Friday, July 22, 2011

Zhang Xin on Charlie Rose

24 mins interview.

Zhang Xin, CEO of SOHO China, the largest real estate developer in Beijing

Wednesday, July 20, 2011

Harry Potter and the Illusion of Potential

A variant of this post first appeared on my Psychology Today blog on November 16, 2010.

Why is the story of Harry Potter so appealing? The success of the series depends on engaging characters and compelling storytelling-it’s a classic tale of good vs. evil and a coming of age story. That’s true, but many stories have those qualities. I think there’s a deeper magic at work here, one that capitalizes on a pervasive cognitive illusion. It’s a cognitive illusion that underlies almost all fantasy (and much science fiction) writing and that contributes to the success of countless movies and television shows. It involves a sort of wish fulfillment.

As a child, I fantasized about how my life would change if I suddenly discovered my “Spiderman” powers and could scale buildings. Or, I envisioned how radically my life would change if I could figure out how to teleport myself instantly from one location to another (most of that fantasizing emerged when I was trudging home from school). Perhaps you have had similar fantasies, or maybe yours were more mundane: imagining discovering you had tremendous athletic prowess at a sport you had never tried or that you would be a virtuoso musician if you just found the right instrument.

We all, at times, fall prey to the illusion of potential-the belief that we can acquire skills or abilities with minimal effort or practice. The illusion of potential relies on the corollary belief that we have vast pools of untapped brain power just waiting to be released. The myth that we only use 10% of our brain is a direct statement of this idea. Hucksters use the belief in untapped potential to sell everything from miracle exercise regimens (great results with minimal effort) to ultra-fast speed reading. Self-claimed psychics argue that they discovered their abilities. Mentalists and magicians know that their audiences are likely to find appeals to untapped potential compelling and use them liberally in their patter.

Not surprisingly, popular culture gives people what they want. The idea of untapped potential is a staple of fantasy books and movies. In fact, it might well be the defining feature of classic fantasy writing; the central character discovers a hidden ability they didn’t know they had. One of the common features of science fiction writing involves changing one element of how the universe works and then playing out the consequences. In many cases, that defining characteristic involves untapped potential (e.g., Verner Vinge’s brilliantly conceived idea of “Focus” in his award-winning novels A Fire Upon The Deep and A Deepness In The Sky).

The theme of untapped potential pervades television dramas. The subtitle of NBC’s hit series Heroes actually restates the definition of untapped potential: “ordinary people discovering extraordinary abilities.” The success of Heroes inspired a slew of shows with the same theme: CBS’s The Mentalist features a detective with “unusual powers of observation,” ABC’s Section 8 was about “especially brainy individuals,” and Fox’s Lie to Me centers on “a man who uses his preternatural skill at reading body language to help solve mysteries.” (Note that Lie to Me is based loosely on Paul Ekman, a prominent psychologist and expert on face perception. If Ekman has exceptional skill in reading faces, it’s because he spent decades studying and training, not because he had some secret talent.) The “untapped potential” plotline is one of the oldest forms of narrative, the rags-to-riches story in which a character finds themselves suddenly transformed, revealing the princess hidden in the lowly servant.

The illusion of potential and the fantasy of discovering hidden powers helps explain the exceptional popularity of Harry Potter. In the books, some people have magical abilities waiting to be revealed and other people are “muggles.” Yes, they hone those skills, but the abilities are there waiting to be discovered and released. That one element-the discovery of a previously unknown ability that reveals itself with little effort or work-is central to the story’s success. It taps our fantasies and cognitive illusions. The Harry Potter stories allow us to vicariously experience the ability to teleport ourselves home from school. It’s cognitive illusion wish fulfillment at its best.


Tuesday, July 19, 2011

Ray Dalio: Mastering The Machine


How Ray Dalio built the world’s richest and strangest hedge fund.

by JULY 25, 2011

Ray Dalio has an uncanny ability to anticipate economic trends. Critics say that he runs a cult. Photograph by Platon.

Ray Dalio has an uncanny ability to anticipate economic trends. Critics say that he runs a cult. Photograph by Platon.

