Japan's big trade deficit grows
All while its economy slows
Abenomics did this
Policy went amiss
When this will crash, nobody knows
All while its economy slows
Abenomics did this
Policy went amiss
When this will crash, nobody knows
Sunday, March 09, 2014
The Cluster Of Due Diligence In China
The excellent folks at CALOBA recently held a very informative seminar on due diligence in China. The dominant theme was the profound attention to detail required for US businesses that want to do business with Chinese partners. I got way more than free Chinese food by attending.
Due diligence should have three main goals: confirming an investment thesis; verifying representations and warranties; and determining the quality of a prospective company. That's the legal framework that US attorneys schooled in the Anglo-Saxon common law model of jurisprudence understand. This understanding may as well be flipped on its head when US businesses go to China in search of acquisition targets or joint venture partners. US-based companies often need local Chinese counsel, an international accounting firm, and a local background investigation firm to understand a potential Chinese deal.
Caterpillar's US$580M write-down on a Chinese investment is the latest classic tale of what goes wrong with insufficient Chinese due diligence. Discovering inventory, revenue, and even whole enterprises that are nonexistent is the hard result of good due diligence. Leaving anything to "trust me" assurances is unacceptable. Here are some uncomfortable truths about Chinese businesses.
Chinese businesses keep more than one set of books. Don't be surprised to find three sets: one for auditors, one for tax authorities, and one for the chairperson or primary owner. Even the chair's set of books may not be completely accurate due to the weaknesses of middle management functions in China. This weakness stems from the Chinese educational system's lack of emphasis on critical thinking and problem solving. A solution will be at least a generation away if China chooses to reform its educational system. Very little empirical work in the public domain has established a methodology for detecting Chinese financial frauds before they become problems. This Princeton economic paper validates a model for detecting fraud based on data revealed in lawsuits. The Hong Kong Institute of Science and Technology describes an approach to detecting false financial statements in both listed and non-listed companies. Auditors examining small private Chinese companies need to go beyond these tools and reconstruct financial statements from scratch to meet US Sarbox standards.
Chinese theft of Western intellectual property is endemic. The US's National Bureau of Asian Research published its IP Commission report in May 2013, noting that China steals US IP equivalent in value to the entire US trade balance with Asia. Chinese companies value the prestige of listing on US stock exchanges. The threat of delisting against prolific corporate IP thieves from China could be a good deterrent.
Chinese employees lie routinely. China Labor Watch describes a cottage industry of Chinese consultants who will lie to help Chinese companies pass Western labor audits. Other cottage industries will falsify customer invoices and bank statements. They will even forge government documents. Efforts to reform this cultural deficiency will go nowhere without regulatory reform, and that will go nowhere without breaking the Communist Party's corruption.
Chinese executives are a pain in the behind. Anecdotes reveal that Chinese CEO-founders of publicly traded companies still think they own the company after listing. They don't understand the US regulatory regime's emphasis on disclosure in financial statements. They interfere with the investigations of US companies' hired lawyers and auditors as they reconstruct financial statements for Sarbox . This culture of impunity would be untenable if Chinese investors could hold executives liable for misconduct. I have met Chinese-American entrepreneurs and venture investors who think they can graft the American entrepreneurial culture onto China. I will say right now that this will not happen without severe reforms to Chinese regulatory agencies and courts, and that won't happen as long as the Communist Party controls China.
Any US company that fails to perform competent due diligence of a prospective Chinese investment may run afoul of the Foreign Corrupt Practices Act. (FCPA). Even China's state-owned enterprises (SOEs) fall under the FCPA regime. The US DOJ and SEC have joint jurisdiction over FCPA enforcement. US companies must insist that their non-US subsidiaries follow compliance programs to avoid sanctions because it is impossible to "quarantine" an FCPA violation in a foreign acquisition. It is still possible to entice Chinese prospects to do the right thing under FCPA. Non-US partners seek US relationships because the integrity and size of US capital markets gives them prestige. Bureaucrats in other countries seek promotions in part by appearing more competent and prestigious, and access to the US gives them this cachet. American multinationals can use the US's prestige as good currency for building trust with Chinese partners who will then comply with FCPA.
I am unable to locate a sample due diligence checklist or budget plan in open source searches. Multinational corporate law firms probably keep those details to themselves. Their services are not cheap. Such documents are probably good things to have if they come with triggers that will require prospective US investors to back away from a Chinese transaction when red flags appear. Having mediation agreements in place with Chinese business partners and good relations with Chinese regulators are good risk management measures, but they just don't substitute for common sense. Refusing to start a relationship with untrustworthy people is the unfortunate conclusion to a lot of Chinese due diligence.
China is still a developing economy because its weak regulations, questionable courts, unreliable economic statistics, and duplicitous middle managers pose enormous hazards to US businesses. The due diligence process for a Chinese prospect can easily become a "cluster" if Americans aren't prepared to walk away from problems they can't solve. American CEOs need to tone down their eagerness for headline-grabbing Chinese deals if they can't trust the people involved.
