Two Reading Tips: Money and China

National Geographic Magazine is probably one of the most overlooked publications in the U.S. This month's (April 2008) issue focuses on China and is absolutely fantastic. In addition to the articles and pictures, there is a detailed map of modern-day China.

I also read a newer publication, Lapham's Quarterly, Vol 1, No. 2, titled, About Money. All of the articles in the Spring volume's journal are about--you guessed it--money. There are too many interesting tidbits to quote everything, but the writers include everyone from Alexis de Tocqueville to Orson Welles. I especially enjoyed the Benjamin Franklin and Jim Cramer pieces. Here are some quotes from the journal:

Thomas Jefferson: "Money, not morality, is the principle of commercial nations."

Roger Starr: "It is not the accumulation of money which is vicious, but overconsumption...[the very poor] are "dehumanized because his relative poverty deprives him of the human responsibility of choice."

Henry Ford(!): "The automobile business was not on what I would call an honest basis, to say nothing of being, from a manufacturing standpoint, on a scientific basis, but it was no worse than business in general." "How much gasoline it [a car] used was of no great moment..." (In 1922, oil was around $3.50 a barrel)

James Boswell: "In civilized society, personal merit will not serve you so much as money will. Sir, you may make the experiment. Go into the street, and give one man a lecture on morality, and another a shilling, and see which one will respect you the most."

Tocqueville: "What grips the heart most powerfully is not the peaceful possession of a precious object but the imperfectly satisfied desire to possess it and the constant fear of losing it."

Elias Cannetti: "What is that happens in an inflation? The unit of money suddenly loses its identity. The crowd it is part of starts growing and, the larger it becomes, the smaller becomes the worth of each unit...Just as one can go on counting upward to any figure, so money can be devalued to any depth... [Are you listening, Bernanke?] An inflation cancels out distinctions between men which had seemed eternal and brings together in the same inflation crowd people who before would scarcely have nodded to each other in the street."

Upton Sinclair: "The assumption [in the entertainment business] was that they would live happily ever after, though never was it shown how that miracle would be achieved, and though the divorce rate in America was continually increasing."

Andrew Carnegie: In bestowing charity, the main consideration should be to help those who will help themselves; to provide part of the means by which those who desire to improve may do so; to give who desire to use the aids by which they may rise; to assist, but rarely or never to do all. Neither the individual nor the race is improved by alms-giving. Those worthy of assistance, except in rare cases, seldom require assistance."

Sallust: "Growing love of money, and the lust for power which followed it, engendered every kind of evil. Avarice destroyed honor, integrity, and every other virtue, and instead taught men to be proud and cruel, to neglect religion, and to hold nothing too sacred to sell."

Jack Weatherford: "Compared with the physical force of the military and the spiritual authority of religion, money offered a third and completely novel way to organize society. Without regard to rank, class, or standing, anyone with the proper coin could buy a goat or a turnip, a jug of wine or a basket of fish, a parcel of land for a vineyard or a pinch of salt to flavor dinner...In the global economy that is still emerging, the power of money will supersede that of any nation, combination of nations, or international organization now in existence. The newly ascended financial elites hold no brief or loyalty for any particular country, and the third revolution in the history of money threatens to erode the value of kinship, religion, occupation, and citizenship as the defining components of civil and social life."

Tim Parks: "The real scandal of money, and particularly usury, as we have already said, is that it does not respect traditional hierarchies. The merest artisan can make a fortune and start strutting around in expensive crimson. The feudal order breaks down."

Mozart

Other than a classical music class I took at a community college--one of the best deals in existence, as the CDs that came with the textbook are still used--I have no expertise in music. But this article about Mozart caught my attention, primarily because it states in different, more concise words my belief that our brains get caught up in limited local patterns that inhibit intellectual growth.

See Corinna Da Fonseca-Wollheim: "The Magic Flute" is as utopian and abstract as "The Abduction" is fresh. By placing his characters in an oriental setting, Mozart reminds us that it is only in confrontation with an Other from whom we allow ourselves to learn that we can find our own voice and transcend prejudice. (WSJ, April 26, 2008)

Absolutely correct, in my humble opinion.

Peggy Noonan's Life, Liberty and the Pursuit of Happiness

I enjoy reading Peggy Noonan's column in the Wall Street Journal, so when I saw one of her books in a used bookstore for $5.50, I bought it. Noonan's style is difficult to describe. It is best-suited to columns and short speeches, but I could not explain to you why I feel this way. The writing in Life, Liberty, and the Pursuit of Happiness (Adams Publishing (1994)) evokes a calm, folksy demeanor, favoring anecdotes over heavy prose. Basically, Noonan's style is vintage Erma Bombeck--if Bombeck had a political agenda.

When Noonan is more concise and quoting others, she is less preachy; for example, she introduces the reader to two interesting quotes, such as "Life makes conservatives of us all," and "Politicians prefer unarmed peasants." The second one made me laugh, and the first one was used very well in its full context. Noonan clearly aims to be a political philosopher, and here is what she says when she refers to Jack Kemp's evolving views of limited government:

[I]t's not the federal government that is the prime helper of the poor in America, it is freedom. Freedom to build, freedom from excessive taxation, from regulations and lawsuits that can ruin your dry-cleaning business because someone says you don't employ enough of this race and that gender. Freedom to work as a kid off the books and learn and get good habits and not have the guy who runs the candy store be buried under tax and medical forms. (page 178)

As a political insider, Noonan also has access to Justice Clarence Thomas, and in response to how he felt during the Anita Hill hearings, we see a more human side of the man:

"I didn't go in there strong," he says. "I went in there a broken man. I had been broken. They had reduced me literally and figuratively to a fetal position. I was broken. And what got me through it was I prayed, I said 'Lord, I am weak, I am weak, you must help me.'" (page 114)

On Dick Cheney, Noonan's experience is telling, even in 1994. After asking him to keep a diary so he could one day write a book, here is what happens:

Cheney makes that wince face he makes and looks down. "No, unfortunately you can't keep diaries in a position like mine anymore." "Why?" I ask. "Because," he says, "anything you write can be subpoenaed or become evidence in a potential legal action. So you can't keep and recount your thoughts anymore. (page 89)

Later, Noonan, a Republican insider, states, "Fact: No one really knows what Cheney would do or think domestically." (page 184) It's enough to make an American do a wince face.

Speaking of domestic issues, California is having heated discussions about immigration in 2008. However, it appears the issues were the exact same in 1994, and after 14 years, California is doing relatively fine, and the same issues keep coming up every few years (it's almost enough to make you think that politicians play the immigration card when it's convenient for them and when they need to get votes):

"What are you going to do about immigration?" "It isn't xenophobia," he said; the Mexicans and other recent immigrants were coming up to him and asking about it, they're taxpayers and they're seeing California sink under the weight of illegals who come into the state and go on its services...California's going broke." (page 186)

And there is what makes Noonan slightly unbearable to read in an expanded format: wide brushes of policy packed in folk style, which are designed to impart a certain lesson, but without regard for accuracy. It's passive-aggressive politico-speak. California is suffering from a lower bond rating in 2008--many years after her book was published--but it is not clear at all whether undocumented immigrants are the reason for the decline in the state's ability to pay future projected costs. (In fact, it appears most payments from the State go to bonds relating to schools--which, last time I checked, needed approval by by citizen taxpayers and which benefited all children.)

Noonan's folksy style becomes excruciatingly asinine in some places:

Young black men will save our country. I'm not sure completely what I mean by this but--they're tough and smart and know how to survive...Anyway, something just tells me they're going to save our country." (page 26)

Although she is foremost a political insider, Noonan comes across best when she dispenses common sense advice:

When you think about your enemies, you're letting them live in your head without paying rent. (The same person told me, When you worry, you're paying a deposit on trouble that may not be delivered.) (page 157)

Noonan continues to be most interesting when she talks about being a mother and about life in general, such as her own born-again experience. Noonan's use of personal experiences are her greatest strength--feet on the ground, writing to lift you just far enough so you can see beyond the horizon and see the promise of conservative principles:

[I]n a way, life is overrated. We have lost somehow a sense of mystery--about us, our purpose, our meaning, our role. Our ancestors believed in two worlds, and understood this to be the solitary, poor, nasty, brutish and short one. We are the first generations of man that actually expected to find happiness here on earth, and our search for it has caused such unhappiness. (page 215)

As long as she sticks to shorter pieces of work, she'll continue to be one of my favorite writers.

