Monday's Top 10: Doom for China; corruption fight dents investment; Warren Buffett; Andrew Thorburn; Michael Lewis; big data; Karl Pilkington; Dilbert, and more

Here's my edition of Top 10 links from around the Internet at 10:00 am today. We now have a Monday-Wednesday-Friday schedule for Top 10.

Bernard will be back with his version this Wednesday. We will have another guest posting on Friday.

As always, we welcome your additions in the comments below or via email to david.chaston@interest.co.nz.

See all previous Top 10s here.

1. 'Big, historic and this year'
China bears have been predicting doom for a long time now. One day they may be right.

Rising interest rates might prick the bubble, they think.

Falling rates beef up cap rates, pushing valuations skyward.

The reverse happen when rates rise. And even China can't push back against the Fed or international bond prices. And the 'markets' 'know' that the Fed is getting ready to raise rates when their QE ends in September.

Then what happens to those cap rates? If they come down they undermine the valuations built up over the past 10 years or so. And the most vulnerable are the Chinese property speculators.

Or so the story goes. There a lot more to it of course and Reuters has details here, and the FT has more here. 

Yet China has consistently defied the odds, projecting itself as a single-party-led export powerhouse with absolute hold over its financial system and a government with deep pockets. Investors have been rewarded with a decade of double-digit economic growth and a property market that has multiplied several times over the years.

But this year seems different. Rising funding costs, a more volatile yuan currency, money market liquidity crises and companies defaulting on bond payments, which is rare for China, all have raised concerns that this could be China's Year of the Bear.

Will the bears finally be able to say "told you so"?

"It's going to be big, it's going to be historic, and probably going to be this year," says Gordon Chang, a Chinese-American lawyer and columnist who's been predicting a crash in China for the past 15 years or so.

2. Tiger hunting on fiscal cliffs
China's vulnerability is perhaps being accentuated by the current anti-corruption drive. It's an impressive thing, tackling the issue deep and high-up within the Communist Party, and within the Peoples Liberation Army.

Anyone would be impressed on how they are pursuing graft.

Unless they are using it as a campaign against perceived internal enemies. And then it could get nasty. Perhaps it started with Bo Xi Lai.

Some very senior people are getting very nervous.

FTAlphaville points to some BAML research and opinion. The whole 'growth' things is being undermined by 'safety' and 'inaction'. Hard to have growth when no-one is prepared to invest.

There could be some elements of truth in the views above, but we believe the major drag is the contractionary fiscal policy as a consequence of Beijing’s anti- corruption and anti-vice campaign which was started at the beginning of last year and was significantly escalated this year. The strong evidence was the abnormally high growth of bank deposits of governments and quasi-government agencies (up 28.3% and 23.6% yoy in February 2014 respectively), a significant slowdown in retail sales growth, and some deceleration in FAI growth ...

The impact of anti-corruption and anti-vice campaigns on consumption is straightforward, but why could FAI be affected?

First, the room for potential corruption might be greatly squeezed as a result of the anti-corruption campaign, so some officials are disincentivized from starting new projects. Second, even honest officials with clean hands might be discouraged from initiating new projects as they may be afraid of being perceived or even charged as being corrupt during the campaign. Inaction might be viewed as the safest way for self- protection amid a political movement ...

3. Off the boil
Just when nearly everyone can agree that Warren Buffett is a financial guru, questions are starting to arise.

Here they are in the NY Times:

Warren Buffett is probably the most famous investor of his generation, and for good reason: His track record over the long term is a thing of beauty.

He has beaten the market by a wide margin over 49 years, a record so impressive that it’s used in finance classes as a textbook example of “alpha.”

Alpha is an elusive quality. Very simply put, it is the ability to beat an index fund without adding risk to a portfolio. Investment managers are always seeking it. If it exists, Warren Buffett surely has had it.

A new statistical analysis of Mr. Buffett’s long-term record at Berkshire Hathaway has just been done, and it’s come up with some fascinating insights about his abilities, past and present, and about the chances that the rest of us have for beating the market. Using a series of statistical measures, the study suggests that Mr. Buffett has indeed been blessed with an impressively big dose of alpha over a very long career.

But it also reveals something that isn’t impressive at all: For four of the last five years, Mr. Buffett has been doing worse than the typical, no-frills Standard & Poor’s 500-stock index fund — so much worse that it’s unlikely to be a matter of a string of bad luck. Mr. Buffett has begun to behave like an investor with no alpha at all.

4. The pick of the bunch
Andrew Thorburn, the CEO of the BNZ, is moving on to the top role in the National Australia Bank. It's a major role. My view is that we are losing a very good bank boss, probably the pick of the bunch at the present.

He is an interesting person. He has an interesting background. In this longer radio interview from a few years ago you can get a good sense of him and his character. At about 20 minutes in, there are some revealing details about his family background. 

He will be another friend of New Zealand at the very highest levels of Aussie business and public policy.

5. A high speed rort
If you always suspected that stock brokers were part of a rigged game, you need to read Michael Lewis's Flash Boys. But first you can get a delicious sample from a NY Times extract. This is Lewis (The Big Short, Moneyball, etc.) at his very best. Yes, it is just Wall Street doing what it does best. But it also raises questions about how these sort of markets work everywhere ...