Due diligence should have three main goals: confirming an investment thesis; verifying representations and warranties; and determining the quality of a prospective company. That's the legal framework that US attorneys schooled in the Anglo-Saxon common law model of jurisprudence understand. This understanding may as well be flipped on its head when US businesses go to China in search of acquisition targets or joint venture partners. US-based companies often need local Chinese counsel, an international accounting firm, and a local background investigation firm to understand a potential Chinese deal.
Caterpillar's US$580M write-down on a Chinese investment is the latest classic tale of what goes wrong with insufficient Chinese due diligence. Discovering inventory, revenue, and even whole enterprises that are nonexistent is the hard result of good due diligence. Leaving anything to "trust me" assurances is unacceptable. Here are some uncomfortable truths about Chinese businesses.
Chinese businesses keep more than one set of books. Don't be surprised to find three sets: one for auditors, one for tax authorities, and one for the chairperson or primary owner. Even the chair's set of books may not be completely accurate due to the weaknesses of middle management functions in China. This weakness stems from the Chinese educational system's lack of emphasis on critical thinking and problem solving. A solution will be at least a generation away if China chooses to reform its educational system. Very little empirical work in the public domain has established a methodology for detecting Chinese financial frauds before they become problems. This Princeton economic paper validates a model for detecting fraud based on data revealed in lawsuits. The Hong Kong Institute of Science and Technology describes an approach to detecting false financial statements in both listed and non-listed companies. Auditors examining small private Chinese companies need to go beyond these tools and reconstruct financial statements from scratch to meet US Sarbox standards.
Chinese theft of Western intellectual property is endemic. The US's National Bureau of Asian Research published its IP Commission report in May 2013, noting that China steals US IP equivalent in value to the entire US trade balance with Asia. Chinese companies value the prestige of listing on US stock exchanges. The threat of delisting against prolific corporate IP thieves from China could be a good deterrent.
Chinese employees lie routinely. China Labor Watch describes a cottage industry of Chinese consultants who will lie to help Chinese companies pass Western labor audits. Other cottage industries will falsify customer invoices and bank statements. They will even forge government documents. Efforts to reform this cultural deficiency will go nowhere without regulatory reform, and that will go nowhere without breaking the Communist Party's corruption.
Chinese executives are a pain in the behind. Anecdotes reveal that Chinese CEO-founders of publicly traded companies still think they own the company after listing. They don't understand the US regulatory regime's emphasis on disclosure in financial statements. They interfere with the investigations of US companies' hired lawyers and auditors as they reconstruct financial statements for Sarbox . This culture of impunity would be untenable if Chinese investors could hold executives liable for misconduct. I have met Chinese-American entrepreneurs and venture investors who think they can graft the American entrepreneurial culture onto China. I will say right now that this will not happen without severe reforms to Chinese regulatory agencies and courts, and that won't happen as long as the Communist Party controls China.
Any US company that fails to perform competent due diligence of a prospective Chinese investment may run afoul of the Foreign Corrupt Practices Act. (FCPA). Even China's state-owned enterprises (SOEs) fall under the FCPA regime. The US DOJ and SEC have joint jurisdiction over FCPA enforcement. US companies must insist that their non-US subsidiaries follow compliance programs to avoid sanctions because it is impossible to "quarantine" an FCPA violation in a foreign acquisition. It is still possible to entice Chinese prospects to do the right thing under FCPA. Non-US partners seek US relationships because the integrity and size of US capital markets gives them prestige. Bureaucrats in other countries seek promotions in part by appearing more competent and prestigious, and access to the US gives them this cachet. American multinationals can use the US's prestige as good currency for building trust with Chinese partners who will then comply with FCPA.
I am unable to locate a sample due diligence checklist or budget plan in open source searches. Multinational corporate law firms probably keep those details to themselves. Their services are not cheap. Such documents are probably good things to have if they come with triggers that will require prospective US investors to back away from a Chinese transaction when red flags appear. Having mediation agreements in place with Chinese business partners and good relations with Chinese regulators are good risk management measures, but they just don't substitute for common sense. Refusing to start a relationship with untrustworthy people is the unfortunate conclusion to a lot of Chinese due diligence.
China is still a developing economy because its weak regulations, questionable courts, unreliable economic statistics, and duplicitous middle managers pose enormous hazards to US businesses. The due diligence process for a Chinese prospect can easily become a "cluster" if Americans aren't prepared to walk away from problems they can't solve. American CEOs need to tone down their eagerness for headline-grabbing Chinese deals if they can't trust the people involved.
Saturday, March 08, 2014
Evaluating The "Warren Buffett Indicator"
There's a lot of nonsense flying around the Interwebs about the so-called "Warren Buffett Indicator." This metric is derived from a comment Warren Buffett made years ago to the media. He stated that the ratio of the total market capitalization of equities in the US divided by the US's annual GDP indicated whether the stock market was attractively valued. A high ratio is supposed to mean overvaluation, and a low ratio means undervaluation. I'm trying to decipher the Oracle's logic behind this belief. This calls for some hard-core Alfidi Capital analysis.
