New Core, with looser rules, will experiment more recklessly, as we once did

SCIENCE AND TECHNOLOGY: "Stem cells in China: Wild East or scientific feast? In the field of stem cells, China is showing that it can do world-class research. It is a shame, then, that so many fraudsters operate and that officialdom turns a blind eye," The Economist, 16 January 2010.

The East, I think, is always going to lack our religious hang-ups, in this regard, to the world's great benefit.

China as the second coming of Japan's bubble economy

BRIEFING: "China's economy: Not just another fake; The similarities between China today and Japan in the 1980s may look ominous But China's boom is unlikely to give way to prolonged slump," The Economist, 16 January 2010.

COMMENT: "What we can learn from Japan's decades of trouble," by Martin Wolf, Financial Times, 13 January 2010.

Similarities: extreme savings rate, undervalued currency, export-driven growth, and huge current-account surplus with chronic overinvestment (meaning loads of bad loans) and overvalued real estate.

Thus we get hedge fund guy James Chanos arguing China's crash will be Dubai times 1,000 or worse!

But when you look at the three key concerns (overvalued assets, overinvestment and excessive bank lending), China doesn't actually look so bad--or at least not as bad as Japan was back before the fall.

Stock prices: Japan's had a price-earning ratio of about 70, while Shanghai's class A stocks sit at 28 (with its long run average being 37).

Yes the housing market is hot, but relative to income growth in China, it trails. Yes, the average cost of a house is ten times annual income, whereas in the U.S. it's typically 4-5. But Chinese homebuyers come from the richest ranks, so the average misleads here, because when the urban elite are compared (and there are numerous), they come very close to the Western average.

Plus, the Chinese tend to pay cash and have small mortgages, so the boom is financed more by savings than by banks.

As for overinvestment, even now the capital stock per person in China is only about 5% that of the U.S. or Japan, so room to grow!

Does China allocate capital well, or is it a modern, marketized version of the USSR with too much meddling from the middle? The mag discounts this too, but here I personally do worry. I've never seen a bunch of guys sitting around the table beat the market's comprehensive wisdom or ruthlessness day-in and day-out. Extensive growth must increasingly be replaced by intensive growth in China, so I wouldn't be surprised that there's tons of bad investments.

The biggest worry, says the Economist, is the recent wave of sloppy bank stimulus lending. Total credit jumped by 30% last year, so you know bad decisions were made.

Optimistic take? The percentage of bad loans in China is unlikely to jump much, so bearable.

Can the bubble burst? Of course!

We're just not looking for a long slump to follow, ala Japan.

But Wolf's point on Japan is key: excessive corporate savings plus diminished investment opportunities (once all the extensive, "catch-up" growth was achieved) did Japan in, and eventually, say I, China will logically hit a similar point where it will pay for political rigidity.

U.S. science lead narrowing, but isn't that a good thing?

U.S. NEWS: "U.S. Keeps Science Lead, But Other Countries Gain," by Justin Lahart, Wall Street Journal, 16-17 January 2010.

I mean, would you prefer the title: "America's science lead grows, as rest of planet seems dumber by the day!"

Don't we want to welcome more smart people working harder problems?

The U.S. accounts for nearly a third of global R&D, above our 20% GDP share and way above our 5% population share.

We also cranked more science and engineering docs and led the world in innovation activity. China and other developing economies lag far behind but the gap is narrowing.

And yeah, I think that's a good thing, unless you're hungry for a more populous world that's less competitive and less talented.

Brazil's moving into Africa too

WORLD NEWS: "Brazil accelerates investment in Africa: Cultural and linguistic ties facilitate growing commercial links," by Richard Lapper, Financial Times, 9 February 2010.

Quick quintupling of trade over a decade, and more capital hopping by Lula than any other BRIC leader.

Brazil is there for all the same reasons why rising China is.

First ground-water concerns, now fears about the air surrounding gas-shale extraction

U.S. NEWS: "Gas Sites Spur Air Fears: Fort Worth, Texas, Officials Rethink Their Longtime Support for the Industry," by Ben Casselman, Wall Street Journal, 4 February 2010.

WORLD NEWS: "Suppliers of oil sands fuel shunned," by Sheila McNulty, Financial Times, 10 February 2010.

Hazardous chemicals in the air near production sites.

The dangers appear to be adding up, yes?

And as they do, you begin to wonder if the whole gas shale thing is going to prove worthwhile or more like another oil sands, which already seems mired in environmental and investment isolation.

FT in, NYT losing out

Turned my paper subscription to the New York Times into the online-only reader edition. Meanwhile, I keep The Economist and Wall Street Journal coming in paper versions, plus I pick up the Financial Times, which arrives every morn by 5am in my mailbox out front.

What I've noticed: I cite the NYT a lot less and the FT a lot more.

The WSJ and Economist hold steady.

M&A is sexy

ARTICLE: African Telecom: Strategic Communications, By Judah Grunstein, WPR Blog, 17 Feb 2010

My editor at WPR, Judah Grunstein, has a blog post about an Indian buy of Kuwaiti-owned African telecom company in the range of $10B.

