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If Chinese companies want to go up on the ladder of manufacturing, they have to get the help from German companies. Germany's Resiliency Buoys Europe Article Comments (9) MORE IN BUSINESS » Email Print Save ↓ More smaller Larger By BRIAN BLACKSTONE And MARCUS WALKER Germany—buoyed by its cadre of family-owned niche companies—appears to be weathering the global slowdown, countering fears that Europe's economic powerhouse faces a sharp downturn that could deepen the region's debt crisis. A pair of bullish reports, on German employment and manufacturing, were reassuring on Wednesday: Unemployment remained at its lowest level in nearly two decades last month, while July machine orders jumped 9% from a year earlier. The latest data suggest that Europe's largest economy, which is expected to grow 3% this year, remains resilient, even as evidence mounts that the U.S. and much of the rest of the world are cooling. The German news offered a ray of optimism for the rest of Europe as it struggles to overcome its debt crisis. A downturn in Germany, which accounts for about a third of the euro-zone's economy, would likely worsen the malaise in the Continent's struggling economies, including important export markets such as Spain and Italy. An economic slowdown in Germany would make it even harder for Chancellor Angela Merkel to justify spending billions in German taxes to prop up countries such as Greece that are buckling under a mountain of debt. In recent weeks, a string of bearish data fueled fears among investors that Germany's economic recovery was petering out. The country's economy grew at just 0.5% at an annualized rate last quarter after a sizzling first quarter. Surveys since then suggest the economy has lost much of its strength. View Full Image Bloomberg News A ship is berthed at Hamburg. Exports are helping power Germany's economic growth. Yet a number of economists now say predictions that Germany's economy could fall off a cliff as Asia and the U.S. slow were overdone. Wednesday's employment report bolstered that view. Unemployment stayed at 7% in August, according to Germany's labor office. (It is even lower when calculated using common European methods.) "Growth may not be buoyant, but it's rather stable," says Michael Heise, chief economist at German insurer Allianz SE. "There's a new flexibility of the German economy." That flexibility is rooted in a system in which businesses and employees frequently agree to changes in wages and the workweek, if needed, to respond to an unexpected drop in demand. In 2008 and 2009, this arrangement, known as Kurzarbeit, or "short work," kept factories humming and workers in their jobs until conditions improved. Until 2005, Germany was written off by some as almost an industrial museum, suffering from unemployment above five million, excessive regulation and welfare burdens. Now, some observers instead talk of a new Wirtschaftswunder, an economic miracle echoing the postwar boom that re-established Germany as Europe's economic motor. The global economy "will have its ups and downs…but there will be opportunities as well," says Bernd Supe-Dienes, a 53-year-old managing partner of Dienes Group, a knife and cutting-systems company located just outside Cologne in northwestern Germany. His business is one of an army of German midsize companies, known collectively as the Mittelstand. The success these little-known companies have had in exploiting niches in the global economy is often credited for turning once-sluggish Germany into Europe's economic bulwark. View Full Image A closer look inside Dienes's unassuming factory just outside the small Rhineland town of Overath offers clues to the secrets of Germany's resilience. It also shows its limits. Inside the low, whitewashed building, employees in overalls operate heavy equipment that crafts the components of Dienes's products: machines bristling with rows of circular blades that can cut newspapers, adhesive tape and copper. The precision components are made with tolerances as small as one thousandth of a millimeter. One machine, recently sold to a Japanese paper company, was worth €600,000 ($865,000). Dienes, which now has 500 employees, has been making pretty much the same thing since Mr. Supe-Dienes's grandfather founded it in 1913. The family business has been through ups and downs, tracking Germany's turbulent history. By seeking out new overseas markets and new uses for its cutting machines, it survived two world wars, the Great Depression, the 1970s oil crises and Germany's brief post-unification bubble. Many factory workers spend their whole careers at Dienes, gaining such skill that they often suggest improvements to the designs they are given by the company's engineers, says Karl-Willi Lob, head of the plant's union. The workers view Dienes's family owners as benevolent patriarchs, says Mr. Lob. "The Supe-Dienes brothers have an ear for the people. If you have a problem, you go to Bernd or Rudolf," he says. "Because the brothers are like that, the labor cooperation is very good here." A portrait of the brothers' grandfather, company founder Karl Rudolf Dienes, hangs beside the pin-up calendar in the union head's office. Such cozy labor relations, typical of many midsize German companies, are harder to find in most other European countries, where labor conflicts have hampered companies' flexibility. In recent years, close cooperation with in-house labor representatives allowed German companies to make themselves more efficient within Europe's system of strong labor rights. View Full Image Dienes Werke A Dienes machine cuts paper into programmable widths at its factory in Overath. The company has exploited a niche in the global economy. Many businesses have even persuaded employees to work longer hours for less money in response to rising global competition. This flexibility "has lessened the fear in the corporate sector of aggressive wage demands that could punish them if they have too much labor," says Mr. Heise, the economist at Allianz. At Dienes, employees willingly made sacrifices two years ago to steer the company through the financial crisis and global recession. In 2009, orders slumped by about one-third, prompting the company to put many of its workers on short hours for less pay. A German government program that compensated workers on short hours for their lost wages helped ease the pain. Dienes Werke The exterior of the Dienes factory in Overath. But shorter hours weren't enough to curtail costs at Dienes. Bernd Supe-Dienes told staff representatives that 32 of the 196 jobs at the Overath factory would have to go. The workers' reps didn't denounce the plan or call for strikes: "It's not our way," says Mr. Lob, adding: "We preferred instead to do what we can to turn this ship around." Mr. Lob helped negotiate severance for his laid-off colleagues. Business bounced back in 2010, and Dienes's workers began working full hours again, even with an occasional overtime shift. The company has cautiously started hiring again, bringing about 20 jobs back. Orders have climbed most of the way back to their peak before the crisis, thanks in part to strong demand from China and other fast-developing countries. Though orders have softened of late, Mr. Supe-Dienes says he isn't worried. The company is revamping its software systems that manage inventories and accounting. "Demand continues to be strong," he says, and the company recently booked a large order from the U.S. "For 2012 we will become more aggressive and hopefully able to generate more growth," he adds. Though Germany's export-driven economy has underpinned Europe's recovery for the past two years, that strength has won Germany as much criticism as praise. Many of its neighbors, including France, resent Germany for exporting more than it imports, deepening Europe's economic divide. Critics complain that Germans are worsening the crisis by refusing to spend more even when they can afford to. To Germany's international critics, the economy's biggest weakness is its reliance on trade surpluses for growth. In absolute terms, Germany's current-account surplus is second only to China's. Unlike China, Germany doesn't stand accused of keeping its exchange rate artificially low and thus boosting exports while curbing imports. Instead, critics say German companies' efforts to keep labor costs from rising have resulted in stagnant incomes for ordinary Germans, leading to weak domestic consumer spending. German executives and politicians reply that the country can't afford to sacrifice its international competitiveness by inflating labor costs. "Besides, a country with an aging population needs to build up financial reserves abroad," says Michael Glos, a lawmaker in Chancellor Merkel's ruling coalition and a former German economy minister. Read More Investment Drives German Growth Switzerland Slashes Stimulus Package Euro-Zone Prices Steady in August Opinion: The World Doesn't Need More Stimulus German retail sales were down 1.6% in July from a year ago, despite the improved labor market, data Wednesday showed. Mr. Lob, the Dienes worker, illustrates why few expect Germany to turn into a consumer-driven economy. Rather than shop, he likes to keep a large balance in his bank account. Recently, he reluctantly made an exception. His television set, 14 years old, had started needed several minutes to warm up. After putting up with this for a year, Mr. Lob's wife got fed up and pushed her husband to replace the TV. He bought a new flat-screen model from a local electronics store—but only after haggling and gaining a discount, free delivery, and free disposal of his old TV. "It comes down to what you learn from your parents," the 60-year-old Mr. Lob says. "Mine taught me to spend only on what you really need. If you don't need it, you don't buy it." Write to Brian Blackstone at brian.blackstone@dowjones.com and Marcus Walker at marcus.walker@wsj.com

I believe there would be some juniors growing into something significant. However, it is not even a game for good investors. I think only 1 in 10000 investors can figure out what really is going on in the sector. The volatility is hard to swallow as well. For a company to go from 1 to 10 per share, sometimes it goes to 5 cents first. It is hard to sleep sound at night with this kind of holdings. Bad for your health :)

Marc Faber could not be more right on this. The Federal Reserve Is A Very Evil Institution The Federal Reserve is a very evil institution in the sense that they punish decent people who have saved all their lives. These are people who don’t understand about stocks and investments and suddenly they are forced to speculate. - in MarketWatch Marc Faber is an international investor known for his uncanny predictions of the stock market and futures markets around the world.

