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FEATURE BOOKS...
Reckless Endangerment
by Gretchen Morgenson and Joshua Rosner
Full Review:
Review Coming Soon!
Poorly Made in China
by Paul Midler
Full Review:
China has had a pervasive impact on the global economy and each one of us. From electrical appliances to the lowly toothbrush, almost everything carries a "Made in China" label. How is China able to produce things so cheaply?
This is the key question Paul Midler tries to answer in his book "Poorly Made in China: An Insider's Account of the Tactics Behind China's Production Game". Mid
ler, an MBA from the Wharton Business School has studied Chinese history, the Mandarin language and resides in the southern city of Guangzhou, the manufacturing capital of China. He is employed as a local agent for American importers. Midler clearly has a unique window on the Chinese export machine.
In an entertaining narrative, Midler reaches the conclusion that the Chinese manufacturers achieve their margins by compromising on quality, aptly termed as the 'quality fade'. The manufacturers squeeze costs by shrinking the labels on bottles or shockingly even altering the chemical composition of products. The trick is to do it without the Western importer finding out. Even if the importer does find out, the Chinese manufacturer will then negotiate a discounted price for future orders to ensure the order flow does not stop.
In his tales of Chinese production woes, Midler provides useful insights into the Chinese culture. A loss of face due to a product recall is very embarrassing for the Chinese manufacturer who obviously does not conduct proper quality control. The onus of quality control falls on the importer, which explains the sharp jump in outside quality inspectors in China and the easy availability of formaldehyde testing kit for checking furniture. Quality control is not cheap or easy. If an importer wants to know which alien ingredient has been added to his product specifications, the cost of the tests is often more than the price of the product. So why bother!
Most of us believe that China has had a deflationary impact on global trade. Midler argues to the contrary. Commodity prices are fixed at the national level in China so economies of scale do not work effectively. In a hilarious episode, Midler asks the manufacturer what the cost will be for a small consignment versus a ten times larger order and she says the price will be the same. Government scrutiny also becomes pronounced as the order size increase. This prompts the manufacturers to keep the operations fragmented. The author goes to the extreme in his skepticism by saying that the Chinese pride in the large size of their country includes exaggerating their population to attract Western firms.
The book also rails against the greed of the Western world in continuing to pursue the Chinese low price mirage despite the obvious quality issues. The reader feels the frustrations of the importer and the total helplessness Midler feels to improve things. However, it fails to address the question of why the land which invented paper and gunpowder is now rife with counterfeits and manufacturing by rote. The book also fails to explore if the margins of importers have actually been squeezed over the years. It would also be interesting to find out if the consumer using an inferior product from China even recalls what a 'Made in America' felt like from 20 years ago. The book should prove a useful guide for any importer venturing into China.
Buyer Beware!
Review by: Vivek Verma
Title: CFA, MBA, MA, BA (Economics)
Position:
Vice President - Canso Investment Counsel Ltd.
The NEW NEW Thing (A Silicon Valley Story)
by Michael Lewis
Overview:
This book is an excellent overview of "wealth creation" in Silicon Valley in the late 1990s. Any investor contemplating the "new paradigm" of dot.com business should read and reflect on this book before exposing too much capital to this new financial fashion. Michael Lewis, author of Liar's Poker, details Jim Clark's transition from fallen star at Silicon Graphics to stock promoter extraordinaire.
Full Review:
Jim Clark, with his Netscape new issue, single-handedly changed the dynamics of venture capital. Traditional venture capital looked for huge potential cashflows that could be exploited. Jim Clark took to promoting new ideas and concepts that could be turned into huge riches through the financial alchemy of the hot new issue market of the late 1990s.
The book traces Clark's foray with Healtheon, which was essentially his quick drawing of a diamond that portrayed how he would fix the United States health system. After a motorcycle accident, Clark had the idea that the internet would solve the health care system by tying it all together efficiently. It didn't matter that he had little insight into how the system actually worked or that he had little personal involvement in the actual project. He promoted the idea to the venture capitalists and won their confidence. It helped very much that he had made people wealthy beyond imagination with his Netscape new issue.
Michael Lewis, the author, combines the progress of the Healtheon venture with the deteriorating business condition of Netscape and Clark's obsession with building an automated sailboat (the biggest in the world of course). That the Netscape new issue occurred to pay for a sailboat at a time when Clark was having obvious worries about the sustainability of Netscape in the face of the Microsoft onslaught is breathtaking. That Netscape's business prospects had absolutely nothing to do with the huge wealth created by the new issue is instructive.
The wealth created by the Netscape issue unleashed a torrent of greed. There is nothing like having missed a lucrative deal to make financial hangers-on convinced of the need to participate in the next one.
