Archive for the 'business' Category

Another geography lesson

Sunday, April 26th, 2015


Yemen, which has little oil of its own but controls a strategic passage way for oil tankers queuing up to enter the Strait of Hormuz through which around 17m barrels per day of crude is shipped, is effectively in a state of anarchy. The government has collapsed and Saudi Arabia and its Sunni allies appear to have no viable plan to restore the deposed president Abdu Rabbu Mansour Hadi.

The conflict has led to the resurgence of Al Qaeda on the Arabian Peninsula (AQAP), which has strengthened its position in Yemen’s interior amid the chaos caused by Saudi coalition strikes against the Houthis. Now the only thing separating AQAP from infiltrating the kingdom is the historically impenetrable barrier of the Rub al-Kali desert, also known as the Empty Quarter. In the summer, this vast expanse of sand where dunes tower over 100 feet high cannot be normally crossed but AQAP fighters are already thought to be gaining footholds there.

The danger for Saudi Arabia and potentially world markets is that they cross the sands and launch attacks in the kingdom, which is the world’s largest exporter of crude. Earlier this week Saudi’s interior ministry warned of the possibility that oil installations and shopping malls may be attacked by terrorists, while the last few weeks has seen a spate of shootings around the capital Riyadh.

Were terrorists to succeed in a major assault on Saudi Arabia’s well-protected oil infrastructure the price of a barrel of crude would skyrocket back to $100 in a heartbeat. Despite America becoming increasingly confident in its own shale oil industry it cannot be considered a global swing producer as it does not posses any spare capacity to immediately adjust production. Only Saudi Arabia has the reserves to be able to increase output to as much as 12.5m barrels per day if required. Even with an apparent 1.5m to 2m barrels of excess supply that has been the real reason behind lower oil prices the world cannot compensate for a prolonged outage in supplies of crude from the kingdom.

HT: Wretchard. BTW, we had no idea where Yemen was 12 months ago. Super fun bonus: some other people who don’t know too much — scroll down about 2/3 of the way.

50 years old and still young

Saturday, April 25th, 2015

Moore, 1965:

Integrated circuits will lead to such wonders as home computers — or at least terminals connected to a central computer — automatic controls for automobiles, and personal portable communications equipment. The electronic wristwatch needs only a display to be feasible today.

Intel: “If automobiles improved at the rate of Moore’s law, they would go nearly 300,000 miles per hour, get 2 million miles to the gallon, and cost only 4 cents. They’d also be the size of ants.”

Hard to top 37 years of uninterrupted growth

Wednesday, April 22nd, 2015

SCMP: “Measuring from December 1978, when the Chinese Communist Party ‘shifted its centre of gravity from propagandising class struggle and organising political campaigns to economic construction’, China is now in its 37th year of economic expansion.” BTW, this morning we saw up close and personal something resembling this. On balance we think they have a good shot at getting past the current problems, but it’s a drama such that no one can predict Act V with any certainty. A decade ago, we saw the past with some clarity, but didn’t know that within a few years billions of people would be walking around with tiny supercomputers. Live and (hopefully) learn.

The glory that was

Tuesday, April 21st, 2015


Tuesday’s trading helped cap off a torrid run which has seen more than 50pc wiped off the value of Greece’s lenders since the start of the year.

Just a reminder or two. This drama has been playing out for more than three years now. One of the questions asked half a decade ago is who’s next? Perhaps we’ll fine out soon whether any of these concerns and questions are still relevant.

Once upon a time, there was a correlation

Sunday, April 19th, 2015

The early days of CAGW must have seemed magical. After all, there really was a correlation of CO2 increases on the one hand, and some modest temperature increases on the other. It’s not surprising that some would see correlation as causation, and it certainly didn’t hurt that there was a pot of gold at the end of that road. Moreover, causation fits in nicely with the West’s current need for self-flagellation as payment for the sin of prosperity. All well and good.

