?When the fools are dancing, the greater fools are watching,? according to an old Japanese proverb.
I have just finished leisurely reading Tom Standage?s book The Victorian Internet: The Remarkable Story of the Telegraph and the Nineteenth Century On-Line Pioneers.
Standage discusses the creation and development of the telegraph system and how it revolutionized communication in the nineteenth century. The book claims that Modern Internet users are in many ways the heirs of the telegraphic tradition, meaning that how people used the telegraph during the nineteenth century parallels how people use the Internet today.
Standage goes on to suggest that by studying how the telegraph developed and created certain trends in society, we can learn a lot about the challenges, opportunities, and pitfalls of the Internet today. From discussing the social impact of both systems with the development of online social interactions to the way that business and work was revolutionized, the book has it all!
You can laugh about how Victorians flirted and developed romantic connections over Morse code and you can marvel at the way getting more rapid information, particularly with the invention of the stock ticker, allowed financial markets to emerge and grow. If you Bloomberg slaves are looking for an educational and entertaining read, click here.
My friend, Ian Bremmer of the Eurasia Group, a global risk analyst who I regularly follow, will soon publish another book entitled The End of the Free Markets: Who Wins the War Between States and Corporations. I find this highly depressing, as it takes me as long to read one of Ian?s books as it takes him to write another one. To read a review of his highly insightful tome published in 2008, The Fat Tail: The Power of Political Knowledge for Strategic Investing, please click here. The world is reaching a tipping point. For the past 40 years, global multinationals with unfettered access to capital, consumer, and labor markets have driven the world economy. There is now a new competitor on the scene, the ?state capitalist,? where political considerations trump economic ones in the allocation of resources. Of course, China is the main player, joined by several other emerging nations. The middle kingdom has posted double digit annual growth for the past 30 years without freedom of speech, economic rules of the road, and independent judiciary, and credible property rights. China?s leadership is clearly worried that Western style freedoms will enable wealth to be generated outside their control and be used to orchestrate their overthrow. Private Western companies can only engage in transactions, which stand on their own economically and deliver the short-term profits, which their shareholders demand. In China, long term political goals enable them to pay through the nose to obtain stable supplies of oil, gas, minerals, and materials. That keeps the country?s massive work force employed, off the streets, and politically neutered. The bottom line is that there are now two competing forms of capitalism. The recent financial crisis has accelerated their entrance to the global stage, moving us from a G7 to a G20 dominated world. Globalization is not ending, but it is definitely entering a new chapter. For those of us who read tea leaves to ascertain long term economic trends, this will be a must read. ? 
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?The art of taxation consists of so plucking the goose as to obtain the largest amount of feathers with the smallest amount of hissing,? said Jean-Baptist Colbert, a 17th century French minister of Finance.
I spent the weekend attending a graduation in Washington state, a stone?s throw from where the 2010 Winter Olympics were held last year. While sitting through the tedious reading of 550 names, and listening to the wailing bagpipes, I did several calculations on the back of the commencement program. I came to some startling conclusions.
Higher education has grown into a gigantic industry, with a massively positive impact on America?s balance of payments, generating an impact on the world far beyond the dollar amounts involved. There are 671,616 foreign students in the US (90,000 from China alone) paying an average out-of-state tuition of $25,000 each, creating a staggering $16.8 billion of payments a year.
On a pro rata basis, that amounts to a serious part of our total receipts in services in Q4 2009 of $131.6 billion, not far behind financial services (click here for the Bureau of Economic Analysis site ) . A fortunate few, backed by endowed chairs and buildings built by wealthy and eager parents, land places at prestigious Universities like Harvard, Princeton, Yale, and UC Berkeley. The overwhelming majority, however, enroll in the provinces in a thousand rural state universities and junior colleges that most of us have never heard of.
The windfall has enabled once sleepy little schools to build themselves into world class institutions of higher learning with 30,000 or more students, boasting state of the art facilities, much to the joy of local residents and state education officials. Furthermore, this dominance of education industry is steadily Americanizing the global establishment.
