China: the ultimate value investor?

The US has been called the world's largest venture capitalist. Should China now be considered its largest value investor?

For a look at the implications of Chinalco's proposed investment in Rio Tinto, check out my recent piece at zzzeitgeist.

That Was The Week That Was

Politique
-As the financial crisis rolls on, the next phase of government (re)action is developing: US House approves an $819bn stimulus package (with a certain provision we don't like very much) and the FT reports that Obama will unveil a "Big Bang" package of banking/financial/housing reforms this week (now next), Harper's minority government unveils a federal budget that includes the country's first fiscal deficit in over a decade, Merkel has reportedly settled on a plan to create government-backed "bad bank" vehicles to clean up balance sheets, and Aso unveiled his own stimulus package under considerable opposition (he also pledged $17bn in aid to other Asian nations).

-62% of Bolivian voters approved a new constitution in last Sunday's referendum. The new constitution increases the government's control over strategic industries (including natural resources), strengthens indigenous rights, and furthers land reform. Despite the popular majority, 4 of the country's 9 provinces voted against the changes.

-North Korea voided all political and military agreements with the South this week, as mounting tensions on the Korean peninsula threaten all out military conflict. While Kim's motivation is unclear, a few theories seem plausible: 1) he is pushing his way onto Obama's agenda, 2) he is provoking an international crisis to stem any internal revolt amid his ailing health, 3) he has lost control and hardliners are their authority over foreign policy.

-Social and political instability is spreading across Europe: Iceland's government fell, massive strikes paralyzed France, and British workers walked off the job to protest the use of foreign workers amid rising British unemployment. Nationalism, protectionism, and industrial action are all on the rise.

-Iraqis voted in provincial elections. Despite a lower than hoped turnout, the elections were peaceful.

Economia
-The IMF reduced its global GDP forecast for 2009 to 0.5%, and the global economy shed over 70,000 jobs in one day.

-Sterling had a small recovery this week on a slight confidence jump in UK banks, the Euro slipped amid eurozone economic weakness and lack of faith in the ECB, and the USD and Yen both endured "rollercoaster" weeks.

-Exxon Mobile reported record earnings for the 4th quarter. The Lex column in the FT praised the company for "generating free cash flows as others invested" during the good times, positioning itself to pick off rivals and acquire assets in the bad. This conservatism has acted as a hedge against the rapid fall in prices.

The Rest
-In the Prem, ManU go 2 clear with 1 in hand, Liverpool score 2 late to take all 3 from a 10-man Chelsea, and Arsenal throw up a big 0 at home against West Ham. Elsewhere, Becks scores his second for Milan as speculation mounts over his return to LA.

-In tennis, Nadal beat Federer in 5 for the Australian Open title. Rafa's performance was simply incredible, coming less than 48 hours after his Australian open record 5 hour, 14 minute semifinal match against fellow Spaniard Fernando Verdasco. Many took Federer's uncontrollable tears in the post-match ceremony as a sign that even the Swiss great doubted his ability to ever beat Nadal again in a major final and catch Sampras' record 14 major titles.

-In Olympic swimming, Oops!

-While much of the fashion world has been tailoring collections to reflect our dark economic times, these designers look to color.

-Move over Highlander, meet Turritopsis nutricula: immortal jellyfish.

Vladimir Putin: "Don't do as we do...we do it best!"

Russian Prime Minister Vladimir Putin used his podium at the World Economic Forum to attack the dollar's supremacy, skewer Wall Street bankers, and call for a new global energy paradigm. He also layed the smack down on Michael Dell.

But it was his warning against excessive state intervention in response to the global economic crisis that really caught my attention. His statement was, um, interesting:

"Excessive intervention in economic activity and blind faith in the state’s omnipotence is another possible mistake."

Huh. Putin, excessive intervention, blind faith in state's omnipotence. I feel like these things are related.

Here we go again...Gazprom to cut gas deliveries to Ukraine

Natural gas negotiations between Russia and Ukraine collapsed Wednesday, with Russia preparing to cut gas deliveries tomorrow. This would be the second time in 3 years that Gazprom has cut deliveries to Ukraine over a price dispute, in turn threatening supplies to the EU. Ukraine is the EU's major transit route for gas deliveries, with over 80% of the bloc's external gas supply traveling over its territory.

The latest Russo-Ukrainian gas row is a reminder that despite the current (low) price levels, energy security remains a major issue, particularly to countries with heavy reliance on external supplies. It may also presage a more aggressive Kremlin in 2009, one that seeks to renegotiate gas contracts (particularly with former Soviet republics paying below market prices) with more frequency and adopts a less compromising position.

As Russia's budget comes under greater pressure, the rouble is devalued further (by as much as 10%, as many economists believe is necessary to account for the loss of petro/gas revenues, a cut the Kremlin has resisted with all of its will) and political unrest rises, the Kremlin will struggle to prop up the Russian economy. It will almost certainly turn to its energy leverage to plug the shortfall and boost spending.

Putin's authoritarian consolidation and economic nationalism have relied on a middle class complacency derived from petro/gas riches. The boom years were financed by the commodity bubble. Over this period the Russian government failed to adequately diversify, liberalize and modernize its economy. This made the Kremlin overly reliant on companies like Gazprom for tax revenues (and spending). Due to excessive state intervention and legal uncertainty, particularly when dealing with foreign investors, Russian industry became overly reliant on the Kremlin for finance and favor. What developed was an economy fundamentally underpined by high commodity prices. This house of cards was always vulnerable to a price collapse. Now that its here, the tight societal weave of Putin's Russia is starting to fray. It is unclear whether Putin/Medvedev are prepared to mend it.