The last three paragraphs are must read. This world has been turned upside-down by the printing of money and artificial low interest rate. It has become necessary for people from almost every profession to learn about how to manage money to avoid becoming pasties for the investment bankers. It is a great tragedy for our societies. How Wall Street Invests Its Money in Hard Times By FRANCESCO GUERRERA In the midst of the 2008 financial crisis, a top Wall Street executive found himself in the entry hall of his bank's headquarters at 3 a.m., en route to an emergency meeting. WSJ Money & Investing Editor Francesco Guerrera stops by Mean Street and tells the story of Wall Street's dirty little secret: traders don't always follow the advice they give to their customers. AP Photo/Petr David Josek As he scanned the cavernous space, empty save for a few sleepy security guards, his gaze alighted on a row of automated teller machines. "I walked over, hoping that no one would see me, and took $800 out," the executive, who has earned millions of dollars in his career, told me this week. "In those days, it felt good to have cash in my pocket." Even Wall Street titans feel fear in troubled times, especially when it comes to their own money. With market turbulence back with a vengeance in the past few weeks, I was curious to hear how the wizards of finance were adjusting their personal investments and whether lesser liquid mortals could learn something from it. The responses I got from a dozen senior types were somewhat surprising. Although none admitted to hitting the ATM in the dead of the night, most disclosed investment strategies that were both ultraconservative for financial experts and at odds with their banks' advice to companies, fund managers and individuals. "I am 80% in cash and Treasurys," said a top investment banker who in previous conversations hadn't once failed to extol the virtues of complex derivatives as a way to reduce risks in the financial system. "What about using some of those derivatives in your own portfolio?" I asked, countering fear with logic. "No chance," came the reply. "I don't want to take any risks." Another executive, a member of a big bank's management team, even showed glimpses of panic. He confessed that, as markets were buffeted by bad news from the U.S. and Europe in recent weeks, he changed his allocations from roughly 60% stocks and 40% bonds to a portfolio laden with U.S. government bonds and other investment-grade paper. When I pointed out that he must have been selling in falling equity markets and buying in rallying bond markets, he didn't flinch. "Right now, it's all about capital preservation," he said. "If I lose some money in the process, so be it." Which is precisely what many financial advisers, including those employed by Wall Street banks, are counseling individual investors not to do, urging them to weather the storm and keep their eyes on the long term. Yet, even seasoned professionals are feeling the pressure of this rocky period. A veteran mergers-and-acquisitions banker described his attitude to his investments as veering between being "pessimist and very pessimist"—an extraordinary statement for an M&A banker, a job where perennial optimism is a condition of employment. But this banker's gloomy disposition toward his wallet hasn't stopped him from telling CEOs to think positively and take advantage of the market slump to snag companies on the cheap. It would be easy to condemn this dichotomy between what Wall Street says to its clients and what it does with its money as hypocrisy or mercenary opportunism. But something deeper is at play here. All the executives I talked to had sat in a front-row seat to watch the near-destruction of global capitalism that was the 2008 meltdown. For them, as for many others, that was a traumatic experience, not just because of the systemic failure it highlighted. The collapse in the share prices of many banks, and the disappearance of others, decimated the riches of hundreds of Wall Street executives whose bonuses often are largely comprised of a chunk of their companies' shares. I know several bankers that, perhaps naively, had counted on, and borrowed against, their stock to send kids to private school, pay for houses, boats and art. When that wealth turned out to be as the paper it was made of rapidly depreciated, their financial world was turned upside down. All of a sudden, bankers had to reassess and resize lifestyles they had taken for granted for years. Don't get me wrong. I am not advocating setting up a "Scarred Bankers' Fund" to help with Picasso collections and college trusts. But memories of having that close-up view during as painful a crash as the 2008 crisis can explain why bankers are throwing their courage to the wind, stashing their money in cash and Treasurys. "What those executives are saying is that they are probably as afraid as the rest of us," says Meir Statman, a finance professor at Santa Clara University and author of "What Investors Really Want." "They extrapolate from the recent past, they make the analogy to 2008 and that makes them even more risk-averse." Should our 401(k)s follow Wall Street's finest into the low-yielding safety of cash and bonds? Not according to the experts. The big difference between common folk and finance's upper echelons is that the latter already have a lot of money in the bank—from the cash portions of their bonuses and the sale of their shares in the good times. They don't really have to worry about their pensions. Most of us do. And we need some high-yielding investments to pay for them. "Individuals are still better off not trying to follow in the footsteps of those executives because if those executives are wrong they will end up having $28 million rather than $30 million," Prof. Statman says. "For young people taking risks is not a luxury, it is a necessity. The notion is that if you are rich you can take more risk but you don't have to." Yet another difference between planet Wall Street and planet Earth.

Ravi and those who are interested, FYI. China Resources Power Posts Small Profit Increase Article Comments MORE IN EARNINGS » Email Print Save ↓ More smaller Larger By YVONNE LEE HONG KONG—China Resources Power Holdings Co. on Monday reported a 1% increase in its first-half net profit, as higher fuel costs eroded the impact of an increase in power output. Net profit for the six months ended June 30 was 2.48 billion Hong Kong dollars (US$319 million), up from HK$2.46 billion a year earlier. The power company, a unit of state-owned China Resources National Corp., said it expects power consumption growth in China to remain strong in the second half of the year, even though coal prices will remain relatively high. The Hong Kong-based power producer plans to increase the production of coal from its own coal mines, especially from Shanxi Province, to offset rising coal costs. "We anticipate that coal production volume from our own coal mines, as well as coal consumption volume from our own coal-fired power plants, will continue to increase in the future years," Chairman Song Lin said in the statement. As part of its efforts to secure coal supply, China Resources raised its first-half total coal output by 63% to 7.7 million metric tons. Revenue rose 37% to HK$29.03 billion from HK$21.16 billion as the company's first-half electricity output grew 24% to 53.79 million megawatt hours. However, higher fuel costs whittled down the company's net profit. China Resources Power said its average fuel costs per unit rose 12% in the first half, and fuel costs accounted for 69% of its total operating costs during the period. Most of China's power producers reported a sharp fall in earnings during the first-half, mainly due to a surge in coal costs, which more than offset high growth in power generation and tariff increases in the second quarter. In the first half, China's spot thermal coal price rose 15% on year, but power producers won't be able to pass all the rising coal costs on to grid operators or consumers due to Beijing's reluctance to loosen state caps on power prices. The blue-chip power producer recommended a first-half dividend of six Hong Kong cents, unchanged from last year.

There is just something wrong with the system. My Response To Buffett And Obama Before you ask for more tax money from me, raise the $2.2 trillion you already collect each year more fairly and spend it more wisely. Article Comments (179) MORE IN OPINION » Email Print Save ↓ More smaller Larger By HARVEY GOLUB Over the years, I have paid a significant portion of my income to the various federal, state and local jurisdictions in which I have lived, and I deeply resent that President Obama has decided that I don't need all the money I've not paid in taxes over the years, or that I should leave less for my children and grandchildren and give more to him to spend as he thinks fit. I also resent that Warren Buffett and others who have created massive wealth for themselves think I'm "coddled" because they believe they should pay more in taxes. I certainly don't feel "coddled" because these various governments have not imposed a higher income tax. After all, I did earn it. Now that I'm 72 years old, I can look forward to paying a significant portion of my accumulated wealth in estate taxes to the federal government and, depending on the state I live in at the time, to that state government as well. Of my current income this year, I expect to pay 80%-90% in federal income taxes, state income taxes, Social Security and Medicare taxes, and federal and state estate taxes. Isn't that enough? Others could pay higher taxes if they choose. They could voluntarily write a check or they could advocate that their gifts to foundations should be made with after-tax dollars and not be deductible. They could also pay higher taxes if they were not allowed to set up foundations to avoid capital gains and estate taxes. View Full Image Bloomberg News What gets me most upset is two other things about this argument: the unfair way taxes are collected, and the violation of the implicit social contract between me and my government that my taxes will be spent—effectively and efficiently—on purposes that support the general needs of the country. Before you call me greedy, make sure you operate fairly on both fronts. Today, top earners—the 250,000 people who earn $1 million or more—pay 20% of all income taxes, and the 3% who earn more than $200,000 pay almost half. Almost half of all filers pay no income taxes at all. Clearly they earn less and should pay less. But they should pay something and have a stake in our government spending their money too. In addition, the extraordinarily complex tax code is replete with favors to various interest groups and industries, favors granted by politicians seeking to retain power. Mortgage interest deductions support the private housing industry at the expense of renters. Generous fringe benefits are not taxed at all, in order to support union and government workers at the expense of people who buy their own insurance with after-tax dollars. Gifts to charities are deductible but gifts to grandchildren are not. That's just a short list, and all of it is unfair. Governments have an obligation to spend our tax money on programs that work. They fail at this fundamental task. Do we really need dozens of retraining programs with no measure of performance or results? Do we really need to spend money on solar panels, windmills and battery-operated cars when we have ample energy supplies in this country? Do we really need all the regulations that put an estimated $2 trillion burden on our economy by raising the price of things we buy? Do we really need subsidies for domestic sugar farmers and ethanol producers? Why do we require that public projects pay above-market labor costs? Why do we spend billions on trains that no one will ride? Why do we keep post offices open in places no one lives? Why do we subsidize small airports in communities close to larger ones? Why do we pay government workers above-market rates and outlandish benefits? Do we really need an energy department or an education department at all? Here's my message: Before you "ask" for more tax money from me and others, raise the $2.2 trillion you already collect each year more fairly and spend it more wisely. Then you'll need less of my money. Mr. Golub, a former chairman and CEO of American Express, currently serves on the executive committee of the American Enterprise Institute.