Ray Dalio, the sixty-one-year-old founder of Bridgewater Associates, the world’s biggest hedge fund, is tall and somewhat gaunt, with an expressive, lined face, gray-blue eyes, and longish gray hair that he parts on the left side. When I met him earlier this year at his office, on the outskirts of Westport, Connecticut, he was wearing an open-necked blue shirt, gray corduroy pants, and black leather boots. He looked a bit like an aging member of a British progressive-rock group. After a few pleasantries, he grabbed a thick briefing book and shepherded me into a large conference room, where his firm was holding what he described as its weekly “What’s going on in the world?” meeting.

Of the fifty or so people present, most were clean-cut men in their twenties or thirties. Dalio sat down near the front of the room. A colleague began describing how the European Central Bank had just bought some Greek bonds from investors at a discount to their face value—a move that the speaker described as a possible precursor to an over-all restructuring of Greece’s vast debts. Dalio interrupted him. He said, “Here’s where you are being imprecise,” and then explained at length what a proper debt restructuring would entail, dismissing the E.C.B.’s move as an exercise in “kicking it down the road.”

Dalio is a “macro” investor, which means that he bets mainly on economic trends, such as changes in exchange rates, inflation, and G.D.P. growth. In search of profitable opportunities, Bridgewater buys and sells more than a hundred different financial instruments around the world—from Japanese bonds to copper futures traded in London to Brazilian currency contracts—which explains why it keeps a close eye on Greece. In 2007, Dalio predicted that the housing-and-lending boom would end badly. Later that year, he warned the Bush Administration that many of the world’s largest banks were on the verge of insolvency. In 2008, a disastrous year for many of Bridgewater’s rivals, the firm’s flagship Pure Alpha fund rose in value by nine and a half per cent after accounting for fees. Last year, the Pure Alpha fund rose forty-five per cent, the highest return of any big hedge fund. This year, it is again doing very well.

The discussion in the conference room moved on to Spain, the United Kingdom, and China, where, during the previous week, the central bank had raised interest rates in an attempt to slow inflation. Dalio said that the Chinese economy was in danger of overheating, and somebody asked how a Chinese slowdown would affect the price of oil and other commodities. Greg Jensen, Bridgewater’s co-chief executive and co-chief investment officer, who is thirty-six, said he thought that even a stuttering China would still grow fast enough to push world commodity prices upward.

Dalio asked for another opinion. From the back of the room, a young man dressed in a black sweatshirt started saying that a Chinese slowdown could have a big effect on global supply and demand. Dalio cut him off: “Are you going to answer me knowledgeably or are you going to give me a guess?” The young man, whom I will call Jack, said he would hazard an educated guess. “Don’t do that,” Dalio said. He went on, “You have a tendency to do this. . . . We’ve talked about this before.” After an awkward silence, Jack tried to defend himself, saying that he thought he had been asked to give his views. Dalio didn’t let up. Eventually, the young employee said that he would go away and do some careful calculations.

After the meeting, Dalio told me that the exchange had been typical for Bridgewater, where he encourages people to challenge one another’s views, regardless of rank, in what he calls a culture of “radical transparency.” Dalio had no qualms about upbraiding a junior employee in front of me and dozens of his colleagues. When confusions arise, he said, it is important to discuss them openly, even if that involves publicly pointing out people’s mistakes—a process he referred to as “getting in synch.” He added, “I believe that the biggest problem that humanity faces is an ego sensitivity to finding out whether one is right or wrong and identifying what one’s strengths and weaknesses are.”

Full Article

Terry Smith: Inside the Temple of Doom*

When I arrived, the News Corp building in Midtown was under siege from TV crews and reporters. News Corp has clearly committed the mistake of itself becoming the story which it has to report on.

The interviewer from Sky demonstrated a blatant pro Murdoch bias.

