a very competent technocrat but a terrible campaigner. He lacks Sarkozy's charisma and bravado and even if he were to miraculously win the primaries, he would never be 100% supported by the party and his campaign would greatly suffer as a result. The man also has quite a few skeletons in his closets. He was recently at the center of a sexual harassment scandal at the IMF and admitted to cheating on his wife with a Hungarian born IMF economist. You can count on Sarkozy's teams to dig out as much dirt as possible about him if he were to enter the contest.

"I know who you did last summer"

3- They have recently tripped. Recent months have not been good for Palin. Her reaction to the tragic shooting in Tucson, Arizona, in which 6 people were killed was testimony to her total incapacity to act as commander in chief. Now to be sure I hate the way the American left has politicized the affair and sought to use it to discredit the Tea Party movement but that is no excuse for Sarah Palin's terrible speech in which she accused the liberal media of stirring up hate 3 minutes after saying that Fox news could not be held accountable for the actions of disturbed individuals and offended pretty much anybody with a little culture by using the term "blood libel" (that originally refers to the fabricated legend that Jews use the blood of their own children during rituals). Even conservatives are starting to fear that she could ruin their camp's side of winning back the White House and the fact that she had her own reality show and that her daughter participated in "dancing with the stars" hardly helps... DSK has another problem. After months of favorable opinion polls and positive media coverage he is entering the tougher part of the long road that leads to the campaign. People are now questioning his motivations and speculating about what his program and style of government would be. Attacks against him from his own party are also getting tougher with other potential candidates unwilling to let a man they see as a Washington sell-out steal the limelight.

4- They have much to loose if they fail. DSK loves power and he presently enjoys plenty of it. At the IMF, he managed to give a declining institution some of its former luster. The IMF has played a very important role in managing the aftermath of the financial crisis and DSK now plays in the major league of world leaders. Rumors even have him replacing Jean Claude Trichet as head of the ECB. Is he willing to give this up and tour rural France for 6 months, pretending to give a damn about everybody's problems and patting cows' behinds (a key part of every presidential campaign in France) for a very uncertain result? Sarah Palin is currently making millions giving terrible speeches, selling books and sharing her Alaskan daily life with the nation on TV. She is also part of Fox News' team of pundits. If she she runs and things don't turn out as expected, you can count on her to not just fail but to crash and burn in an explosion of controversies and ill-though out declarations. I believe that Palin played a major role in torpedoing the Mc Cain campaign but she survived the failure by blaming it all on Mc Cain's advisors and campaign managers. If she fails again in 2012 she will have nobody to blame but herself (well she will certainly find other people to blame but this time the public won't buy it). Currently, both DSK and Palin rely on some kind of star power. DSK is seen as being more competent and somewhat above the pack while Palin is supposed to be this maverick hockey mom, an outsider that can take on the liberal clique and the so called "lame stream media". If they run and fail to win the election, their credibility would greatly suffer as a result and their future career in politics would be jeopardized. So they have a tough choice to make...

"To run or not to run?"

So 2012 will see two interesting elections but will we see these two interesting candidates participating? I'll answer that question later :)

vendredi 4 mars 2011

Recovery? What recovery?

If you look at centuries of financial history, one thing in particular should strike you: no country has ever printed its way out of a recession.

And yet the FED is pointing to a surging stock market and misleading employment numbers to claim that its QE program is a huge success. Pinheads...

QE is nothing more than printing money. It may have a complicated name and have given an artificial boost to the stock market but printing money is not the same than creating wealth and prosperity. Instead of letting the markets readjust and reallocate resources, the FED and the Government are keeping the old economic model alive at the expense of the taxpayer and the suffering middle class (I'll take the time to write about that in later articles).

Recent employment numbers paint a grim picture: unemployment still hoovers around 10% while underemployment (that combines unemployed people with those who have a part time job but would like to work full time) is at nearly 20%. All in all, the job market is more or less where it was a year ago... Good thing TARP, QE and stimulus money was supposed to get us out of the ditch...

Just for fun, let's look at the Obama administration's original predictions...

And they dare say that we, the libertarians, wanted to kill the economy...

jeudi 3 mars 2011

The Smart Cover is bigger news than the iPad 2

Let's take a few minutes to talk about the iPad 2 and Apple's global strategy

Yesterday, people saw the unveiling of the iPad 2 as the major piece of news. To me the iPad's Smart Cover says far more about Apple and the reasons behind its success:

The Smart Cover retails at $40, pretty steep for a piece of plastic that only covers the screen don't you think? And yet people will buy it, I certainly will. Why? Because Apple has this unique capacity to keep only features that matter and ditch the rest. This, I think, is the single most important factor behind Apple's success. If you look at each and every Apple product, you will notice that whichever one you choose, it will have less features than most of its competitors. The iPod was far less technically advanced than other MP3 players when it came out, the iPad is constantly lambasted by geeks for its lack of technical features and the rigidity of the Apple IOS and don't even get me started on Macs... But Apple succeeds because it focusses on what truly matters. It creates value not with technical features but with tangible customer benefits that, put together, create a fluid and nearly flawless customer experience. The Smart Cover is simple and almost minimalist but it does exactly what people expect and incorporates small innovations that bring big improvements to the product experience. A true Apple product.

Click goes the profit margin...

It is widely recognized that the iPad is the best tablet out there (sorry Apple basher but it's true). But do you notice anything about its price? It is remarkably low! The iPad 2 starts at $499 for the 16G+Wifi version and the iPad 1 is now sold for only $399. Competing tablets such as Motorola's Xoom, Dell's Streak and the HTC Flyer are all at least $100 more expensive. How does Apple do it? For starters, the scale of its operations allows it to be a heavyweight in the components market. The company develops strong relationships with its suppliers and is doing everything it can to make it as hard (and expensive) as possible for its competitors to have access to quality components (especially touch-screens). Then, since it operates its own retail network, it can count on more revenue drivers than its competitors. Finally, it knows how to make up for smaller margins.

Now I haven't looked at the financial details but let's suppose for the sake of argument that Apple, to maintain its cost advantage, has to accept a smaller profit margin on its iPad 2 (very probable). Enters the Smart Cover. Retails at $40, probably costs Apple less than $5 apiece. I'm ready to bet that at least 70% of iPad buyers will go for the cover as well. You do the math...