So it must have been panic and madness inducing when some of the data stopped fitting that which had been ordained from on high. Our favorite episode of the madness is when the Medieval Warm Period suddenly vanished, in order to make current results all the more dramatic. Freud had a nice phrase for it. Anyway, we’re on our way to Asia today, where India and China may say a little political blah-blah, but don’t participate in the West’s idiotic madness. We’ll take a look at Steyn’s new book on the flight and report back.


Friday, April 17th, 2015


On March 9, Liu Jian, a former military officer and grandson of Zhu De, one of China’s most revered revolutionary-era generals, told a state-affiliated news website that Guo Boxiong, former vice chairman of the central military commission, was responsible for the sins of his son, Guo Zhenggang. Guo Zhenggang, also a general, has come under investigations for corruption. His father had held a senior post in the People’s Liberation Army under the Hu Jintao government and was appointed by Jiang Zemin, Hu’s predecessor. Guo Boxiong’s colleague Xu Caihou was brought down in the first wave of purges against the military late last year. Liu’s comments about Guo Boxiong were widely publicized and republished in the South China Morning Post.

Arrests for corruption have been going on in China for more than a year. Given the endemic nature of corruption in the Chinese system, with its interlocking political and business relations, it is likely that corruption charges could be brought against an enormous number of officials; they have already been brought against hundreds of thousands of people since mid-2013, and that is likely just a fraction of the number of officials who could be charged. Therefore, from our point of view, the corruption campaign is as much a purge as a cleanup. A purge differs in that it takes place for political reasons — to weaken the opposition, strengthen the position of the government or, most likely, both. That raises the interesting question of who Chinese President Xi Jinping sees as his enemy, and why he is worried enough about them to purge them.

In this context, Liu’s statement is interesting. A person whose primary claim to fame is descent from a national hero has been showcased saying that in a particular corruption case, the father must be held responsible for what the son did. Put differently, Liu, whose grandfather is by definition beyond reproach, is saying that in at least this case, the son’s corruption is the father’s responsibility. The Chinese government has chosen to showcase this statement, and it must therefore be taken seriously and its meaning unraveled.

That is not easy. China has become increasingly opaque, recalling the time when Mao Zedong’s whims would be revealed in poems on wall posters for the world to scratch its heads over. We will assume that this statement is not simply directed at Guo Boxiong, but is stated as a principle of the anti-corruption drive. Otherwise Guo could simply have been arrested without this fanfare. So our best guess is that a generalizable statement is being made, and that statement is not simply about fathers and sons but the older generation of leaders and the younger.

Xi’s anti-corruption campaign is both a genuine attempt to deal with corruption and an attempt to strengthen his position, the position of the Party throughout China, and Beijing’s position as the center of China. The charge could be made that prior presidents had been lax in this. Excessively interested in economic growth and prosperity, they had let the instruments of state control atrophy and, as one outcome, permitted corruption to flourish. More important, the weakening of state control has made managing China during its economic downturn singularly difficult. It is not only an economic problem, but also a social and political problem. Xi has been put in the difficult position of managing political and social forces with weakened and corrupted instruments. Hence, the anti-corruption movement is aligned with a purge.

But obviously, corruption is systemic, and so is the weakness of state power. From Xi’s point of view, it is necessary to address these issues but also to assign blame. That blame would rest with prior Chinese administrations. In laying the blame at their feet — at the feet of the elders — Xi both weakens their residual power and strengthens his own. Jiang, who preceded Hu as president, retains substantial power, as prior presidents in China frequently do. He also presided over China’s major post-1989 economic surge, making it his primary goal. He was the dominant political figure in China during the 1990s and early 2000s and retains significant influence. He is also, according to Forbes, worth $1.7 billion. He oversaw the period of economic climax and intensifying corruption. His own wealth, if Forbes is right, likely had complex origins.

The Chinese public seems enamored with Xi and his fight to try to purify China. In an economic downturn, targeting those who became wealthy, particularly politicians, is a logical process. Xi is obviously locking horns with Jiang over these campaigns that are taking down the former president’s supporters at an accelerating pace. If this campaign were to reach its logical conclusion, then Jiang also would be a likely target.