© Matthew Rafat (first published April 2008, revised)

April 21, 2008 -- Stocks

I have a bench trial this morning where I'm representing an employee not paid his wages, so I went to the office at 6:30AM to review my notes. I did my usual routine and checked my stocks, and also noticed that oil was selling for $117 a barrel. I immediately sold most of my individual stock holdings, except for MOT (I have only 200 shares, which I bought at around 9 dollars a share), PFE (earnings already released), and SNY (a Buffett holding). I even sold GE, but will buy it back if it dips. I did buy a few shares of SWZ for my Roth, and I continue to have stock holdings in my 401(k) in the form of mutual funds. However, I now have no individual holding worth more than 2,400 dollars.

I sold most of my individual stocks because the market rose too much last week without any fundamental change in the economy. Merely because one company--Google--reported stellar earnings, the Dow almost hit 13,000. But Google is not dependent on oil prices or consumer spending, and most of the economy is dependent on those two factors. With oil priced at $117/barrel and consumer spending projected to be anemic, the case for owning individual stocks becomes harder to support. In addition, with several earning reports coming out this week, the market should be volatile. If you own stocks in a Roth, there is no tax penalty for selling, and the case for being a buy-and-hold investor diminishes with increased volatility.

Ted Sorenson, JFK's Speechwriter

Ted Sorenson, a former aide to President John F. Kennedy, gave this moving commencement speech at the New School University in New York on May 21, 2004.

"A Time to Weep"

This is not a speech. Two weeks ago I set aside the speech I prepared. This is a cry from the heart, a lamentation for the loss of this country's goodness and therefore its greatness.

Future historians studying the decline and fall of America will mark this as the time the tide began to turn - toward a mean-spirited mediocrity in place of a noble beacon.

For me the final blow was American guards laughing over the naked, helpless bodies of abused prisoners in Iraq. "There is a time to laugh," the Bible tells us, "and a time to weep." Today I weep for the country I love, the country I proudly served, the country to which my four grandparents sailed over a century ago with hopes for a new land of peace and freedom. I cannot remain silent when that country is in the deepest trouble of my lifetime.

I am not talking only about the prison abuse scandal, that stench will someday subside. Nor am I referring only to the Iraq war - that too will pass - nor to any one political leader or party. This is no time for politics as usual, in which no one responsible admits responsibility, no one genuinely apologizes, no one resigns and everyone else is blamed.

The damage done to this country by its own misconduct in the last few months and years, to its very heart and soul, is far greater and longer lasting than any damage that any terrorist could possibly inflict upon us.

The stain on our credibility, our reputation for decency and integrity, will not quickly wash away.

Last week, a family friend of an accused American guard in Iraq recited the atrocities inflicted by our enemies on Americans, and asked: "Must we be held to a different standard?" My answer is YES. Not only because others expect it. WE must hold ourselves to a different standard. Not only because God demands it, but because it serves our security.

Our greatest strength has long been not merely our military might but our moral authority. Our surest protection against assault from abroad has been not all our guards, gates and guns or even our two oceans, but our essential goodness as a people. Our richest asset has been not our material wealth but our values.

We were world leaders once - helping found the United Nations, the Marshall Plan, NATO, and programs like Food for Peace, international human rights and international environmental standards. The world admired not only the bravery of our Marine Corps but also the idealism of our Peace Corps.

Our word was as good as our gold. At the start of the Cuban Missile Crisis, former Secretary of State Dean Acheson, President Kennedy's special envoy to brief French President de Gaulle, offered to document our case by having the actual pictures of Soviet nuclear missiles in Cuba brought in. "No," shrugged the usually difficult de Gaulle: "The word of the President of the United States is good enough for me."

Eight months later, President Kennedy could say at American University: "The world knows that America will never start a war. This generation of Americans has had enough of war and hate ... we want to build a world of peace where the weak are secure and the strong are just."

Our founding fathers believed this country could be a beacon of light to the world, a model of democratic and humanitarian progress. We were. We prevailed in the Cold War because we inspired millions struggling for freedom in far corners of the Soviet empire. I have been in countries where children and avenues were named for Lincoln, Jefferson, Franklin Roosevelt and John F. Kennedy. We were respected, not reviled, because we respected man's aspirations for peace and justice. This was the country to which foreign leaders sent not only their goods to be sold but their sons and daughters to be educated. In the 1930's, when Jewish and other scholars were driven out of Europe, their preferred destination - even for those on the far left - was not the Communist citadel in Moscow but the New School here in New York.

What has happened to our country? We have been in wars before, without resorting to sexual humiliation as torture, without blocking the Red Cross, without insulting and deceiving our allies and the U.N., without betraying our traditional values, without imitating our adversaries, without blackening our name around the world.

Last year when asked on short notice to speak to a European audience, and inquiring what topic I should address, the Chairman said: "Tell us about the good America, the America when Kennedy was in the White House." "It is still a good America," I replied. "The American people still believe in peace, human rights and justice; they are still a generous, fair-minded, open-minded people."

Today some political figures argue that merely to report, much less to protest, the crimes against humanity committed by a few of our own inadequately trained forces in the fog of war, is to aid the enemy or excuse its atrocities. But Americans know that such self-censorship does not enhance our security. Attempts to justify or defend our illegal acts as nothing more than pranks or no worse than the crimes of our enemies, only further muddies our moral image. 30 years ago, America's war in Vietnam became a hopeless military quagmire; today our war in Iraq has become a senseless moral swamp.

No military victory can endure unless the victor occupies the high moral ground. Surely America, the land of the free, could not lose the high moral ground invading Iraq, a country ruled by terror, torture and tyranny - but we did.

Instead of isolating Saddam Hussein - politically, economically, diplomatically, much as we succeeded in isolating Khadafy, Marcos, Mobutu and a host of other dictators over the years, we have isolated ourselves. We are increasingly alone in a dangerous world in which millions who once respected us now hate us.

Not only Muslims. Every international survey shows our global standing at an all-time low. Even our transatlantic alliance has not yet recovered from its worst crisis in history. Our friends in Western Europe were willing to accept Uncle Sam as class president, but not as class bully, once he forgot JFK's advice that "Civility is not a sign of weakness."

All this is rationalized as part of the war on terror. But abusing prisoners in Iraq, denying detainees their legal rights in Guantanamo, even American citizens, misleading the world at large about Saddam's ready stockpiles of mass destruction and involvement with al Qaeda at 9/11, did not advance by one millimeter our efforts to end the threat of another terrorist attack upon us. On the contrary, our conduct invites and incites new attacks and new recruits to attack us.

The decline in our reputation adds to the decline in our security. We keep losing old friends and making new enemies - not a formula for success. We have not yet rounded up Osama bin Laden or most of the al Qaeda and Taliban leaders or the anthrax mailer. "The world is large," wrote John Boyle O'Reilly, in one of President Kennedy's favorite poems, "when its weary leagues two loving hearts divide, but the world is small when your enemy is loose on the other side." Today our enemies are still loose on the other side of the world, and we are still vulnerable to attack.

True, we have not lost either war we chose or lost too much of our wealth. But we have lost something worse - our good name for truth and justice. To paraphrase Shakespeare: "He who steals our nation's purse, steals trash. T'was ours, tis his, and has been slave to thousands. But he that filches our good name ... makes us poor indeed."

No American wants us to lose a war. Among our enemies are those who, if they could, would fundamentally change our way of life, restricting our freedom of religion by exalting one faith over others, ignoring international law and the opinions of mankind; and trampling on the rights of those who are different, deprived or disliked. To the extent that our nation voluntarily trods those same paths in the name of security, the terrorists win and we are the losers.

We are no longer the world's leaders on matters of international law and peace. After we stopped listening to others, they stopped listening to us. A nation without credibility and moral authority cannot lead, because no one will follow.

Paradoxically, the charges against us in the court of world opinion are contradictory. We are deemed by many to be dangerously aggressive, a threat to world peace. You may regard that as ridiculously unwarranted, no matter how often international surveys show that attitude to be spreading. But remember the old axiom: "No matter how good you feel, if four friends tell you you're drunk, you better lie down."

Yet we are also charged not so much with intervention as indifference - indifference toward the suffering of millions of our fellow inhabitants of this planet who do not enjoy the freedom, the opportunity, the health and wealth and security that we enjoy; indifference to the countless deaths of children and other civilians in unnecessary wars, countless because we usually do not bother to count them; indifference to the centuries of humiliation endured previously in silence by the Arab and Islamic worlds.

The good news, to relieve all this gloom, is that a democracy is inherently self-correcting. Here, the people are sovereign. Inept political leaders can be replaced. Foolish policies can be changed. Disastrous mistakes can be reversed.

When, in 1941, the Japanese Air Force was able to inflict widespread death and destruction on our naval and air forces in Hawaii because they were not on alert, those military officials most responsible for ignoring advance intelligence were summarily dismissed.