I posed the question to her that I am the CEO of a public company. If I had indulged in the following:

1. Paid >$500m for MySpace and then sold it for $35m;
2. Paid $5.7bn for Dow Jones and written off $2.8bn;
3. Paid $615m for my daughter's business;
5. My company’s shares had underperformed for 15 years;
6. And some of my staff had engaged in criminal phone hacking and bribing Police officers and this had been covered up by my management.

I think the shareholders would have had me fired.

So I asked, why hasn't Murdoch been fired?

Full Article

Warren Buffett: 'Disruptive' Debt Limit Debates Are 'Waste of Congress's Time'

As the White House and Congress continue to fight over raising the nation's debt limit, Warren Buffett says it would be better if the U.S. didn't have one at all.

Speaking to NBC's Kristen Welker at the White House today, Buffett said an "artificial" limit of the nation's debt [cnbc explains] is "disruptive" in Washington.

"All it does is slow down a process and divert people's energy, causes people to posture. It doesn't really make any sense ... To have this artificial limit, which always gets raised in the end, disrupt the activities, in an important way, of Congress, periodically, I think is a waste of Congress's time."

He's not alone. Today the credit rating agency Moody's suggested that eliminating a statutory limit on government debt would help ease uncertainty among bond holders.

Full Article

Friday, July 15, 2011

Rupert Brooke: The Soldier

If I should die, think only this of me:

That there's some corner of a foreign field

That is for ever England. There shall be

In that rich earth a richer dust concealed;

A dust whom England bore, shaped, made aware,

Gave, once, her flowers to love, her ways to roam,

A body of England's, breathing English air,

Washed by the rivers, blest by suns of home.

And think, this heart, all evil shed away,

A pulse in the eternal mind, no less

Gives somewhere back the thoughts by England given;

Her sights and sounds; dreams happy as her day;

And laughter, learnt of friends; and gentleness,

In hearts at peace, under an English heaven.


Thursday, July 14, 2011

Daisaku Ikeda: What Is Happiness?

What is the purpose of life? It is to become happy. Whatever country or society people live in, they all have the same deep desire: to become happy.

Yet, there are few ideals as difficult to grasp as that of happiness. In our daily life we constantly experience happiness and unhappiness, but we are still quite ignorant as to what happiness really is.

A young friend of mine once spent a long time trying to work out what happiness was, particularly happiness for women. When she first thought about happiness she saw it as a matter of becoming financially secure or getting married. (The view in Japanese society then was that happiness for a woman was only to be found in marriage.) But looking at friends who were married, she realized that marriage didn't necessarily guarantee happiness.

She saw couples who had been passionately in love suffering from discord soon after their wedding. She saw women who had married men with money or status but who fought constantly with their husbands.

Gradually, she realized that the secret of happiness lay in building a strong inner self that no trial or hardship could ruin. She saw that happiness for anyone - man or woman - does not come simply from having a formal education, from wealth or from marriage. It begins with having the strength to confront and conquer one's own weaknesses. Only then does it become possible to lead a truly happy life and enjoy a successful marriage.

She finally told me, "Now I can say with confidence that happiness doesn't exist in the past or in the future. It only exists within our state of life right now, here in the present, as we face the challenges of daily life."

I agree entirely. You yourself know best whether you are feeling joy or struggling with suffering. These things are not known to other people. Even a man who has great wealth, social recognition and many awards may still be shadowed by indescribable suffering deep in his heart. On the other hand, an elderly woman who is not fortunate financially, leading a simple life alone, may feel the sun of joy and happiness rising in her heart each day.

Happiness is not a life without problems, but rather the strength to overcome the problems that come our way. There is no such thing as a problem-free life; difficulties are unavoidable. But how we experience and react to our problems depends on us. Buddhism teaches that we are each responsible for our own happiness or unhappiness. Our vitality - the amount of energy or "life-force" we have - is in fact the single most important factor in determining whether or not we are happy.

True happiness is to be found within, in the state of our hearts. It does not exist on the far side of some distant mountains. It is within you, yourself. However much you try, you can never run away from yourself. And if you are weak, suffering will follow you wherever you go. You will never find happiness if you don't challenge your weaknesses and change yourself from within.