In retrospect. the past was simple. Build factories for export, take advantage of the very low incomes in the countryside, and grow 10-15% a year. Highly successful for a long time. But that no longer works. What’s next? It’s not at all simple, and so you have dramas such as the above. Five years ago we looked at a number of the issues involved in China’s coming transitions, and the answers are no clearer today. Here’s a couple of amazing statistics for you, while we’re talking about transitions. 100 years ago, 42% of Americans lived on farms; now it’s negligible. China today is about where America was 100 years ago with over 40% on farms; what will the next century bring?


Monday, April 13th, 2015


In the second quarter, the depth of China’s economic problems will become even clearer, with virtually every major indicator — barring, perhaps, those for services industries and household consumption — likely to show slowing or negative growth. Attention will especially focus on the housing sector slowdown’s effects on financial stability and employment in regions most directly exposed to construction-related industries, especially the rust and resource belts of northern and northeast China. Stratfor expects reports of defaults by local property developers, resource companies and building materials businesses to become more common this quarter, along with anecdotal evidence of localized economic and employment crises in provinces like Shanxi. However, thanks in part to proactive government measures to calm local financial crises and in part to China’s inherent internal economic fragmentation, these crises will remain fairly isolated within the quarter.

Economic fragmentation, in conjunction with the government’s desire to allow the economic slowdown to continue and to use the slowdown to drive economic reform and restructuring, make it highly unlikely that Beijing will reverse course and engage in large-scale economic stimulus this quarter. Further interest rate or reserve requirement ratio cuts are possible — even probable — but will serve primarily to ensure that banks have ample liquidity to manage rising non-performing loan ratios. Otherwise, Beijing likely will continue using targeted fiscal and financial measures to boost certain regions and industries — notably services, agriculture and manufacturing — rather than opt for investment and credit expansion on anything approaching the scale of the post-2008 period. In the meantime, Chinese authorities will continue the messy process of implementing long-discussed reforms such as establishing a national property registry, creating a deposit insurance scheme (as a step toward liberalizing deposit rates at state-owned banks), and expanding municipal bond pilot programs.

In the political sphere, China’s second quarter will be dominated by the ongoing anti-corruption campaign. Over the coming months, the campaign will focus on officials from the 26 state-owned enterprises publicly named as potential targets in February, with particular attention to businesses in the struggling resources and construction-related industries. China will continue expanding investment, diplomatic and overland infrastructure ties across its periphery this quarter. Beijing will pay particular attention to implementing President Xi Jinping’s much-touted Silk Road Economic Belt initiative and solidifying plans to build overland rail ties to Thailand.

So we’ve gone from a world where 8% growth in China is a recession to the possibility of something much more traditional. Times appear to have changed.

What’s insane?

Saturday, April 11th, 2015

CA high speed rail to nowhere for $50-100 billion is insane; moreover, cities disappear. (Imagine if the clowns who run this operation spent the time and money on something that mattered, like, um, a reservoir or two or five!) Finally, neo-neocon shows how hard it is to change religions. Speaking of that, perhaps our colleague of many years ago, Tom Steyer, will lose his faith in magic beans one of these days.

Your government at work

Friday, April 10th, 2015

“For more than a decade, the Smelt Working Group has been regularly meeting to make key recommendations to help the delta smelt (Hypomesus transpacificus).” Response: “these policies have resulted in the diversion of more than 300 billion gallons of water away from farmers in the Central Valley and into the San Francisco Bay in order to protect the Delta smelt, an endangered fish that environmentalists have continued to champion at the expense of Californians. This water is simply being washed out to sea.” But it’s really a very cute, fish, about the width of 4 fingers, as the first link demonstrates. Utopia, there’s nothing like it!

