Dr. John Rutledge Blog

April 20, 2007

Chinese version of energy paper available to download

You can download a Chinese version of the paper on Asian Energy Security and the Middle East by clicking on the following link: Download file.

The text below is an abstract of the paper as it will appear in the BOAO publication. We are preparing a translation of the full paper, including footnotes and references, which I will post in the coming days when it has been completed.

JR

亚洲和中东能源安全问题

作者：约翰·拉特里奇博士
美国拉特里奇资本创始人、董事长
中国科学院研究生院荣誉教授

摘 要
整个亚洲对能源强劲增长的需求，加强了对于动乱中的中东之能源供应的依赖，因此使能源安全问题变得非常紧迫。时下的政策都不太可能解决能源的安全问题。这些政策都是建立在传统的基于需求的经济模型，以及过于狭隘的“能源”概念基础之上。此论文展示了一种在自然科学中广义“能源”概念基础上的崭新构架，就是对能源和经济增长进行并行思考。它将经济行为视为现今的太阳能源和过去储备的太阳能源在以自然资源、人力资本、物质资本和技术储存形态下的一种传输现象，此种传输当受热力学定律的驱使。本文指出了关于非传统的能源安全问题解决方案，它包括：对通讯网络、信息技术和教育的投资；对农业研究的投入------以期提高农作物对于能量的摄取效率，和改进农田耕作者的生产力；以及通过法律、法规、汇率政策，为吸引全球投资者对于高新技术的投资，提供一个稳定的环境

JR/约翰

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April 19, 2007

Link to energy Article PDF File

(April 18, 2007), Some people were unable to click through to the PDF file from the email notification. Here is the complete link to the 'Asia Energy Security' PDF file. You may need to copy and paste it into your browser: http://www.rutledgeblog.com/2007-04-03%20Rutledge%20Asia%20Energy%20Security.pdf

I will be presenting this paper at the BOAO Forum in Haikou this weekend.

JR

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April 10, 2007

Asian Energy Security

I've written a piece on Asian Energy Security for the Chinese Academy of Sciences that will be published later this spring. This is the first change I've had to layout some new fundamental thinking about how to integrate thermodynamics to economics. You can see the abstract below and the full draft here: "Asian Energy Security". There is also a link to a PDF version.

JR

Abstract

Strong growth and rising energy needs are increasing Asia’s reliance on energy supplies from the troubled Middle East, making energy security an urgent issue. Existing policies, based on orthodox demand-based economics and an overly narrow concept of energy are unlikely to solve the problem. This paper presents a new framework for thinking about energy and economic growth based on the broad concept of energy used in the natural sciences. This framework views economic activity as transfers of both current solar energy and vintage solar energy, stored in the form of natural resources, human capital, physical capital, and technology, driven by the uncompromising laws of thermodynamics. It points toward unconventional solutions to the energy security problem including investing in communication networks, information technology, and education; agricultural research to increase the efficiency plant energy capture and improve the productivity of farm workers and, thereby, release manpower for the energy-efficient services sector; and legal, regulatory, and exchange rate policies to provide a stable environment to attract high tech capital from global investors.

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March 24, 2007

In China, a Man's Home is his Castle Too

Americans need to lose the Cold War image of China as people in Mao jackets riding bicycles holding little red books. People in China struggle with the same issues we do in America, including local government officials and developers trying to take your house so they can build a shopping center. Sound familiar? This issue is especially important in light of the new private property law passed by China's legislators last week.

Local residents look at a two-storey home, which is now the only building left standing atop a mound in a 10-meter-deep construction pit in Chongqing March 22, 2007. [newsphoto]

There is a great story in today's China Daily, Defiant couple stave off wrecking ball, about a family in Chongqing that is refusing to give up their 2000 square foot house even after the local authorities cut off their water and electricity. Worth noting: 1) the story is being reported by reporters from all over China, 2) the couple has a banner on the house reading "Rights to legitimate private property shall not be infringed upon," 3) the issue is the price--they want to be paid the fair market value in the hot property market so they can relocate, and 4) my friends at Sina.com took a poll yesterday showing that 86% of the 83,175 people interviewed supported the couple's decision. Every one of these points flies in the face of the stereotype shown in the U.S. media.

I'm not saying it's Kansas in Chongqing. Chinese institutions are not just like ours; they are evolving in a healthy direction. There is not yet rule of law, although they are working on it. But people are people everywhere.

Suggestion: set up an automatic search on Google for all stories with the words "National People's Congress" to be delivered to your email every day. You will see a dozen or so stories each day so you can track the changing legal and regulatory climate in China yourself.

JR

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March 23, 2007

IMF: Global Economy on Track for Growth

Recession? I don't think so.

On Friday, Rodrigo Rato, the head of the IMF, told a Wharton group that the IMF expects worldwide economic growth for 2007 to clock in at close to 5 percent, the strongest five-year span for the global economy since the late 1960s. Although the US is slowing a bit, Euro area growth momentum looks solid, Japan's economy seems to have regained its footing, and China and India continue to be engines. You can see the Forbes.com storry by clicking here.

We'd better keep this place growing. Barring dumb moves by the Fed (rate hike) or Congress (tax rate hike) the U.S. economy will do fine. Stock prices are still too low for today's profit growth and interest rates.

JR

Posted by John Rutledge at 11:21 PM | Comments (1)

America's Capital Markets

March 23, 2007.
I want to pass along this article from the Boston Globe, Shifting financial Winds, written by Joseph Fuller, the CEO of Monitor Group.

His topic is the shrinking relative influence of America's capital markets and professional standards in the global economy.

Over the last 25 years, foreign companies anxious to be traded on American exchanges have adopted U.S. financial reporting standards. We Americans have exported such new forms of capital as private equity and venture capital. Executive compensation at foreign multinationals has followed American precedents. So have approaches to board governance, securities and antitrust enforcement regulation. ...American professional-services firms — in investment banking, law, accounting and consulting — have shaped global practice. ...Americans have benefited from the United States' global ascendancy in corporate finance, strategy and governance. U.S. policy has emerged as the world's "reserve policy," much as the dollar emerged as its reserve currency. That position is now in peril. In 2000, 50 percent of initial public stock offerings in the world were listed in America; in 2005, only 5 percent. ...

We should listen to what Joe has to say. It's good to be rich and powerful but it takes work to stay that way. We need to quit whining about the global economy and get back to work.

JR

Posted by John Rutledge at 1:45 AM

Learn Chinese Suggestion

I received a question from Brian that I want to share with you.

Hi John, I know you visit China frequently and I have been wondering, do you give your talks in English or Chinese? Is it necessary to be able to speak Chinese at the events you attend or do the attendees usually speak English? Could you recommend any resources for someone interested in learning Chinese for business? Thanks, and keep doing more Kudlow & Company shows, you're one of their best panelists!
Brian

Brian,
Thanks so much for your note. When I give lectures in China I start in Chinese until I run out of gas, then switch to English. At this point I am good for somewhere between a paragraph and a page. It's not necessary to speak Chinese to visit China or do business there--there are many young people who speak English; there are translators to help you talk with others; and the conferences generally have simultaneous translators. People in China, however, will greatly appreciate the honor you show them by trying to learn their language and culture. It is an act of respect.

I have found that the best tool for learning Chinese is the Pimsleur tape series. (Click on the image to see the details on the course.) You can get the beginning course (18 half hour lessons) at Amazon for less than $40.

I have used Pimsleur courses for more than a dozen languages and find them the best way to get started. And one final tip; you don't need to buy the full course set right away. The 18 lesson intro series will give you plenty to do for a long time.

JR

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Defense Spending Comparison

It is fashionable today to talk about the China Threat. This was especially true 2 weeks ago when China released its new budget showing a big percent increase in defense spending. Thought you might like to see the real numbers. U.S. spending towers over everyone, including China, which will spend $45 billion this year, about one-fifteenth as much as we do.

It is true that China is growing very large in many ways and that China's growth is something we should not ignore. And it is true that China's interests are not our own, just like all the other countries. Maybe we should use this time to get better acquainted. Just a thought.

JR

2005 defense spending

Country Comparisons

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February 7, 2007

Manufacturing Productivity

Heard about the demise of the U.S, manufacturing sector? Take a look at the following chart, which shows an index of total U.S. manufacturing output since 1987. Wow!

If you want an even bigger WOW look at the U.S. manufacturing sector's productivity performance, measured by output per man-hour of work, over the same period, in the chart below.

The difference is Information Technology investments that have radically decreased the time it takes to get products produced and in customers hands.

JR

Posted by John Rutledge at 10:48 PM | Comments (3)

February 6, 2007

137 million Internet Users in China

On January 23, 2007, China Internet Network Information Center (CNNIC) published "the 19th Statistical Survey Report on Internet Development in China".