Happiness is to be found in the dynamism and energy of your own life as you struggle to overcome one obstacle after another. This is why I believe that a person who is active and free from fear is truly happy.

The challenges we face in life can be compared to a tall mountain, rising before a mountain climber. For someone who has not trained properly, whose muscles and reflexes are weak and slow, every inch of the climb will be filled with terror and pain. The exact same climb, however, will be a thrilling journey for someone who is prepared, whose legs and arms have been strengthened by constant training. With each step forward and up, beautiful new views will come into sight.

My teacher used to talk about two kinds of happiness - "relative" and "absolute" happiness. Relative happiness is happiness that depends on things outside ourselves: friends and family, surroundings, the size of our home or family income.

This is what we feel when a desire is fulfilled, or something we have longed for is obtained. While the happiness such things bring us is certainly real, the fact is that none of this lasts forever. Things change. People change. This kind of happiness shatters easily when external conditions alter.

Relative happiness is also based on comparison with others. We may feel this kind of happiness at having a newer or bigger home than the neighbors. But that feeling turns to misery the moment they start making new additions to theirs!

Absolute happiness, on the other hand, is something we must find within. It means establishing a state of life in which we are never defeated by trials and where just being alive is a source of great joy. This persists no matter what we might be lacking, or what might happen around us. A deep sense of joy is something which can only exist in the innermost reaches of our life, and which cannot be destroyed by any external forces. It is eternal and inexhaustible.

This kind of satisfaction is to be found in consistent and repeated effort, so that we can say, "Today, again, I did my very best. Today, again, I have no regrets. Today, again, I won." The accumulated result of such efforts is a life of great victory.

What we should compare is not ourselves against others. We should compare who we are today against who we were yesterday, who we are today against who we will be tomorrow. While this may seem simple and obvious, true happiness is found in a life of constant advancement. And the same worries that could have made us miserable can actually be a source of growth when we approach them with courage and wisdom.

One friend whose dramatic life proved this was Natalia Satz, who founded the first children's theater in Moscow. In the 1930s, she and her husband were marked by Soviet Union's secret police. Even though they were guilty of no crime, her husband was arrested and executed and she was sent to a prison camp in the frozen depths of Siberia.

After she recovered from the initial shock, she started looking at her situation, not with despair, but for opportunity. She realized that many of her fellow prisoners had special skills and talents. She began organizing a "university," encouraging the prisoners to share their knowledge. "You. You are a scientist. Teach us about science. You are an artist. Talk to us about art."

In this way, the boredom and terror of the prison camp were transformed into the joy of learning and teaching. Eventually, Mrs. Satz even made use of her own unique talents to organize a theater group. She survived the five-year prison sentence, and dedicated the rest of her long life to creating children's theater. When we met for the first time in Moscow in 1981, she was already in her 80s. She was as radiant and buoyant as a young girl. Her smile was the smile of someone who has triumphed over the hardships of life. Hers is the kind of spirit I had in mind when I wrote the following poem on "Happiness":

A person with a vast heart is happy.
Such a person lives each day with a broad and embracing spirit.
A person with a
strong will is happy.
Such a person can confidently enjoy life, never defeated by suffering.
A person with a
profound spirit is happy.
Such a person can savor life's depths
while creating meaning and value that will last for eternity.
A person with a
pure mind is happy.
Such a person is always surrounded by refreshing breezes of joy.

Wednesday, July 13, 2011

Tuesday, July 12, 2011

Ben Underwood: Using Echolocation to "See"

Byron Wien: The Smartest Man in Europe Is Very Cautious

Every year I try to spend time with the person I have come to think of as The Smartest Man in Europe. I met him almost thirty years ago when he encouraged me to think about the investment implications of the end of communism in the Soviet Union. He later saw opportunities developing in the emerging markets of Asia. Over the years he has been early to see important changes in trends across the world. He is descended from a mercantile family that has been involved in trade for hundreds of years, going back to the operation of canteens for travelers along the Silk Road. Fluent in many languages, he trained in the United States after World War II, but returned to Europe to take advantage of the recovery taking place there.