I cannot agree more with it. A Road to Smarter Infrastructure in Asia The region needs more farm-to-market roads and fewer superhighways, more basic irrigation and fewer megadams. Article Comments (2) MORE IN OPINION » Email Print Save ↓ More smaller Larger By CURTIS S. CHIN AND JOHN A. DONALDSON China's infrastructure building program used to be the envy of the world, and in some respects it still is. Yet economists, investors and now China's own citizens are worried about diminishing returns, while incidents such as last month's Wenzhou high-speed rail crash raise questions about the durability of China's investments. It's a dilemma that is familiar to policy makers around Asia: How much infrastructure, and what kind, is "enough"? How should developing economies prioritize when the needs are so great? China's experience offers an answer: Smaller is often better. "Small" would not characterize China's infrastructure ambitions in recent years. The Three Gorges Dam, the Beijing Olympics, the Shanghai Expo and the high-speed rail system serve as striking symbols of the country's rise. Yet bigger has not paid higher dividends. Grand-scale projects are particularly susceptible to corruption, cronyism and other forms of excess. Even before the crash, corruption allegations plagued China's high-speed rail, taking down the former Railways Minister Liu Zhijun and other top officials. Dozens of cases of corruption were linked to the Three Gorges Dam and the large-scale projects related to it. These kinds of image projects also contribute far less to stable, long-term growth than many claim. Beijing is still trying to figure out what to do with its Olympic facilities now that the Games are over. The sustainability of high-speed rail without massive ongoing subsidies is doubtful. No one can deny that China and the rest of Asia still need infrastructure, and a lot of it. The problem is that large and impressive projects too often dominate the thinking of policy makers. White elephants attract a lot of attention, much of it admiring, at least in the beginning. Just think back to all the glowing news reports about the Bird's Nest Stadium or the Water Cube before the Olympics. Too often this point gets lost in the shuffle. While the benefits of rural electricity, clean water supply and sanitation systems are evident in people's lives and well-being, such projects too often lose out in favor of more grandiose ventures. Praise and promotion are too often driven by the notion that bigger is better. The contrasts can be striking. Honghe Prefecture in southwest China's Yunnan Province bragged of spending between 700-800 million yuan, or more than $100 million, on a gleaming government campus, featuring an impressive central building that observers compare to the grandeur of China's Great Hall of the People on Tiananmen Square. Yet just a few miles down a bumpy dirty road, farmers live much like their forefathers. Lacking sufficient irrigation systems and other local development projects, these farmers struggle to raise enough food for their own subsistence. Elsewhere in the prefecture, the government of Pingbian County reportedly spent more than 200 million yuan, or some $31 million, on a public square and an impressive though infrequently used football stadium. Improving education and livelihoods and seeking to attract investment might have better served the county's residents. The grinding poverty of Zhaotong Prefecture in another corner of Yunnan reportedly moved then Premier Zhu Rongji to tears. Yet the highway subsequently constructed there brings few benefits to further flung rural residents lacking the infrastructure linking their villages with it. China is not alone. Throughout the region, too often the smaller, more effective, project may well be pushed aside for a bigger, more visible infrastructure project—especially if by couching it in poverty-fighting terminology, governments can get others to provide concessional financing or outright grants. In Nepal, Bangladesh and elsewhere in South Asia, tens of millions of dollars in development assistance has gone to a range of less than successful "big picture" tourism infrastructure initiatives with the hope that if we build it, they will come. This even as millions go without basic water supply and sanitation, and existing roads and infrastructure deteriorate due to a lack of maintenance. In the Greater Mekong Subregion, millions of dollars in loans and grants have helped Vietnam, Laos and Cambodia build road connections and "one stop" customs checkpoints, with an eye toward a grand East-West highway system connecting the region. The near-term beneficiaries of this infrastructure touted as the basis of an "economic growth corridor"? Not necessarily the poorest of the poor who might never leave their home country, but gamblers crossing the border to take advantage of newly built casinos. Leaders in China and throughout Asia need a new attitude toward infrastructure. Instead of choosing projects that are direct providers of employment—or prestige—they should focus on projects that will have more meaningful economic and human results. That means more farm-to-market roads, fewer super highways. More basic irrigation, fewer megadams. These kinds of projects often make more of a difference for the poor and can help funnel the fruits of growth to more people. Such a rethink in approach to infrastructure would do much more than lay a foundation of accountability in building the next set of shiny new trains. It would also help create the jobs and build the businesses that will be the true drivers in ultimately improving the lives of the poorest and most in need. Such a path may be less impressive than showcase cities of construction projects. But it will have a more dramatic long-term impact.

I really liked it. A Cold Warrior at Peace America's leading Russia scholar reflects on the 20th anniversary of communism's collapse, and the new threats to the world order today. Article Comments (10) MORE IN OPINION » Email Print Save ↓ More smaller Larger By NANCY DEWOLF SMITH Twenty years ago, on Aug. 19, an attempted coup in Moscow accidentally started the countdown on what would be the final days of the Soviet Union. The August putsch began as an effort by Communist Party hard-liners to overthrow President Mikhail Gorbachev and stop his reforms, including efforts to give the Soviet republics more freedom from the center. Civilian resistance in Moscow and other cities, aided by military units who refused to move against the protesters, effectively foiled the plot and made a popular democratic hero of Russian Federation President Boris Yeltsin. By the time Mr, Gorbachev resigned on Christmas Day and Mr. Yeltsin took power over Russia, most of the republics had declared independence and Soviet Communism was dead. On the anniversary of the coup, you might expect to find a celebration under way at the house of the man who taught generations of Harvard students the history of the world's most powerful totalitarian regime. Especially someone who helped inform America's response to the Soviet military threat and served on the National Security Council under Ronald Reagan. Surely, this particular professor—still demonized in certain circles as the archetypal Cold Warrior or, sin of sins, a fantasist about Soviet military might—surely he is cackling with delight at the thought of how we beat the Sovs? The dissolution of the Soviet Union was one of "the most important events of the 20th century," says Richard Pipes. But he says this while serenely sitting on the porch overlooking the sunlit lake by his summer home. This is a Cold Warrior at peace. No wonder. Surveying the post-Soviet universe, he sees no threats of the old magnitude on the horizon. When it comes to new foreign powers, he says, "China is the only successor, but the Chinese don't have such world-wide aggressive intentions. For the Russians, for them to triumph, the whole world had to be communist. I don't think that is true of Chinese Communism. They are perfectly content to be a rich and powerful country, to have influence in their region, but I don't think they have any intentions to take over Africa, or Latin America or anything like that." Despite all he knows about Russia's sad history, he was upbeat even about that country for a time after 1991, after the last Communist czar, Mr. Gorbachev, stepped down. "I was rather optimistic" for the Russian people, Mr. Pipes says. "I thought all the chains which had held them had broken and they are free. But it didn't happen." By 2000, ex-KGB strongman Vladimir Putin was in charge, and along with launching a war in Chechnya (and other grim misadventures in the near abroad of the former Soviet Socialist Republics) he began rolling back new freedoms in Russia, eliminating the election of governors, taking over television networks, and reinstating a culture in which free-speaking journalists get murdered. It may seem odd to us that, in the face of re-oppression, Mr. Putin's approval ratings soared. But Mr. Pipes is not surprised. "Russians like strong leaders, autocratic leaders: Ivan the Terrible, Peter the Great, Stalin. They have contempt for weak leaders, leaders who don't impose their will but who listen to the people. Kerensky, who was prime minister of the provisional government in 1917, is held in contempt because he was a democratic leader." View Full Image Ken Fallin How and why Russians missed the social and intellectual developments that infused the rest of Europe with ideas on the rights of man and civil society is the complex subject of Mr. Pipes's scholarship. In simplified form, he explains: "First of all, not only were the Russians peasants, which there were in Europe too, but they were serfs, which were not exactly slaves but close to it. They had no rights. They had no civil rights, no legal rights, no property rights. They were chattel. So that meant they did not develop any sense of belonging to a community." This theory—received by many Russians as a Russophobic accusation that they have a slave mentality—has made enemies for Mr. Pipes, among them the late novelist and gulag survivor Aleksandr Solzhenitsyn. While both men saw the moral horrors and mass human sacrifice that constituted Soviet Communism, they explained its origins very differently. "He said it was because Marxism was a Western idea imported into Russia," Mr. Pipes says. "Whereas my argument is that it has deep roots in Russian history." That drove the nationalist Solzhenitsyn up a wall, judging by his reaction after Mr. Pipes mailed a copy of his book, "Russia and the Old Regime," to Solzhenitsyn in Switzerland in the mid-1970s. "I never heard from him until two years later," Mr. Pipes smiles, "when he attacked me . . . saying I was a 'pseudo scholar.'" Some things do not change. Earlier this month Prime Minister Putin described the United States as "a parasitic" country. But name-calling may be about the worst that Russia can do anymore, at least to the West. "They do pose a threat to their ex-republics," Mr. Pipes says. "They have no problem with Central Asia, because those [states] are rather docile. But they can't reconcile themselves to the loss of the three Baltic Republics [Estonia, Latvia and Lithuania] and Ukraine and Georgia. I feel fairly confident that if Georgia or the Ukraine were to join NATO, as they would like to, the Russians would invade and destroy their independence. But to us they don't pose a threat." Even so, Mr. Pipes says, the rise of China has presented the U.S. with an opportunity to nudge Russia toward the fold of normal European countries. "I don't admire President Obama in general and I don't like his foreign policy. He doesn't have a clear course," Mr. Pipes says. "If you liked, as I did, Reagan's foreign policy, then you can't like Obama's." But he gives the president good marks for his choice of an adviser on Russia, Michael McFaul, and he judges the administration's so-called "reset" policy with Russia as an apparent success. "There are no conflicts right now," he points out, although "how much this is a result of Obama's policy and how much is a result of [Moscow's] fear of China and the desire to move closer to Europe and the U.S., I don't know." Mr. Pipes says Russia is "obsessed" with how its neighbor's growth and progress threaten to make Moscow seem irrelevant on the global stage. "China is becoming a great world power. And that bothers them terribly. They're willing to have America the second great power but they are worried about China being a great power." Mr. Pipes notes that when foreigners visited Russia in the 17th century, Russians would boast—fairly accurately as it turns out—that their country was the same size as the visible surface of the moon. It still is, although an eclipse by China seems unstoppable. "What can they do about it? They cannot reduce Chinese exports to the United States, the Chinese accumulation of hard currency, the military buildup and so on." That is why Mr. Pipes believes Moscow may be ready to move closer to the West, an outcome that would remove a major irritant. This assumes NATO issues don't get in the way. "I am very critical of what the Russians do but you also have to allow for their sensitivities," he says. "The Russians are very sensitive about NATO. If you ask Russians who is the No. 1 enemy of Russia—I think NATO would probably come in first place, even now." That's one reason that NATO may have outlived its usefulness. "We have NATO acting in Afghanistan and et cetera," Mr. Pipes allows. "But NATO was created specifically against the Russian threat. The Russian threat does not exist. . . . So I think the time has come to consider dissolving it." Mr. Pipes thinks the main challenge for America today is militant Islam. "This is difficult to fight with because it is not a direct threat. A direct threat you can stand up to. It is also different because you are dealing with fanatics," he points out. "The communists were not fanatics. They were vicious people, but you could reason with them . . . and when the going got tough, they retreated." For instance, he says, "You had the Cuban missile crisis: Castro wanted the Russians to actually launch a nuclear attack on the United States, and he said 'OK, Cuba will be destroyed but socialism will triumph in the world.' And Khrushchev said no, nothing doing." The communists "were never suicidal," either, Mr. Pipes adds, "and the ordinary Russians . . . they wanted to live. So this is a different danger. It's not as bad as the communist danger was because they don't [control] the arsenals of power, of military power. But they are fanatical, and they are irrational. We have to stand up to them and not be frightened of them. But we may be in for decades of the Muslim threat." Do we have the fortitude for that? At the end of the Cold War, some of the victors questioned whether the U.S. and the West could ever muster the will and stamina for another prolonged ideological struggle. This question seems to amuse Mr. Pipes, who still speaks with an accent of his childhood in Poland, from which he and his family escaped when he was 16. "I came to the U.S. in 1940 and I went to a college in Ohio, and the war was already on. And I remember discussions of whether America was strong enough, or too soft to meet the Nazis." Mr. Pipes laughs. "The same discussions, and that was 70 years ago. So I don't worry, I think that America is great." As for defeating the last known enemy of world peace, Mr. Pipes gives credit to America's policy of containment, which held communists back in most places until the Soviet Union began an inevitable decline. But it might have lingered for decades longer if not for a big push. "Ronald Reagan contributed mightily to the collapse of the Soviet Union," he says. "It would have happened eventually, but not as soon as it did. Because he understood what communism was and how unnatural it was." Another lesson is "that you should not give in for practical reasons to evil, which we had done for many years under détente and so on. We gave in and we treated these people not as crooks and criminals but as worthy partners. And this was a mistake, they were not. And history has proved it. Not to everyone, of course." Partly he's referring to scholars, in his own and related fields, with whom he sparred for decades about the nature of the enemy. "In general, the profession in this country, they were not pro-communist but they thought—and that is why I had quarrels with them always—that the [soviet] system was popular and that it would be there forever. Ergo we have to get along with them, which means we have to make concessions and live with them, and not attack them the way I wanted to attack them, or Reagan wanted to attack them. I mean Reagan, whom they thought a dummy, said this: The Soviet Union is going to collapse. And they said ridiculous, he doesn't know what he is talking about—and he was right." So Mr. Pipes has been vindicated too? "Yes, of course. But they don't admit it," he laughs. "They have done no self-analysis asking: Where did we go wrong? And they just merrily go on." More than once, Mr. Pipes refers to a woman he met in Russia in the 1960s, when he was visiting Leningrad and she was assigned as his driver. She had lost her husband in the war, felt utterly alone and "looked worn out." He tried to comfort her, he says, with words like, "'Don't give up. You are young, you will find a husband, you will find a family.' And I'll never forget her answer," he recalls with what looks like a shudder: "What do you know? You live in paradise." Mr. Pipes seems a happy man today. Even the faltering U.S economy—whose former vigor played such a role in the Cold War victory—hasn't got him down. "I have been through these recessions before. If you're my age and you've been through Hitler and Stalin, nothing frightens you. . . . Who's going to frighten me, [Hugo] Chávez?" Ms. Smith is a member of the Journal's editorial board.