The report shows that by the end of 2006, the Internet users in China reached 137 million, accounting for 10.5% of China's population. The Internet penetration in Beijing exceeded 30% for the first time. The total amount of domain names in China increased remarkably. Over 1.8 million .CN domain names had been registered. The registration increased 64.4% in just one year. 75.9% of Chinese Internet users or 104 million people use broadband connections that include xDSL, Cable Modem and leased line. The scale of mobile phone Internet users has also expanded with the total number reached 17 million. Comparing to the same period last year, China's Internet users increased by 26 million. The growth rate was 24.3% compared with (18.1%) in 2005.

Total domain names in China now touched 4,109,020, which is 1.16 million more than 6 months ago, averaged at 200 thousand net additions per month. The .CN domain name reached 1,803,393, which are 706,469 or 64.4% greater than the same period last year. The .CN today ranks fourth among all ccTLDs and brings China's Internet into the .CN era.

By the end of 2006, China has 4.47 billion webpages and 122,306 GB of webpage contents, the annual growth rates of these two are 86.3% and 81.7% respectively. Along with vast growth of these domestic Internet resources, the total websites and IPv4 addresses in China also grow rapidly and reached 843 thousand and 98 million respectively.

China is making massive investments in its communications network so that China's companies can compete in the high-paying global market for professional services. The opening of China's capital markets on December 5 means that US financial companies are now able to set up shop in China. It also means that Chinese companies are now free to grow by selling information services to customers around the world.

The country with the most advanced information networks will drive productivity and costs in the coming decades. We are ahead for now, but they are investing more and growing faster. We need government policies that encourage new investments in infrastructure. It is the central nervous system for the entire economy.

JR

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February 4, 2007

Chinese Academy of Sciences Honorary Professor

This is so cool! I received an appointment 2 weeks ago to be an Honorary Professor of the Chinese Academy of Sciences (CAS). You know I am a geek; why else would I be a member of the neurology book of the month club? Now I have a place to talk with people about my crazy ideas to integrate economics, finance, and non-equilibrium thermodynamics into something that actually works--as opposed to macroeconomics and modern portfolio theory.

This is a photo of a happy me receiving my appointment certificate from Cheng Siwei, Dean of the Graduate University of the Chinese Academy of Sciences Management School (GUCAS). As I wrote earlier today, Cheng Siwei's day job is vice chairman of the Standing Committee of the National People's Congress.

My duties will be to give several lectures each year to the CAS faculty and graduate students and to supervise PhD dissertations (I have my first graduate student already--a wonderful person named LI hong, who is writing about venture capital and innovation. And I will teach a 4 week course this summer exploring ways to use recent advances in non-equilibrium thermodynamics in economics and finance.

The best part of the day was my visit with Cheng Siwei after the ceremony. More on that later.

JR

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China News Stories to Track

Journalists invited to cover upcoming NPC, CPPCC sessions. The Chinese government has invited both Chinese and foreign journalists (including journalists from Taiwan) to cover the sessions of both the National People's Congress (NPC) and the Chinese People's Political Consultative Conference (CPPCC) to be held in early March. This is a big deal--especially the CPPCC meetings--in China's steps to bring more sunlight into the political process. Great move.

Chinese may OK property rights law. In chairman Mao's days, all property was owned by the government. In 2004, the Constitution was amended to include the protection of private property, although enforcement of the right has remained ambiguous. This has led to many disputes between Chinese and foreign companies and local political authorities, who sometimes abused the system for their own profits. And it led to situations where local officials forcibly appropriated land from farmers with little or no compensation, worsening the growing tensions between rural and urban China.

Under the Constitution, state-owned property is seen as both sacred and inviolable, but the protection of private property is limited to that deemed "legal." The new law will provide that legal framework. Private property will have the same legal status as that held by the state or the public, and the law will require that authorities provide appropriate, i.e., market-priced, compensation to people whose land has been seized.

This law will reduce the risk of investing in China for foreign investors, attract more capital into China. This is great for China.

But America take note. The capital that will come into China must come out of some other place. Capital is the source of jobs, productivity, and paychecks. We need government policies that will keep the capital within our borders.

Charities left high and dry. My friend Cheng Siwei, vice chairman of the Standing Committee of the National People's Congress, has been making waves last week. His comments about the over-heated Chinese stock market had a huge impact on the markets. He also talked about widespread corporate irresponsibility, including both direct malfeasance, such as ignoring health and safety standards in coal mines, and failing to engage in charitable social activities, as you will read in this article in Hong Kong's The Standard.

I will write more about Cheng Siwei later. I met with him 2 weeks ago in the Chinese White House to receive my formal appointment as Honorary Professor at the Schinese Academy of Sciences (CAS), where Cheng Siwei is the Dean of the CAS Graduate University's School of Management. After the ceremony, we had the most extraordinary conversation about economics, finance, physics and chemistry. More on the remarkable man leter today.

JR

Posted by John Rutledge at 6:44 PM | Comments (2)

CEO, Gold Miner, and Quarterback Compensation

I got some great comments from readers about the CEO compensation piece I wrote on Friday, including one challenging my claim that public boards aren't worth a damn, one comparing CEO's and other star players in sprts and Hollywood, one asking how to keep the good CEO's if you take away the stock option free-ride, and one from a wonderful young man who just got his first Wall Street job. You can read them by clicking on the comments button under the Forbes on Fox story.

Which brings me to coal miners.

OK, I'll admit it--I read a lot of weird stuff. I have a fire-hose of journal abstracts, dissertation topics, and newspapers from all over the world landing in my inbox every day so I can see what other people are working on. Imagine how exciting it was this morning when volume 22 of, Research in Law and Economics showed up on my desktop.

I know what you are thinking. "JR, you are so lucky! please tell me how I can get in on this fascinating subject. Please answer soon because I can hardly wait for my first issue."

All you have to do is sign up as a Guest user at ScienceDirect. It's free. Once you have signed up you can graze through a list of at least a gazillion professional research journal titles (Actually, only 2692) and check off the ones you want to track. ScienceDirect will then send you an email evey time htey release a new issue with a table of contents and abstracts for all the articles. If you want to buy an article they will sell them to you ala carte, but you can graze the abstracts for free. It's like eating at a dim sum restaurant of nerdly ideas.

Back to the coal miners. This issue contains an interesting article called Lays vs. Wages: Contracting in the Klondike Gold Rush. Mine owners during the gold rush had two different types of compensation arrangements with the miners they hired to work their claims, ordinary wage contracts and lay contracts which gave the miners a share of the takings. The author analyzes the conditions--the risk of working in extreme weather conditions--that typically led to lay contracts.

That concept--pay for work but upside interest for taking risk and bulding the vallue of a business--makes sense for executive compensation discussions today. If someone wants a piece of the upside they need to have some skin in the game. I think that's why leveraged buyoouts--where the managers frequently pony up their life savings to invest in the company--have a better track record than public company stock options.

But why stop there? I have always thought that franchise players--the Magic Johnson's and Michael Jordan's--that can impact a sports team's value should structure contracts where equity is a big piece of the package. Same for TV, movies, music, and ordinary businesses.

Let me know what you think.

JR

Posted by John Rutledge at 5:50 PM | Comments (5)

January 29, 2007

Technology and Taxes

I heard from my good friend Dan Caprio today. Dan is President of the Progress and Freedom Foundation, where I serve as a board member. Dan wrote that he had recently read a report saying that China was repealing some of the tax incentives they put in place to attract capital and asked for the inside skinny on the story.

Like most stories that come out, the one Dan is referring to is about half right. the Chinese authorities have announced a series of tax changes in recent weeks which they refer to as "equalizing" the tax rates paid by domestic and foreign firms to do the same work. Of course with taxes the devil is always in the details so broad answers are not very useful for real businesses.

It's the story under the story that is interesting to me. China's growth and foreign direct investment (FDI) over the past 20 years has been heavily dependent on manufacturing. As a result, manufacturing makes up a larger share of Chinese GDP than any other major country.

By one account, half the manufacturing capacity in the world is in China. That has made a tremendous impact on the lives of Chinese people; average incomes have roughly quadrupled since the reforms began almost 30 years ago. But it had also led to worsening air and water quality, a widening rural-urban income gap, and worries over the security of future energy supplies.

China's government has decided to attack the problems head-on. They are pushing energy conservation. They are increasing energy supplies and investing heavily in renewable energy projects. Both measures are important, but they only buy time. The real answer is their shift of focus from manufacturing to technology to drive growth.

This is where the tax changes come into the argument. China has increased taxes on steel and other heavy manufacturing industries, but has lowered taxes on information and communications technology companies. And they are aggressively courting tech companies to relocate R&D facilities to China with tax breaks and other subsidies. The biggest carrot of all is China's massive investments in math and science education and aggressive English language education programs.

These are exactly the policies we should be pursuing in the United States. Instead, our Congress couldn't even pass the telecom reform bill last year that would have triggered billions of dollars in new investment. They failed to pass video franchise legislation that would have allowed a massive rollout of optical fiber to homes. And they flirted with price controls to protect the current market cap of the big internet providers under the misleading heading of 'net neutrality." It was a shameful year for US technology policy.