When, in the late 1940's, we faced a global Cold War against another system of ideological fanatics certain that their authoritarian values would eventually rule the world, we prevailed in time. We prevailed because we exercised patience as well as vigilance, self-restraint as well as self-defense, and reached out to moderates and modernists, to democrats and dissidents, within that closed system. We can do that again. We can reach out to moderates and modernists in Islam, proud of its long traditions of dialogue, learning, charity and peace.

Some among us scoff that the war on Jihadist terror is a war between civilization and chaos. But they forget that there were Islamic universities and observatories long before we had railroads.

So do not despair. In this country, the people are sovereign. If we can but tear the blindfold of self-deception from our eyes and loosen the gag of self-denial from our voices, we can restore our country to greatness. In particular, you - the Class of 2004 - have the wisdom and energy to do it. Start soon.

In the words of the ancient Hebrews:

"The day is short, and the work is great, and the laborers are sluggish, but the reward is much, and the Master is urgent."

New Colonist

One of the greatest benefits of the internet is the delight comes with an unexpected discovery. I've just unearthed a great website: http://www.newcolonist.com/asians.html

It's about cities and people, two of my favorite topics. The "Letters" section is fun to read. Browsing the website, I ran into some gems of writing, like this one:

California breeds high expectations and then crushes them. Through history and myth, it tells you there are no limits, and then it leaves you stranded in a cracker box tract house between a 7-Eleven and a freeway interchange." -- Steve Lopez

If you like good writing about cities, check out The New Colonist.

Speaking of good finds, I also enjoyed Aaron David Miller's article in the Spring 2008 (Vol. 32, No. 2) Wilson Quarterly, "The Long Dance: Searching for Arab-Israeli Peace." Here's one sentence from the article: "We must make a fanatical commitment to seeing the world as it is, not as we want it to be or as others want us to see it." This same vein of pragmatism is what I see in successful leaders (e.g. Lee Kuan Yew). I am beginning to realize that the American way--of getting an ideology and then defending the ideology against another (e.g. capitalism v. socialism, rich v. poor, Democrat v. Republican) in a Socratic or adversarial method--must give way to a new paradigm. For progress to continue in a world that is becoming more and more complicated in terms of culture, people, and resources, the smartest people will be the ones without hubris who realize they cannot possibly factor in all the necessary variables to arrive at the right decision or ideology on a macro-level. As a result, we should move towards a more cooperative model where we work with others to achieve solutions that can be modified as needed, rather than try to make singular, dramatic changes based on any particular overarching theme.

Richard Florida's Who's Your City?

Richard Florida has published an interesting book about what makes certain cities more desirable than others, and what factors ought to be taken into consideration when a person decides to move. The main points I got out of his book were these:

1. People don't buy houses or land for the property--they pay high prices in CA and NY to gain access and proximity to certain types of people. In the South and Midwest, people pay to be around more agreeable personalities, while on the East Coast, people are more neurotic and pay to be around people like them. In addition, highly educated people cluster together, creating super-centers of innovation, such as San Jose, CA, or, for offbeat, artistic types, Portland, OR. In short, people pay (in some cases, extraordinary costs) to choose their neighbors. It's an interesting premise, based on the old adage that "people of the same feathers flock together," and destroys the idea that people pay for a house based on square footage rather than neighbors and local amenities. (Potential buyers of a 550 sq foot guest house in Palo Alto, CA for 500,000 dollars, take note!)

2. Cities with high gay/lesbian populations tend to have favorable characteristics such as tolerance and culture, thereby attracting more affluent people who favor such openness. I agree that gay/lesbian populations add to the vibrancy of a city, but not because of any innate predilection towards "culture." The answer is far more simple. Gay people, on average, do not have children or many children; as a result, they tend to have much higher disposable incomes than families, who typically save more due to future expected expenses, such as college educations. Cities with residents who have higher disposable incomes tend to attract interesting outlets for spending money and more small businesses willing to take the risks of setting up shop to cater to affluent residents.

Mr. Florida has some charts in the back of his book that list "best buys" and ranks different locations for potential nomads based on different criteria (families, singles, etc.) I wouldn't call Mr. Florida the second coming of Jane Jacobs just yet. Reading his book is like eating a sweet, light cupcake with sprinkles of statistics--it'll fill you up for a little while, but in about two hours, you'll start getting hungry for more substance.

Does Overpopulation Cause Declining Wages?

I had a little debate with the author of this blog (http://openwindowpublishingco.com/cgi/wp/), who posted a comment to my recent entry reviewing the book, Free Trade:

Here is how I understand your theory: overpopulation (and thereby immigration) eventually causes less per capita consumption due to the limits of land and space for consumables. In other words, as population increases, space decreases, and at some point, consumption must decrease, especially because overpopulation also causes less wage growth. The problem with any economic theory based on overpopulation is that the U.S. is one of the least densely populated places in the world. Also, the idea of physical space limiting consumption only applies to certain industries, such as autos and boats. It is far more likely that spending will increase as people buy smaller products, such as an iPhone or a laptop, which need to be replaced more often than larger products. In addition, more workers are necessary to pay the Medicare and Social Security liabilities we've built up, and some economists estimate 50 to 99 trillion dollar liabilities with respect to government entitlements/programs.

If your overpopulation/anti-immigration theory is correct, then people, especially younger ones, would be flocking to open spaces, such as Indiana and South Dakota, and states with smaller cities would have a higher GDP per capita. But a quick look at the following websites shows that CA (#11 and 10), Illinois (#14, 14) and NY (#5, 5) have relatively high per capita income:

http://www.top50states.com/average-job-salaries.html (2005)

http://en.wikipedia.org/wiki/List_of_U.S._states_by_GDP_per_capita_%28nominal%29 (2006)

What you are really saying is that the fewer the people in a country, the more work there is for the existing residents, because competition is less; however, promoting population decline is a good idea only if you want to be a slow growth country. Part of growth means making way for the younger population and immigrants who can found companies, such as eBay (Iranian/French), Sun Microsystems (Indian), Google (Russian), Yahoo (Taiwan), and probably at least 30% of the start-ups in San Jose, CA:

http://blogs.zdnet.com/ITFacts/?p=12064

Immigrants who found companies in the U.S. create more jobs and also penalize the countries that couldn't keep them (referred to as the "brain drain"). So your argument is flawed, because it assumes population growth is automatically responsible for declining wealth and declining wages in all industries. Such an argument is simply not true--and if it were, NY and CA would not be at the high end of the per capita salary list. (You could counter with TX at #27 and #20, but that is still nowhere near the bottom of the list, as your argument would require.)

What is true is that certain industries, such as manufacturing, will see a drastic decline in wages, while employees in other industries, such as nursing, hotel ownership, marketing, advertising, and law, will experience a higher per capita wage increase. The primary issue is what should be done about the prospect of declining wages in industries that can easily outsource jobs or that require little training (e..g, McDonald's). I wish I knew the answer to that, but all I can come with are 1) job re-training programs; 2) better education, especially at the high school level; 3) longer periods of time unemployment insurance can be collected; 4) corporate acceptance of some due process prior to being terminated for cause, such as IBM's peer review panel, in exchange for an agreement that if the employee pursues litigation, s/he would be liable for the company's attorneys' fees [Update: up to a reasonable cap, such as 20% of total compensation at the time of his/her termination] if s/he loses in court and would be barred from receiving attorneys' fees; 5) elimination of all civil laws except for wage and contract laws relating to businesses with fewer than six non-family employees and/or gross revenue of less than 575,000 dollars per year (thereby encouraging entrepreneurs and small businesses); and 6) heavily subsidized health care benefits financed by higher taxes on gasoline, "sin taxes" (on cigarettes and alcohol), and also a sales tax that would go to the state (notice I said state, not federal) agencies administering the health care programs. Subsidized health care would create service jobs that could not be outsourced and which would also increase wealth across the board by decreasing all Americans' health care costs.

In addition, note that U.S. homeowners will also see a higher wealth effect as demand for homes increases because of population growth (after the market corrects the current bubble, which was good for most homeowners in the U.S. who already owned homes). Thus, while certain wages may decrease, net worth may actually increase due to higher demand for certain products.

Note: here is a counterargument to my post:

http://www.epi.org/content.cfm/bp196

This article says that because 70% of the American workforce is involved in "production/manufacturing" work, outsourcing will cause major displacement that presumably cannot be moderated by legislation or piecemeal benefit programs.

Also, on a separate note, Switzerland's prosperity may indicate that a slow growth economy can work in certain circumstances, assuming a liberal guest worker program (apparently, about 15 to 20% of the workforce in Switzerland are from other countries).

