The Poor, Poor American Dollar

I have a treat for my readers--The Atlantic's (December 2008, p. 62) interview with Gao Xiqing, who oversees and invests $200 billion of China's $2 trillion U.S. dollar holdings. This interview is one of the best ones I've ever read because of the government official's openness:

http://www.theatlantic.com/doc/200812/fallows-chinese-banker

Below are my favorite two parts from the interview, one about the American dollar, and the other about derivatives:

Everyone is saying, “Oh, look, the dollar is getting stronger!” [As it was when we spoke.] I say, that’s really temporary. It’s simply because a lot of people need to cash in, they need U.S. dollars in order to pay back their creditors. But after a short while, the dollar may be going down again. I’d like to bet on that!

I have been converting my dollars into Canadian dollars recently. I already have euros (FXE) and some Swiss francs (FXF). We'll see in a year whether my decision was the right one. I felt compelled to diversify my U.S. dollar holdings, because they were earning around 1% in interest, while competing currencies had much higher interest rates and the possibility of greater upside.

As for derivatives, here is what Mr. Gao had to say:

If you look at every one of these [derivative] products, they make sense. But in aggregate, they are bullsh*t. They are crap. They serve to cheat people.

Mr. Gao explains derivatives by comparing them to multiple mirror reflections of one actual product. It's such a perfect analogy, I'm surprised no mainstream American publication has mentioned it until now.

Kudos to The Atlantic and Mr. Fallows for publishing this interview.

Investment Outlook

My personal sentiments regarding the stock market are similar to Jim Rogers'. Basically, I am overweight commodities and just bought a Commodities ETF (DBC). I also added to my Canadian dollar position (FXC), as an indirect play on commodities.

I disagree with Mr. Roger's assessment of American stocks being too expensive--many "blue chip" technology stocks appear cheap because of their high net cash holdings and market share. T. Rowe Price holds my 401(k), and around 17% of my 401(k) is in its Science and Technology fund (PRSCX). This particular fund has a relatively high percentage of its holdings in semiconductor companies.

The information on this site is provided for discussion purposes only and does not constitute investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities or make any kind of an investment. You are responsible for your own due diligence.

The Auto Bailout, from a Gender Perspective

Amy Siskind has this to say about the auto bailout:

Pew Research recently reported that in 43% of all U.S. homes, women make more of the decisions on household finances (men make more in 26%, and in 31% of homes it is equal). Why then is it that our automotive committee is composed of 21 senators, 20 of which are male. So while 43% of women make the decisions at home, 5% of our Senate Banking Committee is composed of women?

She makes a darn good point.

"Terrorists Are Criminals"

The SJ Merc has a great letter in today's paper (December 9, 2009, 9A): 

All Muslim organizations that I am associated with, including the local mosque, have condemned the Mumbai murders, and all Muslims I know are outraged by this incident in which innocent Hindus, Muslims, Christians and Jews were killed. Yet, people still demand something from Muslims. Terrorists are criminals who represent no one but themselves, and if they happen to embrace the same religion as you or I, then so be it. Religion is intended to teach us about God and how to worship and help others, so people of all faiths must join against the ignorance of terrorism and false accusations. 

Jim Zanghi 

I expressed similar sentiments in an earlier blog post (Anti-Terrorist Sentiment Does Not Require Overt Public Acts): 

When an unarmed black man (Amadou Diallo) in New York is shot 19 times by Christian police officers, does the failure of Christians across the United States condemning the NYPD mean they condone senseless killings? Of course not. Such examples can be made ad infinitum, and it should be fairly obvious that an absence of mass protests or vocal opposition has no relevance as an indicator of general support or non-support. The reasons for silence among most "ordinary Pakistanis" are simple. Muslims in Pakistan don't know the killers in India and don't feel any connection to them. To the 99.9% Pakistanis who live their lives peacefully, there is no connection to the killers in India and therefore no reason to say anything publicly about their heinous acts. 