The total market cap figure for the US at any given time is available in two places. The first is the Federal Reserve's "B.102 Balance Sheet of Nonfinancial Corporate Business" from the Z.1 release, specifically line 36 for "Nonfinancial corporate business; corporate equities; liability." The second is the St. Louis Fed's FRED data set "Nonfinancial Corporate Business; Corporate Equities; Liability, Level (MVEONWMVBSNNCB)," also from the Z.1 release. They both reveal the same number for market cap in 2013 Q4: US$21.36T. The GDP is found in the BEA's news releases. That figure for 2013 Q4 is US$17.08T. Divide market cap by GDP and the ratio is 125.1% for the final quarter of 2013.
Knowing the construction of this ratio is not as useful as knowing whether it indicates a true valuation. A Google search of this metric reveals that most of the financial press is guessing where the upper and lower bounds of this ratio belong. Does 125% mean overvaluation? Does 50% mean undervaluation? There's little time series data showing where this ratio stood in comparison to its long-term average because Wall Street is too lazy to find it. I can't find a reputable source that even calculated the ratio's long-term average. Keep reading if you want to see my awesome solution.
The metric may be more useful as a comparison across geography rather than time. The World Bank helpfully publishes the market cap to GDP ratio for many countries as series CM.MKT.LCAP.GD.ZS from its Financial Sector featured indicators. The data for multiple countries leads me to some intriguing observations. I looked at my preferred currency hedge countries: Australia, Canada, and Switzerland. Canada's ratio is pretty close to the US ratio as of 2012, the latest year for which data is displayed. Switzerland's ratio is much higher, and Australia's is somewhat lower. I am tempted to conclude that Australia's equity market was undervalued recently but that makes little sense as its currency was very strong in 2012. Perhaps this ratio is just one of many metrics for international investors to display in a dashboard as they consider geographic diversification.
I downloaded the World Bank's entire multi-year, multi-country data set in MS Excel format. This enabled me to calculate the long-term average ratio for the US, from 1988-2012, as 105.9%. There are other group categories in the data set that allow for comparisons. I selected the line for all "OECD members" and found the 1988-2012 average is 81.3%. It is intriguing to see that the US's market cap trades at a premium to the OECD aggregate over the long term. I wonder if the US's economic freedom and political stability confer structural advantages that entice investors to bid up its total market cap. It's hard to draw such a broad conclusion from only one metric. Other analysts are free to make their own country comparisons to the various regional aggregates.
Warren Buffett makes investments in companies that trade at a discount to their intrinsic value. He dropped an offhand comment about how a country's market cap compares to its GDP and the financial press jumps on it as some kind of concurrent indicator. I must be more circumspect in my own judgment of this valuation indicator. Consider that this ratio absolutely cratered in 2008 for the US, dropping to 79.7% by the World Bank's data. It stood at 104.5% in 2009 even though the US economy was still feeling the effects of the global financial crisis. This metric is most useful in a time series that compares the US to its competitors and to global aggregates. It is not some "fire and forget" trigger for action by itself.
The total market cap figure for the US at any given time is available in two places. The first is the Federal Reserve's "B.102 Balance Sheet of Nonfinancial Corporate Business" from the Z.1 release, specifically line 36 for "Nonfinancial corporate business; corporate equities; liability." The second is the St. Louis Fed's FRED data set "Nonfinancial Corporate Business; Corporate Equities; Liability, Level (MVEONWMVBSNNCB)," also from the Z.1 release. They both reveal the same number for market cap in 2013 Q4: US$21.36T. The GDP is found in the BEA's news releases. That figure for 2013 Q4 is US$17.08T. Divide market cap by GDP and the ratio is 125.1% for the final quarter of 2013.
Knowing the construction of this ratio is not as useful as knowing whether it indicates a true valuation. A Google search of this metric reveals that most of the financial press is guessing where the upper and lower bounds of this ratio belong. Does 125% mean overvaluation? Does 50% mean undervaluation? There's little time series data showing where this ratio stood in comparison to its long-term average because Wall Street is too lazy to find it. I can't find a reputable source that even calculated the ratio's long-term average. Keep reading if you want to see my awesome solution.
The metric may be more useful as a comparison across geography rather than time. The World Bank helpfully publishes the market cap to GDP ratio for many countries as series CM.MKT.LCAP.GD.ZS from its Financial Sector featured indicators. The data for multiple countries leads me to some intriguing observations. I looked at my preferred currency hedge countries: Australia, Canada, and Switzerland. Canada's ratio is pretty close to the US ratio as of 2012, the latest year for which data is displayed. Switzerland's ratio is much higher, and Australia's is somewhat lower. I am tempted to conclude that Australia's equity market was undervalued recently but that makes little sense as its currency was very strong in 2012. Perhaps this ratio is just one of many metrics for international investors to display in a dashboard as they consider geographic diversification.