Adobe Shareholder Meeting, April 9, 2008

I attended the Adobe Shareholder meeting in downtown San Jose. CEO Shantanu Narayen--who has my nomination for the coolest name in business--stayed afterwards to chat with a few shareholders. He was articulate and obviously extremely intelligent. Some CEOs don't come across well at all (Atmel's George Perlegos comes to mind), but Mr. Narayen presents very well. For such a well-recognized company, very few shareholders attended the meeting, probably around 20 or so (aside from the directors).

In a nutshell, Adobe is doing very well. Almost every metric of measuring profit showed improvement, usually by at least 20%. Software has great margins, so it is usually a good business, assuming a competitor doesn't make it obsolete. But with 2 billion or so in cash, Adobe can pull a Microsoft and buy out its competition.

The refreshments were average, the usual spread of coffee, some fruit, and some muffins.

Following the Adobe/Apple saga, I asked about Adobe's relationship with Apple, and the CEO remarked that the relationship was fine and that Adobe had access to Apple's newly released code and was working on an application for cell phones called Flash Lite. Adobe seems to be creating new products that will allow it to remain the standard in the marketplace. Overall, I was impressed with the company but concerned that it was not doing enough to increase its profile in Wall Street. Adobe may want to hire a PR firm to increase its visibility among traders and the public.

Jagdish Bhagwati's Free Trade Today

Professor Bhagwati has published a number of economic books and is becoming a "hot" name in the academic world. I recently read one of his earlier works, Free Trade Today. I dislike his writing style, which carries a strange odor of disarming arrogance. Still, no one can doubt Professor Bhagwati's diligent research--there were 114 footnotes in a 120 page book, some to his own works (hence, the arrogance).

This book was divided into three chapters. The first one, a defense of free trade, was impenetrable. For example, Prof. Bhagwati says that in a recession, the free market is failing to pay people their properly calibrated wage, and responding to unemployment with tariffs in an attempt to spur domestic consumption only makes the problem worse. This is because the real answer to unemployment is to create higher demand , and tariffs curtail more demand for services by limiting entrants into the market. But here's how Prof. Bhagwati expresses these thoughts:

The Keynesian warming to protection in times of unemployment due to deficiency of aggregrate demand evidently derived from the notion that tariffs could divert aggregrate demand from foreign to domestic goods. But from the viewpoint that I am setting forth about the role of free trade, it is equally possible for us to see that since the social cost of labor in a situation of massive unemployment us clearly less than its (market) wage, this is a market failure, and free trade is no longer a compelling policy. [In other words, too much unemployment leads to major social detriment, which may create a compelling scenario for government intervention.] That the optimal policy mix would still be to remove that market failure by creating a sufficiently more aggregate demand, instead of diverting a given aggregate demand towards yourself, and then holding on to free trade, is a matter that I shall turn to in the context of proposition 2 in the next section. (p. 17, Princeton U Press, 2002)

Did we all get that? (I'm still not sure I have.) Prof. Bhagwati redeems himself in the second portion of the book, which is the only portion I would recommend to anyone. In one section, Prof. Bhagwati demonstrates his high intelligence and understanding of economics vs. sociology:

First, fairness rather than justice is the defining moral principle in the United States, as compared to the more socially structured European and Japanese societies. So equality of access trumps equality of success; equal opportunity trounces equal outcomes. (p. 52)

This statement holds true, as long as the average American continues to have political beliefs slightly right of center. In an extremely interesting premise, Prof. Bhagwati also says democracy is a check against unfettered and irresponsible capitalism:

Few governments, certainly now that democracy has broken out worldwide, are likely to say instead to multinationals: come and make profits by polluting our waters and air. (p. 59-60)

In another interesting section on preferential trade agreements (PTAs), Prof. Bhagwati correctly says that rich nations insert provisions in these trade contracts that are one-sided. For example, the U.S. will focus on child labor rather than environmental or "quasi-slavery conditions for migrant labor in American agriculture." (p. 71) In addition, eliminating child labor in poor countries may lead to children entering more undesirable professions, such as prostitution. (p. 77)

The third chapter is more technical, but still readable, and focuses on how to draft bilateral agreements that favor free trade. Prof. Bhagwati points out that there are now so many bilateral agreements establishing favored trading partners or products, that it is becoming more difficult for poorer countries to navigate this system or even attain fair results.

I would not recommend this book to the casual reader, but if you want to major in economics, read this short book to see whether you have a future in the field, as most of the ideas mentioned are intelligent and informed.

Charles Morris: The Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash

I just read Charles Morris's The Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash. It's a quick read, and he cogently explains some very abstruse financial instruments, like credit default swaps. Banks used these swaps--which generated interest payments--to increase their cash flow. One mistake they made was retaining the local branch or entity to service the loans and guaranteeing it loan payments even in case of default. For more on credit default swaps, click here.

I will be selling my KCAP stock and any hedge-fund related stocks, because it appears that hedge funds have been buying tranches of debt or giving loans to enterprises that are too speculative. Morris's overarching theme is that in a search for greater profits, Wall Street started marketing products that had higher yields and relied too much on economic models that assumed rational investors would withdraw their funds from these financial instruments in an orderly manner.

Basically, Wall Street's models created debt instruments that offered risky but higher yields within a package of more safe debt. Various investors could buy the safer debt at a lower yield; however, the more marketable debt was the riskier debt because it had a higher yield (lower yield bonds compete with the government's ultra-safe Treasuries and muni-bonds, meaning the market isn't that broad for private sellers of very safe bonds). Standing alone, neither the low-paying safe bonds would get many buyers, nor the higher risk bonds. So Wall Street made an unholy alliance of junk bonds with AAA-rated debt to create a very marketable product, increasing yields for everyone in an instrument that was supposed to be safer by spreading the risk.

The flaw was that these instruments assumed that the better-rated payers, who had been placed with riskier debtors, would be able to absorb a certain default rate. The models never thought the better-rated (AAA-rated) payers/debtors would default as well as the lower, more riskier tranches. When both the higher rated and lower rated tranches started defaulting, it became known as a "black swan" event (loosely translated, it means sh*t happens). Mr. Morris is shaping up to become this generation's John Kenneth Galbraith, arguing that the free market is no longer working, and we need more governmental intervention. (Thankfully, Mr. Morris's style is Hemingway-esque, the polar opposite of Mr. Galbraith's wordy, academic writing style.)

Mr. Morris's message hit home much harder, when, the same night, I watched a documentary about coal mine workers in Kentucky, called Harlan County, USA (1976). Barbara Kopple filmed this movie during one of the worst times in the American economy and profiled some of the worst working conditions in America. It is astounding to think that in the 1970's in the U.S., companies were talking about improving working conditions in terms of upgrading laborers from a situation with inadequate indoor plumbing to trailers as evidence of their commitment to their workers. At that time, benefits were about two dollar raises and 6 days of sick leave, and "pensions" were 150 dollars per month for some older workers. It's hard to believe that since then, other workers in positions requiring much less risk and daily manual labor, such as office government workers, have moved from demanding an equitable wage to receiving lifetime medical benefits and annual pensions worth more than what an average American makes in an entire year. During one interesting scene, a protesting coal miner near Duke Power Company's Wall Street offices strikes up a conversation with an amiable New York cop who says he could probably retire in his mid-30s with a pension worth 10,000 dollars a year. As you can see, inflation has serious consequences.

As a libertarian, this film shook me to my core, until I realized how lucky we are today. Few workers today in America risk so much for so little, and to the extent they do, they are typically poor immigrants trying to make a new life for themselves in a new country and aware of the sacrifices. In addition, despite the brouhaha about manufacturing jobs moving overseas, it is apparent that the old tactics of a strike and blocking roads to prevent scabs from going into a factory would not work today. In the modern world, you've got about 3 billion "scabs" all over the world who want prosperity and are willing to work in unstable and terrible working conditions to get a small piece of it. Globalization, by the way, is not new--Kopple's relatively more recent work, American Dream, about a group of Hormel workers in Minnesota, shows that to some extent, globalization has always been with us. The degree of that globalization, however, has changed rapidly, creating scenarios that may eventually create a tale of two cities: one prosperous, with many options, and another with few options and no union capable of staving off capitalism's "creative destruction" of certain jobs.

