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Global Thoughts – 24 May 2012

Jeremy asked him if we could give him sugar for lunch tomorrow in his school box. We said to him, are you crazy? He said “it’s OK, it doesn’t have any nuts.” (He goes to a nut-free school.)

This past month our family went to Israel and to Italy. The kids surprise me with the depth of their humor and powers of absorption. Jeremy ate Jello at a kibbutz using little wooden spoons and told me that this is how they eat Jello in China. Elizabeth was on a tour of the Roman Forum and the guide showed her an ancient oil lamp which she correctly identified. How did you know what this was, she asked? Well, I was on an archeological dig in a cave in Israel a few days ago and I dug up one of those, she answered. You can peruse the travel notes article about the trip; we had a great time. The kids enjoyed running around the car-free and kid-filled kibbutz in the Galilee and doing activities such as Dig for a Day (be a pretend archeologist in a cave) and Genesis Land (ride a camel to Abraham’s tent and tell stores and bake pita bread). In Italy, the kids enjoyed everything from gelato and pizza to dressing up as gladiators at the Coliseum.

Spring has sprung and now Elizabeth is trying to learn how to ride a bicycle. This week the kids got dressed and made breakfast all by themselves. Karen has been in Australia this week (that’s right — I’m on call with the kids home alone for 10 days)  and she commented that at this rate she would prefer to stay away until the kids learn to make themselves dinner. Ha! That’s the easy part — getting them to EAT it is the stickler! Tonight I took the plunge and dared to make hamburgers — they came out so well that both kids polished off two big ones all by themselves! Don’t say you can’t teach an old dog new tricks. Just in case you want to know, the secret ingredient to kid-friendly hamburgers is NO ingredients. Just meat in a frying pan, and don’t overcook them.

Saudi Arabia’s government just banned use of the English language and the Gregorian calendar among all private and public agencies in the country. So if you talk to a receptionist over the telephone, he or she has to talk to you in Arabic. I know this is the part of Global Thoughts that usually has the jokes, but can you believe that this is real news? It is amazing how off the wall they are in that country. Having been there myself, it fits in with the idea that they really think they are at the center of the universe.

Sometimes you wonder why the Chinese, who are supposed to be so clever, are so clumsy. They had this deal with the US concerning the dissident Chen and it fell apart in less than a day creating huge embarrassment both for them and for the US, which probably was hoping to get this chap off their plate on the eve of bilateral talks. Instead of creeping out a guy in a hospital not bringing him his dinner past 9pm the first day, not letting his family visit him and putting a bunch of plain-clothed policemen around his room, they should have just treated him very nicely for a week till the circus went home, and then they could have pretty much locked him away or had their way with him and the world would have moved on.

Ruchir Sharma, head of emerging market equities at Morgan Stanley, wrote an oped in the New York Times discussing China and basically stating that as China matures, its economy can’t continue to grow as fast as it used to since it becomes harder to grow so fast when your economy grows rather large. He predicts that China’s coming economic slowdown will affect the price of oil and push it down. As China’s economy grows and things such as inflation and a strengthening currency take root, its competitive edge in manufacturing will be reduced. We have already seen manufacturing even from Chinese companies move to other countries such as Vietnam. I’ve also been reading about the Chinese military; it is true that they are spending money on it but so far they don’t seem to be getting very far with it and it will be a generation before the new weapons systems they are developing are ready to use. (All the hysteria last month over North Korea’s new missile turned out to be bunk when they actually tested it and the thing didn’t last 30 seconds.) Their military has no real fighting experience for 30 years and right now they have very little power to project beyond their home base. When you also consider the issue of 3D printing (discussed below), it is yet another reason why China is not so scary these days. Let’s look at China’s conundrum. The first two weeks of May China’s four largest banks cut 99% of its lending compared to the whole of March, according to Stratfor. They obviously want to slow down the economy. But this chokes business and will lead to business failures and unemployment, the biggest threat to the stability of the communist government. The problem is that the banks were lending out money in order to prop up business and avoid unemployment. What’s the conundrum? Well, lending out lots of money along with the fact that commodity prices in the world were increasing led to inflation which increased not only the cost of products but also the cost of labor. That increased the cost of exports. Chinese labor costs have risen so much that as I said above other countries such as Vietnam, Bangladesh and even Mexico became more competitive. Chinese exports thus became under heavy pressure. That drives more bank lending. Which in turn continues to drive inflation. Now because most Chinese can’t afford to buy very much and because the country produces much more than it consume, it has to export. If the country has to increase the cost of exports to keep up with the banking cycle but it has found itself at the same time less competitive in the world, well guess what? It has to reduce the price of the exports even if makes almost no profits and of course you can’t build very much on that. So that’s why China is really in a bad place right now. Either they have to have fewer exports and increase consumption among poorer Chinese or they have to go through a recession and get companies to either shape up or fail, even with increased unemployment. But the government is a dictatorship knows that its legitimacy is grounded in keeping people employed and off the streets.And right now that government is almost in full-scale war against itself. What a party.