http://www.economist.com/node/21524920 Well worth a read.

Betting on coal production companies in China may not be profitable, even though it is cheap. Mining is always a marginally profitable business. It is true the coal price is rising, but the cost is going up quickly as well. I am betting on coal as well, but there is a better chance to make money in those companies which help coal producers to increase productivity.

For Intuit Co-Founder, the Numbers Add Up Article Stock Quotes Comments (8) MORE IN SMALL BUSINESS » Email Print Save ↓ More smaller Larger By SARAH E. NEEDLEMAN Nobody likes to pay bills, according to Intuit Inc. co-founder Scott Cook. That's why, in 1983, Mr. Cook says he saw an opportunity in creating software programs that could help consumers more easily manage their finances. It's also why he later recognized a need for tools that could allow small and midsize businesses to do the same. Intuit, maker of TurboTax and Quickbooks, is now a publicly traded company with 7,700 employees and $3.5 billion in annual sales. Bloomberg News Scott Cook The Wall Street Journal spoke with Mr. Cook about the Mountain View, Calif., company's early struggles with financing and marketing, and how a good ad with a 1-800 number changed everything. Edited interview excerpts: WSJ: Before building Intuit, you worked at large firms like Procter & Gamble Co. and Bain & Co. What prompted you to leave Corporate America and start your own business? Mr. Cook: My wife complained about doing the bills. It was a hassle. I had been trained at P&G to find a problem that everybody has and that you could solve with technology. And this struck me as a classic entrepreneurial opportunity. Nobody likes to pay bills. There were about 20-plus personal-finance software products already on the market. I hired a computer-science student at Stanford, who later became Intuit's co-founder, and we tested the leading sellers. They were slow and a waste of time. So we built our first product, Quicken, totally differently than every other competitor. WSJ: How much start-up capital did have to work with? Mr. Cook: We raised between $500,000 and $600,000. It came from my savings and my retirement plan that I cashed out. I also borrowed money from my parents. Lines of credit were another big source of capital. The banks were lending to me and my wife as a couple, not the business. We tried venture capital and that failed. We talked to about two dozen venture-capital firms and they all shut us down. We did get two angels to invest, but they put in only $151,000, total. WSJ: A lot of start-ups struggle in the beginning. What were those first few years like for Intuit? Mr. Cook: They were terrible. We almost went under twice. We couldn't get software stores to carry our product because we had no money for marketing. We had to give back the computers and furniture we rented and stop paying employees' salaries. WSJ: How did you get over that hurdle? Mr. Cook: We found an alternate distribution channel. We sold the software to banks, and banks would resell it to their customers. That kept us alive for another year. Then that ran out of gas so we decided to try advertising in magazines. We had an ad agency do the first ad but that didn't work. It didn't generate sales to cover its costs. But then a friend taught me how to write a direct-response ad. It had a 1-800-number and it brought in orders that delivered profits. WSJ: In 1992, Intuit began making accounting and tax software for businesses. What led the company down this path? Mr. Cook: We built Quicken as a home product, but when we did a tracking study, we discovered that half of our [customers] used it in an office. Initially, we ignored the results because we didn't believe it. Three or four years later, it bugged me that people were still answering this question [Where are you using Quicken: Home, office or both?] in an odd way. It was when we started calling those customers that we discovered what was going on. There was a giant unsolved problem that they faced. Every small business has to keep books, but most don't understand debit and credit accounting. That's why they were buying and using Quicken. So then we built the first accounting software with no accounting in it and we called it QuickBooks. WSJ: Many of Intuit's products are now Web-based and accessible via smartphones with apps like SnapTax. Is there a lesson here about adapting to whatever new platforms consumers are using the most? Mr. Cook: The lesson is the power of small entrepreneurial teams. Big organizations get committed to the way things were. It's the small team led by an entrepreneur that can invent the way things will be. So SnapTax was done by a team of initially two and then three people. Similarly, our online-payroll service was done by a small team. Each one solves a problem that nobody else has solved and that's what keeps the company on the cutting edge of change, whether it's on mobile phones or Web services. WSJ: The U.S. job market has been stagnant for years. How has the weak economy affected Intuit's hiring activities? Mr. Cook: We stopped hiring in 2009 just to make sure which way things were going, but then we resumed hiring fairly soon thereafter. We've been increasing our work force for the past two years. We're always hiring software engineers and data analysts. We just brought in a new CIO, a returning employee, and we just hired a head of corporate strategy. We're particularly looking for people who have entrepreneurial talent. WSJ: Many company founders move on after their businesses go public. But you've stayed with Intuit and are now chairman of its executive committee. How come? Mr. Cook: Changing people's lives and growing entrepreneurs is something I can do a lot more of here than elsewhere. WSJ: What advice do you have for folks looking to follow in your footsteps? Mr. Cook: Find the problem that other people have ignored.

Weighed down by Germany, overall eurozone GDP rose by only 0.2 per cent in the second quarter, after a 0.8 per cent rise in the first three months of the year – bringing growth in line with the pace of expansion as in the UK but below the 0.3 per cent increase reported by the US. An unlikely star performer was Belgium, which saw a 0.7 per cent rise in the second quarter – attributed by analysts at least partly to the lack of a government in the country able to push through spending cuts or tax increases. This one says it all!

To make it simple, I do not have an answer for your questions. Sorry about that. One thing I am sure though. As Chinese firms finally started to climb up the manufacturing ladders, there will be a lot of blood in the western manufacturing sector.

I am not recommending buying this stock, so I do not really care if the growth will continue. My point is that this is a very typical case where a 10-bagger was born in a lousy industry. This company succeeded by inventing a whole different set of products catering to SMEs. The result is astounding. I have heard hundreds of time management talking about differentiation. But it is to hard to believe them, just like M2. How could anybody reselling telecommunications service differentiates itself? M2 did it. You may argue other larger competitors can copy its products and crash it. But M2 has done this successfully over the last 10 years. I believe reading into history is the best way to learn about the future. M2 offers a great case study(and free!) to give you insights about how a small company in a commodity business can succeed. At least for me, this lesson is priceless!

I don't really have a market valuation or Shiller p/e type data on Australian stocks, my experience is like yours, I've looked at plenty of Australian stocks, and thought they were expensive generally when one adjusted for the cyclical fluff in many company's earnings. The fact that your best example of a cheap Australian stock is a dentistry company at 12 times earnings, proves my point. In the US there are world class multinational companyies trading at or near that valuation, from retail (WMT, TGT) to tech (AAPL, HPQ, DELL, CISCO) to healthcare related (JNJ, Medtronic, etc...) I read some of your minibook on "Chinese Culture" and honestly couldn't find anything that refuted or even contradicted Chanos's arguments. He's not saying that the Chinese economy is going to blow up, just that the housing and construction industries will. I have no doubt there are many virtues in Chinese culture (as there are many evils), but this is a non-sequitor and doesn't change the fact that there are empty cities being built, or that there is a 5 foot by 5 foot office space for every man woman and child in the country currently. The problem for Australia is that even if this amount of space is adequate for the Chinese population, building will surely slow and probably eventually halt. There doesn't neeed to be a China housing bust or even recession, just a slowing of building and industries that import commodities. Yet, many stocks are being valued off of record high earnings from this record China building. This is a money spiget that the entire economy depends on and it will adjust the earnings and dividends of the companies you are buying to lower levels. Anyways those are my thoughts and we can probably leave them there. Hester, I welcome arguments. As long as we make them with merits. There is one thing I forgot to mention. I do not look at companies with a market cap over 500 million and businesses I cannot possibly understand, for example, mining. That is probably why our conclusions are sharply different in the first place. Maybe my phrasing should be Australia small stocks are cheap. However, you are comparing oranges to apples when you compare small caps VS mega caps. They have totally different growth profiles. As to my little collection of thoughts, I have to say I never claimed to be an expert on China issues. I am a Chinese, and I happened to be a value investor. So I looked at China through a pair of glasses colored with "value investor". I did not mean to argue with anyone else neither. It simply serves the purpose to tell people there are other things to consider about China.

When I choose companies to invest, I always put people before numbers. A unique set of talents can produce miracles even in a commoditized industry. And when I was reading this company's history, I was nothing but speechless. M2 Telecom's revenue in 2001 was around 3 million. Through acquisition and organic growth, now the revenue on the run rate basis is 430 million. IPOed at 0.25/share, it went up 1200% in 7 years without counting in dividend. Guess what business it is in? A reseller of telecom services. I strongly recommend reading everything about this fascinating business!