The promise America makes to its citizens is that while there will be differences in income and outcomes, the path to the middle class--of owning a home, putting your children through college, and being able to retire before 65 years of age--will always be there for anyone willing to work hard and make sacrifices. Recent globalization has enacted a period of creative destruction akin to dropping a nuclear bomb on certain industries, especially in the manufacturing sector. Yet, seeing Kopple's film shows how far we've come. Today, fewer Americans need to work in dangerous jobs, and we can outsource menial labor to other countries or their citizens--that is a sign of prosperity, one that is harder to see without seeing the history behind the labor movement and the working conditions that caused it.

FYI: Brokers that Allow Direct International Trades

Disclaimer: of course, this post is not a recommendation to buy or sell any stocks/funds/ETFs. Do your own due diligence. This post is also not a recommendation of any broker. I am not licensed to give and do not give investment advice.

It is surprisingly difficult to trade directly in foreign shares, as opposed to just ADRs. Here are some brokers that allow direct access to international markets (taken from April 3, 2008 edition of WSJ):

bursamex.com/mx (Mexico)
boom.com (most Asian countries)
directbroking.co.nz (New Zealand and Australia)
etrade.com (Canada, France, Germany, Hong Kong, Japan, United Kingdom)
hermesonline.com (Middle East)
everbank.com
interactivebrokers.com
investorseruope.com
stockbrokers-botswana.com
visocap.com (former USSR satellites)

The international companies I am interested in, such as Siemens and AXA, already have ADRs. In addition, Singapore, an underrated 20th century success story, already has an ETF, which I own: "EWS." However, the Philippines may present an interesting opportunity, given the number of expats sending remittances. It is estimated immigrants in the U.S. sent 66 billion dollars abroad in 2007.

Disclaimer: of course, this post is not a recommendation to buy or sell any stocks/funds/ETFs. Do your own due diligence. This post is also not a recommendation of any broker. I am not licensed to give and do not give investment advice.

Polygraphs: Reliable or Just Imperfect?

The April 3, 2008 Wall Street Journal published a letter by an economist re: the unreliability of polygraph testing that I thought worth of sharing:

Your article makes it crystal clear why a person should never consent to polygraph tests, which suffer from two types of errors: showing an innocent person to be guilty and showing a guilty person to be innocent. The article illustrates that a person is likely to fail the test because of perceived or actual guilt on subjects that aren't even being tested. The test i much more likely to show an innocent person to be guilty than a guilty person innocent. This is especially true if the person being tested is reasonably honest and worries about minor peccadillos, such as taking home a paper clip or coming to work a few minutes late. Because of this, polygraph tests encourage law enforcers who "know you are guilty" to keep digging until some question of innocence can be found on some (perhaps unrelated) activity.

Duane Eberhardt
Professor of Economics, Retired
Missouri Southern State University
Joplin, MO

See related article at Mother Jones:

http://www.motherjones.com/news/feature/2002/11/ma_148_01.html

Chip Johnson of SF Chronicle, Holding Government Accountable

Chip Johnson in his April 1, 2008 column in the SF Chronicle's B1 page, reports that almost 1/3 of Oakland's city workers are making over 100,000 dollars in salary per year. That figure, of course, does not include benefits and pensions. Overall, non-federal government (meaning, county, city and state) salaries probably make up between 10 to 15% of gross domestic expenditures, which doesn't sound like a lot until you realize that it's harder to reduce salaries once they achieve such a high level. More troubling is the fact that it's harder to reduce government benefits because such benefits are vested; in addition, such costs are difficult to estimate due to the guesswork in determining a former employee's health and life expectancy for pensions and medical benefit purposes.  In short, the public is indebted to the government for amounts unknown, even if the economy enters a period of recession or constrained growth.

Strangely, government employees making over 100,000 dollars a year are still eligible for overtime pay. In the private sector, most employees making 100K+ annually in base pay would be exempt and still expected to put in the hours that come with making such a salary.

The recent California Supreme Court decision allowing the public to see such salaries is INTERNATIONAL FEDERATION OF PROFESSIONAL AND TECHNICAL ENGINEERS, LOCAL 21, AFL-CIO et al., v. SUPERIOR COURT OF ALAMEDA COUNTY, REAL PARTIES IN INTEREST: CONTRA COSTA NEWSPAPERS (2007), which can be found at this link:

http://cprareq.blogspot.com/2007/08/contra-costa-newspapers-inc-v-city-of.html

The origin of "K Yew"

Some readers might notice the "K_Yew" nickname I have on my blog, but in no way is this a cute phonetic bit. The International Heald Tribune did a wonderful interview with Lee Kuan Yew that I just discovered. Here is one of my favorite bits from the interview:

The system works regardless of your race, language or religion because otherwise we'd have divisions. We are pragmatists. We don't stick to any ideology. Does it work? Let's try it and if it does work, fine, let's continue it. If it doesn't work, toss it out, try another one. We are not enamored with any ideology.

Let the historians and the Ph.D. students work out their doctrines. I'm not interested in theories per se.

It should not surprise anyone that this man is one of my heroes. The full interview is below, but if the link expires, you can go to the International Heald Tribune, Asia-Pacific, and do a search for the full interview, which spans eight pages and is dated August 29, 2007.

http://www.iht.com/articles/2007/08/29/asia/lee-excerpts.php?page=1

Starbucks Shareholder Meeting (Howard Schultz: "This will not stand." )

Puget Sound
U of Washington Law School
Seattle's Museum of Flight
First Starbucks at Pike's Place Market
Pike's Place
I went to the lovely city of Seattle to attend my first Starbucks (SBUX) shareholder meeting. This particular meeting was highly anticipated because of Howard Schultz. After leaving the CEO helm, only to see a downward spiral in SBUX's share price, Mr. Schultz returned and was greeted as an anointed savior. My friend said he looked like a cross between Pat Riley from his L.A. days and a Sopranos character, and he meant it as a compliment. Mr. Schultz does come across as a street-smart, wiry Mafia guy who was born to lead. (His slicked-back hair and nice suits draw comparisons to Pat Riley, another man from humble origins.)

First, let's talk about Seattle: the city is clean, fun, and mid-sized. I wanted to spend some time seeing the city, so I planned a three-day trip. The first two days, I felt like I was in a ghost town, because after being in San Jose, which has twice the population, Seattle felt tiny at just 500,000 people. On the other hand, the upside of fewer people is a better ability to control the local environment. As a result of conservation education and being so close to several lakes and near Puget Sound, Seattle's air feels noticeably clean and healthy. Indeed, one look at the view around Puget Sound, and you can't help but relax. Larger cities often forget that they are virtually concrete and asphalt fortresses, and spending a few days in Seattle proves that modern urban living and the environment can harmoniously co-exist.

Besides the cleanliness and beautiful lakes, Seattle distinguishes itself by having no state income tax. While that does seem to reduce government spending, it also results in making some cities, like Bellevue, into designated shopping mall areas and not much else ("Old Bellevue" is one unexciting, short block). Thus far, the retail businesses have left plenty of land for other uses, and with a sales tax of around 9% generating significant revenue, it seems reasonable to assume Seattle will continue to welcome retail establishments.

I would suggest skipping Bellevue, as well as the Space Needle (Seattle's version of Toronto's CN Tower, allowing visitors a bird's-eye of the city). After Chicago's Sears Tower, the Space Needle seemed unexciting and smallish to me. Instead, spend your time walking up and down "The Ave" near the University of Washington (don't miss the majestic George Washington statue near Red Square) and Broadway Street, Washington's version of Berkeley's Telegraph Street. I had a fantastic time walking up and down the Ave and Broadway.

The other "touristy" areas are Pike's Place, Pioneer Square, and the International District, all within walking distance from each other. The "original" Starbucks is at the Pike's Place, and was fun to see, old logo and all. Pioneer Square has an interesting memorial dedicated to firefighters who died in the line of duty and a few bars and shops, but not much else. A few blocks away are a small Chinatown and Little Saigon (after the trouble San Jose has had with this name, I chuckled at how common the "Saigon" name seems elsewhere). Neither district impressed me much, as they consisted of only a few blocks. Other than good restaurants--including one that sold a delicious durian milkshake--the "Asian" districts didn't seem to offer anything unique.

Seattle owes quite a bit to its Asian population--one of the first Boeing designers was Chinese, and Asian immigrants have revitalized the city. Seattle calls itself diverse, and nearby the university, it certainly is; yet, when compared with such an integrated Asian population in the main downtown and university areas, the International District seemed to include a less upwardly mobile immigrant population.

The Flight Museum, nearby the airport, was also fascinating, if you enjoy seeing actual, life-size planes used in World War I and II. There was even a miniature model plane section, which displayed about 100+ mini-planes. The price of admission included seeing the inside of an older Air Force One and Concorde. The Concorde wasn't much different from a regular plane on the inside, but the aerodynamic design was obviously novel at the time. Air Force One was plush, as expected, with some couches and large seating spaces.