Miscellaneous learning opportunity

Wednesday, April 8th, 2015


The Yangtze River is the key geographic, ecological, cultural and economic feature of China. Stretching 6,418 kilometers from its source in the Tibetan Plateau to its terminus in the East China Sea, the river both divides and connects the country. To its north lie the wheat fields and coal mines of the North China Plain and Loess Plateau, which unified China’s traditional political cores. Along its banks and to the south are the riverine wetlands and terraced mountain faces that historically supplied China with rice, tea, cotton and timber. The river passes through the highlands of the Yunnan-Guizhou Plateau, the fertile Sichuan Basin, the lakes and marshes of the Middle Yangtze and on to the trade hubs of the Yangtze River Delta. Its watershed touches 19 provinces and is central to the economic life of more people than the populations of Russia and the United States combined. The river’s dozens of tributaries reach from Xian, in the southern Shaanxi province, to northern Guangdong — a complex of capillaries without which China likely would never have coalesced into a single political entity…

Only after the Qin captured the Yangtze’s three primary regions — the Upper, Middle and Lower stretches — in 221 B.C., thereby gaining access to the southeast coast, did “China” as a single unit come into being. In the two millennia since, the Yangtze has continued to mark the boundary between kingdom and empire. The constant cycle between periods of unity (when one power takes the lands north and south of the Yangtze) and disunity (when that power breaks into its constituent regional parts) constitutes Chinese political history.

If the Yangtze did not exist, or if its route had veered downward into South and Southeast Asia (like most of the rivers that begin on the Tibetan Plateau), China would be an altogether different and much less significant place. Its population would be much smaller, isolated to the southeast coast, Loess Plateau and North China Plain — the only parts of Han China where economic life does not depend on the Yangtze. The provinces of central China, which today produce more rice than all of India, would be as barren as Central Asia. Regional commercial and political power bases like the Yangtze River Delta or the Sichuan Basin would never have emerged. The entire flow of Chinese history would be different.

Three regions in particular make up the bulk of the Yangtze River Basin: the Upper (encompassing present-day Sichuan and Chongqing), Middle (Hubei, Hunan and Jiangxi) and Lower Yangtze (Jiangsu and Zhejiang provinces, as well as Shanghai and parts of Anhui). Geography and time have made these regions into distinct and relatively autonomous units, each with its own history, culture and language. Each region has its own hubs — Chengdu and Chongqing for the Upper Yangtze; Wuhan, Changsha and Nanchang for the Middle Yangtze; and Suzhou, Hangzhou and Shanghai for the Lower Yangtze. Each region has its own internal market networks, and each historically is more interested in protecting its autonomy and prosperity than uniting under the north’s control. Conquering and integrating them from the outside therefore required not only overwhelming military power — historically, northern China’s advantage — but also complex bureaucratic and internal security apparatuses. Finally, it required a transport and communications infrastructure comprehensive enough to make the exercise of central authority over vast distances and diverse populations feasible…

the Yangtze River is by far the world’s busiest inland waterway for freight transport. In 2011, more than 1.6 billion metric tons of goods passed through it, representing 40 percent of the nation’s total inland waterborne cargo traffic and about 5 percent of all domestic goods transport that year — up 250 percent from 2004. Over the last decade, dramatic increases in waterway freight traffic have been seen in some provinces along the Yangtze River corridor, such as Anhui (840 percent, to 364 million tons), Chongqing (640 percent, to 117 million tons) and Hunan (500 percent, to 179 million tons). By 2011, the nine provincial capitals that sit along the Yangtze and its major tributaries had a combined gross domestic product of $1 trillion, up from $155 billion in 2001. That gives these cities a total wealth roughly comparable to the gross domestic products of South Korea and Mexico. This growth, since roughly 2003, has been underpinned by a massive expansion in centrally allocated fixed-asset investment into the interior, and specifically to those parts of the interior Beijing considers most viable as potential alternative or supplemental industrial bases to the southeast coast. Unsurprisingly, areas with ready access to the Yangtze River system have been targeted as cores of future inland urbanization…

Investment in the interior accelerated rapidly in the wake of the 2008-2009 financial crisis, when the sudden evaporation of external demand revealed just how fragile and imbalanced China’s economy had become. Thirty years of export-oriented manufacturing centered in a handful of coastal cities generated huge wealth and created hundreds of millions of jobs. But it also created an economy characterized by deep discrepancies in the geographic allocation of resources and by very little internal cohesion. By 2001, the economies of Shanghai and Shenzhen, for instance, were in many ways more connected to those of Tokyo, Seoul and Los Angeles than of the hinterlands of Sichuan and Shaanxi provinces. For most of the 1990s and 2000s, this lack of cohesion was viewed as an unfortunate but necessary and temporary byproduct of an economic model that was otherwise doing its job. After the 2008-2009 financial crisis, internal economic disunity — like the growth model it embodied — became a social and political liability.