Hester, I wonder how you arrive to your conclusions here. Do you have data to support your arguments here? I just want to hear different opinions, no offense. And I was wondering why you claim I can only find a few stocks. Did you do the same work like me reading through annual reports of every company? Jim Chanos is a great investor. I have seen his presentation a while ago and agreed with everything he said. However, he missed something inherent in the Chinese culture and other elements. I have posted my thoughts on China here. Hopefully it can give you a different perspective looking at China.

Personally, I greatly appreciate the adaptability of Chinese people. As long as the drive to become rich remains intact for Chinese people, and no obstacles were set to hinder them, I believe we are going to do just fine in the next few decades. However, any fantasy that we can achieve as much as we did in the past 30 years, is just fantasy. There are huge problems in the society, and some of them are the consequences of many years’s mismanagement. There are great excesses in a lot of sectors, and once the economy slows down, it will take time to remove those. However, I do not believe that we will repeat Japanese’s tragic lost decades. In China there is a saying goes like this, personality decides destiny. I think it makes a lot of sense. Let’s say a Chinese and a Japanese are travelling together. The journey was joyful and successful for many years. Both grew very rich doing businesses along the way. They have faced many obstacles but they managed to overcome them with resolution and luck. Over time, the Japanese believed that his method will work for every problem, while the Chinese guy was indifferent about everything but focusing on doing business. Then they hit a wall, a very solid one. They used all the tricks they have, bot to no avail. The Chinese realized that this is not a wall they have encountered before. It is higher, more solid. He then went around to see if there was an end to the wall. He tried to climb the wall and he even tried to dig a tunnel under it. On the other hand, the Japanese do not believe there is a wall he could not break. Not that he does not know the fact, but the sheer thoughts of a unbreakable wall sent chills down his neck. How could it be possible? He used every method he had trying to break it, but it did not work. Then he decided if he could not break the wall using the old method, it only meant he did not try hard enough. If he tried ten times and it did not work, it might work after a thousand tries. And this is exactly where the Japanese problem comes from. Do not get me wrong. I am an admirer of Japanese people and culture although I do not like certain parts of them. The point I want to make here is, if there is a problem as big as Japan’s in the 1990s, Chinese people will try to solve them instead of kicking the can down the road. If we can’t using X technique, we would try Y until the situation gets better. The government cares about its power and survival; the Chinese people care about money. If both parties are practical, there will always be a way to work things out. ------------------------------------------------------------------------------------------------------------------------- Housing is an essential part of Chinese’s life. One of my mother’s dream is to live in a big apartment or house. Without having lived in China in the 70s and 80s, it is hard to understand why Chinese put so much value on its own real estate and why people keep buying even when renting is so much cheaper than owning a property. When I was a child, my family lived in a small apartment. We have four people and the apartment was around 30 square meters. Carpet or wooden floor were only things in the movies. People back then did not talk about furnishings, they talked about how big your apartment was. And believe it or not, our condition was better than a lot of other people. At least we had our private bathroom. Chinese also have a strange attachment to home. If they do not own the house they live in, they consider they are just a guest. That is why when people talk about settle down, it normally means they bought an apartment. By any measure, there is real estate bubble going on in China. I joked to friends that almost everyone in China who owns an apartment is a millionaire, but it is only on the paper. When people sell their apartment for a million, they have to buy a new one for another million. Sounds familiar right? But unlike other bubbles, this one may not bust for another decade or two unless the interest goes up dramatically. I never have any doubt that the government will do anything to prevent the bubble from popping unless there is a threat to its very existence. That is why I care so much about the inflation in China. When the government is forced to raise interest rate, that is the ultimate signal that China is going to have major problems in the housing and local government sector. When the housing bubble bursted in the US, the financial crisis was largely caused by financial innovation around housing. But when the bubble pops in China, there will be a chain reaction in the economic system. I have no idea about what will happen, but I do know it will have a huge impact on the society. There are so many things depending on the real estate development. The finance of the local government is counting on the income from selling the land; major corporations all around the country have RE subs, and they contribute a lot of profit; (I am not kidding. Even the company which makes rockets for the military has a huge RE sub. Other companies include those which make air conditioning, shoes, anything you can think of. ) Banks are on the hook too since they have so huge a book of RE business. The problem is, the money from building apartments is so easy to make. Without the contribution from RE, where is the GDP going to come from? We are playing a dangerous game, but many observers failed to point out that the danger and sacrifice is mostly on the poor, who do not have money or relationship. This is also part of the reason the game can still last for a long time. I will give an example here. A friend’s parents live in an apartment built around 30 years ago. I went to see the building. It was maintained well and I guess it can last another 20 years or so. The building is on the ‘ChaiQian” list because there will be an exit for the subway which is being constructed. It really shocked me when my friend told me that a full 400 families have to move because of the subway exit. Can you imagine it? More than a thousand people have to move because the subway exit is being built. Of course, this is only an excuse. The real reason is that the land around this area is so valuable that even after compensating the original residents at market price, big money will still be made when a bigger and taller building is built. However, this is a very bad deal for the original residents. Because the old apartment is generally small, when they were compensated based on the area, they do not get much. If they try to buy a similar apartment around this area, no one will sell because the supply in that area is very tiny. So they have to move outside the city where land is plenty and price is only a bit cheaper. It is really not hard to understand why people want to buy apartment. They really have no choice when they were forced out of their homes. So the land supply is virtually unlimited. Whenever there is a need to sell land, the government can always find it at below-market costs. That being said, the biggest beneficiary of the real estate is actually the government itself. No wonder every time the government vowed to cool the RE market down, the price went up regardlessly. As we can see, the financial burden is largely on those people who have the least resources. If they had the ability, they would have moved to a bigger and newer apartment. When the price goes up, it only give the government more drive to seize more land from the poor. And when the poor has to use their life savings to buy a new apartment, it creates the demand for the land. This is a circle never ends. In my opinion, the RE development is actually a process in which the poor is being driven out of the city. When a new building is built, naturally the rich will invest and own it. It is more like a wealth transfer convened by the government. There is only one flaw in the model. When the land is seized, the developers will compensate the residents at market price. However, when the new building is built, the price has to be higher to compensate for the costs of compensation, land and development. In the last decade, the price has went straight up. Will this continue for the next 10 years? Trees are not going to grow to the sky and there will be a limit on the price. Until now, the limit is still no in sight even though the housing is unaffordable to majority people. The reason that local governments are so keen on infrastructure spending is very obvious. Normally building big infrastructure projects involves huge spendings. Since the government decides who and which will get the contract, there are great opportunities for those guys to gain financially. Yes, those numbers come easily to millions or in some extreme cases, billions. It is a joke that Forbes magazine publishes a ranking for rich people in China. For premier’s son, the PingAn insurance IPO alone brought him 700 million US dollars, or almost 6 billion Yuan a few years ago. Of course, this was never proved. Another reason is that China is forced to make infrastructure spending since this is an essential step in real estate development. For example, it is common sense that when a subway is built or extended, the value of land around the subway stations will rise substantially. Normally when the government is doing the planning, it wants to make sure that a project is viable socially and financially(not necessarily profitable). But in China, it is the other way around. The local government chooses to build first, then sell the land to developers. Developers build more apartments on the assumption that people will come and buy, and it worked like a charm. For the government, it earned more from land sale; for the banks, it means more businesses; for developers, what can be more dreamy than an ever-increasing revenue stream? By borrowing money to fund infrastructure spending and boosts land value, the urbanisation has progressed at lightening speed. But does it sound familiar? Yes, this miracle is built on mountains of debts. Readers of world news might have been aware of the recent accident on the high-speed rail in Southern China. Rumor has it that 179 people actually died instead of 38 reported officially. (Do not be surprised though. I remember in a coal mine accident, the officials even let people to impersonate those who actually died in the accident and therefore made an accident appeared to be less severe. I do not make this up. People on the Internet actually analyzed the TV news screen by screen and showed those on the stretchers are not coal mine workers at all.) Why would China put so much money in high-speed rail system even though the early projection showed it is going to lose money from the start? It is because building a high-speed rail network will help the development along the rail. For example, there are now many commuters working in Beijing choose to live in another city. It takes them 4-5 hours a day on the road. Until now, the model is obvious. Using debt to finance highways, subways, airports, high-speed rail network, you name it. Seize the land at low price for the sake of greater good for the nation. Sell the land when the value is up significantly to pay part of the loan and interest. Then do it over and over again. But there are two problems: diminishing returns and debt. When China starts to build infrastructure in the 1980s, every investment is wonderful. However, after the highway network has been built, airports largely ready, there are not much place to invest in. China’s economy, as we all know, is largely investment-oriented. And when promotion in the government is hooked with GDP, lower investment means less GDP and thus failure. Currently, the investment still looks good. For example, when Nanjing decided to build subway, I thought that was a joke with only a few million people in the city. Now the city practically cannot operate without it. The second problem is more urgent and few economists covered it. The whole urban development, including those mega infrastructure project going in almost every city, is progressing on the assumption that housing price will never fall and there will always be people who are willing to buy an apartment at any price. But forever is a dangerous word. This process can go on 10 years, 50 years, but it has to stop somewhere. And there is a risk of de-leveraging. If there is a prolonged contraction in the housing market, let’s say 3 years. The revenue of the local government will fall. In fact, they rely so much on the land sale and we have term called ‘land fiscal policy’. Already debt-laden, how the hell are those local governments going to finance those projects, especially when the banks are vulnerable during a market downturn? In the end, Beijing will come to rescue. Yes, we will print over any unpleasant things. But what if this scenario happens when the government is not able to print? After all, people in China are losing faith on paper money and consensus of long-term, sustainable inflation is being formed. It is truly remarkable to me that majority of economists failed to point out that a large part of China’s growth is built on debt. And it is debt which causes a financial crisis in almost every case. It is hard to imagine Chinese government will be unable to pay its obligations, but it can happen. Nobody really knows how much we owe, and how much asset we have. Is the foreign currency reserve really worth its face value? There is nothing wrong with building infrastructure. Those investment has changed life of Chinese people and the economy growth was made possible. If my memory served me well, it is the city Dalian firstly introduced this model and other cities followed very soon. However, it is dangerous to use debt to finance those spendings, especially when the low-hanging fruit is gone. In the end, the probability of a financial crisis happening in China is still low, although massive debt is being accumulated in the financial system. Unlike other democratic countries, where political parties worry about election, the China government can always decide who will be left holding the bag. And we can be assured it will be Chinese people who are below the mid level of the society. Rich people are not stupid. They bought apartments, gold, arts and whatever you can think of to protect their assets. But people who are really poor has no choice but putting money into bank savings account. Essentially, people who put money in the bank will be taxed because of the dilution of the value of money. As long as people still trust the banking system, especially the poor, any financial crisis will be impossible. But things are changing rapidly. As I noted in previous emails, even my mother is aware of the incoming inflation. When inflation happens in real estate sector, eduction sector or health care sector, people can always respond by not buying new apartments, not paying huge fees to attend a better school, or not choosing the best health care available. However, when inflation spreads to the food sector, people start to realize the money is worth less over time. That is exactly what’s happening in China today. Think about it. When financial assets appreciate, poor people will not feel much since they do not even have the means to participate. But when essential things like food become more expensive, poor people will respond very dramatically. Of course, I think China has passed the stage that people will buy everything they can when the inflation hits. But looking around, they really do not have many options. My estimate is that in order to preserve the purchasing power of Yuan, the nominal return has to be at least 12-15% annually. I am not talking about food, but overall real inflation. Stocks are volatile and companies are focusing on getting more capital instead of shareholder return. We call it a casino. Real estate is better, but it requires a lot of capital. Besides, the rent is pathetic. Forget about CDs and bonds. Once I thought this through, I realized why Chinese now are putting money abroad and buying precious metals. Inflation can be infective. In Toronto, housing prices went up and up, with no limit in sight. In Shanghai, 300K CAD can only buy 2 bedrooms apartment or probably a smaller one. However, you can buy a decent house in Toronto using the same amount of money. It is no coincidence that the countries with the largest immigrants inflow from China have the highest housing price. If you are still wondering how high the price can go, just look at Vancouver, where houses under half a million are rare. That being said, behind the surging price of housing in countries, there is a huge demand from the Chinese. It is not because the housing itself is not expensive. It is, but compared to housing price in China, those are still deep bargains. What can be safer than putting money into real estate when the rich immigrates to a new country? No one ever lost a dime betting on real estate in China in the last decade. Next time if somebody talks about real estate bubble in Canada and Australia, do not listen. Just watch closely how the real estate market in China is performing. That gives you a better idea."