Jim Clark is a stock promoter. He turns nothing into something by virtue of his fertile mind and willing capital markets. He is a good promoter, however, one that shares the wealth of his creations with those around him and those who are willing to believe in his ideas. After Netscape, venture capitalists, programmers and engineers followed Clark and begged to be let into his latest creations. A company that was a very rudimentary idea could get money and pay staff on the basis of Clark's reputation for making people rich. The operations had to exist but not necessarily make any particular business sense. That would come later, once the new issue occurred and the company had huge financial capacity.
In the huge stock speculation of the 1920s, there was a similar period when the sophisticated and financially astute pooled their money and speculated on the stock market under the leadership of promoters like Wil Durant. Remember that this was a time of huge technological change with the introduction of the automobile, airplane and commercial radio. If you want to understand the "new economy" and those it rewards, this book is essential to your financial education.
Review by: John Carswell
Title: CFA, MBA, BA(Commerce)
Position:
President - Canso Investment Counsel Ltd.
World's that Move the World's Markets, THE GREENSPAN EFFECT
by David B. Sicilia
Overview:
When I first decided to read this book, I must admit it was with not a little trepidation with quotes like "When Alan Greenspan talks, the markets listen". The one genre of book that I despise is flattering biography. Given the widespread credit that Alan Greenspan has received for "engineering" the longest peacetime growth period in United States history, I feared a sycophantic summary of his powers and prescience. Much to my delight, not only was this not the case with this book, I found that I actually gained a very important insight into both Alan Greenspan and the economic impact of his actions.
Full Review:
The beauty of this book is that it exposes Alan Greenspan's economic beliefs and relates them to his actions through an analysis of his public speeches and appearances. The importance of Greenspan's views to an investor and money manager cannot be underestimated. Through monetary policy, the Federal Reserve system has immense power over the financial system. Those investors who ignore this do so at their own peril. Going against the market maxim of "Don't fight the Fed" has wiped out many investors, both bullish and bearish. Control of the production and amount of money is a monopoly of the United States government which is the financial equivalent of its nuclear arsenal.
The fascinating thing about Alan Greenspan is his financial pragmatism. Economics is a very fashion conscious and trendy pursuit. Unfortunately, like all academic disciplines, it is a very political process of theoretical supposition. Keynesians explained the Great Depression, pointed the way out and came to dominate economics faculties around the world. Monetarists explained the stagflation of the 1970s and replaced the Keynesians. Since economists seem to have a "take no prisoner" approach to their particular brand of analysis that meant that most economists who came work at central banks and monetary authorities had been thoroughly indoctrinated in the "proper" way to look at things. Like generals at the start of a conflict, they typically fight the last war (usually ineptly).
Enter Alan Greenspan, economic pragmatist extraordinaire. His experience and training was in practical economics, working as an economic forecaster never very far from the political corridors of power. He admired the rugged individualism espoused by Ayn Rand. Replacing the zealous Paul Volcker who slew the inflation dragron, he was tested very quickly in the 1987 stock market crash. Drawing upon financial history and understanding the importance of confidence to the financial system, he emulated the financial confidence-building of J.P. Morgan by very visibly making funds available to stem market panic.
"Early on Tuesday morning, October 20th, we issued a statement indicating that the Federal Reserve stood ready to provide liquidity to the economy and financial markets. In support of that policy, we maintained a highly visible presence…… underscoring our intent to keep markets liquid." Alan Greenspan
The effect of these words and actions on financial market participants was immediate. The federal reserve would inject large quantities of cash into the market. There was no question that the Fed had sufficient funds to do so, it could create as much money as it wanted. Banks did not have to call loans to investment dealers to preserve their own capital. Panic was stemmed and the markets again started their upwards march that lasted through the 1990s. Compare Greenpan's actions to the hapless head of the Japanese monetary authority who declared that the stock market was not his worry during the meltdown of their stock market in the late 1980s and early 1990s. Japan entered a recession that it has yet to come out of!
What one learns from this book is that Alan Greenspan is not an economic moralist. He doesn't think that risk taking is bad and should be punished. In fact, Greenspan thinks that it is the job of the monetary authority to prevent "systemic risk" and remove the need for other economic agents to hold reserves in case of very negative market and economic scenarios.
He also isn't an economic ideologue. Compared to the 1990s central bank vogue of "zero inflation" he has waged a moderate war on inflation. Canada, New Zealand, Germany and France all waged their absurd fight for zero inflation at a very high cost to their economies. Greenspan allowed the markets to run which allowed resources to be devoted to further lowering the cost of goods and services to American consumers. He understood that expansion of nominal cashflows was essential for investors to be confident of the economic future.