Instead of competing for high-tech capital, we tax and regulate it out of the country--US companies bear a 22% excess overhead load ccompared with overseas competitors. And we tax communications services--the central nervous system of the economy--as if it were a sin to talk with your customer or supplier, or even your family, on the phone. Depending on where you live in America, between 15-30% of your wireless phone bill goes to excise taxes.

Meanwhile in Shanghai last week a pilot project was announced to provide 4G mobile services which would allow selected customers to transmit content at speeds greater than enjoyed by most fiber optic users in the US.

We need to wise up and do the things now to make our technology companies believe they should build their businesses here. We don't have a lot of time to waste.

JR

Posted by John Rutledge at 10:11 PM | Comments (7)

January 26, 2007

Back in the Saddle Again

Blog block--guilty as charged. Too many things going on in the past several weeks to figure out how to write them down. I apologize to my loyal blog readers.

Here's a summary of the things I forgot to write about. 20 lectures at a dozen universities, policy discussion meetings with 2 countries, 4 states, and 3 mayors, 12 conferences, 2 trips to China in 3 weeks (I'm too old for this), one election, 27 TV shows, 11 radio interviews, 3 op-eds, meetings with lots of newspaper and magazine editors, meetings with 2 dozen companies and a load of investors, 5 board meetings, 4 family birthdays, one runaway cat (Lily, the nasty one that everybody liked best), and 37 trades in the portfolio.

During this period we had one election, one "extremely lame" duck Congress, a weak State of the Union address, and a hundred hours of hubris. Wall Street hyperventilated through a recession scare, an inflation scare, falling rates, rising rates, a housing bubble, bird flu, global warming, and the end of the Internet as we know it--none of which proved to be true. In spite of all this we finished the year with good growth, huge profits, moderate inflation, low interest rates, and 15-20% stock market gains.

There, now we are all caught up. Now we can move on to the things I am thinking about today.

1. Technology--we're blowing it. After huffing and puffing for more than 2 years, Congress failed to pass the telecom reform legislation that we need to support the massive sustained investments in the new, high-speed communication networks that we need to compete with China, India, and other countries who are getting it right.

2. A dysfunctional political system. Politics in America today are more divisive than at any time since the Vietnam War. Class warfare is back. That makes it almost impossible for anyone, Republican or Democrat, to put in place the long-term policies we need to compete in the world. That’s why social security reform died even though everyone knows the current structure is busted. That’s why small single-interest groups, like the textile workers, can swing enough power to push American trade policy off a protectionist cliff.

3. Energy. Iraq is not about democracy; it’s not about WMD. Iraq is about oil. The world economy won’t go around unless the oil keeps flowing, and the oil is in the Persian Gulf. Peace is not going to break out in the Middle East. Global supplies are getting tighter every year. It is paramount that we develop more energy supplies and increase energy efficiency, but our politics are keeping us from drilling in Alaska and off the Florida coast, we are not building nuclear plants, and we burn fuel as if it were free. Long-term, the answer to both problems is technology, which means educating our kids in math and science.

Fighting over trade--whose workers will operate the sewing machines—is yesterday’s war. Today’s war is energy. Tomorrow’s is technology. More to come on all these issues.

JR

Posted by John Rutledge at 5:59 PM | Comments (15)

November 18, 2006

China Update

I just got back from China and here are a few points I discussed on CNBC's SquawkBox:

- I was in Beijing on November 7, Election Day. Everyone there knew the results of the election in real time. People in China--especially young people--know a lot more about America than people in the U.S. do about China. It's time for us to learn.

- The Democrat's sweep was important for China because it increases protectionist pressure on the Hill and could lead to a tariff bill.

- Erecting trade barriers against China would be very dumb. It would not reduce the trade deficit. It would increase the U.S. price level, push interest rates up, and worsen the housing crunch.

- China is beginning to take steps to make their currency convertible. This is much more important that the exchange rate. It is currently illegal for people in China to hold foreign currency.

- The big words in China are entrepreneurship and innovation. (I chaired an entrepreneurship forum there last Thursday and handed diplomas to the second graduating class of our university that night.) The Chinese government knows they will not be able to continue growth through manufacturing. There is not enough oil, gas, and coal and the air and water quality is terrible. They have decided to grow by investing in IT (fiber optic communications networks) and human capital (education) to increase productivity. Fighting over textiles is yesterday's war. We should be thinking about where Cisco puts their next R&D facility. China is currently bidding very hard for such operations to relocate to their country.

- The Democrat’s victory here has also killed the chance for the telecom reform bill which would have resulted in huge capital spending on high-speed networks. Not having high-speed networks hurts our U.S. businesses’’ ability to compete in the global market.

- The Chinese capital markets open December 5 to foreign (U.S.) financial firms. There is going to be an Oklahoma land rush to set up shop there.

- The top TV show in China is “Win in China” (see my Wall Street Journal op-ed) where 120,000 young entrepreneurs compete for 10 million RMB ($1.2M) in venture capital financing for their business plan, 20% of the equity, and the CEO job. The final show is December 5. I will be there as one of the judges.

- November 11 was the 5th anniversary of China joining the WTO. It was a very big deal.

- The Olympics are China's coming out party--they will not screw it up. That is why they 'solved' the North Korea problem week before last week.

Bottom line: China today is much more capitalist than the U.S.
JR

Posted by John Rutledge at 4:06 PM

October 4, 2006

My 'Win in China' story in today's Asian Wall Street Journal

I have an op-ed piece in today's Wall Street Journal Asia about Win in China, the hit TV show in China I wrote about in the blog last week. You can read the article on the Opinion page of the Wall Street Journal's website by clicking here.

During my visit to Beijing week before last I was able to spend time with Anna Wang, the show's extraordinary creator. Win in China is a reality show where 120,000 young Chinese entrepreneurs compete to win 10 million RMB ($1.2 million) in venture capital financing to start their own business.

I wrote this story so Americans could see that its time to throw out the image of China as people in Mao jackets riding bicycles. These kids are capable, educated, and very hungry for success. Show the article to your children so they can get to know the competition they will face in the global economy. If that doesn't light a blue flame behind them to do their homework I don't know what will.

JR

Posted by John Rutledge at 9:53 PM | Comments (1) | TrackBack

September 27, 2006

August New Residential Sales

(Greenwich, 9/27/2006) Sales of new one-family houses in August 2006 were at a seasonally adjusted annual rate of 1,050,000, according today's U.S. Census Bureau/HUD New Residential Sales in August, 2006 Report. This is 4.1% above July but 17.4% below August 2005. The median sales price of new houses sold in August 2006 was $237,000, just under its $240,100 level a year earlier but down 7.8% from its peak of $257,000 in April. The seasonally adjusted estimate of new houses for sale at the end of August was 568,000, 6.6 months supply at the current sales rate compared with 4.3 months supply a year ago.

JR

Posted by John Rutledge at 10:39 PM | Comments (2)

August Durable Goods

(Greenwich, 9/27/2006) New orders for manufactured durable goods in August 2006 decreased 0.5%, to $209.7 billion the second consecutive monthly decrease and followed a 2.7% decrease in July. Orders were up 8.5% over year earlier figures. You can see the report by clicking here, then clicking the red Advance Report on Durable goods title.

Manufactured durable shipments increased 1.9%, to $214.2 billion, its highest level since 1992 and 7.6% above a year earlier. Capital goods shipments rose 1.4% in August, 11% higher than a year ago.

Unfilled orders increased $2.4 billion, or 0.4%, to $631.9 billion, up fifteen of the last sixteen months. This is the highest level since the series began. Inventories rose 0.2%, to $287.1 billion.

Communications equipment was a bright spot, with orders up 7.0% in August (+13.8% year over year) and shipments up 4.7% in August (+5.8% year over year.)

Motor vehicles and parts orders continued their see-saw, up big for the onth after a terrible July but only 0.5% for the year. Shipments for the year were 0.0%.

Taken as a whole the report gives a soft picture of growth, which will help keep interest rates down and support firming multiples in the stock market.

JR

Posted by John Rutledge at 10:00 PM | Comments (1)

Middle Market Private Equity

(Greenwich, 9/27/2006) My partner Rob Tucker confirmed today there is a wall of money chasing a shrinking pool of deals in the middle market for private equity transactions. Banks, mezzanine lenders, and equity investors are all trying to get money to work. A business that would have sold for 4.5 times trailing 12 month EBITDA, or cash flow, 5 years ago is now trading at 7.5 times. At those prices an equity investor selling the business at the same multiple 5 years from now would earn high teens returns even it the company hits its business plan. Mezzanine lenders would earn 12-14%.

This chart shows Thompson Financial data for average transaction multiples by size of deal, with prices ranging up to 9 times cash flow for over $100 million deals. TAggressive lending is driving the high prices.

Transactions are now being done with total debt levels of almost 5 times cash flow and senior debt over 4 times cash flow. Both numbers are as high or higher than anything we saw at the peak of the last buying binge in 1999 and early 2000. Although there are rumors of credit officers asking questions about companies having a hard time meeeting aggressive plans there is no sign yet of a pullback by lenders.