I mentioned Chinese have very good working ethics and I want to talk more about it here. In China, the bonds among families are considerably closer than those of westerners, especially between parents and their children. The fact is, Chinese parents are willing to sacrifice almost anything to make sure their children have the brightest future. Normally, this effort extends well beyond one’s adulthood. In many cases, the parents chose to work after they retired even though they’d never have to work if they are only to support themselves. One night a close friend of mine and me went to a grill shop. It is even not a shop because it is a location in the open. So every night, except for the new year’s day, the old man with his wife, obviously over 60 years old, work from 6 in the evening to 4 in the morning. And they get up at 9 every day to prepare the food they are selling at night. Because it is an open location. In the summer it is unbearably hot. Nanjing is actually one of the hottest cities in China, and they work just by the fire. In the winter it is freezing cold because Nanjing is by the Yangze River, and therefore the humidity. By my estimate, they can easily earn 20k per month, which is a considerable sum in China. They have done this for many years, so retirement is affordable for them. But they chose not to retire because they have two sons who are not married yet. In China, if you want to get married as a man, the prerequisite is to own an apartment. Because the mother-in-law is so insistent on the apartment, we Chinese joke that to own an apartment before getting married is “inelastic demand” or “steel demand”. A typical apartment in Nanjing for a couple costs around 1.6-2 million. If you count in the costs of furnishing(almost all new apartments in China are unfurnished) and marriage, it will add another 20% on the top of the housing costs. In Nanjing, earning 5K per month is considered to be a good job. The one child policy has given every incentive for Chinese parents to invest heavily on their Children. In my opinion, that partly explained the China miracle for the last 30 years. In a month, Children who graduated from either kindgarden or primary school will know which school they are going to. However, this selection process is determined by two factors, money and relationship. It is very normal to pay a whole year’s salary to just let the child get admitted to this desired school or kindgarden. When China’s education input is one of lowest per head in the world, it is no wonder education system in China has advanced so fast and so decisively in the last few decades. As an investor, I truly believe the best ROIC will be achieved by putting money into education. With every parent in China competing on every possible chance to get into a better school, how can this investment not have a good return? Even though I am not an advocate of the current system, it seems to me every parent in China is an excellent allocator of capital on the education front. Before we went abroad, we used to think that the first world has the best health care system. However, it is a consensus among Chinese overseas that if we ever we have a serious illness, we should go back to China immediately for BETTER treatment. Unlike the hospitals in CA or Finland, where people always needs an appointment, patients in China can walk into a hospital and get diagnosed the same day. Doctors were ranked from senior to junior and they charge different fees. It is a given that while a doctor is seeing a patient, there are always 2 or 3 patients in the same room without realizing they are intruders of other people’s privacy. Chinese hospitals are extremely efficient. Doctors earning significantly less than its peers in US, seeing patients one after the other. If you do not look at the uniforms, you might wonder if you are nearby a supermarket where people are paying for groceries. Including diagnosis, writing prescription, it normally takes less than 15 mins to finish a patient assuming no further tests needed. Chinese doctors work 9 hours a day, so they see at least 30 patients a day! And because Chinese doctors have so many patients available, they have far more opportunities to improve their skills than their wester peers, especially in the surgery area. Even though it only takes 5 years for Chinese to finish medical school, I believe most doctors in China are better at dealing with patients after a few years’ work. It is also common practice for Chinese to compete for better medical treatment using either money or relationship or both. When living abroad, I heard quite a few times even when people are dying, or feeling they are dying, the system still insists that they should make an appointment first. This never happens in China. When a patient is rushed into the ER, there will always be someone to attend the situation. Without taking into account the high costs and inequality, Chinese health care system is probably one of the most successful one in the world. Many renowned investors including Mr. Buffett and Mr. Munger commented that the Chinese technocrats did a fantastic job in managing the economy in the last three decades. But in our opinion, they did the job that way because they had no other choice. And if aware of the probabilities, we should understand that luck played a very big part in China’s success. In the 80s, when funds were not available for road constructions, we borrowed the funds first and charge the users of road to pay back the loan. It turned out to be a brilliant decision. However, this has fired back in recent years. In the 90s, because the government no longer can afford the medical expense, it let the hospitals to become for-profit organization. In the next 20 years, the conditions of the hospitals improved dramatically. However, again, it has fired back because the poor can no longer afford health care. I think those are very important things to understand because good outcomes do not mean they are the consequences of brilliant decisions. We cannot simply conclude that communist technocrats did a good job because the Chinese economy has advanced. In my opinion, except for a few leaders like Deng, nobody really knows why China has been so successful so far. But obviously the communists are not shy attributing every success to their flawless management. If my point is valid, we should no longer assume that China can manage so well in the next few decades, or at least we cannot take it for granted. -------------------------------------------------------------------------------------------------------------------------

