Partners - Stock market, economic and political commentary by Patricia Chadwick

Archive for April, 2011

Where are the Republican Presidential Candidates?

Monday, April 25th, 2011

In the last presidential campaign, then Senator Barack Obama declared his candidacy in early February, 2007, a full year and three quarters before the polls opened on Election Day.
This season, the Republicans seem to be timid – dancing around the arena but not throwing their hats in the ring. Only Mitt Romney has been bold enough to ‘test the waters’ with an ‘exploratory committee’.
Pundits opine that Mitt Romney’s leadership in signing into law a universal health care bill for Massachusetts residents will be his albatross. I think quite the contrary. The mandated health care system in Massachusetts has now been in place for nearly five years and while it is probably far from perfect, it has achieved its multiple objectives. I would argue that Massachusetts has all but proven that the thorny issue of health care should be the responsibility of the State Governments, where it can be managed on a reasonable scale, as opposed to being one more giant bureaucracy of the Federal Government. If Mitt Romney were willing to have an open debate on the issues of State vs. Federal management of health care, I think he could help his candidacy immensely. He has so much going for him as a Presidential candidate – he has been a successful CEO, both in the private sector, at Bain & Company, and in the public sector, as governor of Massachusetts. In the last forty years, five of the seven elected U.S. Presidents had prior experience as State Governors. Romney most assuredly does not lack credentials. The question is: Does he lack inspiration?
But why are the myriad other potential candidates so timid? Could it be “The Donald” factor? You have to give Donald Trump credit for chutzpah, but I wonder if that chutzpah might not come to be his albatross? No one can doubt for a moment that Donald Trump would love nothing more than to be President of the United States, the ne plus ultra CEO role. He likes being Mr. Big. And for the last thirty years, he has mouthed off as Mr. Big on a torrent of issues, all of which are part of recorded history. If his popularity continues to rise and he starts to seem like the inevitable Republican candidate, that’s when the trouble will start. Trump reminds me of Howard Dean – articulate, different, interesting, but a loose cannon that eventually back-fired, ruining his political career.
It will soon be deposition time, so to speak, as the media home in on Trump’s record. So many questions to answer: Why do Trump companies go into bankruptcy, but the Donald remains unscathed? Is that good business leadership? Do good CEO’s let their companies fail? What about the equity owners in those businesses who have lost their investment? Trump boasts of great wealth – since when was that a sign of leadership, or inspiration or wisdom?
Trump’s most recent foray into the ‘birther’ issue will do him no good – the vast majority of Republicans think it’s a diversion for the ‘lunatic fringe’. I expect that Trump will drop it soon, if he is truly serious about being a presidential candidate. Trump has been on both sides of so many issues – or so it seems when one is presented with his countless statements, remarks, asides and expostulations. Of course he can claim to have changed his mind – but at what point is ‘changing your mind’ simply flip flopping for expediency’s sake? Leaders don’t flip flop. Leaders have vision; they are able to cut through the debris and forge ahead. The media will have a field day – there will be no kid gloves – let’s see how the Donald handles it.
In the meantime, the rest of the field of Republican potential candidates reminds me of the Kentucky Derby – all that milling around behind the starting gate, with horses being led, and horses rearing up, and horses wearing blind-folds to calm them down – masses of churning, kinetic energy that seems a necessary precursor to the start of the race. Well, this year there are enough Republican candidates to field a full derby. The unanswered question: who will be the winner? I will hazard a guess, but without a name: it will be a present or past Governor. Somehow I can’t be any bolder than that.
Patricia W Chadwick
Ravengate Partners LLC
April 25, 2011

“Cash is King” – in China and the U.S.