On Larry Kudlow's show Tuesday night we had a spirited debate with several guests who were ready to declare a recession. I see no signs of recession yet. But I knnow how to create one if you would like me to do so. Recessions happen when credit markets shift from being cleared by market prices and being cleared by non-price rationing. that happens when there is a sudden deterioration in collateral values for existing loans (as in 1989-92 when land prices fell for the first time since the 1930s) or in the cash flow levels specified in loan documents or when the order goes out from central command (the Treasury or Fed) to stop lending (as in 2001-2004). these conditions create a temporary 'blackout' in credit markets during which it is difficult to get credit at any price. We should keep our eye on private equity loans and real estate loans as potential sources of a blackout.

JR

Posted by John Rutledge at 9:21 PM | Comments (2)

Falling Marginal Tax Rate in France

(Greenwich, 9/27/2006) Interesting piece in Le Figaro today on falling marginal tax rates in France from 50% in 2003 to 40% ne3xt year. The French economy is growing again. Hmmm. I wonder if there is a connection. Keep cutting mes amis. You will like it.

JR

Posted by John Rutledge at 7:32 PM

The Internet is Hard to Control

(Greenwich, 9/27/2006) With PCs and mobile phones everywhere and widely available broadband networks China's Internet and information market are really taking off. Thought you would like to see this article from today's Shanghai Daily on the ongoing attempt to adjust regulations on communications so they are actually enforceable. With today's technology, controlling informatioonis like trying to stop the sea by holding up your hand. Shanghai Daily.

JR

Chongqing Internet users no need to register 2006-09-27 THE Standing Committee of the Chongqing People's Congress deleted the article in a new regulation that requiring all individuals to register with the police in 30 days after their network is connected, or their connection will be shut down for as long as six months, Chongqing Evening News reported today.

The committee revised the draft of Internet security regulation during its second revision, saying that only the Internet access providers, information service institutes and companies that operate local area networks need to register at public security departments.

The former proposal suggested that individual Internet users entrust their Internet service providers, such as China Telecom, China Unicom or China Netcom, to register for them by providing these operators with their personal information.

The practice was meant to enhance the management and supervision of Internet surfing and to crack down on online crimes, which have been increasing by thousands countrywide per year, and earlier report said.

Posted by John Rutledge at 6:56 PM | Comments (1)

Credit Cards in China

(Greenwich, 9/27/2006) As I have written before, China is working toward fully opening its capital markets to foreign firms by the end of this year in accord with the WTO agreement. US firms are lining up at the border like the Oklahoma land rush to get at China's huge, growing market.

Today, most transactions in China are handled using cash, sometimes thick stacks of 100 RMB notes. There is a huge opportunity to bring credit cards to China. There is also a lot of work to do to create the necessary credit history data bases and risk measurement and management systems. There will also be a period during which China's consumers will learn how to manage credit.

Thought you would like to see the charming email I received from a young woman in China on the subject.

Dr. Rutledge, it's my first time to leave comments on your blog, although I have read them several times! xixi, Maybe as a young greenhand girl on work, it's a little difficult to understand all of the economic thing, but I'm much interested. I particularly like your part on China. After reading, I can feel a kind of confidence for my motherland's future development, thank you for your analysis and support. Yeah, there always exist changes in chinese daily life. For example, recently I found so many banks began the campaign of sending credit cards toward the public. and the requirement for application is not as complicated and high as before. Even the fresh worker like me can have one or more. I wonder if it is cost-effective for me to have one and use it in my daily expense. hehe. It's pleasure to taik with you.

It is young people like this that are going to drive China's growth over the coming decades.

I am working on two aspects of the credit problem. With Hunan University I will be working on credit histories. With Haidian I am working to attract financial talent to help train and grow financial companies. This is going to be an exciting story for many years.

JR

Posted by John Rutledge at 5:18 PM | Comments (2) | TrackBack

Forget the Slowdown Talk: State Tax Receipts Soaring

(Greenwich, 9/27/2006) Slowdown? What slowdown? Tax collections are the best metric for economic growth. You only pay them when you make money. You have to pay them or federal agents will enter your house with a gun. Not much room for statistical error there.

As you can see from the following excerpt from a Reuters story today, real state tax collections are soaring. Forget why--we can save that for another day. Strong tax receipts mean the economic n umbers will eventually be revised upward to show where the money came from--people's paychecks and gains on investments. The household employment survey shows the same thinkg. Don't buy the fears of slowing growth and falling profits. Most of all, don't forward this article to the Fed. We want them to think the economy is weak so they will stop fiddling with interest rates.

JR

Reuters - September 27, 2006 3:14 PM ET
WASHINGTON, Sept 27 (Reuters) - U.S. state tax revenue grew 4.1 percent in the second calendar quarter year-on-year after adjusting for tax changes and inflation. Personal tax receipts climbed 15.1 percent in the second quarter from a year ago while corporate tax income advanced 14.7 percent, the Nelson A. Rockefeller Institute of Government said in its report on the health of state finances released today. Sales tax receipts gained 5.7 percent.

The 4.1 percent overall increase is the strongest since the second quarter of 2005 when tax revenue, net changes and inflation, rose 6.5 percent.

The second quarter marked the 11th straight quarter of overall tax revenue growth for the 50 states. Revenues rose 9.9 percent when inflation and legislated changes are not excluded.
"State tax collection strength was at odds with a slowing national economy," said the research group, which is part of the State University of New York in Albany. "One explanation ... is that final (tax) payments in April (on 2005 income) were strong and that estimated payments in April and June were also strong."

Furthermore, capital gains and bonuses may have boosted tax revenue more so than underlying economic strength, the group added.

The second calendar quarter marks the end of the fiscal year for most states. Many states collected more tax receipts than they had previously projected and ran budget surpluses.

Posted by John Rutledge at 3:36 PM | Comments (3)

September 25, 2006

Chinese ESOPS--CSOPS?

(Greenwich, 9/25/2006) While we are whining about stock option scandals and tying magers up in Sarbanes-Oxley knots Chinese companies are discovering the magic of incentives. Bank of China (BOC) and China Construction Bank (CCB), two of China's top four commercial banks, will initiate employee stock ownership plans this year as part of their employee incentive programmes. BOC's shareholders already approved a stock appreciation rights policy for the management team (secret code for stock options). Regulators support the idea. You can read the story by clicking here.

According to a CCB press release:

The implementation of such plans is to increase the bank's cohesion, to harmonize benefits for employees and shareholders, and to reduce the bank's operational risks. We expect to build up our core competitiveness by attracting more talent and improving innovation through the employee incentive programmes.

Sound fammiliar?

CCB will allow its employees to hold 1 to 2 per cent of its total shares, which means each staff member will be able to buy 52,000 yuan (US$6,500) worth of stocks on average, according to the bank's current market value on the Hong Kong stock exchange. The 300,000 employees will be able to hold around 4.5 billion shares, with a total market value of HK$15 billion (US$1.95 billion).

In May, Zhou Xiaochuan, governor of the People's Bank of China, encouraged State-owned financial institutions to adopt employee stock ownership plans for the first time. "The employee stock ownership plan is an important part of financial institutions' joint stock reform," Zhou said earlier.

JR

Posted by John Rutledge at 7:01 PM | Comments (3)

Wanyuanhu, Chinese Word for 10,000-aire, Now Obsolete

(Greenwich, 9/25/2006) This piece is for the closet philologists out there. The Peoples Daily Online website is running an interesting series of articles called 49 obsolete Chinese words that tracks changes in the Chinese language. Here is one from yesderday:

Wanyuanhu: disappeared in 1997. The Chinese phrase "wanyuanhu" means a household whose annual income exceeds 10,000 yuan. In the early 1980s, the average household income was very low in China. Then, a wanyuanhu was considered very rich in both rural and urban areas. Owing to rapid economic growth in the 1990s, the standard of living has improved significantly. In 1997, the average annual income of a rural household surpassed 10,000 yuan according to national statistics. Every household has become a wanyuanhu. This was no longer considered a high standard of living and so the phrase became outdated.

Lifting vast numbers of people out of poverty is one of the truly great stories of our time. Thought you would like to see a story with a happy ending for a change.

JR

Posted by John Rutledge at 6:46 PM

Home Prices Down for Full Year--First Time in 11 Years

(Greenwich, 9/25/2006) The median sales prices of existing homes fell 1.7% in August from year-ago levels, the first full year decline in 11 years. This is the second largest decline in the 38 year history of the National Association of Realtors survey. You can read the press release by clicking here here.or review the data by clicking clicking here.

Sales of existing homes fell 0.5% in August to 6.30 million (annual rate), the fifth straight month of falling sales but were 12.6% below year ago levels.

You ain't seen nothing yet. Home sellers are stubborn; they don't like to admit their home is declining in value. So when demand drops the first thing we see is a drop in transactions. Only later do prices fall under the weight of rising inventories of unsold homes.