Usually we have our discussions in hotels or offices, but this year I spent a weekend with him at his summer home on the Mediterranean in France. There, surrounded by his impressive paintings and sculpture, we talked about the current outlook for global investors. I wrote my first essay about these meetings in 2001 and it was called “The Smartest Man in Europe Is Upbeat.” His mood was very different this year.

“It’s very hard to make money in stocks. Earnings growth is the key to equity market performance and with the heavy debt burdens of the developed economies of the United States and Europe, growth is likely to be slow. I know earnings are going to be good this year but profit margins are high and it will be hard for earnings to exceed the nominal growth rate of the economy on a sustained basis. The developed economies don’t have the resources to stimulate to grow faster even though that is what their people want. Unemployment is high in the United States and many parts of Europe, and this will dampen consumer spending. Politicians are in a difficult position. They would have to spend more money to create jobs and they need the money to service and draw down the debt in the United States and to deal with the credit crisis in Greece and Portugal in Europe.

“Ironically, the big beneficiary of the financial problems in the weaker European countries has been Germany. The credit crisis has kept the euro cheap. I know it doesn’t look that way to you Americans because your currency has deteriorated significantly, but to many others around the world German goods are very attractively priced, making their exports strong. That’s why it is in Germany’s interest to keep the European Union intact. If Greece and Portugal were thrown out because of their poor financial management, the euro would appreciate and the German economy would suffer. The current solution that allows Greece to roll over its maturing debt into new longer-dated, lower-interest obligations avoids default and is very elegant. It doesn’t solve any of the long-term problems, but it does get Europe through the current crisis. Greece will have to undergo severe austerity and the people will react badly to that, but they have no other choice. The hope would be that they could grow their way out of the problem, but that’s hard to do if your economy is based on tourism and olive oil.

“Over the next few years the banks in the stronger countries – Germany, France and the Netherlands – will try to become less exposed to the sovereign debt of the weaker countries. In a few years, if the situation has not improved, the European Union may have to be restructured. While the Germans believe that the people in the weaker countries should go through a period of hardship as Germany itself did when the East and West parts of the country were combined, they have come around to the view that they have more to lose than to gain if the euro collapses, and so they are supporting the program to help the weaker countries get through the crisis. Ultimately the Greek banks will have to be nationalized. They have already lost most of their deposits. The government has tried to solve part of the problem by raising taxes, but 30% of the economy is underground and there is no record of income. If Greece defaulted, the whole European banking system would be in trouble.

“The United States is destroying its currency. You cannot keep borrowing from abroad at the rate you are doing it and expect the dollar to maintain its value. America has been living beyond its means for a long time. Most people think that means that consumers have been spending too much and borrowing to do it, but that’s not what bothers me. The government has been spending seriously beyond its means. It has 150 military bases around the world and is involved in three wars. How does that make sense when you are running a deficit of $1.5 trillion?

“Right now my portfolio is invested in gold and Swiss francs. Every once in a while a special situation appears that interests me. Last year I made a real estate investment in Baghdad. I remember the look in your face when I told you about it. After I had owned the property for less than a year, the Iraqi government wanted to buy it and I got out with almost a 100% profit. I like to seek opportunity in places everyone else is avoiding.

Full Article

Lessons from Southern Cross

The collapse of Southern Cross offers a lesson for investors of all stripes: do not enjoy the story so much that you forget to look at the numbers. The management team at the care home operator, which announced on Monday that it would close its operations, offered an enticing narrative after the intial public offering in 2006: here was the biggest residential care provider in a country that was getting older. Demand would outpace supply, so fees would always go up. The elderly were such an important demographic that politicians would never reduce funding. Investors lapped it up: by the middle of 2007 the shares were trading at 30 times earnings.

If only they had studied the accounts. The biggest red flag was the company’s off-balance sheet liabilities. There were £390m of liabilities on the 2007 balance sheet – a fairly racy 2.7 times shareholders’ equity. But the footnotes showed about £5bn in off-balance sheet liabilities, mostly 30-year operating leases on the company’s properties, which included fixed annual rent increases.