Technology had collided with Wall Street in a peculiar way. It had been used to increase efficiency. But it had also been used to introduce a peculiar sort of market inefficiency. Taking advantage of loopholes in some well-meaning regulation introduced in the mid-2000s, some large amount of what Wall Street had been doing with technology was simply so someone inside the financial markets would know something that the outside world did not. The same system that once gave us subprime-mortgage collateralized debt obligations no investor could possibly truly understand now gave us stock-market trades involving fractions of a penny that occurred at unsafe speeds using order types that no investor could possibly truly understand. That is why Brad Katsuyama’s desire to explain things so that others would understand was so seditious. He attacked the newly automated financial system at its core, where the money was made from its incomprehensibility.

And it was beaten by honesty and transparency.

6. Responsibility
Rachel Smalley has touched a nerve, no doubt about it. Maybe we are a nation of 'lardos' and 'heifers' - the stats seem to suggest she is right, despite the apology. Many blame the processed foods we eat, and that is largely going unchallenged - except by the food industry, and their defense doesn't count given the obvious conflict-of-interest they have.

But, what if they are right? A science teacher in the US - as others have done - recently tried to replicate the famous super-size me story, by only eating at McDonalds for three months. Only he failed, spectacularly. Being a science teacher, and with the help of three of his students, he simply planned and followed a diet that totaled no more than 2,000 calories each day and closely mirrored the reference daily intakes of carbohydrates, protein, fat, and cholesterol. That's 270 McDonalds meals straight, nothing else.

He apparently lost 17 kgs. It wasn't what he ate; it was how he lived.

A typical day's sustenance varied, but it would typically include two egg white delight McMuffins, a bowl of maple oatmeal, and a 1% milk for breakfast; a salad for lunch; and a value meal for dinner.

"So this isn't something where you say, 'well he went to McDonalds and he only had the salads.' No, I had the Big Macs, the quarter pounders with cheese. I had sundaes, I had ice cream cones," Cisna told KCCI.

Also included in Cisna's self-experiment were 45 minutes of daily walking. Moreover, the teacher dutifully tracked his meals and exercise in an Excel spreadsheet. By the end of the 90 days, he was 37 pounds slimmer, and his LDL (bad) cholesterol had plummeted by 60 points.

It's not the food per se (fat, sugar, meat, dairy, etc etc.), its the balance. In other words, its all about self-discipline. Not much different to financial issues, really.

7. The old risks may not get us, but new ones might
Nouriel Roubini predicted the GFC and raised the flag on many risks. Now he admits that of the six risks he thought may overwhelm us, none is actually likely to now.

The are 'reduced' he says.

But he has six more, just in case you might think that he is not Dr Doom anymore. They are China, The Fed, the Fed again, Emerging Markets, the Ukraine, and a China-Japan territory flare-up.

I think the bears will have to try harder than that, especially for a Kiwi audience ... although #1 today above does sound spooky and it is the same as the new #1 on the Roubini list.

8. A big mistake?
A British professor (a toff?) scoffs at the current American fascination with 'big data. He has some points worth noting, but he may be himself misunderstanding the commercial opportunities available from our ability to collect, process and analyse huge amounts of data. I strongly suspect that time might have passed this professor by.

The issue is covered in the FT:

Found data underpin the new internet economy as companies such as Google, Facebook and Amazon seek new ways to understand our lives through our data exhaust. Since Edward Snowden’s leaks about the scale and scope of US electronic surveillance it has become apparent that security services are just as fascinated with what they might learn from our data exhaust, too.

Consultants urge the data-naive to wise up to the potential of big data. A recent report from the McKinsey Global Institute reckoned that the US healthcare system could save $300bn a year – $1,000 per American – through better integration and analysis of the data produced by everything from clinical trials to health insurance transactions to smart running shoes.

But while big data promise much to scientists, entrepreneurs and governments, they are doomed to disappoint us if we ignore some very familiar statistical lessons.

“There are a lot of small data problems that occur in big data,” says Spiegelhalter. “They don’t disappear because you’ve got lots of the stuff. They get worse.”

9. Healthy Chinese consumption
We all know that the Chinese are famous savers. One big reason is that there is virtually no social safety net. 

Economist Martin Feldstein thinks the best way to release that huge pool of Chinese savings and get the country to 'consume' more would be to establish a social health-care insurance program. (Joseph Stiglitz more or less agrees.)

Private health insurance would make such excessive saving unnecessary by pooling relatively small premiums from individuals – or from their employers – and then paying out to those who are hit with large medical bills.

Thus, by encouraging the purchase of health insurance by individuals or employers, the Chinese government could reduce significantly the overall household saving rate. Individuals who have such insurance would be better off, because they would not face the risk of large medical bills and would be able to spend more on other forms of consumption.

A general expansion of health insurance would also lead to an increase in the provision of hospital services. Private providers will enter the market when they see that insurance has increased demand for such services. And the Chinese government will be able to expand the provision of health services without having to pay for them, because consumers’ insurance will be available to pick up the tab.

In short, favorable tax treatment of the purchase of insurance for major medical costs would reduce the national saving rate, increase consumer spending, lower the public’s anxiety about the cost of treatment, and increase the quantity of health care. The sooner the authorities act, the faster the Chinese Dream will be realized.

Would it work in reverse? I wonder. New Zealand has a terrible savings rate. If we canceled our socialised health care compact, perhaps our savings rate would fix itself. People really would need to provide for their future. I'm not serious of course, except to point out that we get the outcomes we deserve from the incentives we provide. Make the future essentially 'risk free' for many and they will spend now, certain others will bail them out. There is not a politician of any party at the upcoming election who will disturb our 'bargain' - in fact, the battle will be to extend it so there will be even less imperative to save.

10. Today's quote
"People who live in glass houses ... have to answer the door." - Karl Pilkington