Inventories are building up like thunderheads on a summer afternoon. In August there were 3.92 million homes (7.5 months supply) for sale, up 1.5% over July. Inventories are 76% higher today than they were in 2004 (2.2 million units, 4.1 months supply) at the peak of the property boom.

The eye of the storm is condos and coops, with 8.6 months supply (568,000 units) homes listed for sale, more than twice the 274,000 units listed for sale in 2004, and a gusher of new supply still under construction, especially in the west where units sold have dropped 24.8% and prices have declined 6.5% from year ago levels.

Single-family home prices fell by 2.2% in August and were 1.7% lower than a year ago. The biggest damage was in the Northeast (Wall Street bonuses?) where prices fell 2.9% in august ands were 5.5% lower than a year earlier.

The growth-haters on Wall Street, of course, loved the report. They reason that falling home prices will convince the Fed to back off. They are right. I am sticking by what I told you 6 months ago. The 10 year Treasury will finish the year below--it looks like well below--5%. And the yield curve will revert to its normal upward slope early next year when the Fed is forced to lower the Fed funds rate to less than 5% to protect growth.

What does this mean for stocks? The duration (the weighted average maturity of the present value of the free cash flows) of the S&P 400 Industrial companies is about 25 years. That means each 100 basis point drop in the 10 year Treasury adds 25% to the intrinsic value of the index. Profits are at an all-time high as a percentage of GDP, still rising at more than 15% per year.

This is a great time to own equities.

JR

Posted by John Rutledge at 11:14 AM | Comments (1)

September 23, 2006

June Employee Compensation Report

(Greenwich, 9/23/2006) The Bureau of Labor Statistics (where you can get all sorts of cool economic data by clicking here) has released their report on Employer Costs for Employee Compensation for June, 2006.

Data watchers pay attention to this report because they know that the Fed is data-driven, waiting impatiently by the mail room to interpret each new piece of data as it poops out of the government data mills. And they know the Fed (erroneously) believes that wage increases cause inflation. Personally, I have never understood how anyone can get excited about a report that comes out on September 22 telling you what wages were three months ago. Weren't they there? weren't they paying attention?

This report tells us that total employer costs for employee compensation for nonfarm private and state and local government workers averaged $26.86 per hour worked. Wages and salaries made up $18.80 (70%) of the figure; benefits, $8.06 per hour, accounted for the remaining 30 percent.

Costs for legally required benefits, including Social Security, Medicare, unemployment insurance, and workers‚ compensation, averaged $2.17 per hour (8.1 percent of total compensation). Employer costs for life, health, and disability insurance benefits averaged $2.19 (8.1 percent); paid leave benefits (vacations, holidays, sick leave, and other leave) averaged $1.88 (7.0 percent); and retirement and savings benefits averaged $1.15 (4.3 percent) per hour worked.

Interestingly, private industry employer compensation costs averaged $25.16 per hour worked, i.e., government employees make more money that people who actually produce goods and services. Shocking!

Looking ast the breakdown by sector we find that Management, business, and financial workers ($49.62) earned the highest total compensation, followed by teachers ($47.77), and registered nurses ($41.32). At the bottom were office and administrative support ($21.33), transportation and material moving ($20.78), and Service ($14.88). People living on the coasts earned more than people living in the middle of the country. Workers in big companies earned more than workers in small companies.

Show this report to your children.

JR

Posted by John Rutledge at 1:37 PM

China Opening Capital Markets: New Leasing Law

(Greenwich, 9/23/2006) The occasion for the conferences in China where I spoke over the past 2 weeks is China's WTO requirement to fully open its financial sector to foreign firms by the end of this year. Although there is a lot of arm wrestling going on to define "fully open" the government is making great progress. The latest advance is the new law now being considered by the National People's Congress, China's lawmaking body, to establish financial leasing firms. You can read about it in a Forbes article by clicking here.

These change are creating interesting opportunities for both foreign and Chinese companies to expand the financial service sector. I spent a lot of time with the Governors of both the Haidian District (Beijing's Silicon Valley) and Xicheng District (Beijing's financial district.) Both are committed to policies that will bring new sources of financing to China's dynamic private companies. Today, there is ample funding for large, state-owned companies but very little venture capital, growth capital, and working capital for the small and medium size enterprises (SME's) that are driving China's growth.

I am also working with Hunan University (where the Yuelu Academy, China's oldest standing universoty was founded in 978 AD), where I am a Visiting Professor in the Finance School, to help design the consumer and business credit risk measurement systems that banks will need to bring credit cards and other forms of SME financing to China. Will keep you posted on our progress.

Stay tuned for further events this fall.

JR

Posted by John Rutledge at 1:09 PM

September 22, 2006

Chinese view of free market

(Washington, DC, 9/22/2006) Harper's Magazine reported that 74% of Chinese say the free market is "the best system on which to base the future of the world," compared with just 36% In France.

JR

Posted by John Rutledge at 2:19 PM | Comments (1) | TrackBack

September 19, 2006

August Producer Price Index

(Greenwich, 9/19/2006) U.S. producer prices rose 0.1% in August following increases in July and June of 0.1% and 0.5% respectively. The core rate—finished goods other than foods and energy--declined by 0.4% following July’s 0.3% drop. This is the largest drop since April 2003 and the first two-month decline since late 2002. The drop in core prices was led by a 2.6% drop in new car prices and a 3.4% decline in light motor trucks. Drug prices dropped 0.9% and alcoholic beverage prices decreased 0.9%. Energy prices saw the smallest increase since February, rising 0.3% after a 1.3% gain in July. While food prices rose 1.4% following a 0.3% decline in the previous month, consumer goods other than food and energy fell 0.5% and capital equipment prices fell 0.3%. Read the full report

This report will help Fed watchers to unclench their buttocks a little. Inflation is on the down slope now, as shown in falling metals and commodity prices. The long bond should stay right where it is, at 4.75% for the 10 year Treasury, for the rest of the year. We could even see a drop in short rates in the next several months.

JR

Posted by John Rutledge at 10:55 AM

August Housing Starts

(Greenwich, 9/19/2006) U.S. housing starts fell 6% in August to an annual rate of 1.665 million, the lowest since April 2003, according to the Commerce Department. Housing starts have fallen in six of the past seven months and have dropped 19.8% compared to August 2005. Building permits fell 2.3% to 1.722 million, the lowest since August 2002. Permits have fallen seven months in a row, down 21.9% from a year ago. Read the full report.

It's no secret to anybody now that home prices are falling. This means the only housing starts from here on will be ones that already have bullet-proof financing. Look for more weak housing numbers ahead. Good news for lower interest rates ahead.

JR

Posted by John Rutledge at 10:53 AM

August Home Builder’s Confidence Index

(Greenwich, 9/19/2006) The confidence of U.S. home builders decreased for the eighth straight month in September, falling to the lowest level since February 1991 according to the National Association of Home Builders. The NAHB/Wells Fargo housing market index dropped by three points in September to 30 from 33 in August, showing that most builders think the housing market is poor. A year ago, the index was at 65. (A reading of 50 indicates that builder sentiment was balanced between good and poor.)

By index measures, builders in all four regions of the country are pessimistic about the market. Sentiment fell by six points in the Northeast to 28. It fell by five points in the West to 38 and by three points to 38 in the South. The sentiment index held steady at 16 in the Midwest.

These charts are starting to look a lot like 1991-92 again, only this time it is all happening a lot faster thanks to the Internet and bloggers. I do not think this is going to torpedo growth, but it will make the Fed a lot more cooperative. Intereset rate increases are behind us now.

JR

Posted by John Rutledge at 10:47 AM

September 18, 2006

Forget the Renminbi, Revalue the Latte

(Greenwich, 9/18/06) You won't see this story any place else. In a terrific piece of investigative journalist I have discovered that Starbucks has devalued the Latte in China. It's a little difficult to read the type in the "steath photo" I took with my little spy camera at the Beijing Starbucks last week--I spent a lot of time there--but if you look closely you will see that the 3 cup sizes in the photo are not Venti, Grande, and Tall we are familiar with in the US but Grande, Tall, and Short. Someone has kidnapped the Venti.

The prices of the 3 sizes, translated into US dollars, were about the same as we would pay in the US which means the "per ounce" prices in China are actually higher, not lower, as many Americans believe. (using one ounce of cappuchino--defined in Wikipedia as 1/3 espresso, 1/3 steamed milk, and 1/3 foam--as the unit of account I have determined than one unit of cappuchino in Beijing is 50% more expensive (the tall/short volume ratio being 12/8=1.5) , measured in US dollars, as it is in the US.

This discovery has major implcations for global currency markets. Instead of revaluing the RMB by 25% as the US government wants, my research indicates that china should actually devalue the RMB by 50% to restore Cappuchino Purchasing Power Parity (CPPP) and correct global imbalances. I am trying to get this information to Treasury Secretary Paulson before his meetings in Beijing this week to avoid a potentially disastrous policy mistake that could have global repercussions.