Countries act against their own interests when they force ordinary citizens to choose between their religion and supporting law enforcement in the battle against terrorism. Governments need to condemn associating terrorism with any single trait, whether religion or race, so as to ensure the broadest possible cooperation among their citizens.

Guanabee

Here is a little-known website that is apparently targeting a Latina audience--I am giving it props, just because:

http://guanabee.com/

It's written in an informal style, and some material is NSFW, but it's a fun website if you like gossip and pop culture. Here's the page that led me to the overall website:

http://guanabee.com/2008/12/guanabee-presents-5-most-epic-quinces-fails.php

An Auto Bailout is Unjust

Here's an audacious question: How is an auto bailout not preferential corporate welfare?

There is no contention that America suffers from an automobile shortage. Honda and Toyota are perfectly capable of increasing production to fill in any gap caused by a GM and Chrysler bankruptcy (I don't mention Ford, because it appears to be the healthiest of the Big Three). Meanwhile, Japanese car companies have created thousands of jobs in the South and are schooling Americans in how to run an efficient, profitable auto manufacturing operation.

To its credit, the UAW has responded to charges that it is asking American taxpayers to subsidize the Big Three's inefficiency. Unfortunately, its arguments are misleading. For example, the UAW has mentioned state incentives given to Japanese car companies as support for a federal bailout (See Autonews Article).

First, states like Alabama provided incentives to Japanese companies because the UAW was opposed to relocating to the deep South. (Southern states generally favor "right-to-work" laws, which are code for anti-union laws.) The UAW's refusal to support American production in the deep South allowed the Japanese to enter those states without competition. The UAW and the Big Three could have requested Southern state incentives, but they failed to do so on reasonable terms. As a result, any tax incentive given to other companies was due to the UAW's own unwillingness to be flexible. It's akin to losing a war because you refused to go to the most advantageous territory to fight--and then calling the other side dirty for going where you wouldn't.

Second, speaking of the Japanese, we criticized them for years because they bailed out their banks after their speculative bubble. Indeed, almost every American economics study found that bailing out inefficient companies exacerbated the Japanese recession. Just google "Japan's lost decade" for more. (Here's one particularly relevant link from a google search result: http://www.guardian.co.uk/business/2008/sep/30/japan.japan)

Third, the Japanese car companies received only $3 billion since 1992--far below the UAW's request for $25 billion (see penultimate paragraph of Autonews article). The disparate amounts of incentives requested indicate that subsidies aren't the reason for the Big Three's woes. In addition, while it's easy to forget now, the Japanese took a major risk in coming to the South to do business. Just fifteen years ago, no major entity was considering investing billions of dollars in the deep South because of its less-than-cosmopolitan reputation. This reputation required the Japanese to take major risks, such as opening manufacturing plants in places where some residents had never met a Japanese person and where pro-white groups still exist.

There's a happy ending to the Japanese and their risk-taking. Although various Americans continue to refer to Southerners as uneducated and backwards, it is now apparent that these so-called "backward" Southerners have outworked the Midwestern UAW. (It will be interesting to see if Southerners will return the favor and call non-Southern workers lazy and handout-prone). In short, the Japanese should be lauded for taking a risk when the Big Three and UAW refused to consider the South as a viable business destination. Moreover, $3 billion is not what the UAW is demanding, making their reference to the South irrelevant.

The UAW's remaining argument is based on emotion. It talks about the loss of thousands of jobs, implying that without taxpayer monies, the Big Three's employees will be in breadlines and bankruptcy courts. By resorting to this argument, the UAW has taken a page out of Naomi Klein's Shock Doctrine. The UAW fails to mention any other option except demanding billions of dollars in taxpayer monies. For example, it fails to advocate increasing the length of time and amount of payments given to unemployed workers nationwide. Yet, the $15 to $25 billion requested could be used to extend unemployment benefits for all Americans, and at higher amounts. Using this method, no industry receives preference, and taxpayer money benefits Americans nationwide. After all, it's not just the auto workers being affected by this recession, but engineers, accountants, and food service workers. Don't these workers have families to support, too? By demanding money only for auto employees so they can continue in an inefficient business, the UAW is essentially admitting it wants preferential treatment over every single American worker who has been laid off and those who will be laid off. Its attitude is unacceptable if you believe that government should consider the welfare of all its people, not just one particular group.