The crucial bit:

Today's deal illustrates the way in which India is trying to play catch up with China in Africa, but also the way in which second-order markets, such as telecom, are part of the competitive landscape. For now, African telecom is more attractive for the mass it offers than for the actual revenue. As the article indicates, Zain's African share accounts for 62 percent of its subscribers (which total 65 million), but only 15 percent of the group's net profit. But given the widespread practice of SIM-sharing in Africa, there's a lot of upside potential as income rises with development.

So for now, this is as much about positioning as profit. But increasingly; and across a growing spectrum of sectors, Africa is a strategic position to occupy.

My quibble: I would NEVER refer to telecom M&A activity as "second tier"!

Per my connectivity theme, it's about as sexy as it gets.

Tom around the web

+ Zenpundit linked A Bad Time to Wreck Our Relationship with China.
+ So did Manders.

+ JEFFREY L. FOSTER used BFA a lot and quite favorably in his paper 'REGIONAL MILITARY SECURITY COOPERATION IN NORTH AMERICA'.

+ HG's WORLD cited GP regarding Lincoln.

+ Globo Diplo linked the TED video.
+ So did kirstiehepburn.

+ Ragbag linked China will have to switch to democracy.
+ Squidoo's Globalization lens lists BFA (why that one and not PNM or GP or all 3?)
+ eaves.ca discussed The Map.
+ LibraryThing says people who read Samuel Huntington read Tom and then read James Carroll...
+ Tony Fleming tweeted Haiti shows our SysAdmin need.
+ Sublime Oblivion cited PNM.
+ Armchair Generalist linked What the freak-out artists fear most: the passage of time that allows things to work out.

+ Free Numerology Newsletter quoted GP (I include it because I find it amusing).

China's expansion triggers back-pressure

ARTICLE: Chinese mountain now biggest iron-ore mine, By John Pomfret, Washington Post, February 14, 2010

A good summary of Australia's growing ambivalence regarding China, and yet, it continues to take the money.

Shows you that connectivity breeds resistance even when we're talking a mature globalizer like Australia. Why? The sheer size question, not unlike America's many dominant economic relationships around the planet, breeds a desire to balance that relationship with others.

Still, this is a lot of show in response to real economic transactions. Australia can jack up its tiny defense budget and think it's standing up to the Chinese, but why would the Chinese use its military to take what it can readily buy? And the more it buys, the more it will influence--military or not.

But the larger point is valid: if China is a democracy, then most of this distrust goes away, meaning the longer China stays a single-party state, the more back-pressure its expansion will trigger.

And that is good.

(Thanks: Jim Fick)

What Pakistan wants

POST: Baradar: Why Now?, by Steve Coll, Think Tank, February 16, 2010

This fits with the subsequent NYT analysis that Pakistan now views a seat at the political table to be an imperative.

(Thanks: Our man in Kabul)

Shrinking the Gap is COIN writ large

ARTICLE: Afghan Offensive Is New War Model, By DEXTER FILKINS, New York Times, February 12, 2010

The "population is the prize" argument works throughout the Gap, especially when we're talking the bottom-of-the-pyramid emerging middle class.

Shrinking the Gap is simply COIN on a grand strategic level, aka making globalization truly global.

(Thanks: merhumes)

To conquer the bottom-of-the-pyramid, stay at rock-bottom prices

IN DEPTH: "Getting Over the JetBlues: Ousted JetBlue founder David Neeleman is taking his dirt-cheap-airline model to Brazil. Will it fly?" by Diane Brady and Adriana Brasileiro, Bloomberg BusinessWeek, 15 February 2010.

Interesting story of how JetBlue founder David Neeleman seeks to strike gold for the second time in South America, his logical expectation being that rising Brazil and the continent's growing middle class will seek to travel a lot more by air.

Ousted by his own board after the disastrous performance of JetBlue during the infamous 2007 Valentine's Day ice storm (this I remember), Neeleman was sent down to Brazil by some investor friends to check out a struggling, low-cost Brazilian airline. Intrigued by the market potential and this firm's poor performance, he spotted a market worth exploiting and started his own local firm (Azul).

Neeleman even went so far as to get dual citizenship, which gets him around the nation's cap on foreign ownership of airlines (20% max).

He is targeting the 52% of Brazilian households who earn between $594 to $2600 a year--serious BOP territory. Most would never think to pay for a cab to the airport, so Neeleman lures them with free transport by bus.

Fascinating case study.

Crazy like a fox

ARTICLE: Clinton Raises U.S. Concerns of Military Power in Iran, By MARK LANDLER, New York Times, February 15, 2010

So Hillary has come out and said it: the mullahs are effective figureheads and the Revolutionary Guard is a de facto military dictatorship.

Ahmadinejad has achieved his primary goal: a president-centric single-party state.

The price of saving the world may be the follow-on bubble bursting in China

WORLD NEWS: "Risk of price bubble grows in China: Bank lending surges in January; Temporary halt on credit by regulator," by Geoff Dyer, Financial Times, 12 February 2010.