I can?t tell you how many times over the decades I have run into the Persian Gulf sovereign fund manager who went to Florida State, the Asian CEO who attended Cal State Hayward, or the African finance minister who fondly recalled rooting for the Kansas State Wildcats. Those who constantly bemoan the impending fall of the Great American Empire can take heart by merely looking inland at these impressive degree factories. It also might give them an explanation of why the dollar is so strong in the face of absolute gigantic and perennial trade deficits.
My tuxes are packed, the hotels are booked, and the limo is waiting outside. The Lear jet is fully fueled up and waiting for me at nearby Buchanan Field, the flight plan already filed. I am taking off for Europe today for a mix of business and pleasure.
Along the way I will be meeting with other hedge fund managers, senior government officials, CEO?s at major banks and Fortune 500 companies, large institutional investors, and a Nobel Prize winner or two. Getting out into the real world and soaking up new data and opinions is invaluable in shaping my own global view, and your performance benefits from it. I don?t find these people walking across my living room, so go out into the world and seek them I must.
I?ll kick off my trip with a strategy luncheon in Chicago on June 29, which is always well attended. Pit traders from the CME should note that tank tops and flip flops are not permitted by the club. With any luck, you will later find me that evening at the Windy City?s Union Station waiting for the overnight train to New York, the famed Lake Shore Limited. I always get a ton of writing done on these long train rides.
The Fourth of July will find me on a reader?s mega yacht watching the fireworks near the Brooklyn Bridge. I hope to reconnect with many old friends at my New York strategy seminar on July 5. The next day I will enjoy the view from my penthouse suite on Cunard?s Queen Mary II as we pass the Statue of Liberty outbound for Southampton, England. Hopefully, those who signed up for my Seminar at Sea are well stocked with motion sickness pills.
In London I?ll catch William Shakespeare?s The Tempest at the Globe Theater, spend an evening at the Royal Ballet, and visit the Royal Academy of Arts Summer Exhibition. At least one morning you will find me catching an old fashioned straight razor shave at the Jermyn Street Barbers, and topping up my supply of business shirts at Turnbull & Asser. The cheese trolley at the Michelin restaurant is to die for.
For accommodations, I?ll be staying at the ever reliable, if not spartan, British Navy Officers Club. You know, the place where Horatio Nelson used to hang out with his pals? After my July 16 London strategy luncheon it will be a race to St. Pancreas Station to catch the Eurostar under the English Channel to Paris.
I will spend the night at the French Army Officers Club. You know, the place where Napoleon killed time with his buddies? Last time I had dinner there, the table on my right saw a group packed with French Air Force officers planning the next NATO air strike on Libya, while the one on my left saw a group negotiating to sell an aircraft carrier to some Chinese admirals. My ears were ringing for a week.
Frankfurt is next on the agenda where I?ll be hosting a strategy lunch on July 18, intermixed with meetings with the CEO?s of major German industrial companies seeking how to navigate the global economy in the ?new normal.? After that, I am counting on my winter of polka instructions to pay off big time.
In the lead up to my July 27 strategy seminar in Zermatt, I?ll be consulting with the representatives of some Middle Eastern royal families while they vacation in the Alps. One afternoon will be devoted to taking the paddle wheel steamer on Lake Geneva to the Chateau de Chillon in Montreux where Lord Byron used to live, sipping fine Swiss white wines along the way.
The high point of my trip, both literally and figuratively, will be my annual assault on the Matterhorn, which at 14,692 feet is higher than anything we have in the continental US. With another year of arduous training under my belt, it?s now or never. I?ll spend my evenings at public steam rooms where, afterwards, I roll around in the snow with the local fr?uleins and beat myself with birch branches. It is invigorating, to say the least. Those Europeans are so open-minded.
The chalet that I have reserved has a granite boulder foundation, an outhouse, and high-speed broadband. I will be ducking out from my mountain hideout only to fly to London for the day from the nearby Swiss Air Force base at Sion on a client?s private jet to attend the opening ceremony for the Olympics.
Next, it?s on to Milan.? If a new Brioni suit and pair of Gucci shoes throw themselves upon me while I stroll through the Galleria I may be unable to resist.
I will be traveling with my laptop and keeping touch with the markets. While 17th and 18th century Internet service is passable, it is unreliable. So unless I see something extraordinary, I will be issuing few new trade alerts. The remaining positions in the model portfolio are best left to ferment over a slow summer and profit from the time decay.