I downloaded the World Bank's entire multi-year, multi-country data set in MS Excel format. This enabled me to calculate the long-term average ratio for the US, from 1988-2012, as 105.9%. There are other group categories in the data set that allow for comparisons. I selected the line for all "OECD members" and found the 1988-2012 average is 81.3%. It is intriguing to see that the US's market cap trades at a premium to the OECD aggregate over the long term. I wonder if the US's economic freedom and political stability confer structural advantages that entice investors to bid up its total market cap. It's hard to draw such a broad conclusion from only one metric. Other analysts are free to make their own country comparisons to the various regional aggregates.
Warren Buffett makes investments in companies that trade at a discount to their intrinsic value. He dropped an offhand comment about how a country's market cap compares to its GDP and the financial press jumps on it as some kind of concurrent indicator. I must be more circumspect in my own judgment of this valuation indicator. Consider that this ratio absolutely cratered in 2008 for the US, dropping to 79.7% by the World Bank's data. It stood at 104.5% in 2009 even though the US economy was still feeling the effects of the global financial crisis. This metric is most useful in a time series that compares the US to its competitors and to global aggregates. It is not some "fire and forget" trigger for action by itself.
Friday, March 07, 2014
Bad Infrastructure Grades Include Pipelines And Electricity Transmission Lines
It is very depressing to read the poor grades the ASCE gives to America's infrastructure. The organization's Infrastructure Report Card for 2013 shows that most of this country's public facilities earn D's. That is embarrassing. It's also a serious disconnect from the World Bank's LPI, which rates America's transportation infrastructure as having the 9th best infrastructure worldwide in 2012.
The LPI ranking is a more comprehensive score that includes human competencies in processing and tracking movements. The ASCE's report card addresses only the physical quality of infrastructure, but this does not explain its mismatch with the World Bank's data. Adjusting the LPI rankings so that the "Infrastructure" column achieves primacy elevates the US to the fourth-highest overall score just for that category. That is an even more severe divergence from the ASCE's opinions. This disconnect's underlying cause becomes apparent once we delve into the World Bank's "Domestic LPI" data. Clicking the "Infrastructure" link there shows that the LPI scores are based on self-reported assessments from respondents. Compare this with the ASCE's more scientific assessment of physical deficiencies. The ASCE's report card assesses investment need while the World Bank's surveys assess operating capacity. The Alfidi Capital conclusion is that the US economy can continue to perform at the high proficiency that the LPI scores indicate, right up to the point everything falls apart if the US does not correct the glaring deficiencies the ASCE noted.
The ASCE report card thankfully addresses energy infrastructure. Pipelines and electricity transmission lines are significant infrastructure categories, and many of these assets are privately owned. USDOE's EIA tracks the natural gas pipeline grid but regulatory oversight for new investment is distributed among several federal agencies. USDOT maintains the National Pipeline Mapping System for the most complete picture of the network's physical layout. FERC has the most regulatory control over the pipeline operating companies when they address markets. The AOPL's industry facts and policy issues do not address the overall physical condition of the nation's network. Assessing the sectors' investment needs means examining the annual reports of the major pipeline operators.
FERC completed a comprehensive study of the electricity transmission grid in 2002. The most important takeaway from any study of the nation's electric grid is that there is little connectivity between the east and west halves of the country. The next most important takeaway is that there is little connectivity to the most promising undeveloped sites for wind farms in the north-central US. The Edison Electric Institute tracks investments in the electric transmission grid. The US Bureau of Land Management has a plan to accelerate permitting on land designated as corridors for transmission lines. The need for additional investment is as obvious as the need for multi-jurisdictional regulatory coordination.
The US clearly needs to upgrade its physical infrastructure. The ASCE's estimated bill for $3.6T could probably have been paid with the cost of our wars in Iraq and Afghanistan plus the Wall Street TARP bailout. America instead chose to delay urgent investments in its public commons. This huge bill for infrastructure must now compete with middle class entitlements that the Bowles-Simpson NCFRR report determined to be unsustainable. America is in for a hard core wake-up. The bill for infrastructure is due now.
The LPI ranking is a more comprehensive score that includes human competencies in processing and tracking movements. The ASCE's report card addresses only the physical quality of infrastructure, but this does not explain its mismatch with the World Bank's data. Adjusting the LPI rankings so that the "Infrastructure" column achieves primacy elevates the US to the fourth-highest overall score just for that category. That is an even more severe divergence from the ASCE's opinions. This disconnect's underlying cause becomes apparent once we delve into the World Bank's "Domestic LPI" data. Clicking the "Infrastructure" link there shows that the LPI scores are based on self-reported assessments from respondents. Compare this with the ASCE's more scientific assessment of physical deficiencies. The ASCE's report card assesses investment need while the World Bank's surveys assess operating capacity. The Alfidi Capital conclusion is that the US economy can continue to perform at the high proficiency that the LPI scores indicate, right up to the point everything falls apart if the US does not correct the glaring deficiencies the ASCE noted.
The ASCE report card thankfully addresses energy infrastructure. Pipelines and electricity transmission lines are significant infrastructure categories, and many of these assets are privately owned. USDOE's EIA tracks the natural gas pipeline grid but regulatory oversight for new investment is distributed among several federal agencies. USDOT maintains the National Pipeline Mapping System for the most complete picture of the network's physical layout. FERC has the most regulatory control over the pipeline operating companies when they address markets. The AOPL's industry facts and policy issues do not address the overall physical condition of the nation's network. Assessing the sectors' investment needs means examining the annual reports of the major pipeline operators.