JR

Posted by John Rutledge at 7:04 PM | Comments (1)

Competing for Capital

Last thing I remember
I was running for the door.
I had to find the passage back to the place I was before.
Relax said the night man
We are programmed to receive.
You can check out any time you like
But you can never leave.
(The Eagles, Hotel California.)

(Beijing, 9/16/06) Some governments get it. Some don’t. Countries are not competing for jobs today; they are competing for capital. Access to capital—modern tools, education and training, technology, and working capital— is what makes workers productive.

Capital makes paychecks possible.

Not so long ago national governments were able to count the capital within their borders as national assets to do with as they pleased. Capital was expensive to move from one country to another. Moving capital was slow, at the speed of cargo ships, easy for governments to see, tax, and regulate.

No longer. Modern communications networks and efficient capital markets have changed the rules of the game. Today, global investors can move capital from any country in the world, to any country in the world, whenever they please. These capital movements occur at the speed of light over fiber-optic networks at virtually no cost to investors. They are virtually invisible to governments.

Governments who ignore these changes in the mobility of capital do so at the peril of their workers’ paychecks.

China
I have spent the past 2 weeks in Beijing with a group of government officials who definitely get it. They are taking steps to make China a destination resort for capital. China’s leaders realize the only way to deliver continued high economic growth without further fouling the air and water and without running out of energy is to focus on IT, communications, and financial services. They are adopting policies to convince foreign investors to relocate their R&D operations in China with tax breaks, development funds, and other policies. China’s new policy mantra in China is innovation and entrepreneurship. They are doing the things to deliver on the promise.

In Beijing I spoke at 1) a venture capital forum in Haidian (Beijing’s silicon valley) to announce a new government fund to attract foreign capital, 2) the opening of a new finance school in the Xicheng, Beijing’s financial district, to train people to be employed by the foreign banks, insurance companies, investment banks, and investment managers who will open up shop after China completes its obligation to open its capital markets by the end of this year, 3) the International Financial Forum, which included talks by top Chinese officials on the importance of attracting foreign capital and a discussion of a new special enterprise zone in Tiantsin to conduct an experiment on currency convertibility, a crucial issue for investors.

Last Friday the government announced major revisions to its tax rebate system for exports. These changes reduce rebates (discourage investment) in coal, gas, steel, non-ferrous metals, wooden products and other natural resources, glass, cement, textiles, cigarette lighters, but they increase rebates (encourage investment) in biotech, pharmaceuticals, and telecommunications. And I had dinner with the executive producer of China’s hit TV show named Win in China, where 120,000 young entrepreneurs across China are competing to win 10 million RMB ($1.2M) in venture capital financing for their business plan.

U.S.
I have also spent time recently with leaders who definitely do not get it. Unfortunately, they are our leaders. In a world where countries are scrambling to attract capital—especially high-tech capital—Congress is too concerned with lobby groups, earmarked expenditures, and mid-term elections to worry about attracting and holding capital. Like Nero, they are fiddling while Rome burns, wasting their time fighting over non-issues like so-called network neutrality and deciding which snouts will enjoy the $7.3 billion Universal Service Fund trough instead of passing the communications legislation overhaul we need to drive investment and productivity higher.

Meanwhile, company after company is moving R&D facilities offshore--the share of US companies in the global telecom equipment market has fallen from 40% to 20% in the past 5 years.

Dominican Republic
Of course, it could be worse. We could be citizens of the Dominican Republic. There, Government leaders are erasing any chance their citizens have for economic growth and rising paychecks by erecting a giant sign for global investors which reads “Foreign Capital Keep Out”. Just 2 years after signing a free trade agreement with the US (DR-CAFTA), their tax authorities are attempting to gouge a $523 million payment from an American telecom company (Verizon) in violation of their own laws and international treaties.

This Hotel California tax (“You can check out any time you like. But you can never leave.”) and other investor-hostile policies (the Heritage Foundation ranks the Dominican Republic in 116th place in their Economic Freedom List) are certain to drive future would-be investors away from the Dominican Republic, a tragedy for the 9 million people who live there and who earn just $2080 per year, less than 91 other countries and only 5% of US per capita income.

Ironically, this is “Dominican Week” in New York, complete with parades and a visit from the DR President Fernandez who will give a speech about the Dominican Republic’s “business-friendly” climate. He could have saved the plane fare to New York--Investors will not be fooled. The language of global capital markets is actions, not words.

Of course, in global capital markets, one country’s loss is another country’s gain. They are cheering in the streets of Beijing.

JR

Posted by John Rutledge at 5:21 PM | Comments (0) | TrackBack

September 12, 2006

Telecom and Growth

(Beijing, 9/12/06) On September 22, I will be speaking at the U.S. Chamber of Commerce TeleCONSENSUS forum in Washington DC along with Joel Popkin. The topic is “The Telecommunications Economy: Competition and the Global Marketplace. Download file

After spending the last week in China, I can tell you that the Chinese government understands the only way to deliver high growth and increase living standards without further fouling the air and running out of energy is to focus on IT, communications, and the financial service sector. The Chinese are putting a full court press on innovation and entrepreneurship by aggressively investing in tech education and pursuing policies to attract foreign capital to relocate to China--especially such as R&D operations.

What are we doing?

JR

Posted by John Rutledge at 10:21 AM | Comments (2) | TrackBack

September 9, 2006

Haidian District Venture Capital Conference

(Beijing, 9/9/2006) Bob Mundell and I spoke Thursday at a venture capital conference in Haidian district, Beijing, where I am the Chief Advisor for Finance to the Governor. Haidian is the home of China's 2 top universities. We were knee deep in physicists. It was a great audience for me to talk about work I have been doing to apply non-equilibrium thermodynamics to issues in capital markets and economics. I will post the slide show on the blog in the next day or two.

Haidian is the “silicone valley” of China. With only 2.6 million people and 400 square kilometers in size, Haidian generates 3% of the total tax revenues for the entire country. Haidian is the home of 80 universities including Beijing and Tsinghua (#1 and #2 in China), 400,000 students, 30,000 graduate students, 100,000 private companies, 15,000 tech companies (including Lenovo, IBM and AMD) and is headquarters for 13 NASDAQ companies. As a designated high-tech zone, high-tech companies that move to Haidian pay 0% taxes for 3 years, 7.5% taxes for 3 additional years, and 15% in year 7. Capital gains taxes on stock profits are 0%.

The purpose of the conference was to introduce venture capital and private equity investors to Chinese entrepreneurs and potential business opportunities coming out of the Haidian universities and to educate the entrepreneurs about venture capital. We had an audience of 300 plus, including many U.S. investors, who came to hear about what the opening of China’s capital markets later this year will mean for investors.

JR

Posted by John Rutledge at 11:58 AM

August 16, 2006

Birthday Musings

I am 58 years old today, which means I have used up almost half of my time. You see, I read a story long ago about a woman in Italy who was 120. I decided to live to be 120 and then to disappear in a magnificent ball of flame. That's my plan and I'm sticking with it.

Does make me think, though, about what I should do with the remaining 120-58-1=61 years. (The minus one is because I have already decided to spend the last one in Maui paddling my outrigger canoe.) There is so much to do I don't know where to start.

First of all, there is so much to learn. Ever since the Internet, I have been drinking from a firehose of information. The more I read, the more I find out I don't know. The most valuable stuff I get is from friends. Then there is the usual crap (I apologize for the colorful language but, really, no other word quite captures it) in the government economics reports. (I just can't understand why everyone stands around on pins and needles waiting for the new CPI report that tells you how much they paid for the stuff you bought last month; weren't they paying attention?) I also get copies of newspapers from Germany, France, Italy, Spain, the UK, Japan, China, India, Russia, Dubai, and Israel delivered to my desktop every morning. I like to see the facts through different eyes, and the language practice doesn't hurt either.

My basic philosophy is Chekhov's Law.

In one of Anton Chekhov's more than 200 short stories--I forget which one--a character says:

If you want to understand Bulgarians you have to go to Bulgaria. You can't just read about them in the newspaper.

I have been going to Bulgaria since my 16th birthday when I left Winthrop Harbor, Illinois to hitchhike to California. After nearly 15 million air miles, I am sure Chekhov was right. The only way to get to know people in far-away places is to go there, have dinner with them and get to know their kids. When you do you find out that the differences among people are not as important as the similarities. That's especially important today because people all over the world can see each other real-time on TV's. It is too easy to blame far-away people when things don't go well in our own lives.

Best recent example, the fighting in Lebanon. Everyone in America has a strong opinion, even though people have not spent time in either Lebanon or Israel. I have travelled to northern Africa about 100 times since my first visit in 1976. I have had the pleasure of spending time and knowing wonderful people in both places, which makes me very disturbed by the growing mob mentality in the US who have decided to hate and dehumanized "them" out of misplaced tribal fealty. When I watch the news reports all I see is people being hurt on both sides.