Some downsides to Seattle: a) the water coming out of my hotel faucet was opaque; as a result, I would recommend not drinking Seattle's tap water; and b) Seattle is very eco-conscious, and seems to discourage driving by making parking somewhat expensive and limited. Parking is not an issue for tourists like me, who can use Seattle's decent bus system, and the parking situation is nowhere near the level of difficulty in San Francisco; at the same time, it was unusual to see a city discouraging personal transportation.

Now, to the main event: the Starbucks meeting took place at the Seattle Center in the Queen Anne neighborhood (near the Space Needle). Schultz came out to cheers from the audience, and immediately launched into a motivational speech about how although these were tough economic times, Starbucks needed to focus on making better coffee to attract customers back. His speech was geared to both shareholders and employees ("partners"), and many SBUX partners came to the meeting. After telling everyone that the poor performance "will not stand," Schultz had several ideas on how to improve sales, including using a new espresso machine that allowed the fresh aroma of beans to permeate the stores ("Mastrena"). This machine also had a lower height, allowing more interaction with customers. The SBUX baristas cheered the lower height of the machine, but it was unclear whether the cheers were because their shoulder muscles would be less weary, or whether they were looking forward to the prospect of easier eye contact with customers.

Mr. Schultz also announced Starbucks' acquisition of a local company that invented a machine that brewed an individual cup of coffee in seconds, creating a single, ultra-fresh cup of coffee ("Clover"). In addition to those two innovations--the "Mastrena" and the "Clover," Schultz introduced a loyalty card that allowed regular customers to receive their "customizations," such as syrup shots, for free, as well as a partnership with an eco-company (whose direct impact on the bottom line was ambiguous). There were a total of six new ideas, including a web-site for customer feedback and the introduction of a new blend of coffee, but the Mastrena was the main upgrade.

k.d. lang performed a few songs, and her voice was beautiful, even better than her "Constant Craving" days. Her rendition of Leonard Cohen's "Hallelujah" was inspiring. (Starbucks doesn't announce who their annual musician will be, which creates additional buzz around their meeting.)

The other entertainment highlight was Mr. Schultz playing a "Colbert Report" clip on the host's travails when SBUX shut down for a few hours to re-train employees (Schultz said, in all earnestness, that the limited shutdown was not a publicity stunt). Upon leaving, each shareholder was given a bag with some SBUX goodies, including a CD (I learned that Aretha Franklin copied her "Respect" song from Otis Redding), a mug, and some coffee beans. All in all, the meeting was a great experience.

CalPERS and CalSTRS

Teachers and government employees always ask for more money, claiming that they cannot attract good employees because entry salaries are too low. Putting aside the argument that government employees exchange, in some areas, somewhat lower salaries than their private industry counterparts for a pension and other benefits, the amount of money government employees have taken from private citizens is vast.

Benn Steil, Director of international economics at the Council on Foreign Relations, provided recent numbers on how much private citizens have given California's state government (Wall Street Journal, March 2008):

The Public Employees' Retirement System has 259 billion dollars in assets.

The State Teachers' Retirement System has 169 billion dollars in assets.

Even so, these entities are underfunded in future obligations/payments, meaning that they will most likely put initiatives on future ballots asking for more funds/taxes from private citizens.

Applied Materials (AMAT) Shareholder Meeting (March 11, 2008)

I attended AMAT's shareholder meeting yesterday. All in all, it was uneventful. Only two people asked questions, and I was one of them. (Quite a contrast from the Apple meeting.) The food was above average--Starbucks coffee, some fruit sticks, and pastries.

AMAT did have an excellent presentation showing that its nano-manufacturing technology was used in many applications worldwide. More specifically, the projected growth for products relating to LCD displays and solar technology was high, and AMAT indicated it was well-placed to achieve sales in those two areas.

Much of AMAT's revenue comes from Taiwan and South Korea. I asked what companies in Taiwan were AMAT's major buyers of products, and the CEO answered that it was mainly DRAM manufacturers. Such companies would most likely include Inotera and Nanya Technology; however, neither of those companies offer ADRs in the States. American investors can buy SMOD if they are interested in Taiwanese DRAM makers. (A search also uncovered this unrelated, interesting stock: TRCR.)

My original thinking was that if AMAT was projecting high growth in certain areas, its future stock price could be ascertained by checking its Taiwanese buyers' health. But the picture is more complicated, I found, because even if the Taiwanese companies buy more products from AMAT, overall prices need to stay stable to increase profits. Favorable margins are a key component of growth, and Inotera's President has said that a sharp decline in DRAM prices has caused Taiwanese DRAM makers to cut back on their capital spending plans this year. Thus, the question is whether AMAT's buyers will decrease overall spending and hurt AMAT's ability to sell more of its products. I don't know--the shareholder meeting, while well-done, left me with more questions than answers.

I did discover another (non-legal) definition of "deposition"--page 2 of AMAT's 10-K states that a deposition is also a "fundamental step in fabricating a chip. During deposition, layers of dielectric (an insulator), barrier, or electrically conductive (typically metal) films are deposited or grown on a wafer."

Overall, AMAT's shareholder meeting was professional and informative, but scarce on specifics.

Adobe and Stock Investing ("The Wide Moat")

All the talk about Adobe's technology not being compatible with the iPhone made me wonder if its stock was still a good hold or buy. One key to investing is making sure you don't buy outdated manufacturers or companies that have products out of favor with consumers. Warren Buffett famously refused to invest in tech companies during the 2000 stock market boom/bubble, avoiding companies he did not understand because he could not calculate whether a particular technology would survive long-term.

Taking a look at the top 40 companies in Santa Clara County in 1982 and 2002, I recognized only 20% of the top revenue-generating companies on the 1982 list--and most non-stock-investors would only recognize three or four names. After Steve Jobs' comments at the Apple shareholder meeting, I became more curious about Adobe's product, especially because I own shares in both Adobe and Apple. I wondered whether Adobe would be one of those companies missing from the 2022 list. Mr. Buffett has a metric called a "wide moat." Basically, a wide moat is how secure a company's product is from competition/attack. Imagine being in a castle and having no moat. You will be invaded and possibly vanquished. But with a wide moat, attackers need to spend more time, energy, and resources to attack you and might avoid your territory. I asked one my friends, whom I've known since high school and who has always impressed me with his tech knowledge, whether Adobe had a wide moat. Here is his response:

PDF is an open international standard created by Adobe.

Anyone can create software that uses or reads PDF files. PDF is actually native to Macs. The imaging model of Mac OS X is PDF. The Preview application can display PDF files, as can version 2.0 and later of the Safari web browser. System-level support for PDF allows Mac OS X applications to create PDF documents automatically. When taking a screen shots under Mac OS X versions 10.0 through 10.3, the image is captured as a PDF; in 10.4 and 10.5 the default behavior is set to capture as a PNG file, though this behavior can be set back to PDF.

In other words, on a Mac virtually all applications can read and create PDF documents without downloading any software from Adobe.

Microsoft hates PDF and is trying to replace it with XPS, but they have been unsuccessful so far. Windows Vista comes with the tools necessary to create and read XPS documents. Some third party companies have created XPS tools for Macs and Linux systems. Thus, Adobe provides all PDF software for Windows systems.

So you might wonder then why do people buy Adobe PDF creation software for Windows and Macs? Yes, that's right, Mac users buy PDF creation software from Adobe too. The answer is that the PDF format is much like Microsoft Word. Over the many years of its existence, it has become a big fat pig of specifications and rules. The *only* software capable of reading and creating every feature with 100% accuracy is Adobe's software. The main reason for this is because Adobe adds new stuff to the PDF specification almost every year. For example, Adobe PDFs support DRM. Their DRM scheme was broken and thus Adobe added a new DRM scheme to the following year's specification. If you want to make 100% product you would need to implement both DRM schemes. However since only enterprise customers use the DRM feature and average-joe- computer user could care less, they don't need a reader with DRM support. Thus, most non-Adobe PDF software does not implement PDF DRM support.

PDF has many features of this sort that are only used by niche customers (e.g. enterprise). Enterprise customers have money and thus are willing to pay for these products. Windows users usually have no choice but to buy Adobe's software if they want to *create* PDF files. Mac OS X users can create basic PDF files for free, but if they want to use features like forms support then they too will have to buy Adobe's PDF creater.

In the same token, Google Docs lets you import Microsoft Word documents, but it doesn't support every feature of a Microsoft Word document. Often Google Docs users will import a Microsoft Word document only to discover the formatting is messed up in some way. So then those users go back to Microsoft Words for their documents.