FERC completed a comprehensive study of the electricity transmission grid in 2002. The most important takeaway from any study of the nation's electric grid is that there is little connectivity between the east and west halves of the country. The next most important takeaway is that there is little connectivity to the most promising undeveloped sites for wind farms in the north-central US. The Edison Electric Institute tracks investments in the electric transmission grid. The US Bureau of Land Management has a plan to accelerate permitting on land designated as corridors for transmission lines. The need for additional investment is as obvious as the need for multi-jurisdictional regulatory coordination.
The US clearly needs to upgrade its physical infrastructure. The ASCE's estimated bill for $3.6T could probably have been paid with the cost of our wars in Iraq and Afghanistan plus the Wall Street TARP bailout. America instead chose to delay urgent investments in its public commons. This huge bill for infrastructure must now compete with middle class entitlements that the Bowles-Simpson NCFRR report determined to be unsustainable. America is in for a hard core wake-up. The bill for infrastructure is due now.
Thursday, March 06, 2014
Wednesday, March 05, 2014
Identifying The Manufacturing And Design Bodies Of Knowledge
I attended a PR seminar last night that got me thinking about design details that drive a PR message. A lot of the panel's comments addressed the expertise that cross-functional teams bring to product design. They also covered how product features drive user engagement, which will ultimately get the product's story told. Cross-functional teams have been all the rage for decades but the manufacturing knowledge that drives product design has become a lost art in the US ever since American executives started outsourcing production to developing countries. Practitioners need to know where knowledge of manufacturing and design can be found.
I asked the panel if a body of knowledge exists that product designers can use. One expert remarked that innovation has outpaced documentation, and many product development details can escape notice. That tells me there's a gap in knowledge management where some automated solution for documenting product and process changes can fill an enterprise need. Another panelist mentioned the free courseware at edX and free design templates at the MIT Media Lab. Those are great sources for people adding skills to their repertoire.
Professional societies have organized larger bodies of knowledge (BoKs) that pertain specifically to manufacturing and design. APICS has a BoK for operations management. The Society of Manufacturing Engineers has a BoK for manufacturing technology, and another BoK for lean certification. The Usability Body of Knowledge should be very useful to any produce designer working the human-computer interface (HCI) for wearables. The IEEE software engineering BoK, ASQ quality management BoK, and ASQ reliability engineer BoK are within the reach of anyone willing to study them. All of those things matter in scaling up hi-tech products.
The secrets to success in product development aren't secrets at all. They're buried under reams of academic concepts that practitioners have spent decades validating. Practitioners who master the above BoKs should populate the cross-functional teams that design products. The crucial factor today in product success is iterating product development in response to CustDev on a very compressed timeline. One panelist remarked that the old way of developing product features in advance of seeking customer feedback now takes too long to get a product to market. Enterprises doing CustDev can make that happen faster.
Most of the people I've seen attending the startup talks and meetups in San Francisco aren't very impressive. They're either too dense to benefit from the panelists' expert wisdom or too impatient to slog it out through the long road of development. There aren't many shortcuts in product development, and only experts can find the ones that exist. Experts do that once they've mastered BoKs and can see intuitively how systems behave. Come to think of it, these BoKs are the kind of multidisciplinary education that artisan designers in the maker movement need. The San Franciscans who show up at meetups should spend less time grabbing food from their hosts and more time applying BoKs to real projects.
I asked the panel if a body of knowledge exists that product designers can use. One expert remarked that innovation has outpaced documentation, and many product development details can escape notice. That tells me there's a gap in knowledge management where some automated solution for documenting product and process changes can fill an enterprise need. Another panelist mentioned the free courseware at edX and free design templates at the MIT Media Lab. Those are great sources for people adding skills to their repertoire.
Professional societies have organized larger bodies of knowledge (BoKs) that pertain specifically to manufacturing and design. APICS has a BoK for operations management. The Society of Manufacturing Engineers has a BoK for manufacturing technology, and another BoK for lean certification. The Usability Body of Knowledge should be very useful to any produce designer working the human-computer interface (HCI) for wearables. The IEEE software engineering BoK, ASQ quality management BoK, and ASQ reliability engineer BoK are within the reach of anyone willing to study them. All of those things matter in scaling up hi-tech products.
The secrets to success in product development aren't secrets at all. They're buried under reams of academic concepts that practitioners have spent decades validating. Practitioners who master the above BoKs should populate the cross-functional teams that design products. The crucial factor today in product success is iterating product development in response to CustDev on a very compressed timeline. One panelist remarked that the old way of developing product features in advance of seeking customer feedback now takes too long to get a product to market. Enterprises doing CustDev can make that happen faster.