China is a second example. The newspapers, magazines, and TV are full of stories about China written by people with strong opinions but no direct knowledge of the country, its history, or its people. If you really want to know what is happening in China climb on the plane with me and see for yourself. What you will see is a country that is bigger than you could ever have imagined, going through massive change, driven by the energies of people who love their families, respect their history and culture, and work very hard. You will lose your firm opinions but increase your desire to understand this complex country because the evolving relationship between an awakened and growing China and the US is the biggest story of the 21st century.

Perhaps the biggest story of the 21st centry is the impact of global real-time communications networks on people's behavior. Today, for the first time in the history of the world, the rich and poor people in the world can watch each other on TV in real time. The real question is how people adapt to living in a world of glass houses. Images of rich people can either create entrepreneurs or terrorists in poor countries. Images of poor people can either motivate people in rich countries to help others grow or to grab the remote to look for something less stressful.

We are going to use a lot of energy in the coming years dealing with the conflicts created by this story, which range from terrorism to high gasoline prices, to China's trade surplus, to vicious politics, record corporate profits, and Wal-Mart's labor practices. I hope we can manage our way through this with more passion and fewer lynch mobs. But it will ultimately deliver billions of people from poverty. That can't be all bad.

Chekhov's got me getitng on a plane again in a couple of days, first to a technology conference in Aspen, then to a series of conferences in Beijing concerning China's opening capital markets. I'll keep you posted on the ideas I run across on the road through the blog.

JR

Posted by John Rutledge at 10:31 PM | Comments (5) | TrackBack

August 2, 2006

WalMart Workers Unionize in China

As you can see in this article in The Australian, Wal-Mart's labor issues are not limited to Chicago. The All-China Federation of Trade Unions has succeeded in unionizing the stores in Fujian province. Wal-Mart buys 1 per cent of China's entire gross domestic product, operates 59 stores, employs 23,000 people, and plans to open 20 new stores and increase employment to 150,000 over the next 5 years.

Last month Wang Zhaoguo, an influential Chinese leader, proposed legislation to force all foreign employers to unionize their workers. This is worth keeping an eye on as an indicator of Chinese government attitudes toward attracting and retaining foreign capital, the key to sustainable growth.

JR

Posted by John Rutledge at 8:37 PM

July 22, 2006

Boersen-Zeitung. Deutsche Bank setzt sich an die M & A-Spitze - Volumen im Inland steigt um 40 Prozent. The Moving Men are Working Hard in Germany Too.

An interesting article in today's (Saturday) edition of the Boersen-Zeitung reports that German M&A activity in the first half of 2006 was 40% higher than a year earlier, with Deutsche Bank knocking Goldman Sachs out of first place. You can read a summary of the article below or see the full article on the BZ website.

Deutsche Bank setzt sich an die M & A-Spitze - Volumen im Inland steigt um 40 Prozent

Goldman Sachs bei abgeschlossenen Transaktionen im ersten Halbjahr auf Rang 2 vor Morgan Stanley

kb Frankfurt - Das Volumen von abgeschlossenen Mergers & Acquisitions, bei denen deutsche Unternehmen involviert sind, ist im ersten Halbjahr 2006 im Vergleich zum gleichen Vorjahreszeitraum weiter kräftig um fast 40 % auf 152 Mrd. Euro gestiegen. Dies überrascht insofern, als die Flut der angekündigten milliardenschweren Transaktionen noch nicht in den Daten enthalten ist. So lief das Übernahmeangebot von Bayer für Schering über den Stichtag 30. Juni hinaus, und auch die Übernahme von BOC durch Linde ist zu diesem Zeitpunkt noch nicht abgeschlossen, ganz zu schweigen von der geplanten Übernahme der spanischen Endesa durch Eon.

The same thing is happening all over the world, of course. As I will talk about tomorrow on Fox News and sunday on NBC's Wall Street Journal Report, the cost of moving capital from anywhere, to anywhere in the world has essentially gone to zero and is entirely invisible to governments. For historical reasons all the capital in the world is bottled up in the U.S., Western Europe, and Japan. All the people in the world are bottled up in China and India. All these regions are now connected by a sophisticated fiber-optic communications network that makes information about returns instantly available to investors around the world. Investors are doing the obvious thing--moving large amounts of their capital to Asia. It takes a lot of moving men to do the job.

That's what investment bankers, hedge fund managers, and mutual fund managers are, very high-priced moving men. There is an enormous amount of moving to do. We have more than $165 trillion of privately-owned assets in the U.S. alone (not counting the more than 700 million acres of land the Federal government owns.) the moving men are going to be making a lot of money for a long time.

JR

Posted by John Rutledge at 12:13 AM

July 21, 2006

Taïwan et la Chine reliés par avion-cargo (Not All News is Bad News)

In case you thought that only bad things were happening today, here is a story I found in today's Le Figaro. The first direct cargo flight between China and Taiwan landed in Shanghai at midnight last night. Last month both governments bowed to the laws of practical economics and authorized a series of cargo flights this summer, in spite of their political disagreements.

Many Americans do not realize the depth of the business and investment relationships that have developed between China and Taiwan. It is these ordinary business relationships that will one day resolve the political tensions between the two governments.

Here is a summary of the story:

Shanghaï, JULIE DESNÉ. Publié le 21 juillet 2006 Actualisé le 21 juillet 2006 : 11h46

Pour la première fois depuis 1949, un vol direct par avion-cargo a été autorisé par les deux pays.

LE PREMIER avion-cargo reliant directement Taïwan et la Chine a atterri à Shanghaï hier à minuit passé. Obéissant aux règles du pragmatisme économique, Taïpeh et Pékin s'étaient mis d'accord le mois dernier pour autoriser une série de vols cargo cet été, malgré leur désaccord politique.

Le Boeing 747 affrété par China Airlines, première compagnie taïwanaise qui d'ordinaire ne vole pas au-dessus du territoire chinois, transportait 61 tonnes d'équipement électronique destiné à une usine de la compagnie Taiwan Semiconductor Manufacturing Co. (TSMC), premier fondeur mondial, dans la région de Shanghaï. D'ici au 10 août, d'autres vols devraient permettre à l'entreprise d'importer tous les équipements nécessaires à la construction de sa chaîne de production de puces 8 pouces. Mais si Zhang Guanhua, de l'Académie des sciences sociales, estime que « ce vol cargo est un pas vers des vols plus réguliers », aucun accord sur la question ne semble se profiler.

Depuis 1949 et la rupture consommée de l'île avec la Chine communiste, aucune liaison directe aérienne ni maritime ne relie les deux rives. Taïwan impose d'ordinaire un stop à Hongkong ou Macao. Seule exception à la règle : le Nouvel An chinois. Depuis trois ans, des vols de passagers sont rétablis pour permettre aux familles chinoises de se retrouver à l'occasion de la fête la plus célébrée de l'année.

You can find the whole article at the Le Figaro site.

JR

Posted by John Rutledge at 6:43 PM

July 20, 2006

Consumer Price Index June 2006

The Labor Department's Bureau of Labor Statistics released the June CPI report yesterday. You can download aPDF file of the report here, but I would suggest that you take a look at the absolutely delicious BLS website page where they let drill down to see you all the details.

BLS Summary: The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.2 percent in June, before seasonal adjustment, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. The June level of 202.9 (1982-84=100) was 4.3 percent higher than in June 2005.

The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) also increased 0.2 percent in June, prior to seasonal adjustment. The June level of 198.6 (1982-84=100) was 4.5 percent higher than in June 2005.

The Chained Consumer Price Index for All Urban Consumers (C-CPI-U) increased 0.3 percent in June on a not seasonally adjusted basis. The June level of 117.5 (December 1999=100) was 3.7 percent higher than in June 2005.

The June number (0.2%) was smaller than the previous two months but larger than the street expected. Small potatoes, however, which were totally drowned out by the positive impact of Gentle Ben's testimony to the Senate yesterday. The numbers that jump off the page, of course, are the energy prices, (Shocking!) which increased by 23.3% since June a year ago. If you take out volatile food and energy prices, the 'core rate' is just 2.2% over the past 12 months. Not so bad.

As you can see above, 2.2% is the same as we saw in both 2005 and 2004, and equal to the average of 1999-2005. What's happening, of course, is the U.S. economy is swallowing a massive increase in oil and commodity prices like a snake swallowing an egg. Once it passes through our gut, later this year, we will be back at just over 2% again. That's why I have been arguing that people are over-worrying the long-term inflation outlook. And that's why I believe the 10 year bond yield will still be about 5% at the end of the year.

Inflation will subside again for 2 reasons. The first is the extraordinary U.S. productivity growth driven by IT and communications investments. The second is slow demand growth. Prices cannot rise continuously for a long period without a sustained increase in demand. But the Fed has allowed the monetary base to grow just 4% over the past year--less than nominal GDP growth. Bank reserves have actually declined by 1% over the past year. Without sustained increased in reserves there will be no long-term inflation.

With profits growing at 12-15% and a 5% bond yield, the stock market is far too cheap. It can't stay that way forever.