A debt bubble helped keep things moving for a while; however, this rebalancing towards the interior seems like a more effective program over the longer term. It’s amazing that China has come this far this fast, without the massive dislocations some had forecast. (Spengler chimes in as well.)

The shocking power of the narrative

Tuesday, April 7th, 2015

We confess to being blindsided by the raw power of MSM narratives, despite having observed them rather closely for years. We expected their power to diminish, and instead the opposite has happened. The young don’t know anything, and between the media and the academy, they believe everything from the silly (CAGW) to the deeply pernicious. This Iran farce is something else again: it is at least 3 standard deviations from reality and yet the true believers still believe. We’ve never seen anything like it in our lives. (Sometimes the deviations from reality are funny, but not with Iran.) Still, there are cracks in the façade — witness Chuck Schumer coming over to the Dark Side. Strange world indeed.


Monday, April 6th, 2015

Larry Summers:

I can think of no event since Bretton Woods comparable to the combination of China’s effort to establish a major new institution and the failure of the United States to persuade dozens of its traditional allies, starting with Britain, to stay out. This failure of strategy and tactics was a long time coming…With U.S. commitments unhonored and U.S.-backed policies blocking the kinds of finance other countries want to provide or receive through the existing institutions, the way was clear for China to establish the Asian Infrastructure Investment Bank.

So it is that Larry Summers not only gives the vapors, he gets them too. HT: PL

Letting banks fail

Friday, April 3rd, 2015


China has taken another step in shifting its economy. Zhou Xiaochuan, chairman of the People’s Bank of China, announced March 31 that starting May 1, the Chinese government would insure individual deposits of up to 500,000 yuan (about $81,000) at Chinese banks. By providing an explicit guarantee on ordinary bank deposits, the insurance scheme will pave the way for Beijing to liberalize deposit interest rates, allowing banks to compete more fiercely to attract new depositors.

At the same time, it will enable China’s government, at least in theory, to step back from its longstanding but implicit promise not to let individual banks fail, injecting risk into the system. This deposit insurance is a key step toward curbing the moral hazard and widespread capital misallocation that characterize China’s economy, something that has long eluded Chinese decision-makers focused on maintaining high levels of economic growth. It would have the added advantage of boosting consumer confidence and spending.

Soon we’ll probably see some bank failures. It makes sense, given the lending practices since 2008/9.

Bad day

Tuesday, March 24th, 2015

The older we get, the more affecting things like the German airline crash become, because well, the kids could be on such a flight. We’ve logged close to 10 million miles with nary a problem (number 2 engine shutdown on a TWA L1011 and an Air Cal flight that had a hydraulic problem, that’s it). Too soon to know anything, but we were definitely reminded of this. (Spidey sense update: I learned tonight that the Dinoson had taken that flight in the other direction from Dusseldorf to Barcelona recently. Whoa.)

Imagine there’s no coffee

Thursday, March 19th, 2015

In an amusing exchange, Dennis Miller and Bill O’Reilly discussed Starbucks, and it was suggested that there be a Yoko Ono coffee order at Starbucks, a company being the object of some ridicule lately. Gwen Ifill was pretty funny. O’Reilly suggested that Starbucks could perform a community service by lowering prices for majority and minority patrons alike. Ha Ha. As for Yoko: “Imagine there’s no coffee, and you still have to pay eight bucks.”

Super fun bonus: Spengler does coffee.

And now for something completely different

Monday, March 16th, 2015


LNC’s economic guru, aerodynamic engineer Bjorn Fehrm, took a very close analysis of the A321LR vs the Boeing 757 and the Boeing 737-9. He analyzed the prospect of a long-range Boeing 737-8. He also looked at the prospect of re-starting the 757 in the form of a re-engined 757 Max.