After grinding out more quality content than anyone else on the Internet and maintaining an average annualized 30% return, I deserve a break. The month of May alone saw me shoot out 28 trade alerts, 20 letters, 5 live webinars, and countless radio and TV interviews. I?m basically writing the equivalent of ?War and Peace? every six months. It took Tolstoy ten years to pen his, but then he didn?t have Microsoft Office. I need to spend some time alone on a mountain top, communing with the spirits, attempting to focus on long term financial trends through the smoke and dust.
While on the road, I will be re-running some of my favorite research pieces from the past, interspersed with some new pieces that I will write on the road. This is to expose my thousands of new subscribers to the golden oldies, and to remind the legacy readers who have since forgotten them. I?ll return to my desk in San Francisco full time on August 8.
In the meantime, I shall be raising a glass of vintage Champagne to all of you at dinner as we pass over the Titanic on the 100th anniversary of its sinking, the loyal readers of the Diary of a Mad Hedge Fund Trader. Salut! Prost! And Cheers! I couldn?t do all of this without you. Thank you for my great life!
I?ll Meet You on Top
Buried in the recently passed Dodd-Frank financial reform bill are massive financial rewards for turning in your crooked boss. The SEC is hoping that multimillion dollar rewards amounting to 10%-30% of sanction amounts will drive a stampede of whistleblowers to their doors with evidence of malfeasance and fraud by their employers.
If such rules were in place at the time of the settlement with Goldman Sachs (GS), the bonus, in theory, could have been worth up to $500 million. Wall Street firms are bracing themselves for an onslaught of claims, legitimate and otherwise, by droves of hungry gold diggers looking for an early retirement.
Don't count on this as a get rich quick scheme. Government hurdles to meet the requirement of a true stoolie can be daunting. The standard of evidence demanded is high, and must be matched with the violation of specific federal laws. Idle chit chat at the water cooler won't do. Litigation can stretch out over five years, involve substantial legal costs, and often lead to a non-financial settlement with no reward. For those who do deliver the goods, death threats from defendants are not unheard of.
Having 'rat' on your resume doesn't exactly look inviting either. Just ask Sherron Watkins, the in-house CPA who turned in energy giant Enron's Ken Lay, Andy Fastow, and Jeffrey Skilling just before it crashed in flames. Nearly a decade later, Sherron earns a modest living on the lecture circuit warning of the risks of false accounting, and whistleblowing. There have been no job offers.
The great thing about running an online newsletter is that it is not only self-correcting, it is self-enhancing. Whenever I make a mistake or state a factual error, my inbox catches on fire when corrections, additional data, and chastisements. Ditto when I exclude some key points to bolster my own arguments. So I thought I would publish a letter I received from a reader from the subcontinent regarding yesterday?s piece on ?India is Catching Up With China? (click here).
?Dear Sir,
I am surprised in your comparison with China because you have missed several important points. India is a democracy. It does not have a Ponzi/mafia political party which focuses on looting the nation. Check out the number of billionaires in the Communist Party of China. Patents are relatively much safer in India. The press is free and vibrant. There is no "mad" overcapacity in anything like empty buildings/cities and the like.
The Indian judiciary is slow and generally very fair. India does not have problems of one child policy. Air pollution in Indian cities is probably lower. Most importantly: the fundamentals of the Indian economy in many ways are better than the Chinese. India does not control its currency artificially. There are fewer Indians trying to run out of India than Chinese trying to run out of China. In fact, most Indians can take foreign currency outside the country up to a limit. Few do it in China.?
Regards,
Kshitij Gupta
Here?s the Better Bet
When I first visited Calcutta in 1976, more than 800,000 people were sleeping on the sidewalks, I was hauled everywhere by a very lean, barefoot rickshaw driver, and drinking the water out of a tap was tantamount to committing suicide. Some 36 years later, and the subcontinent is poised to overtake China's white hot growth rate.
My friends at the International Monetary Fund just put out a report predicting that India will grow by 8.5% this year. While the country's total GDP is only a quarter of China's $5 trillion, its growth could exceed that in the Middle Kingdom as early as 2013. Many hedge funds believe that India will be the top growing major emerging market for the next 25 years, and are positioning themselves accordingly.