BTW, Adobe's bread-and-butter product is not PDF, but Photoshop. Photoshop is the de facto standard for Digital Art. Although there's free alternatives like GIMP, Photoshop has huge following with a large investment in education and training. When you go to college to study Digital Art, you are taught Photoshop. Photoshop is the standard. Transitioning to GIMP from Photoshop is too hard. So, most people just end up buying Photoshop when they graduate (or download a pirated copy from the net). If your business deals with Digital Art like Apple, then you buy lots of copies of Photoshop.

There you have it. I am holding onto my Adobe shares. And for the record, I didn't think Mr. Jobs was trying to disrespect Adobe with his response to my question. I think he was just trying to say that no such product existed, and if anyone could create such a product, it would be a boon for the tech industry.

Apple Shareholder Meeting Follow-Up

This news story is based on the question I asked re: Adobe at the Apple shareholder meeting--the story's negative slant was surprising, especially because it excluded Mr. Jobs' positive comments about Adobe at the meeting:

Adobe's Flash Player Not Suited For Phone, Apple CEO Says

March 04, 2008: 05:42 PM EST

"Adobe Systems Inc.'s (ADBE) popular media player for cellphones simply isn't good enough for Apple Inc.'s (AAPL) iPhone, Apple Chief Executive Steve Jobs said Tuesday in the most substantive comments to date about why the iPhone can't now be used to view a large percentage of videos on the Internet."

"Apple's iPhone, with all its cutting-edge mobile Internet trickery, needs something much better than the current Flash player that Adobe makes for cellphones."

Perhaps the more accurate term would be much "faster," not "better." Basically, Adobe's existing software is designed for larger electronics, like laptops, not devices as small as the iPhone. But Jobs didn't seem like he was intentionally slamming Adobe. He was saying that no product existed that provided the speed he needed--he said, "There's this missing product in the middle.

This part is interesting: "The companies have a history of strained relations. Several years ago, Adobe dropped support for Apple's Macintosh computers and then introduced other software products that were only compatible with Microsoft Corp. (MSFT) software...With the continuing tensions over the iPhone, it appears the two may be drifting further apart."

See, this is surprising, because neither CEO seemed to indicate that there were any strained relations, at least not currently. Still, it makes for good drama in the high tech Valley.

The article was written by Ben Charny; Dow Jones Newswires; 415-765-8230. ben.charny@dowjones.com

2008 Apple Annual Shareholders' Meeting

I always enjoy attending Apple's shareholder meetings. Apple's meetings are like no other company's annual meetings, except for possibly Berkshire Hathaway. People today who asked questions traveled from Wyoming, Kentucky, and Pennsylvania. I asked a question about Adobe's relationship with Apple and why the iPhone was incompatible with Adobe's flash technology. Steve Jobs responded that the Adobe flash was too slow to be used in the iPhone, and thus far, no one had developed a similar technology that could be applied to smaller devices such as the iPhone that did not suffer from a loss of speed. He reiterated that Apple used Adobe extensively in its Macs and that the relationship was fine, and the iPhone issue was not an Adobe-specific issue because no company had the necessary technology.

Apple's meetings are fun because people feel comfortable enough to make comments as well as questions. Today, an older shareholder mentioned that last year he came with a tie, and this year, he had learned not to let his "generational handicap" get in the way and came tie-less (I actually wore a tie but was the only person I saw wearing one). Others asked specific questions about technology. What makes Steve Jobs so special is that he seems to know all of the features and quirks of his products, even to the most minute detail. As a result, Apple attracts a lot of smart shareholders who love the technology and can't wait to ask Mr. Jobs questions.

Apple's board of directors included Al Gore, who attended today. When he entered the room, most people started clapping. He has gained some weight and looks like a football linebacker--big, with a presence.

One shareholder proposal on executive compensation actually passed, causing Mr. Jobs to crack, "I hope you can help me with my one dollar annual salary." Comments like these make Mr. Jobs a joy to watch--even when he loses something, he still lets you know he's right, and he's on top of the matter. In someone less charismatic and prepared, this attitude would be insufferable. But Steve Jobs, in creating a viable competitor to Microsoft, has the allegiance of all the "Macheads," who view him as a genius sent from the tech heavens. In fact, almost every year, someone inquires about what will happen to Apple if he leaves or "gets hit by a bus."

At the end of the meeting, I went to shake Steve Jobs' hand. He is a wiry fellow, much trimmer than he looks on television. Immediately after the meeting, he went in a corner to talk with Eric Schmidt of Google before coming down to chat with the shareholders. Perhaps he was talking about a new Google-Apple product. With Steve Jobs, you always wonder what the next big thing is going to be, and that's the wonder of being an Apple shareholder and user.

"Burning Platform"

The information in recent posts relating to bond ratings and the declining dollar has far-reaching consequences. Take a look at this headline from the Financial Times, January 11, 2008: "US's triple-A credit rating 'under threat'"

The US is at risk of losing its top-notch triple-A credit rating within a decade unless it takes radical action to curb soaring healthcare and social security spending, Moody's, the credit rating agency, said yesterday.

The warning over the future of the triple-A rating - granted to US government debt since it was first assessed in 1917 - reflects growing concerns over the country's ability to retain its financial and economic supremacy.

Also from the Financial Times, August 14, 2007:

Drawing parallels with the end of the Roman empire, Mr. David Walker, former U.S. Comptroller, warned there were “striking similarities” between America’s current situation and the factors that brought down Rome, including “declining moral values and political civility at home, an over-confident and over-extended military in foreign lands and fiscal irresponsibility by the central government.”

“Sound familiar?” Mr Walker said. “In my view, it’s time to learn from history and take steps to ensure the American Republic is the first to stand the test of time.”

Mr Walker’s views carry weight because he is a non-partisan figure in charge of the Government Accountability Office, often described as the investigative arm of the US Congress.

Bond Ratings Explained

In my February 29, 2008 posting ("Warren Buffett's Letter..."), I mentioned that California's bonds were rated the second-worst in the entire country (single A). Why is this problematic? Two reasons: 1) the relatively low rating shows that the health of the state economy isn't as stable as it could/should be; and 2) low bond ratings mean that future expenses may exceed future revenue, making borrowing for new projects (think schools, tax credits to the poor, new roads and bridges, etc.) prohibitively expensive. In short, Californians may not be able to maximize funds for future generations if bond ratings do not improve.

Let me put this in perspective. California's rating is A. Investment grade bonds are bonds rated in the top four quality categories by either Standard & Poor's (AAA, AA, A, BBB) or Moody's (Aaa, Aa, A, Baa). Some readers might think that the credit risk assessors have rated Californian bonds in the top three, so there is no problem. But, as I stated above, California has the second worst rating in the nation, which means that the accountants who have studied our expected revenue and expenses are saying that our economy is projected to be the second worst place to invest in the entire United States. Moreover, our lower bond rating means that we have to pay a higher interest rate if we want to borrow money, which, over time, could create more liabilities for our children in the form of billions of dollars of interest payments. Other than mis-management and the irresponsibility of our elected representatives, there are no reasons why liberal Oregon, post-Big-3 Michigan, low-growth West Virginia, and high-growth Texas should be able to issue higher-grade investments than California.

Furthermore, California's economy is one of the top ten largest economies in the entire world, so its low bond rating means that the state is not budgeting well at all (i.e., our elected representatives are concealing future costs, or enriching themselves or their lobbyists' pet projects at our expense), and if we enter a recession, the effects would be felt world-wide. As a result, this bond rating exposes a crack in California's economy that could potentially impact not just you, but that 13 year old kid in Thailand who makes clothing to sell to us.

I own a T. Rowe price international bond fund. In my bond fund, 56% of the bonds held have higher ratings than California's bonds. The bond invests primarily in Austria, Malaysia, Italy, Japan, France, Germany, and the United Kingdom. Already, some of T. Rowe Price's investors have basically decided, "Why invest in California if you can get an equivalent, more stable return internationally?" Meanwhile the EU's GDP is now equal to the U.S. It doesn't it take a genius to figure out what will happen if this trend continues. We must take measures to fix these issues lest the price of oil and other major commodity indices become denominated in euros (or some other currency), causing Americans to spend the majority of their days working to pay taxes to Washington, D.C. so that our representatives can use those funds to send payments abroad.

For a more in-depth explanation of bond ratings, see

http://mockingbird.creighton.edu/english/fajardo/teaching/SRP435/junkbond.htm

The Wire, Season 2

I'm only on the second season of The Wire, but David Simon is looking like a genius. The actors in this series are aren't the normal Hollywood contenders--they're gritty and real, and one risk of seeing these characters for six seasons in one role means they will be typecast with the crime genre far more than other actors, limiting their overall exposure.