January's bank lending topped the previous three months combined. Housing prices up almost 10% for the year.

The gist of the situation:

The rapid rebound in the economy over the past year has been based on easy credit, much of it channeled into infrastructure and property construction. However, the sharp rise in bank loans has prompted intense discussion within China on the risks of fomenting bubbles.

We have little to do with Iran's shift

NEWS ANALYSIS: U.S. Encounters Limits of Iran Engagement Policy, By HELENE COOPER, New York Times, February 15, 2010

Key bit:

And if Mrs. Clinton is correct that the Revolutionary Guards, not the politicians or the clerics, are becoming the central power in Iran, the prospects for rapprochement can only look worse.

True in the short run, as the Revolutionary Guard continue to consolidate power. Also true for as long as we remain myopically focused on the nukes.

But in general, it will be easier to deal with a military dictatorship than a theocracy.

The "outing" rationale is cute but meaningless. We were completely irrelevant to this shift within Iran, and nothing we would have done would have changed that.

Another example why Iran is not North Korea

NEW BUSINESS: "Reading Keynes In Tehran: A group of Iranian executives is determined to build a modern B-school for their country," by Stanley Reed, Bloomberg BusinessWeek, 15 February 2010.

Hard to imagine the locals pushing for a B-school in NorKo.

The driver behind the idea is a 37-year-old local businessman who is "one of the few Iranians to run successful firms in his country despite the red tape and isolation that burden businesses there."

Imagine how clever this guy has to be.

Guy left as kid following revolution and then was educated in the West (Stanford and then Rhodes to Oxford). For some crazy reason, he goes back to Iran in 2005 and starts a couple of financial management firms.

The guy's vision: most of the economy is under state control, but he sees an eventual pragmatism already embodied in the fact that many state firms are listed on the local stock exchange.

Why worth citing?

I think this guy's optimism is realistic. The more comfortable the Revolutionary Guard grows in its mafia-like grip over both the economy and the political system, the more these guys will seek to maximize revenue, and scale comes with access to outside capital.

Sad to say for those who support the Green Movement (including myself) and who fear Iran's eventual achievement of nuclear-weapon status (I personally don't welcome it, but I think it inevitable and nothing to go wobbly over), the shift from true clerical rule to a single-party autocracy centered around the president and monopolized by the Guard (with the Supreme Leader ever more the figurehead who sold his soul to the RG to avoid the loss of the presidency last year to reformists) is actually a step forward.

Over time, we'll see something eminently more familiar and easier to manage--the corrupt party dictatorship that's really only interested in extending its power and maximizing its income.

That's a regime that walks right into the soft-kill zone.

Clinton (Bill) on business answers for Haiti

OUTSIDE SHOT: "Business Can Help Haiti," by Bill Clinton, Bloomberg BusinessWeek, 15 February 2010.

Before he got sidelined for the stent, Bill was maintaining his usual peripatetic schedule, focused heavily on Haiti.

His plea here is a decent one, focusing on agribusiness, rural infrastructure, renewable energy, reforestation, apparel and textiles, and call centers.

Passing of the torch

ARTICLE: China Ends Russian Winning Streak in Pairs With a One-Two Punch, By JULIET MACUR, New York Times, February 15, 2010

A true Olympic shocker: the almost half-century Russian streak in paired figure skating is over!

The Chinese, of course, take the gold.

The rising superpower MUST display its prowess at the Olympics.

Impressive win.

VW as the next Toyota?

FEATURE: "The Transformer: Why VW Is The Car Giant To Watch: Volkswagen is bent on displacing Toyota as the world's biggest car company--and it just may succeed," by David Welch, Bloomberg BusinessWeek, 25 January 2010.

Last November, VW passed Toyota in global production but not yet in sales, but VW's CEO is confident the automaker will catch its Japanese rival by 2018. VW believes it has spotted a chink in the Toyota armor: going after the rising Asian market faster and more aggressively (various M&A/investing efforts in fellow car companies better positioned than Toyota).

But VW also plans to reconquer America a bit.

The big shift was VW abandoning some of its up-market moves in the early part of last decade (buying into higher-end brands) and moving more toward a bottom-of-the-pyramid approach, where Honda and Toyota have run laps around VW in the past.

But, with so much room for improvement, VW is bullish.

The Internet changes nothing!

SCIENCE: "Your Brain Online: Does the Web change how we think?" by Sharon Begley, Newsweek, 18 January 2010.

The consensus of brain experts remains the same: all these claims that surfing fractures thinking and kills in-depth thought is simply untrue. In short, it changes the how of collecting information but not the how of processing it.

As a member of a transitional generation who parents those born to it, I observe this to be true. The parenting my wife and I offer to our kids overwhelms any processing change triggered by video games, surfing, texting, etc.

But that's true about everything in life: strong parenting rules, and in its absence, problems emerge as identities are not firmly formed and thus subject to all manner of influences--both good and bad.