Most of the people I've seen attending the startup talks and meetups in San Francisco aren't very impressive. They're either too dense to benefit from the panelists' expert wisdom or too impatient to slog it out through the long road of development. There aren't many shortcuts in product development, and only experts can find the ones that exist. Experts do that once they've mastered BoKs and can see intuitively how systems behave. Come to think of it, these BoKs are the kind of multidisciplinary education that artisan designers in the maker movement need. The San Franciscans who show up at meetups should spend less time grabbing food from their hosts and more time applying BoKs to real projects.
The Haiku of Finance for 03/05/14
Derive some rating
Product may still be worthless
Buyer must beware
Product may still be worthless
Buyer must beware
S&P Ratings Business Under Fire From Australia
S&P just can't catch a break. They came under the US Department of Justice's scrutiny while competitor Moody's escaped attention. Now an Australian judge has found S&P liable for the ratings it gave to poor investments. More rulings like this in the developed economies will make rating complex securities almost impossible due to liability exposure. I say "almost" because a ratings agency will have to place such severe limits on its assessments as to make a firm opinion meaningless.
The old principle of caveat emptor is slowly succumbing to a culture of settling scores. Investments are risky and more complicated investments carry more risk. Whatever hides inside all of the moving parts of derivatives can blow up the whole instrument. Sophisticated investors should know this but they feign ignorance when they think litigation can compensate them for bad judgment. The courts should be a remedy for fraud, not stupidity.
I have no sympathy for investment banks who knowingly package garbage into an security and misrepresent it as a good deal. Those people are liars and phonies. The prevalence of such behavior on Wall Street's sell side should be sufficient warning to institutional investors that complex derivatives are at best unnecessary and at worst a disaster waiting to happen. Ratings have always been mere icing on the cake. The cake itself has always been of questionable nutritional value.
McGraw Hill Financial (MHFI) doesn't have to throw away S&P just yet. The unit's index services are a very important brand in the financial sector. Capital IQ is indispensable to countless traders and analysts, until of course something with deeper Big Data analytics comes along. Potentially mortal wounds to credit rating services don't have to destroy an entire enterprise.
Nota bene: Alfidi Capital does not rate derivatives. If the Alfidi Capital Blog or research reports describe a stock, bond, or other security, such a description is always in the context of what I do with my own money. In other words, my opinions are only useful for my own decisions and not for anyone else's situation.
The old principle of caveat emptor is slowly succumbing to a culture of settling scores. Investments are risky and more complicated investments carry more risk. Whatever hides inside all of the moving parts of derivatives can blow up the whole instrument. Sophisticated investors should know this but they feign ignorance when they think litigation can compensate them for bad judgment. The courts should be a remedy for fraud, not stupidity.
I have no sympathy for investment banks who knowingly package garbage into an security and misrepresent it as a good deal. Those people are liars and phonies. The prevalence of such behavior on Wall Street's sell side should be sufficient warning to institutional investors that complex derivatives are at best unnecessary and at worst a disaster waiting to happen. Ratings have always been mere icing on the cake. The cake itself has always been of questionable nutritional value.
McGraw Hill Financial (MHFI) doesn't have to throw away S&P just yet. The unit's index services are a very important brand in the financial sector. Capital IQ is indispensable to countless traders and analysts, until of course something with deeper Big Data analytics comes along. Potentially mortal wounds to credit rating services don't have to destroy an entire enterprise.
Nota bene: Alfidi Capital does not rate derivatives. If the Alfidi Capital Blog or research reports describe a stock, bond, or other security, such a description is always in the context of what I do with my own money. In other words, my opinions are only useful for my own decisions and not for anyone else's situation.
Tuesday, March 04, 2014
Italian Innovation Day Comes To Silicon Valley
I attended Mind The Bridge's Italian Innovation Day yesterday at the Computer History Museum in Silicon Valley. I have never associated innovation with Italians before with the exception of Leonardo da Vinci. The event highlighted the connection between Italy's design tradition and the modern maker movement. I didn't let the blue and white balloons they inflated distract me in my search for hot Italian women.
I had to check out the claim one speaker made that Italian universities produce engineers at a lower cost than US universities. That may depend on the type of engineering degree. CollegeCalc has scored the annual costs of mechanical engineering degrees in the US. They also have the costs for chemical engineering degrees. The chemical engineering degree is slightly more expensive than the mechanical engineering degree. I can't find any statistics on the costs of Italian degrees. I did find this page from FEANI describing the European professional engineer designation. The FEANI page specifically notes that the EUR ING designation is not applicable in Italy because that country maintains its own accreditation standard for engineers. Such a duplicative body probably increases the cost of training an Italian engineer. Viva la . . . something or other.
Innovative workforces command premium compensation and multiply the creation of other jobs, according to Enrico Moretti's The New Geography Of Jobs. Italy's translation of design into innovation is still hampered by lack of a national English-language media that can help translate its innovations into the language of international business.
Let's run down Italy's ranking on some of my favorite international indexes. Italy is . . .
. . . 69th out of 175 on Transparency International's corruption index . . .
. . . 86th out of 178 on the Heritage Foundation's Index of Economic Freedom . . .
. . . 29th out of 142 on the Global Innovation Index.