— The A321LR comes close to being a 757-200W replacement but it’s not an exact match.
— The 737-9 simply doesn’t work as a 757 international replacement, due to operational performance issues in an international configuration.
— The 737-8 could be a long, thin, albeit much smaller capacity choice. (Lo and behold, Boeing subsequently began showing a concept called the 737-8ERX to airlines.)
— A larger 737 MAX 10, while technically feasible, is a three-quarters new airplane, so why bother?
— The 757 MAX is not competitive to the A321LR.
— The idea of a “787 Light” is a simplistic solution that doesn’t work, either: it’s entirely too much airplane.
— That a “757 replacement” is best an entirely new twin-aisle, 2x3x2 airplane of 200-250 seats and a range of 4,500nm-5,000nm…

Boeing will launch a new airplane program in what was then the 757 replacement arena around 2018 with a 2025 entry-into-service. This remains the timing we believe will be true for the 225/5000 or MOM airplane. At ISTAT, Steven Udvar-Hazy, CEO of Air Lease Corp., said he expects a new Boeing airplane in 8, 10, 12 years. That’s 2023-2027. LNC is sticking with its 2025 forecast.

Life is short. However, industrial lifespans can be very long. The T-56 was introduced in 1954, for example, and still powers many C-130 aircraft.

A-I say goodbye?

Sunday, March 15th, 2015

USA Today:

“I say robot, you say no-bot!” The chant reverberated through the air near the entrance to the SXSW tech and entertainment festival here. About two dozen protesters, led by a computer engineer, echoed that sentiment in their movement against artificial intelligence…Phil Libin, CEO of software firm Evernote, frames the protest and movement as the latest iteration of the man vs. machine debate. “People worry about robots taking over the world, but I assure you there are much more dangerous things (income inequality and global warming) in front of the line,” he said.

Once again, ban argon!!! BTW, Mr. Libin might be a little prejudiced, since he owns robots that run around and do work for him.

What’s up with a $17,000 Apple watch?

Saturday, March 14th, 2015

BI thinks they have an answer — smart marketing. We question that. Even if the watch’s guts are replaceable every 12-18 months to keep it technologically competitive, what’s the point? How annoying! OTOH, we have a classmate from business school whose flagship store in a large Asian city sold a $30,000 handbag once a week, no doubt a gift from a fine gentleman to someone special. (That business has dried up due to certain recent developments.) Well, it will be interesting to see just what sort of people go in for such foolishness.

Extra bonus fun: arithmetic am difficult.

Sectoral slowing

Friday, March 13th, 2015


Chinese industrial production grew only 6.8% in January and February, the slowest since 2008. Real estate sales plunged 15.8% in value. Fixed-asset investment, the principal driver of Chinese growth, recorded anemic growth at 1.05% and 1.03% in January and February, respectively (compared with 1.49% and 1.42% in the same period last year).

This fellow has his work cut out for him.

Rudd: “The strongest Chinese president since Mao”

Thursday, March 12th, 2015

Xi Jinping, the last party plenum in 2014 with its entrenching of the anti-corruption movement into the fabric of Chinese law, and the restoration of party legitimacy are among the subjects of a remarkable interview of the 26th PM of Australia, Kevin Rudd (who speaks Mandarin and is known in some circles as 陸克文). Some rough excerpts: “All of us who’ve grown up in study of Western political science assume the $14,000 per capita income threshold; then people demand more liberties, and what you end up with is one form of democratic government or other. Xi Jinping does not have that as his game plan for China. What he is attempting is to defy history. Frank Fukuyama’s point, we end with liberal capitalism is not where China is going. Xi Jinping is seeking to advance a radical alternative. We need to be very cautious in saying this is inherently unsustainable. The folks at the center of this are determined to prosecute this model.” On a perhaps unrelated but interesting note, the SCMP reports that Xi Jinping just reshuffled the leadership at China’s version of the Secret Service.

Update: the WaPo covers some similar territory.