India certainly has a lot of catching up to do. According to the World Bank, its per capita income is $3,275, compared to $6,800 in China and $46,400 in the US. This is with the two populations close in size, at 1.3 billion for China and 1.2 billion for India.
But India has a number of advantages that China lacks. To paraphrase hockey great, Wayne Gretzky, you want to aim not where the puck is, but where it's going to be. The massive infrastructure projects that have powered much of Chinese growth for the past three decades, such as the Three Gorges Dam, are missing in India. But financing and construction for huge transportation, power generation, water, and pollution control projects are underway.
A large network of private schools is boosting education levels, enabling the country to capitalize on its English language advantage. When planning the expansion of my own business, I was presented with the choice of hiring a website designer here for $60,000 a year, or in India for $5,000. That's why booking a ticket on United Airlines or calling technical support at Dell Computer gets you someone in Bangalore.
India is also a huge winner on the demographic front, with one of the lowest ratios of social service demanding retirees in the world. China's 30 year old 'one child' policy is going to drive it into a wall in ten years, when the number of retirees starts to outnumber their children.
There is one more issue out there that few are talking about. The reform of the Chinese electoral process at the next People's Congress in 2013 could lead to posturing and political instability which the markets could find unsettling. India is the world's largest democracy, and much of its current prosperity can be traced to wide ranging deregulation and modernization than took place 20 years ago.
I have been a big fan of India for a long time, and not just because they constantly help me fix my computers. In August, I recommended Tata Motors (TTM), and it has gone up in a straight line since, instantly making it one of my top picks of the year. On the next decent dip take a look at the Indian ETF's (INP), (PIN), and (EPI).
Better to Own This Pyramid
Than This Pyramid
Taxi! Taxi!
I have spent many hours speaking at length with the generals who are running our wars in the Middle East, like David Petraeus, and James E. Cartwright. To get the boots on the ground view, I attended the graduation of a friend at the Defense Language Institute in Monterey, California, the world's preeminent language training facility.
As I circulated at the reception at the once top secret installation, I heard the same view repeated over and over in the many conversations swirling around me. While we can handily beat armies, defeating an idea is impossible. With the planet's fastest growing population, Muslims are expected to double from one to two billion by 2050, the terrorists can breed replacements faster than we can kill them. The US will have to maintain a military presence in the Middle East for another 100 years. The goal is not to win, but to keep the war at a low cost, slow burn, over there, and away from the US.
I have never met a more determined, disciplined, and motivated group of students. There were seven teachers for 16 students, some with PhD's and all native Arabic speakers. The Defense Department calculates the cost of this 63 week, total emersion course at $200,000 per student.
They are taught not just language, but also the history, culture, and politics of the region as well. I found myself discussing at length the origins of the Sunni/Shiite split in the 7th century, the rise of the Mughals in India in the 16th century, and the fall of the Ottoman Empire after WWI, and this was with a 19 year old private from Kentucky whose previous employment had been at Wal-Mart! I doubt most Americans his age could find the Middle East on a map. Students graduated with near perfect scores. If you fail a class, you get sent to Iraq, unless you are in the Air Force, which kicks you out of the service completely.
As we feasted on hummus and other Arab delicacies, I studied the pictures on the wall describing the early history of the DLI in WWII, and realized that I knew several of the participants. The school was founded in 1941 to train Japanese Americans in their own language to gain an intelligence advantage in the Pacific war. General 'Vinegar Joe' Stillwell said their contribution shortened the war by two years. General Douglas McArthur believed that an army had never before gone to war with so much advance knowledge about its enemy. To this day, the school's motto is 'Yankee Samurai'.
My old friends at the Foreign Correspondents' Club of Japan will remember well the late Al Pinder. He spent the summer of 1941 photographing every Eastern facing beach in Japan, successfully smuggled them out hidden in a chest full of Japanese sex toys. He then spent the rest of the war working for the OSS in China. I know this because I shared a desk in Tokyo with Al for nearly ten years. His picture is there in all his youth, accepting the Japanese surrender in Korea with DLI graduates.
I Guess I Should Have Studied Harder