You know why Apple is something like $600 a share? A few months ago I told you how all our employees were getting iPhones. My wife got an iPad, and guess what? I just bought one for myself. And today I found out that my dad just bought one too and both my wife and my dad went to an Apple store class to learn how to work it. And it works pretty well. I am tired of relying on business centers in hotels to check e-mail when I travel (half the time the computers are slow or don’t work) and want to look at the internet, and it is portable enough to enjoy on an airplane to read and write things. I don’t do Facebook, don’t have a smart phone and I prefer using a print calculator and still know how to do long division by hand. But I bought an iPad, so that must mean something for Apple. And I must say that their packaging and design really are works of art, right down to the last centimeter.

I can’t figure out why a retail chain like Best Buy goes out and creates a store that fills up 3 floors of a building on prime real estate in Manhattan, puts a ton of sales people on the floor, and then there is only one person at the checkout lane with half a dozen people waiting on line. They must have figured out that people will not abandon the line. And by the way, the sales guys will totally mislead you to get you to buy a product that they get commission on, and they must believe that you’ll never find out that you were misled. They told me that you can’t read a Microsoft Word document on an iPad, for instance, and that I would need instead to buy a tablet from Samsung instead if I wanted to view files from Microsoft Office applications.

A few days before the Facebook IPO, when I read that they were going to increase the amount of IPO stock by 25% and make it available to more individual investors who were clamoring for a piece of the action, I said to myself “They’re getting greedy..this thing is overvalued and it’s going to flop.” And they were greedy, and it did flop.

The Economist had an interesting survey last month about 3D printing. I’ve mentioned a few months ago that I think this is a really exciting development in technology, one that really changes the game in manufacturing in a once-in-a-century kind of way. I think this will bring a good deal of high-level manufacturing back to the US even if it won’t necessarily bring back a lot of jobs because what’s the point of sending out production to China where mass production is cheaper when you no longer need to mass produce anything. Two particular companies cited in that survey seem really fascinating. The Replicator by Cybaman Technologies in Britain, can scan an object placed inside it to produce the data needed to build an exact replica. It can therefore scan an object in one place and tell a machine on the other side of the world how to build a copy. You can thus instantly reverse engineer something or print out a rare spare part without having to keep it in stock. You could keep digital libraries of these items and then print out anything on demand. You could digitally repair something that was broken and then print out a perfect thing if all you had to go on was a defective or broken item. Shapeways, headquartered in New York City, heads up an online manufacturing community. Users upload their designs to get instant quotes for printing them. Users can sell their goods online and buyers can customize their designs. This has huge implications for speedily getting things to market. So for instance iPad covers went on sale through Shapeways just four days after Apple first launched the device. The risk of going to market falls to zero because people can test ideas before scaling up and tweak the designs in response to buyer feedback. Some Shapeways products go through 20-30 iterations a year. And you can produce things that cannot be made in other ways because they are too intricate to be mass produced.

I went to a conference from the National Association of Corporate Directors, where I am taking courses in how to be a professional corporate director. The conference was in Charlotte, North Carolina, which happens to have a pretty nice downtown. The Ritz Carlton is indicative of the New South with a modern ambience in the middle of this city which has Dean and Deluca and other such upscale outlets and lots of banks (although I couldn’t find any Chase or Citibank to use my ATM card with).  Downtown Charlotte is also a 10 minute taxi ride from the airport which is more sprawling than I’d like it to be for not such a large city. (And everyone I know hopes that US Airways doesn’t buy up American Airlines because nobody I know likes US Airways or wants to have to fly via Charlotte.) Anyway, one thing I heard bears noting here — a professor of business from Southern Methodist University mentioned that banks such as Citibank carry a $50 billion asset on their balance sheet known as carryover tax losses that can be applied against future profits. He said this is a phony asset because it only becomes worth something if Citibank has something like $150 billion worth of future profits to set against the losses. He said the government allows them to carry this asset on their balance sheet because without it the company would be clearly bankrupt. How comforting to know the US banks are basically more healthy than the European banks (which everyone knows are being propped up) mainly because they get to carry more phony assets on their balance sheets.