JR

Posted by John Rutledge at 5:10 PM | Comments (1)

Real Earnings, June 2006 - Good Month, Flatline Year

The June Real Earnings report, released yesterday by the Bureau of Labor Statistics, shows the economy is still growing but that workers are having a hard time keeping up with price increases. You can see the report by going to the BLS website or by downloading the PDF file.

Weekly earnings of $566.13 in June increased 0.8%, driven by a 0.5% increase in hourly pay ($16.70/hour) and a 0.3% increase in hours worked. Prices increased by just 0.2%, so real weekly earnings rose 0.6%. Pretty good month.

For the full year, however, it's a tougher story. The hourly pay for American workers was 3.9% higher in June than it was a year earlier, but the pay increase was more than offset by increased prices; real hourly pay fell 0.6& over the year. Weekly earnings were stronger due to the increase in hours worked, i.e., real growth. Weekly earnings in June were 4.5% higher than a year earlier, but only 0.1% better than inflation.

This contrast between profits growing 12-15% per year and at an all time high as a percent of GDP and flat real wages reflects the phenomenal change in global capital markets over the past 20 years. Capital owners can now move their capital anywhere in the world at almost no cost. Workers are stuck wherever they find themselves. The relative abundance of capital and scarcity of people in the U.S. compared with China and India means capital is migrating to places where it can earn higher returns. This is great for the stock market. But it is also the reason behind our increasingly contentious politics.

This story is not going to go away.

JR

Posted by John Rutledge at 4:28 PM

July 19, 2006

New Residential Construction in June 2006--Going Down!

The U.S. Census Bureau and the Department of Housing and Urban Development jointly announced the following new
residential construction statistics for June 2006:

BUILDING PERMITS
Privately-owned housing units authorized by building permits in June were at a seasonally adjusted annual rate of 1,862,000.
This is 4.3 percent (±1.0%) below the revised May rate of 1,946,000 and is 14.9 percent (±1.0%) below the June 2005
estimate of 2,188,000.
Single-family authorizations in June were at a rate of 1,395,000; this is 6.3 percent (±1.0%) below the May figure of
1,488,000. Authorizations of units in buildings with five units or more were at a rate of 397,000 in June.

HOUSING STARTS
Privately-owned housing starts in June were at a seasonally adjusted annual rate of 1,850,000. This is 5.3 percent (±6.6%)*
below the revised May estimate of 1,953,000 and is 11.0 percent (±5.6%) below the June 2005 rate of 2,078,000.
Single-family housing starts in June were at a rate of 1,486,000; this is 6.5 percent (±7.2%)* below the May figure of
1,590,000. The June rate for units in buildings with five units or more was 306,000.

HOUSING COMPLETIONS
Privately-owned housing completions in June were at a seasonally adjusted annual rate of 2,017,000. This is 6.4 percent
(±9.4%)* above the revised May estimate of 1,896,000 and is 2.0 percent (±8.4%)* above the June 2005 rate of 1,977,000.
Single-family housing completions in June were at a rate of 1,738,000; this is 7.5 percent below the May figure of 1,616,000. The June rate for units in buildings with five units or more was 255,000.

The increase in mortgage rates is taking a bite out of both housing activity and home prices. Bsed on our estimates, the duration of the stream of services delivered by the US housing stock is more than 25 years. This means a one percentage point increase in mortage rates lowers the intrinsic value of hte housing stock by about 25%. Ouch!

JR

Posted by Pamela Rutledge at 10:44 AM | Comments (2)

July 18, 2006

June Producer Price Index

7/18/2006 - U.S. producer prices increased by 0.5% in June. This followed advances of 0.2% in May and 0.9% in April. Core inflation rose 0.2%. Higher energy and food prices accounted for most of the gain in June in the producer price index for finished goods. Energy prices increased 0.7% in June, as wholesale gasoline prices rose 6.3%. Natural gas and residential electricity prices fell. Food prices rose 1.4%, the most since October 2004. Read the full government report at the Bureau of Labor Statistics website or you can download the PDF file here.

Posted by John Rutledge at 4:00 PM | Comments (1)

July Builder Confidence, Still Falling

7/18/2006 – Increasing interest rate concerns and housing affordability caused builder confidence for new single-family homes to drop to 39, according to the National Association of Home Builders/Wells Fargo Housing Market Index (HMI). This is down from a high of 72 in June last year and is the lowest in 15 years. In July, all three components of the home builders' index fell. Current sales index fell to 43 from 47, the expected sales index dropped to 46 from 51, and the traffic of potential buyers index fell to 27 from 29. Builders in the west, who have been the most optimistic as measured by the HMI, recorded the biggest drop, from 60 in June to 51 in July. The release is available at NAHB’s website.

JR

Posted by John Rutledge at 3:00 PM

July 17, 2006

June Industrial Production and Capacity Utilization

7/17/2006 - U.S. industrial output rose 0.8% in June and was 4.5% higher than it’s year-ago level. The June increase was lifted by strong output at factories, mines and utilities. Capacity utilization rose to 82.4%, the highest level in six years. June’s rate was 2.1% above its level in June 2005 and 1.4% above its 1972-2005 average. Manufacturing and utility output each rose 0.7% in June, while the output of mines rose 1.2%. Production of consumer goods increased 0.8%. Production of business equipment increased 0.7%. Production of industrial supplies increased 0.6%. Read the full government report at the Federal Reserve Board website.

Posted by John Rutledge at 7:30 PM

July 12, 2006

May Trade Deficit

7/12/2006 - The U.S. trade deficit increased by 0.8% in May to $63.8 billion with imports rising more than exports. Exports increased 2.4% to $118.7 billion, the biggest percentage gain since December 2004. Petroleum imports contributed a 1.8% increase ($182.5 billion) to the rise in imports. The non-petroleum deficit declined to $43.2 billion, its lowest level in nine months. The deficit in April was revised insignificantly to $63.3 billion. The report is available at the U.S. Census Bureau website.

Underneath the energy data there is a strong export story building. Asia needs American capital goods.

JR

Posted by John Rutledge at 7:33 PM

New Research Paper on Net Worth and Savings Rates

A new research paper by Vladimir Klyuev and Paul Mills, of the IMF, measures the imact of rising net worth on American savings rates. Their paper, Working Paper No. 06/162: Is Housing Wealth an 'ATM'? The Relationship Between Household Wealth, Home Equity Withdrawal, and Saving Rates, concludes that increased household net worth from housing and equity gains may have an impact of about 20 cents per dollar, a significant portion of the decline in US savings rates that everyone is worrying about. This confirms the lesson that I learned 30 years ago: balance sheets always trump GDP accounts in driving economic and financial change.

Perhaps the sky is not falling after all.
JR

Posted by John Rutledge at 3:19 PM | Comments (1)

French Head-Butt Apple Too

Take a look at Tom Hazlett's Op-Ed in today's Financial Times, Antitrust regulators must listen to reason. Tom is professor of law and economics at George Mason University, where he is director of the Information Economy Project of the National Center for Technology and Law. Eighteen months ago, Tom, Deborah Hewitt, Colman Bazelon and I wrote the U.S. Chamber of Commerce study on telecom reform. You can find an executive summary at the Chamber's site as well.

In the op-ed, Tom takes the French government to task for passing legislation that could force Apple’s iTunes to play on devices other than Apple’s iPods.

There is also a nationalist undercurrent to the legislation. You may remember that last summer the EU concluded that Yoghurt is a "strategic industry" when they blocked the Danone acquisition.

European regulators are increasingly pointing their revved-up antitrust sceptre at US firms. In a forthcoming paper in the Economic Journal, Nihat Aktas, Eric de Bodt and Richard Roll show that EU authorities tend to block mergers where competition to European firms, as revealed by stock market movements, is most likely. The iPod presents an inviting target.

This story, along with today's EU announcement that Microsoft will pay a huge fine, amounts to an invitation to U.S. capital owners to leave the premises. Every government retains the right to shoot themselves, and their citizens, in the foot. They should not be surprised, however, that Europe is the slowest-growing region in the world.

JR

Posted by John Rutledge at 10:19 AM

July 11, 2006

New Chinese Language site

China launches portal on Chinese learning - Telecom Asia

China launches portal on Chinese learning

Jul 10, 2006
Telecom Asia Daily

(Xinhua via NewsEdge) China launched a Web site, www.linese.com, to offer learning courses of Mandarin Chinese online to meet the surging demand of Chinese learning around the world.

Sponsored by China's National Office for Teaching Chinese as a Foreign Language (NOCFL), the Web site aims to offer online learning, training, volunteer help, search services and various learning resources.

If users log onto the Web site, they enter a virtual community sets in a traditional Beijing residential courtyard where registered users can communicate with each other and learn Chinese through the specially designed games.

Statistics from the Ministry of Education show more than 30 million people worldwide are learning Chinese and more than 2,500 universities in 100 countries and regions offer Chinese courses.

Jul 10, 2006
Telecom Asia Daily

Posted by John Rutledge at 3:57 AM | Comments (4)

May 21, 2006

Beijing University of Technology Lecture on Thermodynamics and Economics

I hav