The Wire's first season seemed long. I know now that Mr. Simon was developing his characters for upcoming seasons, and the first season was like the first 50 pages of a good 400 page book--somewhat tedious, but necessary. The second season was flawless. It deals with the ports and the shipping unions, which we do not normally see or hear from, but are vital hubs of activity nonetheless. One of the best-developed characters, Frank Sobotka, says something poignant about the state of our economy:

"You know what the trouble is? We used to make sh*t in this country, build sh*t. Now we just put our hand in the next guy's pocket."

It's exactly what Warren Buffett is saying about the U.S. economy and the American trade deficit, but it hits home a little harder coming from a non-billionaire.

Warren Buffett's Letter to BRK Shareholders and Government Liabilities

Each year, Warren Buffett publishes a letter to Berkshire shareholders that is both informative and humorous. This year, Buffett discussed an issue that gets far too little press: pension plan liabilities and actual costs of future benefits, which are notoriously difficult to calculate:

"Whatever pension-cost surprises are in store for shareholders down the road, these jolts will be surpassed many times over by those experienced by taxpayers. Public pension promises are huge and, in many cases, funding is woefully inadequate. Because the fuse on this time bomb is long, politicians flinch from inflicting tax pain, given that problems will only become apparent long after these officials have departed. Promises involving very early retirement – sometimes to those in their low 40s – and generous cost-of-living adjustments are easy for these officials to make. In a world where people are living longer and inflation is certain, those promises will be anything but easy to keep."

I am happy to say I sounded the horn on this issue before Mr. Buffett, at least in print. On or around December 2007, The Metro published a letter from me discussing the government's pension plan liabilities. In the letter, I sound quite Ron-Paul-ish, probably more than I actually am, but I have revised the letter and included it below:

America was founded to ensure that private citizens had freedom. To that end, the Constitution provided for a limited federal government, recognizing that large, non-transparent governments and freedom are incompatible. Indeed, any government salary (or new law, for that matter) saps resources from private citizens that could be spent on innovation and other, more productive activities, while also increasing a government official’s power to exert influence and control over private lives. High government salaries are particularly problematic, because they are a form of fraud on the public, i.e. the taking of more funds than necessary from dispersed private citizens to support unionized government members. Here, our local government wanted to hide how much its members were making, which prevents the discovery of corruption and fraud in the form of higher-than-normal salaries. Yet, almost any county position could be filled with qualified individuals even if the county reduced its salaries significantly, recognizing that a pension and the possibility of lifetime medical benefits are more than enough to attract qualified workers. In fact, almost no one in the private sector receives pensions or lifetime medical benefits, and all the private companies that used to offer such benefits, such as General Motors and Ford, are changing their policies. There is a lesson there for private citizens, who may eventually be forced to pay higher taxes to support the unusually generous benefits the government keeps giving itself.

As an attorney, I have litigated against several government agencies and have been shocked at how power individual citizens have granted to unqualified government members. In one case, the DFEH brought an action in a separate tribunal set up exclusively for employment claims, in front of an unelected judge who used to work for the DFEH. The DFEH’s client was awarded no money in the case, but my client had to pay thousands of dollars in attorneys’ fees for a case that almost no one in the private sector would have touched. Yet, we are all paying for a tribunal (the FEHC) with the power to award 150,000 dollars against any small business or individual.

This government excess is not limited to legal tribunals. San Jose’s independent police auditor is having to fight to get a small measure of authority to review taser deaths caused by San Jose police. To get an idea of what happens when government workers are strongly unionized and do not have to fear discipline, read the case of Grassilli v. Barr (2006).

California's own government is so large, I was shocked the first time I saw a list of just the state agencies. Take a look at this link–it does not include city or county governments and yet shows a massive, sprawling government:

http://www.ca.gov/About/Government/agencyindex.html

Someone must pay for all of these employees and their pensions, sabbaticals, and health care. Teachers’ unions usually ask for more money, but the California State Teachers Retirement System is already worth around $125 billion.* It has around 750,000 members and is the third largest public retirement fund in the country. Yet, after health care, education reform remains crucial, and the CTA continues to ask for more money.

As a result of government salaries and benefits spiraling out of control, California’s bond ratings have gone from AAA to single A and are approaching status that is slightly above junk (see http://www.treasurer.ca.gov/ratings/current.asp). The high salaries and unusual benefits of local government workers are just one small part of major fiscal problems that will not get better on their own. The lack of transparency in local government salaries has been remedied somewhat, but many other issues remain. I pray that this country’s citizens will read its history and think harder about current Constitutional issues; otherwise, we will be seeing a great power slowly but inexorably degenerate into a bloated, inefficient police state.

*My figure placed the value of the CTA pension plan at $125 billion. It is actually $131.2 billion, according to the Wall Street Journal's February 28, 2008 article, "Dear Crunch," C1. But what is problematic is that the CTA pension plan is underfunded by 19.6 billion dollars, all of which eventually has to be paid by California taxpayers. This means that the current debt calls for paying retired California teachers 19.6 billion dollars, and the pension plan doesn't have that money now and is hoping to get it in the future (stock market gains, more dues, higher taxes, etc.). To get an overall picture of the financial liabilities we face, the WSJ states that we--that includes you, if you pay taxes in the U.S.--owe our government $440 billion dollars, all of which will be put into the pockets of government workers. In a sign that the purse is already appearing shallow, the WSJ said that the city of Vallejo, CA is considering filing for bankruptcy. Its local government granted itself so much in benefits and salaries that the police and fire department's "salaries and benefits account for 80% of budget costs." Again, if you look at my letter to The Metro, the unstated premise is that without oversight, government will enrich itself at the expense of private citizens, especially in the areas of police power. The City of Vallejo, with almost all the taxpayer revenue going to police/fire union members, proves my point. Yet, even recent front page news stories about how the San Francisco mayor's office increased the salaries of close associates, or how various government departments are paying so much in overtime that correctional guards regularly exceed 100,000 dollars per year in compensation, is not causing any alarm bells to go off (This in a country that now has 1% of its adult population behind bars and will probably need more correctional officers in the future). When front-page news does not shock the public into demanding reform, we need to re-examine how we grant benefits and salaries to government members, perhaps even having referendums or some opt-in voting measure to establish reasonable salaries and benefits. Otherwise, every government employee will be functioning in a pyramid scheme where actual future costs of benefits, especially health care, remain undisclosed and incalculable. Such a situation is not good for taxpayers or our government members. Government, like private industry, benefits when new and highly performing members are attracted to jobs and bring with them fresh ideas. At this rate, government agencies will not be able to hire new employees, and private citizens will not benefit from a fiscally-healthy, secure government.

One of the links in my letter led to bond ratings for all the states. As of today, it shows that California's bond rating is the second worst in the nation, leading to higher borrowing costs and difficulty with improving our infrastructure. Who has the worst bond rating? Louisiana, which was battered by Hurricane Katrina and is still feeling its effects economically. It should be shocking that the sixth or seventh largest economy in the world has the second worst bond rating in the U.S., above only a hurricane-ravaged state, but so far, there are no protests in the streets, no condemnation of government expenditures by citizens, and no cries of unjust takings from our grandchildren. Our founders would be stunned at our utter complacency, but perhaps also proud of the prosperity we have achieved in such a short time. With that in mind, it would be a shame if future generations were unable to see America's promise of prosperity because government members and unions were enriching themselves at our expense or refusing to accept pay cuts, even as tax revenue decreases.

Original letter here: http://www.metroactive.com/metro/12.26.07/letters-0752.html

Update on January 13, 2009: here's a great website on public pensions:

http://www.pensiontsunami.com/

First, Kill All the School Boards

After the Wilson Quarterly, the Atlantic Monthly is my favorite periodical. Its Jan/Feb 2008 issue has a section written by Matt Miller about schools and some memorable quotes:

Mark Twain: In the first place, God made idiots. This was for practice. Then He made School Boards.

Miller jokes, "Things don't appear to have improved since Twain's time."

Also from Matt Miller: The usual explanation for why national [educational] standards won't fly is that the right hates "national" and the left hates "standards."

I read an interesting tidbit about why so many founders of tech companies (e.g. Bill Gates, David Packard, etc.) are focused on changing and improving education. (Many billionaires fund non-profits and various enterprises, but the Gates Foundation, for example, has worked extensively on expanding charter schools.) The theory is that Gates and others in Silicon Valley got their wealth through education rather than inheritance; therefore, they believe that more inventors and entrepreneurs will be created through a better educational system.