I was planning to post this after I finished the writing. I definitely could be wrong, but this is definitely something different from what you read on the newspapers. "My RANDOM thoughts about China It was a remarkable vacation in China. I happily stayed with my parents for 51 days, visited my friends and had some memorable moments. When I arrived at home, I was wearing wintercoat made with feathers; when I left, I was wearing short sleeve T-shirt. You must be wondering how much and how fast things can change in just 51 days. And how things can change in China over merely three decades. I have talked to many people from different countries. Not surprisingly, when asked about how they feel about their countries, there were tons of unpleasant things to say, especially those who come from developing ones. Why not? High inflation, uneven distribution of wealth, expensive health-care and education. Those are all things worth complaining about. When I was in the 20s, I thought there were a lot of things wrong. People with relationship went up in the company without achieving anything. I still remember there was a girl in our bank sitting on the fourth floor doing nothing but taking a hefty income simply because she was able to attract 100m in RMB deposit because of the relationship. However, when I returned to China, I heard quite a few of my former colleagues and classmates are doing really well, earning significant sum per year even by American standard. Make no mistake, those are people who went to vocational school(no formal degree in university) and barely had any strong relationship inside the system. So how did they succeed? Did I miss something here? I lived in three continents so far, and stay in Canada is the shortest, which is 20 months. Maybe because of this experience, it occurred to me that I have certain bias against almost everything, especially towards my own country. If China has not changed a lot, I would not be sitting here, in one of the best universities in Finland, writing in fluent English. It is no coincidence that the civilization of China survived for 5000 years. There were many times when the legacy was at the verge of extinction. But Han(the majority of Chinese people today) people survived and thrived. Ruled by many other ethnic groups, the Han still managed to keep its tradition and culture. Amazingly, it assimilated those ethnic groups into its own culture. How many civilizations have a similar record? Maybe there is something to consider. Take one issue for example. My mother has strikingly different two sides. Inside the family, she is a model wife, daughter and mother. We lived with grandmother for 15 years and my mother took care of her until the very end. Grandma died 89 years old. She spent everything she has to nourish his two sons. Outside the family, she is suspicious, selfish and unmoved by others’ misery. It seems to her it is natural only to focus on her own family before thinking about others. And she can never give enough attention to her families. I know, this sounds awful enough. But isn’s it a philosophy developed in the toughest times to ensure the continuation of the family? I simply understand better now. Another example is the extreme tolerance of reality of Chinese people. Because of the censorship, many social unrests were covered up. China today is far from a harmonic society. Significant portion of students finds no job when graduated. In local words, graduation equals to unemployment. But the students do not go on the street and protest; instead, they chose to live with their parents and wait for things to turn around. In China, we call them “feed-on-the-old”. Early 2000s, in one of the big layoffs in the history by the GOEs, there were no protest or riots. People in the 40s’ and 50s’ accepted meager payment for almost a life time service in the company and waited until they hit 60 to get the pension payment. Remember, it is almost impossible for those people to find a job before they can receive the pension payment! If this were to happen in France or Greece, I doubt the government officials can ever save their lives. Bearing that in mind, it is very easy to understand why Chinese can sustain almost a century long of civil war, social unrest, warlords, war with foreign countries, not including famine, mismanagement of economy, floods, cultural revolution and other difficulties. And it is therefore easier to understand when even a minimum level of incentive was given, the society took a forceful stride to prosperity and never looked back. For one thing, people like better lives. They enjoy abundant food, which was always a luxury for common people throughout the history. Good health care, traveling, education are simply unthinkable 30 years ago. For another, people just do not want to go back no matter how good they feel about the old times. China’s miracle happens because of its people and the culture comes with it. This includes close bond of families members, an extreme emphasis on education, a very good work-ethic and as it in other successes, the luck. Every time when I was reading the history of ancient China, I could not help but felt really sorry for those people who suffered. And every time I think of that and look around, the feeling is stronger that Chinese people will not allow themselves to go back. In other words, they will not allow the “circle” to continue. For every few hundred years, the old dynasty will be overthrown by peasants. Civil war followed for many years. Chaos ensued and in books there is a saying: “nine houses are empty in every ten houses”. In the most famous book about 3 kindoms fighting for domination in China a few thousands years ago, the war was described as exciting as a hollywood movie. But in fact, the statistics showed after the war, 90% of the population was eliminated after 100 years of continuing clashes. Since the start of the 20st century, people died in millions and millions nonstop until the 1980s. In 1930s, a flood can cause 30 million people to become homeless, and that was more than 7.5% of the population. Sorry for the history, but if you fully understand the past, you will truly appreciate what happened and what is happening in China. In China’s history, we never had such a degree of freedom to do everything we like, to pursue everything we desire and say everything without being put in prison. Of course, I meant not to say it VERY publicly. In my opinion, the past 30 years is merely a turning point for Chinese people and not an end of the progress. People have changed a lot. That is the ultimate reason why I am still optimistic about China despite its short term problem. It is hard to argue that a money-oriented society has negative implications, but in China’s case, this concept has done very well. When money is the sole yardstick to valuate the success, no longer do people care about the ‘originality’ . Instead, how much money you have decides where you are on the social ladders. This is the absolutely the best thing happened in China’s history. It has been 30 years since this concept was promoted across the country by Mr. Deng. We have tremendous respect for him even today. China’s real danger, as I was thinking a few years ago, is never a hard landing, but the consequences brought by a economic setback. The politics is still being dominated by the old folks, and in their mind, the past 30 years is probably a great experiment. So if things look really bad, they might want to go back to the status quo, or the communism concept. The probability is not zero, and I doubt people ever think this could be a reality. I am reading a book written by Hallett Abend called “My life in China 1926-1941”. He was a correspondant of NYT and witnessed the history. There is one comment especially intriguing. This book was written in 1943. I will give the excerpt here: “Years later, upon my return to the US to reside, when I was traveling widely on lecture tours, I found that this Chinese communist problem was most misunderstood of all Far East problems. The Chinese Communists are not now, and have not for many years, been “communists” in the Soviet Russian meaning of that term - not in the Lenin-Trotsky meaning, or in what is now called communism under Joseph Stalin. The so called communist movement is China is an agrarian movement, a labor movement; it is a party organized against the tenant-farmer system of China, and against the exploitation of labor by what, before this war, was China’s growing industrialism and capitalism.” If his opinion was accepted from day one, a lot of things would not happen and the world and China should be even better by now. The sad thing is, the western world is still thinking about China this way. How can a country be a threat where everybody is concentrating on making money? With everyday passing, the probability that China will go back to status quo is getting smaller. So in my opinion, instead of promoting so-called democracy, it is better for westerners to leave China as it is and help when things get really bad. ------------------------------------------------------------------------------------------------------------------------- China today is more stable than before because the “moeny-is-everything” philosophy did wonders in the last few decades. Practically everyone in the society can climb the ladder regardless of education, gender or relationship. This is especially true before 2000, when people focused more on creating real wealth, instead of betting on apartments. I still remember a guy who was a very bad student in middle school. He was the kind of bully well-known. But years later, when I met him again in 2000, he was working for the American company manufacturing Centrum, and a few years later became a manager of a domestic company. I have not seen him for ages, but I guess he must have done really well. Also in year 2000 in the middle school reunion, a guy who never figured out how to compete in the education system went to vocational school, which was considered loser’s choice, owned a car body shop. Many years later, when I was talking with my wife, we both wondered why those classmates in middle school, who never made it to college or university, achieved far more financially than those who actually considering to be elites in the school. Earning more money, and the ability to earn money is the absolute goal for majority of people. By that standard, we lost out handsomely in the last ten years, and we are happy about it. Besides certain restrictions, Chinese enjoyed a degree of freedom never seen in history. Hukou? No problem. You can buy it with money. You can buy an apartment then the local government will give you Hukou. Or you if you are a successful business man, the local government will invite you to be a local resident. With enough money on hand, there is unlimited possibility for getting world-class education. Many business owners in China received little or no education but their children went to Cambrige, Harvard and so on. Many people in China today dislikes the wide gap between the rich and poor. However, I believe this is a very best thing we can have at the moment. China is a big, experimental jungle where social Darwinism exerts its utmost power. It is true that without relation or heritage, you are unlikely to climb to the top of the social pyramid. However, there is almost nothing to prevent people with shrewd mind and good working ethics to become rich. There are thousands and thousands of ways to make money. There are always demand to be filled and there is always new markets. When the domestic milk is polluted with chemicals and the imported ones become too expensive, Chinese went to Russia to find the milk and turn them into milk powders to sell. There is no brand, no commercials, because they are selling it on TaoBao at only a fraction of brand name’s cost. To demonstrate Chinese people’s abilities to compete in businesses, here is again an excerpt from the Abend’s book, a personal comment from a high rank Japanese official: “All of this new construction seems to me to be a futile waste of time and labor and money. If we were to make peace with China tomorrow, and to take our armies home, we would undoubtedly have to come back again with our planes and guns and knock it all down again not later than the year 1950. We knocked it down in 1932 and we knocked it down again in 1937, but even now, only a little less than two years later, reconstructed Chinese mills are already taking rice out of bowls of the Japanese workers. The Chinese are more shrewd than we are as businessmen. They work longer and harder and live on less than we do. By strikes, by tariffs, by chicanery, andy by sheer weight of wealth the Chinese can outdistance us within a decade unless we conquer and rule them. By weight of wealth I mean China’s incomparably greater area, her natural resources and her 450 million people who constitute a potential labor reservoir of incomparable might. I feel the task is too big for us, both economically and militarily, and we are headed for ruin if we agree to any settlement that does not give us unquestioned rule.” Those remarks were made when the Japanese used everything to suppress Chinese businesses and protect its own. Japan took advantage of its indisputable military power to try to build a market dominated by Japanese firms, but failed miserably. What they were good at was prostitution, gambling and drugs. Looking back from almost a hundred years later, I am still wondering how fast, and how dramatic things can change. Part of the reason that the Chinese civilization can survive that long is its ability to adapt. There is a Chinese saying goes: “Better living with shame than dying with honor”. That concludes the philosophy of the Chinese people. The early migrants from China to American went there through illegal ways. Typically they pay a huge sum compared to their income and the money was raised from relatives. When they arrive at their destinations successfully, they work 16 hours a day, 7 days a week to pay their debt off. From what I know, those people are still doing this today because they want a better living for themselves and their children. Such sacrifices are just unthinkable in the western world. It is really not only hardworking. A lot of people in other nations are hard working too, but such a willingness to sacrifice is just unheard of. I recently read an article on the Internet and it shows you how smart the Chinese people can be at exploiting the system and making money. Most of the electricity generation businesses are owned by the government. Every year, the fire-based plants have to book the coal prior to the start of the peak season, for a whole year. To ensure the availability of the coal, many companies simply choose to overbook. However, they do this for a different reason, which is price speculation of the coal. For example, when a plant needs 0.4 million ton of coal, they normally book 0.5 million ton. The price will be fixed for a year. If the price of coal falls during the year, the company will lose money and the cost will be on the government. However, when the coal price on the rise, insiders are going to make tons of money. Early this year, the coal price(market) is around 400 per ton. Now, it is around 750 per ton. I can’t recall exact number, but the difference of the price now exceeds 200 per ton, according to a market participant. 100K ton of coal multiplies by 200, that is 20 million RMB or 3 million US dollars. And this only a small plant. No wonder people are saying making money is easy in China. This is of course illegal, but we are playing the game everywhere. -------------------------------------------------------------------------------------------------------------------------

I would honestly take the other side of that cheerfully. If there is one country in the world to short I think it's Australia. The Chinese construction bubble will eventually bust, and nobody will be effected more than Australia. The % of their economy that consists of exporting building materials to China is huge. This has imparted a boom on most other areas of the economy, currently the housing market is in a bubble for example, see Jeremy Grantham's views on the subject. If that wasn't bad enough, banks and lenders are easing standards at a very fast rate. Westpac, for example, recently changed it's treatment of savings that it requires borrowers to have, making 12 months of continous rent payments equal to savings. We should know by now how inflated housing prices and low lending standards works out in the long run. As for stocks being cheap, I disagree. Most stocks are expensive, and stocks are usually more expensive in Australia generally because there is a lot of investment capital in the country chasing few public companies. Some may appear cheap on the historically high and inflated margins they are getting from the commodities booms, but that will end, and the dividends will stop. Once China stops building empty cities Australia will crumble. With that being said I agree with you on the politics, I really like Julia Gillard, but that doesn't make for good investing Hester, it is hard to argue that AU has many problems, and which country doesn't. I totally agree with you. Sometimes I just want to look at things from a different perspective, especially when I have a first-hand experience on the small and micro caps there. We will see how this develops. As to valuation, I think AU stocks are cheap, especially when most companies are paying a decent dividend. I will just give one example here. Have you looked at a company in AU called 1300 Smiles(ONT.ax)? You should check it out. What I wrote last year: “As I said, I have researched many companies worldwide and I know ONT is a special one after reading the AR for 5 mins. Here are a few facts that you guys would want to know. Use google map to look at the HQ. And you would not believe your eyes. It is located in the old 2-story building and the ground floor was leased out. Last year ONT earned 4.3 million on 22 million revenue, you must be wondering how come the margin is so high. The pay for all directors and executives are the lowest I have seen after reading 200+ annual reports in Austrilia companies. With 6 years of profit growth, last year top management and directors as a whole were paid less than 300,000. That is less than 50K per person!! Can you guys pinpoint any company with simliar profitability paying so little to its MD and majority owner? 1300 has also 0 stock options while unprofitable companies giving millions of options to insiders. How many percent of companies listing in Australia do not issues options? When I look at companies, I look at what management does instead of what they say. If MD wants to pump the share price by misinforming investors, why he never sold a single share? Why would he not have a better office? Why would he just issue a lot of options to himself, since any option plan will be passed for sure. Why would he pay a lot more to himself? And why on the earth MD is still spending half a day treating patients after becoming a mulit-millionaire?” A note, ONT went public in 2004, increased dividend almost every year, and the stock price went from 0.8 to 3.3 today. It is paying 15c dividend on a run rate basis. And it will probably earn 27 cents this year. You may argue this is not cheap. Well, for an investor with a reasonable expectation on risk-adjusted return, I do not know if you can find a better one for me. I do not own this one because at this price, because it still does not meet my hurdles.