Note for the record that the US beats Italy in all of those rankings. The most important claim to innovation is of course the Global Innovation Index rank, which puts Italy in the top quartile. Italian innovators should be concerned about whether they can profit from their innovations given Italy's disappointing scores on the first two rankings. Italy is a G-8 member because of its economy's size. These rankings show that GDP size has little to do with transparency, freedom, or innovation. The message to innovators should be painted in big red letters on a sign lit with spotlights saying "Escape to more hospitable economic climes," in Italian of course.
One panelist at this event mentioned that it is harder to start high-tech companies in the south of Italy than in the north. The persistent cultural divide in that country is a legacy of Italy's inconsistent reforms and economic policies since unification in the 19th century. The European Regional Development Fund has attempted to stimulate development under the EU regional policy's convergence objectives. Italy's regional divide is still significant despite this EU policy. Italian innovators need another clear message: "Move north if you want a tech startup."
There are undoubtedly strong ethnic connections between some Americans and their distant Italian relatives. Business leaders overestimate the importance of those connections. Ethnicity matters in business if trade missions and business associations transform kinship into real economic ties. The BAIA is one such network. My own ancestors left Italy for a better life in the US but I felt no kinship with the Italians running this event. They started it fifteen minutes late. I get irritated whenever people are late or keep me waiting. They excused it as "typical of Italy" but I call it typical of bad business.
Europe gets a lot of business strategies correct in spite of the unique situations of its constituent nations. The European Investment Fund builds the European Investment Bank's SME strategy. The Startup Europe Partnership is the EU's first try at building an ecosystem to match the one in Silicon Valley. Imitation is the sincerest form of flattery. The Italians promoting this project at the event I attended made it clear that they want sponsorship from large European corporations willing to commit their deep pockets to deal flow. It would help if the guiding structure for this platform wasn't scattered among different web portals. Here's where the confusion starts. This strategy for the EU Digital Agenda recognizes Startup America as inspiration. It does not link to this more detailed action plan for Startup Europe. Confusion will reign when strategic guidance contradicts itself. Launching the Startup Europe Partnership at Davos this year must have made for great conversation over cocktails. It's good that elites are on board with startup culture. Now they should step aside and let Europe's entrepreneurs go to work. Policy elites can work on their own innovations with the Lisbon Council.
Italian Innovation Day tipped its hat to the maker movement. Rome hosts a Maker Faire. MakeinItaly is the country's brand new foundation to push a local maker movement. I am hooked on the Maker Fair Bay Area ever since I attended last year. The crucial insight from makers addressing this Italian crowd was that multidisciplinary education develops intuition on how systems operate. I get engineer envy whenever I think of how teams of designers from different technical backgrounds put a project together on a tight deadline.
I did not find any hot Italian women at this event. They might have been there but I looked around quite thoroughly. Attractive women usually seek me out so I hardly think they could have escaped my notice if they attended. I can't subscribe to the notion that some parts of Europe have a higher proportion of attractive women. Women who were searching for the legendary Italian male models at this function would have been just as disappointed. One dude wore his waist-length hair in a knotted mass. It was easy for me to be the most handsome man there with such lame competition. Italians may be gradually exchanging their hot-blooded appeal for cool techno trappings. That's fine if it leads to national prosperity and an escape from the PIIGS categorization. Make it happen, Italian makers.
I had to check out the claim one speaker made that Italian universities produce engineers at a lower cost than US universities. That may depend on the type of engineering degree. CollegeCalc has scored the annual costs of mechanical engineering degrees in the US. They also have the costs for chemical engineering degrees. The chemical engineering degree is slightly more expensive than the mechanical engineering degree. I can't find any statistics on the costs of Italian degrees. I did find this page from FEANI describing the European professional engineer designation. The FEANI page specifically notes that the EUR ING designation is not applicable in Italy because that country maintains its own accreditation standard for engineers. Such a duplicative body probably increases the cost of training an Italian engineer. Viva la . . . something or other.
Innovative workforces command premium compensation and multiply the creation of other jobs, according to Enrico Moretti's The New Geography Of Jobs. Italy's translation of design into innovation is still hampered by lack of a national English-language media that can help translate its innovations into the language of international business.
Let's run down Italy's ranking on some of my favorite international indexes. Italy is . . .
. . . 69th out of 175 on Transparency International's corruption index . . .
. . . 86th out of 178 on the Heritage Foundation's Index of Economic Freedom . . .
. . . 29th out of 142 on the Global Innovation Index.
Note for the record that the US beats Italy in all of those rankings. The most important claim to innovation is of course the Global Innovation Index rank, which puts Italy in the top quartile. Italian innovators should be concerned about whether they can profit from their innovations given Italy's disappointing scores on the first two rankings. Italy is a G-8 member because of its economy's size. These rankings show that GDP size has little to do with transparency, freedom, or innovation. The message to innovators should be painted in big red letters on a sign lit with spotlights saying "Escape to more hospitable economic climes," in Italian of course.
