Archive for May, 2010

Smokey Mountain, Sinking Japan

Monday, May 31st, 2010

Every morning, tens of thousands of Filipino slum-dwellers flock in droves to what has now become known as “smokey mountain” – an outrageously large heap of waste located in Manila, Philippines. It has become somewhat euphemistically known as “smokey mountain” in reference to how the decomposing rubble occasionally catches fire.

For Filipinos mired in poverty in Manila, there is little other option than to salvage whatever they can from the “mountain” and survive. Though the Japanese media has repeatedly shone much spotlight on the issue, little real progress has been made in lifting Filipinos out of poverty.

What’s worst about it all is the number of young children who manually sort through the garbage looking for edible grub: a sight quite worthy of being included in Dante’s Inferno. Philanthropy-dollars do help, but without long-term programs to enable slum-dwellers to become self-sufficient, marked progress is forlorn at best.

But while the Japanese media scrutinizes every grime-clad child scrummaging “Smokey Mountain” for today’s grubby meal, there lies another entity with equally zealous eyes meticulously examining a far larger mountain of rubble.

Who is this entity, and what is he after?

After spending a week dining with top-brass executives from renown companies including Goldman Sachs, Morgan Stanley, and McKinsey & Company in Japan (their names will remain undisclosed), they seem to be in accordance with one seemingly undisputable fact: within 20 years, Japan will be awash with foreign capital.

Of course, not in a good way.

Overthe last 20 years, roughly 2/3rds of Japanese companies listed on Fortune 500 – all multinational companies that no one thought would tank – simply vanished. And within 20 years, Japan’s labor force will shrink relative to the total population as the population continues to age – sure signs of mounting fiscal deficits as government pension schemes are stretched to their limits.

That means an absolute decline in the savings rate in Japan. Without the ability to issue government or corporate bonds within national borders, there’s only one other investor that the Japanese, who have been reluctant  to do so thus far, can rely on: Mr. Gaijin-san (gaijin: a somewhat derogatory term used in reference to foreigners.)

Odds are, as many economists predict (and as current trends already indicate), Japanese medium and small-scale parts makers will “detatch” themselves from their parent companies and begin selling their parts to overseas companies and investors eager to absorb Japanese technology and precision. When that happens, Japan’s comparative advantage in high-tech goods and Japan Inc.’s brand for safety, reliability, and precision will be for sale.

This only means one thing: Japan, with its thousands of islands big and small, is now one big “Smokey Mountain” that foreign capital will flock to in droves. Make no mistake: every pebble will be turned over, every shrivel of technology will be eagerly consumed, and everything sellable will sell to the highest bidding foreigner.

That, in itself, is not a bad thing, unless you’re a conservative eager to tout Japan’s supremacy. But it does mean a long-term decline in real competitiveness, and with that a continued chain of bankrupt Japanese multinational-companies, a gradual yet incessant decline in full-time jobs, and a sizeable long-term shrinking of Japan’s GDP.

I leave you with one over-used marketing slogan to mull over:

Coming to a store near you: The secrets to Japan Inc.’s gadgets and wizardry.
Get your reservations in advance.


Neiderhoffer and Nassim: Two People All Investment-Banker-Hopefuls Should Know

Sunday, May 23rd, 2010

A promiment Harvard undergraduate blogger once lamented about how all of her close and smartest friends “wanted to be investment bankers.”

Today, quantiative finance is one of the most popular majors amongst undergrads. Professors capable of teaching and breeding “Quants” – those who study and master the enigmatic mathematical models of quantiative finance – earn a comparatively larger dole than their counterparts who teach other majors.

There is little surprise that investment banking has become so popular in recent years: it is by far one of the most intellectually challenging and lucrative careers available.

In Japan, an increasing number of undergraduates are pursuing careers in “gaishi-kei” companies: that is, foreign companies based in Japan. Domestic firms and government jobs are becoming less-and-less popular as the international clout of Japan gradually but surely erodes. In light of this, many undergraduates (in particular, Japanese polyglots) have set their binoculars on “gaishi-kei” companies that will, in their eyes, provide them with a a brighter future.

Needless to say, that makes foreign investment banks one of the most sought-after jobs in Japan.

But of course, there is a catch.
Japanese undergraduates have very little idea of what the world of finance is all about.

The world of finance is, in short, the intangible world that governs the economy. Though Lenin identifies key industries such as steel, coal, railways, etc. as the “Commanding Heights” of the economy, there is little doubt that in today’s world, the reins of the world economy is held firmly in the hands of the finance industry.

Of course, the description I’ve given above is ambiguous at best and completely unhelpful at worst. But the reality is that there always remains a great divide in opinion whenever it comes to financial parlay.

Take, for instance, two financial titans: Victor Neiderhoffer and Nassim Taleb. They’re both incredibly successful financiers.

Yet the two could not be any further apart.

Neiderhoffer has founded and run several hedge funs, which usually generate astronomical annual earnings, even by hedge-fund standards.

Nassim Taleb, the author of several bestselling books including “Fooled by Randomness” (now a must-read for financial experts) and “The Black Swan,” runs a hedge fund as well. On most days – in fact, just about every single day, it loses money.

But once in a while, Neiderhoffer loses a fortune, while Nassim basks in newfound wealth.

What’s different about Neiderhoffer and Nassim is how they position themselves in the market. Neiderhoffer, after rigorous statistical and mathematical analysis, makes bets that, as far as track records are concerned, are usually right. In other words, in information economic parlance, Neiderhoffer uses information asymmetry to his advantage: he takes his time to gather superior information, which is how he repeatedly makes a killing.