I bought into Australia as well. If you look at the companies in AU, you will find that the culture is not broken or as broken as US's. And that will make a very big difference. When the political parties using balancing the budget as a weapon to win a election, you know that there are people who are thinking straight. Of course, there are not countries without issues in this world. But I like my chance in AU. Stocks are generally cheap and paying very nice dividends. When not paying dividends because of manifesting of options became new normal on the wall street, companies in AU remind me of the sweet and old, NORMAL days. I like Germany as well because the stocks are even cheaper. What Business is Wall Street in ? 作者：markcuban 有 21 人喜欢此条目 another post from last year that i thought was relevant again: What Business is Wall Street In ? May 9th 2010 11:36AM My last two posts were designed to stimulate discussion. But lets talk the real problem that regulators, public companies, investor/shareholders and traders face. The problem is that Wall Street doesn’t know what business it is in. Regulators don’t know what the business of Wall Street is. Investor/shareholders don’t know what business Wall Street is in. The only people who know what business Wall Street is in are the traders. They know what business Wall Street is in better than everyone else. To traders, whether day traders or high frequency or somewhere in between, Wall Street has nothing to do with creating capital for businesses, its original goal. Wall Street is a platform. It’s a platform to be exploited by every technological and intellectual means possible. The best analogy for traders ? They are hackers. Just as hackers search for and exploit operating system and application shortcomings, traders do the same thing. A hacker wants to jump in front of your shopping cart and grab your credit card and then sell it. A high frequency trader wants to jump in front of your trade and then sell that stock to you. A hacker will tell you that they are serving a purpose by identifying the weak links in your system. A trader will tell you they deserve the pennies they are making on the trade because they provide liquidity to the market. I recognize that one is illegal, the other is not. That isn’t the important issue. The important issue is recognizing that Wall Street is no longer what it was designed to be. Wall Street was designed to be a market to which companies provide securities (stocks/bonds), from which they received capital that would help them start/grow/sell businesses. Investors made their money by recognizing value where others did not, or by simply committing to a company and growing with it as a shareholder, receiving dividends or appreciation in their holdings. What percentage of the market is driven by investors these days ? I started actively trading stocks in 1992. I traded a lot. Over the years I’ve written quite a bit about the market. I have always thought I had a good handle on the market. Until recently. Over just the past 3 years, the market has changed. It is getting increasingly difficult to just invest in companies you believe in. Discussion in the market place is not about the performance of specific companies and their returns. Discussion is about macro issues that impact all stocks. And those macro issues impact automated trading decisions, which impact any and every stock that is part of any and every index or ETF. Combine that with the leverage of derivatives tracking companies, indexes and other packages or the leveraged ETFs, and individual stocks become pawns in a much bigger game than I feel increasingly less comfortable playing. It is a game fraught with ever increasing risk. The Pimco (who I think are the smartest guys on the Street) guys talk about a new normal as it applies to today’s state of the world economy. I think just as important is the new normal as it applies to Wall Street. Wall Street is now a huge mathematical game of chess where individual companies are just pawns. This is money in the bank for the big players like Goldman, Morgan, etc. Why ? Because the game of chess is far too complicated for 99pct of the institutions out there investing money. So to keep up, they turn to Goldman, Morgan and the like to invent products for them. “You don’t know how to play the housing boom, let us show you”. “You think the housing boom is about to crash, let us show you how to play that”. “You think that PIIGS are in trouble because they can’t print money to pay debt holders, let us create a product to allow you to play that game” The big houses have the best hackers in the business and they put together the games and sell them to the many, many institutions managing Billions and Billions of dollars. They are the ultimate Hackers selling their attacks to the highest bidder, regardless of which side they are on. That is a new normal. Again, I’m not passing judgement one or the other. I’m just recognizing what is going on in the financial world today. It’s rare for companies to go public these days. Just as rare for secondary offerings. The only thing that keeps me in the market is that most of the stocks (not all) pay dividends or some other sort of cash payout. For the first time in my life, I bought outside the United States. I bought Australia in a big way because it is becoming increasingly hard to find new domestic investments that are not influenced by the “hackers” and the games being played on a macro level. It’s hard to believe, but evaluating countries as an investment is now easier than evaluating companies . Even with all the unrest in Europe. Or maybe because of it. So back to the original question. What business is Wall Street in ? Its primary business is no longer creating capital for business. Creating capital for business has to be less than 1pct of the volume on Wall Street in any given period. (I would be curious if anyone out there knows what percentage of transactions actually return money to a company for any reason). It wouldn’t shock me that even in this environment that more money flows from companies to the market in the form of buybacks (which i think are always a mistake), then flows into companies in the form of equity. My 2 cents is that it is important for this country to push Wall Street back to the business of creating capital for business. Whether its through a use of taxes on trades, or changing the capital gains tax structure so that there is no capital gains tax on any shares of stock (private or public company) held for 5 years or more, and no tax on dividends paid to shareholders who have held stock in the company for more than 5 years. However we need to do it, we need to get the smart money on Wall Street back to thinking about ways to use their capital to help start and grow companies. That is what will create jobs. That is where we will find the next big thing that will accelerate the world economy. It won’t come from traders trying to hack the financial system for a few pennies per trade. And solutions won’t come from bureaucrats trying to prevent the traders from hacking the system. The only certainty when bureaucrats step in is that the law of unintended consequences will smack us all in the head and the trader/hackers will find new ways to exploit the system that makes them big money and even more money for the big institutions that develop products for the other institutions that are desperate to play the game. Regulators have got to start to recognize that traders are not investors and vice versa and treat them differently. Different regulations. Different tax structure. Different oversight. Individual investors and the funds that just invest in stocks and bonds are not going to crash the market. Big traders who are always leveraging up and maximizing the number of trades/hacks they make will always put the system at risk. We need to recognize that they do not serve much of a purpose other than to add substantial risk to the global economy. That their stated value add of liquidity does not compensate the US and World Economy nearly enough for the risk of collapse they introduce into the system. Wall Street as a whole needs to be in the business of creating capital for companies and selling shares to investors who believe they are shareholders. The Government needs to create incentives for this business and extract compensation from the traders/hackers for the systemic failure level of risk they introduce. There will be another crash, because there are too many players looking for the trillion dollar score. They can’t all win, yet how many do you think wouldn’t risk everything, even what is not theirs, for that remote chance to score big ? Put another way, there is zero moral hazard attached to any trade. So why wouldn’t traders take the biggest risk possible ? Update at 10pm 5.9.10 One more consideration. If there are traders of any kind that are unregulated or unmonitored, and trade for their own account, how do we know how big they are and how much of a threat they pose to the system, individually and in aggregate ?. For any High Frequency or big leverage derivative folks out there- is it possible there could be firms that have billions at risk with questionable ability to make a margin call or fulfill their side of the trade if things went against them ? Could there be hidden AIGs that few people know about or a bunch of AIG like situations ,which in aggregate fail and put the system at risk ? I have no idea. Just asking the question. Update 8-9-2011 As a follow up from a comment, I found it interesting that Australia treats professional traders very differently than individual investors that invest in shares of companies. Traders pay regular income tax on their gains, investors pay capital gains and if held more than a year can even get a discount on the capital gains rate. Something that would make a ton of sense in the USA as well

I thought this was supposed to be a value investing forum? I can assure you, when Warren Buffett invests in a financial, he certainly does not take any leaps of faith. The numbers are all out there, if you're diligent enough, you will find them. I can't help but HAHAHAHAH~~~~

This is an excellent point. Thanks! In BAC I do not TRUST! I love his analysis as well and would and have put money on it. I have answered the question about the balance sheet before. The answer is simple, but perhaps not satisfactory. In terms of how you get comfortable with it . . . you just do. You have to take a leap of faith. Banks are a black box in that way. You will never be able to analyze their assets in a way that will give you 100% comfort. But at the end of the day, how is this so different from other companies that are non-financials? Take FFH or BRK, for example. You have a list of assets and you think you know what they are worth. But all you know is what is listed on a piece of paper. They both have countless subsidiaries, etc. What is an insurance company really worth? You think you know and you do, so long as the numbers on the piece of paper are correct. Are you actually going to various insurance companies and doing an audit on their figures? Even if you had that kind of access, would it even be possible to do? Is one capable of doing it? Then, in BRK's case, there are all the operating companies both wholly owned and the investments. What is KO really worth? They tell you they have operations all over the world. Have people been to Nepal to analyze their exposure there? What about China? What about all their bottling companies? At the end of the day as with any investment, all we know is what is listed on a piece of paper in the 10-K. Either you take the numbers at face value with your own bit of analysis built in, or you don't. I'm not saying that one shouldn't discount or whatever, as appropriate, but if you think BAC is playing games, don't invest. I can assure you that no one knows exactly what any of these banks is truly worth in the sense of putting an exact valuation on it. Buffett doesn't really know what WFC is worth. Berkowitz doesn't really know what BAC is worth. The structured assets alone, even if you had a list of each and every one is impossible to value accurately. But you don't need precision to know that at the current price BAC is undervalued. As they used to say on an old tv show, believe it . . . or not.

I would not do this even in my wildest dream. Really can't handle risks. Good luck Eric. I hope this works well for you!