Where this book falls down is in its lack of analysis of the particular set of circumstances that allowed Greenspan the latitude to wash huge amounts of liquidity through the U.S. financial system without substantive inflation. Clearly, being the world's reserve currency removed the prospect of a currency crisis. Having virtually all of the world's tradable commodities and manufactured goods priced in U.S. dollars meant that inflated money supply would not lead to higher input prices due to currency depreciation.
The Greenspan response to the Long Term Capital hedge fund crisis is also omitted from the book, perhaps though timing. Given that Greenspan rescued the investment dealers and banks that dealt with this inanely speculative fund, one has to question how far the "systemic risk" net can be cast before Greenspan's Fed becomes a classic regulator "captured" by its industry. A friend of mine attended a conference in the Far East last year that featured Hong Kong monetary officials being highly praised for rescuing their stock market by buying up a good part of it with foreign currency reserves. It seems that Greenspanian intervention is now the new central bank vogue. Could the "no lose" central bank regulated stock market be Greenspan's true legacy?
No matter what your economic bias, this book will help you understand one of the most important reasons for our current long period of economic growth and stock market increase. A must read for the serious and professional investor.
Review by: John Carswell
Title: CFA, MBA, BA(Commerce)
Position:
President - Canso Investment Counsel Ltd.
The Vulture Fund
by Stephen Frey
Overview:
An up and coming investment banker is chosen to head a "vulture fund" that will prey on distressed New York real estate. He doesn't know the distress will come from a terrorist plot to cover New York in deadly radiation. His suspicions uncover a trail that reaches in to the highest levels of the United States government!
Full Review:
Mace McLain is living the fast-paced life of an up and coming investment banker. The senior partner of his firm reaches down to appoint him as co-manager of the Broadway Ventures fund, a "vulture fund" that will profit from buying distressed real estate and stocks. He is thrust unknowingly into a murky and dangerous plot that involves a terrorist attack on New York city for political and financial gain. The treachery and deceit he uncovers reaches into the highest levels of the United States government and puts his life at risk.
His best friend, a covert intelligence operative, is somehow involved. His co-manager, the beautiful Leeny Hunt, uses her charms to seduce Mace and their market contacts and she can be deadly! Lewis Webster, the senior partner, is involved up to his cold, clammy eyeballs as he targets Mace for death. Mace falls for Rachel, a bright MBA student who helps him unravel the tentacles of this dark plot and puts her life at risk.
From the seating plan of the MBA class that Mace teaches to the negotiation tactics of Wall Street, this book gives a good feel for the naked power of investment banking. Personalities are exaggerated but accurate. The financial plan to profit from the terrorist threat to New York is plausible, as are the internal workings of a high profile investment bank.
Review by: John Carswell
Title: CFA, MBA, BA(Commerce)
Position:
President - Canso Investment Counsel Ltd.
other financial reference selections:
F.I.A.S.C.O. Blood in the Water on Wall Street
By Frank Partnoy
Overview:
"The value system I had acquired in recent years included shooting at clients and blowing people up, all in the name of money..... Everyone I knew who had been an investment banker for a few years, including me, was an asshole.", Frank Partnoy, ex-Morgan Stanley investment banker in F.I.A.S.C.O. This book is a must read for anyone who wants to understand what caused hedge funds to collapse inwards on their own financial rot or why bankers could be sucked into lending to them.
Investment Policy:
How to Win the Loser's Game
By Charles D. Ellis
Overview:
This investment classic by Charley Ellis, managing partner of Greenwich Associates, shows the importance of investment policy.
Money of the Mind
By James Grant
Overview:
A must read for any investor who hopes to understand what moves financial markets, interest rates and economic cycles.
The Education of a Speculator
By Victor Niederhoffer
Overview:
On October 27, 1997, Victor Niederhoffer and his partners were unable to meet a $50 million margin call. Bankrupt. The event foreseen by a friend reading his forthcoming book, The Education of a Speculator, had come to pass. "It's obvious that it's only a question of time until you go under," Niederhoffer quoted with pride, scorn and false humility.
Free to Trade
by Michael Ridpath
Overview:
A financial thriller that starts with an obscure bond issue that doesn't seem quite right and a plodding bond trader on its trail, with murder and mayhem in his wake.
The Zero Hour
by Joseph Finder
Overview:
A thriller that's thrilling. Bauman, the "Prince of Darkness" is a hired killer who balks at nothing to complete his mission: Destroy the U. S. economy!
Shock Wave
by Clive Cussler
Overview:
An adventure novel with a healthy dose of diamonds, science and finance.
Debt of Honour
By Tom Clancy
Overview:
A powerful Japanese businessman is intent on revenge. A surprise Japanese military and economic attack puts the United States on its heels.
A Dangerous Fortune
By Ken Follet
Overview:
A murder at an exclusive boy's school leads to the bankruptcy of an 1800s British banking house. A fascinating picture of financial intrigue.
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