Anyway, so I went and sold most of my bank stocks today (Citibank, Bank of America and JP Morgan). I don’t like that $50 billion phony asset over at Citibank, I think that JP Morgan’s trading losses are a lot more than the $2 billion they currently admit to, figure that something is going to happen in Europe and there will be bank contagion, and also I saw an article in the Financial Times this week about an emergency plan being drawn up by central bankers in case one of 7 major cross-border banks goes under. I really wonder if something is about to happen out there, and don’t want to be caught with my pants down. Meanwhile, I traded them for “boring” but rather good performing companies such as Exxon, Kraft, Phillip Morris, Newell Rubbermaid and Colgate.

Onto another economic basket case in the making — Argentina — which in my opinion went for the easy money in nationalizing an oil company YPF which was operating in Argentina that was the product of Spanish investment. We see where Venezuela went, and you can probably assume that nobody is going to want to invest in Argentina now that this happened. I’ve visited Argentina twice, once in the 1980s and once a decade later. It is a country that has never gotten over its Peronist delusions of grandeur and thinks of itself as a European country misplaced in South America. It has the natural resources but I think its people are basically accustomed to looking for an easy way out of their problems.

Now to Brazil. I’ve been holding their index funds for several years now and think it’s time to bail on Brazil in favor of more Malaysia. In the opinion of Ruchir Sharma, head of emerging markets at Morgan Stanley writing in Foreign Affairs (wow this guy must be a fantastic writing machine cause I just noticed while editing this that I’m citing two articles by this person this month in two different publications about two different regions), Brazil has wasted a lot of years of opportunity to clean up their country while they enjoyed the benefit of being a favored emerging economy amid high commodity prices. But now those prices are set to fall and their economy is still highly dependent on those prices remaining high. China is not going to consume as much as they did the past few years as its economy slows, and Brazil basically took most of the money they got and spent it on welfare instead of reforming what wasn’t working. They really have not invested in infrastructure, industry is very inefficient and their economy is supported by protectionist policies which make them a poor competitor. Now they can’t coast anymore and they really haven’t cleaned up their act. Their partners in the region are going leftist and are not going to be good trade partners — look at Argentina and Venezuela, for example.

Here’s another company I just doubled-down on — ticker symbol FMX on ADR in the US. It is a Mexican company calledMexican Economic Development, Inc. It’s up 70% since I bought it 2 years ago and it seems to be doing rather well.

Europe — Restating my earlier position: Greece will eventually default and leave the Euro zone because they can’t effectively compete in a system that was designed for the benefit of Germany and France. They realize that all this austerity is going to nearly kill them and they still won’t be able to recover. And you know what? The effect on Europe and the world will be less than everything thinks. In fact, it might even just work out for the best and then other similarly situated countries might do the same thing. And so what? Let the stronger European countries have the Euro and let the others go back to their own currency. I kinda miss all the pretty colored money they used to have in Europe anyway.

Now let’s go to the Middle East. Netanyahu’s alliance with Kadima makes perfect sense. If they went to elections, Likud would win hugely and the second place finisher might have been a right-wing bloc, that would have put Bibi into a horrible place because he would have to go into coalition with them and have very little room to deal with the rest of the world because his government would look very radical from the outside and inside. Kadima was also set to lose a lot of seats in an election. Kadima’s previous chair, Tzippi Livni, was a loser who preferred to be on the outside with no influence. The new leader Shaul Mofaz, is not ideologically far away from Netanyahu and had no good reason to go to elections, lose a ton of seats and then have no power in government. Ehud Barak, the defense minister, was heading up a non-existent party that wouldn’t even win one seat in parliament in a new election and of course he is the one man Bibi doesn’t want to be without. So it all made perfect sense. Bibi now has a coalition of 96 out of 120 parliament members and he continues to run the most stable government in that country’s recent history. He has maximum leverage with Iran, the Palestinians and the rest of the world — he is now seen to be firmly in control, to have more reasonable coalition partners, and in a position to agree to make tough choices and to deliver on them. This is good — Arabs want to deal with someone who can deliver; not necessarily the one who offers the nicest deal, because what good is nice words if you can’t deliver the goods? That’s why Shimon Peres and Ehud Olmert never got deals done and why Menachem Begin did. Nobody knows if Netanyahu is truly interested in a deal, but at least now he can’t say that he is hostage to local politics.