Friday, April 1st, 2011

Returning this past weekend to JFK airport and emerging from customs after two weeks in China, my teenage son turned to me and said, “Mom, this airport feels like a third world country.” The stark comparison between airports in Beijing, Shanghai and even the western city of Lijiang in China and those around New York City brought home the reality of that venerated corporate adage: Cash is king. China today is a cash-rich nation, while the U.S. is cash starved.
China is building roads, airports, hotels, high rise apartments and commercial buildings at a rate never seen on this planet. Not even our most massive infrastructure triumph, the construction of the interstate highway system following World War II, is on this scale. And hugely impressive as China’s changing skyline is, the building process is far from complete. Standing in the middle of Shanghai, among 3000 skyscrapers, one wonders if the growth in commerce across China will justify all this office space.
Many Chinese complain that already apartments are becoming unaffordable. Unlike here in the U.S., the standard down payment on an apartment is 30%. And outside the major cities nearly all transactions, including home buying, are made in cash. Many young professionals, college-educated men and women in their late twenties, all of whom seem to have flips or cell phones or some electronic contraption as a permanent appendage, look to their more frugal parents to help them with the down payment. One wonders if the culture of saving which has been the survival ethic of parents and grandparents will be lost on the new, young, professional generation. English is the second language in China today; students start English lessons in primary school where their teacher selects an “American/English” name for each child. We had guides with the names of Bill, Tony, Java, Rocky, Peggy, Danny and Martin. Colleges and universities are abundant; however, higher education is not free.
Admittedly, Facebook is inaccessible (for the time being, at any rate) and in Beijing internet access is less than ideal. And as an aside, I was astounded to discover that young, educated Chinese have never heard of the Tiananmen Square incident of 1989. Most of them were small children at the time and the event is unrecorded in their history books nor ever mentioned by their news media. The reason for my surprise is that these English speaking Chinese professionals have an air of Western-ness about them. There is a sense of openness, of freedom, of complete mobility (unless, that is, they want to come to the United States). They speak their minds about their leaders. Capitalism is rampant, in fact it is the operating credo of the entire society and it has an American flavor. Young people talk about doing better than their parents, and in doing so, making them proud.
To the older generation, Mao Zedong is virtually a god. To the younger generation, it is Deng Xiaoping they most admire. He carries the title of Leader of Modern China, and with good reason. One supposes that given his near deity status as the re-creator of China’s great rebirth, in the minds of his devotees, Deng could not have ordered the slaughter of 1989. Or if he gave an order to impose calm, China’s ubiquitous and despised party functionaries must have distorted Deng’s intent. Regardless, China has arisen to reclaim its rightful place of greatness, thanks largely to Deng.
So what is the source of the Chinese government’s seemingly endless stream of cash? Despite its system of government, a significant portion of China’s economy – approaching 40% of industry – is in private hands; export revenues do not automatically flow into the coffers of the government. Income taxes are not exorbitant. However, there is one valuable card that the Government holds and is using as a gargantuan source of capital: it owns all the land in China. It has developed a sophisticated profit system as the national landlord, reaping cash flow from a long term asset while not relinquishing its ownership. As buildings go up all over China, the Government is the beneficiary of the ‘sale’ of the underlying land (in fact, it is a seventy year lease, at the end of which ownership reverts to the government.) Talk about a capitalist/monopolist government!
China has an abundance of land and people. And as long as there are people anxious and willing to move from the countryside to the cities (more than 65 percent of China’s 1.3 billion souls still live in the countryside), and if the gleaming metro areas continue thrumming with opportunity for the young and adventurous, I venture there will be demand by the private sector for more land on which to build the apartments and residences of tomorrow. Assuming the country solves its very real water shortage problems in north and central China, that will help keep China supplied with an exogenous source of capital for infrastructure building for many years to come.
However, at some point in time (maybe decades away) as China’s population ages and the ratio of old to young surges, (the result of an entire generation of one child families) the demand for development land will diminish sharply and with it the flow of capital to the state. But today, that source of capital is a bonanza for the government’s ambitious development program and will allow it to exceed the U.S. in its investment in vital infrastructure. At the same time, the U.S. finds itself struggling to maintain an increasingly dilapidated network of roads, bridges, subways, tunnels and buildings. Sadly, there is no easy solution to our public sector infrastructure problem. The U.S. government is like an aging company, losing competitiveness to a more nimble, dynamic newcomer on the scene. Without a giant cash infusion, there is little we can do to fix the problem. China, by buying our Government debt, is at least providing some of that necessary cash infusion. Fortunately, the state of the U.S. private sector, which comprises 75% of our national output, is dynamic, strong and competitive.
Postscript: There is an interesting paradox of history in a comparison between the approaches taken by the U.S. and China in promoting national economic development. In 1862, in an effort to spur settlement and cultivation of the west, President Abraham Lincoln signed into law the Homestead Act. Over the next one hundred years, 420,000 square miles of this country were privatized (10% of the contiguous US landmass) through simple, physical occupation of the land, not through sale by the Government to the homesteaders nor by settler purchase from Native Americans. It was a giveaway, hardly a capitalist concept. In China today, as the people move from the countryside to the cities, the Chinese Government is capitalizing on the demand for land through lucrative sales, hardly a communist concept.
What is clear is that the final test of which country is better off will come in the degree to which the people choose their own future and choose it well. Emerging from JFK airport, I admit to momentary doubt… but only momentary.