The UAW's selfishness exposes another issue with an auto company bailout--the slippery slope. What will Congress do when other industries come knocking? Will taxpayers be forced to support all affected industries that happen to have highly paid lobbyists? Once Americans understand that Congress probably wouldn't take seriously a bailout request from restaurants waiters and waitresses, they have to ask why their government is focusing on the Big Three to the exclusion of other industries.

The only reason to provide an automobile bailout is because of the Big Three's legacy costs, which may be shifted onto taxpayers anyway through the PBGC. Unfortunately for taxpayers, it seems that all roads lead to pillaging of their wallets.

Update on December 21, 2008: a 12/20/08 WSJ letter pointed out that the Southern states didn't get loans--they received tax deductions, which are useless, unless the companies actually invest in a particular state and expect to make a profit. In other words, without the tax breaks, a state like Kentucky would get 0 dollars for its residents. But with the tax deductions, a company might come to Kentucky and bring jobs and other positive benefits--none of which would have happened without the tax incentives. So Kentucky and its residents received a net gain because of the tax incentives. GM and Chrysler, on the other hand, are asking for loans directly from taxpayers, which force Americans to own a stake in American car companies and which do not create new jobs. The loans are high-risk and it remains to be seen whether American taxpayers will come out ahead.

Update on 12/23/08: Madoff's investors are already asking for a taxpayer bailout:

"There's no doubt that hearings will be held on this, and some government aid is a very logical request," said Robert Schachter, an attorney with New York-based Zwerling, Schachter & Zwerling, which is representing several Madoff victims. "If we're bailing out Wall Street and the auto industry, maybe these individuals should be bailed out too."

Can you say, "slippery slope"?

Basketball: Don Nelson

The San Francisco Magazine interviewed Golden State Warriors coach Don Nelson (October 2008 edition). They emphasized his humble beginnings:

By 1976, when he retired as a player, Nelson had won five championship rings and paid off his house, yet he was anything but rich. In most years, he made around $30,000, and he still drove [Coach] Red Auerbach's hand-me-down Buick. His marriage was also on the rocks...His accountant said Nelson couldn't send his four kids to college. "He was always worried about money, trying to stay ahead," says Donnie [Nelson], who remembers moonlighting with his dad at YMCAs and Rotary Clubs where Nelson would give brief speeches, tossing out the same three jokes for $100 a pop. "Failure simply wasn't an option."

Sometimes, life's second acts are much more profitable. Mr. Nelson has not won an NBA championship as a coach.

On the player side, Corey Maggette is problematic for the Warriors. He plays like Kobe Bryant--if Kobe had mediocre shooting and defensive abilities. Essentially, the Warriors are left with a shooter without a conscience, but one who can't shoot consistently. Something tells me this won't end well, especially with the more experienced Stephen Jackson and Jamal Crawford needing to take at least 12 shots a game for the Warriors to be competitive. On the bright side, Al Harrington seems like he's doing better in New York.

The Baron-Davis-led Warriors were something special, and they will be missed. Right now, the Warriors need a consistent PG--like Chris Duhon, Jose Calderon, or Deron Williams--to keep their gonzo playing style from becoming self-destructive. Baron, shaky knee and all, provided stability to his team, and now, the Warriors have no one to provide steady passing and ball control. The Warriors should offer the Toronto Raptors a mutually beneficial deal: Maggette for Calderon, straight-up. Two other PGs to consider: Antonio Daniels (his quickness will fit perfectly with the Warriors) and local Stanford grad Brevin Knight. Even when Monta Ellis returns, the Warriors will need an experienced backup PG. Just my two cents.