I was just in Israel this past month and I can report that the country looks like it is in great shape. Having recovered from shallow effects of the worldwide slowdown, real estate projects that were delayed have been completed. These projects take time here but eventually they do get done and the results are pretty darn good. There is a lot going on in the various cities in this country. People are happy, employed and not really concerned about anything, even Iran. People are a bit in denial (or maybe more realistic than the people running the show there); they keep assuming that the US will take care of Iran because why should and how could they anyway? The “peace process” is a dead issue in that country and Israelis are not thinking about terrorism or intifadahs. The country has spent billions of dollars building this fantastic network of roads, tunnels, walls and checkpoints and the Palestinians are basically encircled and caged — out of sight and out of mind of the Israelis. You can drive all the way around Bethlehem on the way to some other place in Israel and you would totally not even notice the place. I remember 30 years ago when you would drive through the center of Bethlehem because you had to. I recall going on a Saturday night in 1983 on a bus through Bethlehem from a little town near Hebron and seeing all these lights and not realizing until after I returned to Jerusalem and looking at the TV listings that it was Christmas Eve in Bethlehem and the Mass was going to be televised. This was back in the days when Christmas was not something you ever noticed in Israel and I would never have noticed had I not read the TV listings that evening in the Jerusalem Post. (Now you’d never have a reason to ever go to Bethlehem and Christians are anyway now highly marginalized creatures in that town, although you’d notice it was Christmas if you were in Israel since you have so many Christian Russians living there.) Whether or not this is true, the Israelis basically believe that the Palestinians are pacified because they both have quiet within their areas and the Palestinians have good reason to keep it that way since there is now significant investment taking place within their areas and true economic growth, even in Gaza to some degree. For all intent and purposes, the Palestinians have their own state. It is not contiguous, but they have their cantons exactly the way I predicted in the late 1980’s. You go into a Palestinian zone and you see big signs, Palestinian flags and checkpoints telling you that this is a Palestinian area, and then you go to Israeli areas, and you get the same thing telling you the opposite. I think at this point this is a matter that is more of interest to the foreign press and to diplomats than it is to the locals. Now I recall that the same was true in the 1980’s and the Palestinians started their intifadah in 1987 against all reasonable calculations. But I think that after two of these intifadahs, a generation of Palestinians have come to the conclusion that violence doesn’t pay and they are not going to do it again. Even with Gaza the Israelis are convinced that they have coopted Hamas and that they are not looking for trouble in Gaza. And as I have stated, Hamas sees the changing landscape and they really have no good options except to get along and go along with Egypt who really is not looking for trouble with Israel.

I just went to my 25th college reunion (Yeshiva University in NY City) where less than 10% of my class showed up and found out that one third of the class had a good excuse — one third of my class lives in Israel. The college says it is the highest ratio of people in a class living in Israel in their 100+ year history. Think about that.

Following are some impressions and notes from conversations during my trip to Israel:Mohammed (sharia judge and astute observer of the region): The Moslem Brotherhood in Egypt will turn out to be a decent ally to Israel and Israel should not feel threatened by it. They have to run a country now and they know that Israel is a reality. The Saudis issue fatwas against Assad saying that he is not a real Moslem and that it is OK to kill him, and are preparing to send militias into Syria like they did with Afghanistan. Iraq will not fall so easily under Iran’s thumb. Oded: Egypt and Turkey are crazy countries and will be unsettled for years. The US will have no choice but to deal with Iran. Oded likes Obama and feels the US has been very cooperative with Israel behind the scenes, such as in directing traffic via Eastern Europe and Germany to get Israel things it wants. Assad won’t last; the Saudis will move on it. Iran has no mobility capability beyond its borders and its only military power is whatever it can use to subjugate its own people. And it’s got no air force to back it up. (Last month I quoted the Qatari ambassador to the US who feared Iran military forces marching across the region — nonsense, says Oded.) The Palestinians are completely pacified; all the Arab countries in the region see Israel as a bedrock and want to invest in it. The economy is running well; Bibi has everything covered and has turned out to be a rather good 2nd term prime minister (remember he had served a first time during the 1990’s). There is no material opposition to him. He figures Israel will either attack Iran July/August or at the end of the year, but that they will not act alone. (This comports with what I heard a month ago from the Gulf side and what I heard elsewhere within Israel — that people in the region expect a coalition of forces to shoulder the risk and the blame for attacking Iran.) The Saudis are wasting their own oil; they are now the 6th largest consumer in the world. Egypt is at war between fundamentalists and their own army — not in a position to be a problem for Israel anytime soon. Sinai is in chaos — nobody is dealing with it. (I also read local newspaper articles during my visit from military correspondents in Sinai that confirmed this.) The Israelis will build a large fence on the Sinai border and close it off. Hamas is pacified; they have no backers and no good choices. The Turkish prime minister is nuts. Jordan is no longer stable and the king is trying to survive. America is on the rise and Bibi knows it; he is counting on American strength to carry Israel — when America is ready to knock out Iran, it will. US military and economy are on the uptick, especially as opposed to Europe, China and Japan which are all faltering. The US has special operations forces poised all over the world doing all kinds of operations under the radar and they seem to be doing rather well at it.