Nassim positions himself completely differently: he bets that he doesn’t know anything at all. To make a complicated story short, he bets on market irregularities; he bets on the kind of things no one predicts will happen: like Sept. 11th and the global financial crisis.

That means on most day Nassim’s hedge fund will be bleeding. But every once in a while, on those days when every trader’s hands are flailing and clawing in despair (including Neiderhoffer), Nassim will be smiling.

Speaking of his hedge fund (which has become enormously successful thanks to the financial crisis) at a conference following the launch of his now much-acclaimed book The Black Swan, Nassim said: “We have billions under management now [...] and we still know nothing.”

The story of investors has a very long history. In fact, tulip futures had been bought and sold in the Netherlands centuries ago. Today, the world of finance is much more complicated, but the rules of the game are largely the same: for every investor’s position, there is an investor taking the opposite position and that only means one thing – someone’s betting on exactly the opposite thing you’re betting on.

And when investors nowadays have MBA’s and Ph.D’s from the most prestigious academic institutions in the world, when investors think they’re smarter than everyone else, when the only person left to out-smart is the genius next door, that only means one thing: get out while you’re still ahead.


The Fall of the Iron Curtain and the Battle of Ideologies

Friday, May 14th, 2010

Some time ago, Francis Fukuyama famously proclaimed that “the end of history” was upon us; with the fall of the Soviet Union, the battle over people’s hearts and minds had finally been settled.

Capitalism had won.
Or so it seemed.

The world today is run by different governments, each with their own unique economic agenda. Before the fall of the Soviet Union, the world was largely divided between two ideological camps: the Soviet-led Communist bloc (central planning, state-ownership, scientific socialism) and the West (free-market capitalism, private ownership, innovation.)

According to Fukuyama, we were to see the dawn of an era where American capitalism would envelop the world. Furthering Fukuyama’s thesis, Thomas Friedman, a journalist for the New York Times, proclaimed that this new paradigm, coupled with the advent and proliferation of IT, would bring about a “flattening of the playing field.”

Both Fukuyama and Friedman envisioned a world where the world would be governed by very similar sets of economic and political policies.

But do we live in an era where the economic policies of each country are largely the same? Do we live in an era where travelers face the same consumption tax anywhere in the world? Do we live in an era where the income tax is the same across the board?

The answer to all of the questions above is, quite obviously, no.

If anything, the battle of ideologies has become far more complicated than ever before. The fall of Soviet-Russia had created a large ideological void that would span half the world. We see today the gradualist, central-planning of China, the fiscal-stimulus obsessed Keynesian policies of Japan, and even the birth of resource-nationalism of the OPEC states.

With the fall of the ideological schism has come a new time in which it’s become far more complicated to differentiate one set of ideas from another. What, exactly, is socialism? What, exactly, is a democratic country? When every sociologist has his own pet-plan that he brands as a new form of socialism, and where both China and America openly proclaim to be democratic countries, we see the rise of great paradoxes and the nullification of meaning in socioeconomic terminology.

The iron curtain has fallen, but now in its wake many new curtains of different shades and variety lie fluttering in every pane.


Japanese Housewives and Why They Rule the World

Sunday, May 9th, 2010

Perhaps when one talks of “the financial world,” it may evoke images of powerful finance ministers pulling the strings behind closed doors. Perhaps it conjures the image of the nondescript building of Goldman Sachs. Or, perhaps, it doesn’t really call to mind very much at all.

The truth of the matter is, if the financial world is a boat in rough waters, then at the helm are Japanese housewives.

For years, both the central banks of Japan and America have been boggled by why their monetary policies seem to have very little effect on the marketplace. Alan Greenspan, former chairman of the FED, famously proclaimed that this new world in which central banks no longer hold very much authority a “conundrum.”

In other words, the big dogs (i.e. the government and the savvy investment banks) were no longer calling the shots in the world of finance.

So who took over? Who is this enigmatic man that has suddenly taken the reins of power?

The answer may be surprising. This man, against historical convention, isn’t Caucasian. In fact, he isn’t very much of a man at all.

He is, in fact, a she, and she is none other than what The Economist now calls “Mrs. Watanabe:” the amalgam of Japanese housewives that have at their disposable nearly all of Japan’s household savings.

This reality is perhaps best expressed in David Smick’s book The World is Curved.

Smick, a famous financial consultant, observes:
“the Japanese system, once brilliant at controlling bureaucratic image and substance, is today facing its own fragile world that is curved. Now millions of [Japanese] housewives and other market decision-makers care little about bureaucratic image and power. They care about information-facts and insights that reflect future rates of return and risk. They care little about bureaucratic power because, in today’s brave new world, they collectively now are the power.”

“by the beginning of the twenty-first century, the frustrated housewives (and/or herads of households) had had enough of the economy’s poor performance, particularly its poor returns on savings account investments […] the housewives, taking financial matters into their own hands, began to hunt for a greater return on their savings.”


And here, perhaps, is where the changing landscape is best expressed:

In the world of currency trading, a common question lately has become: “what are the [Japanese] housewives investing in these days?”

Today, in a world where liquid capital is scarce and where Japan holds a great amount of the world’s reserves, Japanese housewives are the key players in deciding where future investments will be made.

If you want to know where best to invest your 401k, your best consultant is the apron-clad housewife walking her dog in Japan.