One panelist at this event mentioned that it is harder to start high-tech companies in the south of Italy than in the north. The persistent cultural divide in that country is a legacy of Italy's inconsistent reforms and economic policies since unification in the 19th century. The European Regional Development Fund has attempted to stimulate development under the EU regional policy's convergence objectives. Italy's regional divide is still significant despite this EU policy. Italian innovators need another clear message: "Move north if you want a tech startup."
There are undoubtedly strong ethnic connections between some Americans and their distant Italian relatives. Business leaders overestimate the importance of those connections. Ethnicity matters in business if trade missions and business associations transform kinship into real economic ties. The BAIA is one such network. My own ancestors left Italy for a better life in the US but I felt no kinship with the Italians running this event. They started it fifteen minutes late. I get irritated whenever people are late or keep me waiting. They excused it as "typical of Italy" but I call it typical of bad business.
Europe gets a lot of business strategies correct in spite of the unique situations of its constituent nations. The European Investment Fund builds the European Investment Bank's SME strategy. The Startup Europe Partnership is the EU's first try at building an ecosystem to match the one in Silicon Valley. Imitation is the sincerest form of flattery. The Italians promoting this project at the event I attended made it clear that they want sponsorship from large European corporations willing to commit their deep pockets to deal flow. It would help if the guiding structure for this platform wasn't scattered among different web portals. Here's where the confusion starts. This strategy for the EU Digital Agenda recognizes Startup America as inspiration. It does not link to this more detailed action plan for Startup Europe. Confusion will reign when strategic guidance contradicts itself. Launching the Startup Europe Partnership at Davos this year must have made for great conversation over cocktails. It's good that elites are on board with startup culture. Now they should step aside and let Europe's entrepreneurs go to work. Policy elites can work on their own innovations with the Lisbon Council.
Italian Innovation Day tipped its hat to the maker movement. Rome hosts a Maker Faire. MakeinItaly is the country's brand new foundation to push a local maker movement. I am hooked on the Maker Fair Bay Area ever since I attended last year. The crucial insight from makers addressing this Italian crowd was that multidisciplinary education develops intuition on how systems operate. I get engineer envy whenever I think of how teams of designers from different technical backgrounds put a project together on a tight deadline.
I did not find any hot Italian women at this event. They might have been there but I looked around quite thoroughly. Attractive women usually seek me out so I hardly think they could have escaped my notice if they attended. I can't subscribe to the notion that some parts of Europe have a higher proportion of attractive women. Women who were searching for the legendary Italian male models at this function would have been just as disappointed. One dude wore his waist-length hair in a knotted mass. It was easy for me to be the most handsome man there with such lame competition. Italians may be gradually exchanging their hot-blooded appeal for cool techno trappings. That's fine if it leads to national prosperity and an escape from the PIIGS categorization. Make it happen, Italian makers.
Monday, March 03, 2014
Financial Sarcasm Roundup for 03/03/14
Global tensions shall not deter me from being sarcastic about finance. Conflicts aren't funny but the foibles of the finance sector provide comic relief.
The European Banking Authority is just now waking up to the risks of digital currencies. Welcome to the party. It took the Mt. Gox bankruptcy to alert regulators in the largest economies. They should have paid attention since at least 2009 when it Bitcoin was obviously becoming a disruptive phenomenon in finance. Now it's too late for the hapless suckers who used Mt. Gox to change real money into fake money. It's not too late for "investors" in other non-coins once regulators decide that crypto-coins aren't real currencies. The difference after regulation is that crypto-nerds will have to live with the reporting and taxation requirements they thought they could escape. Techno-idiots can't get any dumber! They should go back to playing video games.
US GDP growth is getting another downward revision. Those of you who follow Shadow Government Statistics, like me, would not be surprised. Investors who do not understand the extent to which statisticians adjust official economic results deserve to get smacked upside the head really hard. I'd be happy to smack them but I'll let the markets do my dirty work for me. Market analysts react with a yawn because they know the numbers are gamed and that the slow US recovery is driven by exceptional forces - monetary stimulus, share buybacks, and other steroid effects. These forces are unsustainable. Analysts can't get any dumber! They should go back to goofing off during office hours.
One ECB board member is waking up to the risk in sovereign debt. It's too bad no one will listen. The phantom recovery in some parts of Europe tempts big banks to underwrite more government bond issues. Refusing to hold excess capital against these increasingly risky assets exposes European banks to destruction. The ECB's stress tests were designed to ignore sovereign credit risks. European bankers can't get any dumber! They should go back to drinking espresso, or whatever European folks drink these days.
European bankers should underwrite a Bitcoin-denominated sovereign debt issue that analysts could rate without even understanding it. Such a development would provide me with the ultimate basis for sarcasm. Lots of stupid people would lose money, but those idiots are losing money anyway betting on those constituencies separately. Rolling them all together into a big nonsensical blob just makes sense.
Sunday, March 02, 2014
The Limerick of Finance for 03/02/14
Shock conflict emerged overnight
Global markets are due for a fright
Gas supply is at stake
Leaders should step on brake
Suddenly our future's not so bright
Saturday, March 01, 2014
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