I look at Syria and North Korea in 2012 and it is easy for me to understand why the Holocaust happened. The world knows there are concentration camps in North Korea for a generation and that the people there are starving, and being dehumanized and abused by their government in a most sickening way. The world knows what is going on in Syria and that over 10,000 people have been killed there over the past year or so in vicious ways mainly because the rest of the world did nothing to stop it. It would not take that much work to stop it and it is obvious that without intervention the status quo will go on indefinitely in both countries. The world knows that the UN’s big move in Syria — sending in 300 observers — is not going to tell them anything they don’t already know and that it is not going to prevent anything from happening. It is motion for appearances sake and everyone knows it. Nobody wants to intervene because nobody knows what comes next and nobody really wants to take a hit in order to save people in these countries. Nobody wants to be stuck with the bill for doing the job and having to take care of either country afterward which has nothing to offer the rest of the world really except to come hat in hand for tons of aid which will become the responsibility of the liberator. Frankly, can one tell me why it would have been convenient for America or the rest of Allied Europe  to want to send its armies to Germany to fight Hitler who was killing Jews (not exactly a popular class of people in America or Britain at that or any time)? It is all very logical and very unfortunate. One cannot say that people should learn from history and not be ignorant of it; we see history repeating itself and we don’t want to learn from it. Just to cover all the bases — the flip side on the Syria story is that the opposition itself is so divided and has its own shady elements to boot that it makes it hard to gain international support.

If I were King Abdullah of Jordan, I’d be concerned. I have this feeling that in another couple of years he might not last as King. He seems to be losing the support of the Beduin tribes (that he never really had), and people are getting bolder about insulting him and his wife in public. There definitely seems to be the feeling out there that his wife is benefitting her clan with land and treasury. He has gone through too many prime ministers and the idea of any functioning government in that country is a farce. Someone in my industry just compared a constant turnover of managerial staff to “being like Jordan.” When you hear that from somebody in the business world who doesn’t really deal with foreign affairs, you know you’re in trouble.  I don’t think you will wake up one day to find out there was a coup but it just doesn’t look stable there and I wouldn’t be surprised to see Hassan (once the crown prince) step in as a white knight. I don’t know why King Hussein decided on Abdullah in the first place, but Abdullah has tried to play it safe the past decade and squandered his good will. I noticed on my last visit to the country a few years ago that the country just hasn’t moved forward over the last decade anything like its neighbor to the East. I see interesting trends in IT coming out of Jordan but that is really a sliver of the country. I think the King ought to be more proactive about moving toward a constitutional monarchy and stop with the phony reforms, or he might just find himself cornered in a country that sees him as blocking progress in a region where people are anxious to see their lives bettered and are showing less tolerance of official corruption and phony reforms.

During this month, I visited Los Angeles on a brief business trip. An interesting hotel near the airport is called the Custom Hotel. It has nice rooms; I got a suite for under $200 a night through American Express. They have theme lounges on most floors and the rooms are quiet. It is about 2 miles from the airport terminal. Definitely an interesting change from the chain hotels. I visited the Ritz Carlton in Marina Del Rey and Shutters on the Beach at Santa Monica and they are good places to eat al fresco if you are near the airport and don’t want to go into town. I agree that much of this area is over-rated and it is just a total pain to get from one place to another around here but the key to enjoying this city is to figure out how to drive around and avoid the main streets and freeways — if you really get the hang of it as my brother has after living here close to 20 years, you can greatly decrease travel time by just knowing which streets to avoid. I’d like to try the newly renovated Bel-Air when I next visit LA, and I still count the Beverly Hills Hotel and the Polo Lounge as my #1 choice in the city.

Coming up this next month I will be visiting Amsterdam, Maastricht and Brussels to see what’s new. Just to give you an idea — I have a nice schedule through the end of the year; highlights include two weeks in Germany during August, Australia and Hawaii at Christmas, Blackberry Farm in Tennessee for peak foliage, and a visit to Qatar and the Emirates in January.

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