Russia's resurgence has as much to do with oil and gas as it does with Putin. The major question for Russia in 2009 is: how does Putin respond?

Thomas Friedman on the auto bail-out

I don't read Thomas Friedman that often. I always found his "flat-world" theory to be lacking an appreciation for the asymmetries in the international political economy. I think a world of "peaks and valleys" is a more appropriate image. But who am I? Friedman's sold a billion books, won multiple Pulitzers, and is rumored to garner circa $50,000 per speaking engagement. Obviously, he's doing something right.

But I do read Dave Hart (regularly in fact), whose great piece on the Big-3 got me traversing the internets for opinion on the prospects of an automotive bailout. This led me to Friedman, whose recent media crusade against the US auto industry I find spot on. His 11/11/08 NYT column, "How to Fix a Flat", sums up his criticism of the US Big-3 automakers:

for years, executives, lobbyists, and Congress (in particular the Michigan delegation) have sheltered these companies from the need to innovate or die. The have been allowed to resist higher environmental and fuel-efficiency standards, and implement bone-headed strategies that prioritized the SUV over hybrid or smaller, fuel-efficient vehicles. And now, as their business model, balance sheets, and beloved SUVs are forcing them into bankruptcy, these companies feel entitled to a taxpayer-funded bail-out?

I share Friedman's (admittedly, everyone's) outrage. I recognize the risks to the real-economy of their bankruptcy. Millions of workers (if you include suppliers) would lose their jobs in a period of rapidly rising unemployment and deflation. I also believe that the sensible arguments against Chapter 11 are important: in the current credit environment, Chapter 11 restructuring might be impossible, giving way to Chapter 7 and the worst-case scenario. But what is the chance that these companies will be compelled into any of the necessary restructuring in exchange for further financial assistance? Remember, the US government has been bailing these bozos out for decades, and what have we received in return? Sasquatch.

As Clusterstock pointed out, a short/medium-term cost benefit analysis might fall in favor of a bail-out. But what then? The shield that would be erected around these three posterchilds of protectionism would take decades to dismantle. The union contracts would remain largely in tact (not a chance Dems are jeopardizing the Rust Belt in 2010)*. CAFE standards are already (predictably) being vilified by the auto companies.

The US economy can't afford an industry collapse. But taxpayers can't afford another waisted bailout. If they agree to the thorough concessions and restructuring Friedman and Ingrassia call for, then bail em out. If they don't, let creative destruction work, and follow Friedman's advice. Allow Chapter 11, compel independent administration, and set these companies toward a restructuring process long overdue. One company might go into bankruptcy, but like the investment banks after Lehman, the others will quickly fall in line and accept strict conditions to assistance.

We must also renegotiate the contracts of remaining workers (on fair terms- whatever those are), increase unemployment benefits, and retrain those who are laid off in green jobs or re-employ them in a massive infrastructure-based stimulus project. And how about universal health care reform as well?

We need the political will (finally) to confront the auto industry and dictate the terms of assistance. This means confronting their stubborness head on. It may be risky, but its a risk worth taking.

Michael Phelps is Korean

Having spent the past few days birthday partying, traveling, and taking my dissertation procrastination to unseen levels, I am slowly getting back in the saddle. 

While I'll be on the road until Monday night- unless a hurricane throws a serious wrench into my plans (which is looking more and more likely)- I'll be dropping a line here and there on interesting developments. Starting now.

If anyone thought that the deep historical tensions in Asia had been put on hold for the Olympic games, this story comes via FP Passport. Apparently, Chinese bloggers are falsely accusing the Koreans of trying to claim Michael Phelps as their own, going so far as to fabricate the argument of a fake Korean university professor and his non-existent research. The fake Korean professor's claim is that some Koreans settled in the Maryland area around 1,000 B.C., and as everyone knows by now, Phelps is from Baltimore, Maryland. This means that Phelps is pretty definitely of Korean descent.  This is a pretty elaborate lie, not to mention utterly bizarre in its logic. 

But this little story fits nicely in the current debate over the resurgence of nationalism, discussed recently by our friends at Zeitgeist. Russia's actions in Georgia sparked a debate over the impact of nationalism on our interconnected, globalized world. As my co-author recently noted, the Golden Arches rule has been shattered (if ever relevant), and FDI in Eastern Europe is expected to decline due to regional instability. The re-nationalization of strategic sectors such as energy, food, and transport has spread throughout the developing world. In short, we are witnessing the "return of history". 

The liberal peace that has governed the post-cold war era is under increasing strain. The high politics of old are back, and the commercial and financial ties that bind globalization are now wrapped up in relative power and security considerations. In many ways this parallels the pre-WWI breakdown of the last great era of globalization. 

But this is not 1914 and Georgia is not Serbia. The current era of globalization is defined by its breadth and depth. The interdependence between Russia, China and the West is such that no country can afford a deterioration in economic relations. The liberal paradigm is on shaky ground, but the global economy it has created is sustainable. Economic and financial entanglements can preserve this era of globalization in much the same way that military entanglements shattered the previous one.