There were other numerical warning signals: the proportion of earnings before interest, tax, depreciation, and amortisation that showed up as cash fell by one-quarter between 2006 and 2007; in 2007 bed capacity increased by 25 per cent, yet revenues grew only 20 per cent; the company’s staff turnover was high; returns on invested capital were low; 80 per cent of revenue came from one customer (the government).

Finally, even the laziest of investors should have been alarmed when the chairman, chief executive, finance director and chief operating officer all sold their entire stakes in the company at the end of 2007. When even the people who told the story acted as though they did not believe it, it was time to stop listening.

Full Article

Seth Klarman: Wall Street legend aims to strike pay dirt in Ontario

Seth Klarman is considered one of the world’s money managing impresarios, a superb value investor whose record of outsized returns has given him cult status on Wall Street.

What interests him now might be a surprise: rocks and spuds in a rural Ontario backwater.

While typical hedge funds flip stocks, commodities, and complex financial derivatives, Mr. Klarman’s Baupost Group has taken a position that is more down to earth, literally. It’s invested in Highland Companies, Ontario’s largest potato grower, which recently proposed developing a mega quarry on part of its sprawling spud lands.

Potatoes and gravel seem like far-out investment ideas, even for a U.S. hedge fund, and Mr. Klarman’s taking a shine to them suggests they may have upside potential currently not appreciated by the market.

The trade is likely to either cement Mr. Klarman’s reputation for acumen, or be a big flop.

On the side of acumen are some intriguing numbers. Baupost was part of a group funding Highland’s purchase of about $50-million worth of potato lands in Dufferin County in Southwestern Ontario, under which, at a relatively shallow depth of about six metres, lie an estimated one billion tonnes of limestone suitable for construction aggregate. The rock could be worth up to $25-billion, depending on its quality.

Full Article

Monday, July 11, 2011

Daniel Kish: The Blind Man Who Taught Himself To See

Daniel Kish has been sightless since he was a year old. Yet he can mountain bike. And navigate the wilderness alone. And recognize a building as far away as 1,000 feet. How? The same way bats can see in the dark.

The first thing Daniel Kish does, when I pull up to his tidy gray bungalow in Long Beach, California, is make fun of my driving. “You’re going to leave it that far from the curb?” he asks. He’s standing on his stoop, a good 10 paces from my car. I glance behind me as I walk up to him. I am, indeed, parked about a foot and a half from the curb.

The second thing Kish does, in his living room a few minutes later, is remove his prosthetic eyeballs. He does this casually, like a person taking off a smudged pair of glasses. The prosthetics are thin convex shells, made of acrylic plastic, with light brown irises. A couple of times a day they need to be cleaned. “They get gummy,” he explains. Behind them is mostly scar tissue. He wipes them gently with a white cloth and places them back in.

Kish was born with an aggressive form of cancer called retinoblastoma, which attacks the retinas. To save his life, both of his eyes were removed by the time he was 13 months old. Since his infancy — Kish is now 44 — he has been adapting to his blindness in such remarkable ways that some people have wondered if he’s playing a grand practical joke. But Kish, I can confirm, is completely blind.

He knew my car was poorly parked because he produced a brief, sharp click with his tongue. The sound waves he created traveled at a speed of more than 1,000 feet per second, bounced off every object around him, and returned to his ears at the same rate, though vastly decreased in volume.

But not silent. Kish has trained himself to hear these slight echoes and to interpret their meaning. Standing on his front stoop, he could visualize, with an extraordinary degree of precision, the two pine trees on his front lawn, the curb at the edge of his street, and finally, a bit too far from that curb, my rental car. Kish has given a name to what he does — he calls it “FlashSonar” — but it’s more commonly known by its scientific term, echolocation.

Bats, of course, use echolocation. Beluga whales too. Dolphins. And Daniel Kish. He is so accomplished at echolocation that he’s able to pedal his mountain bike through streets heavy with traffic and on precipitous dirt trails. He climbs trees. He camps out, by himself, deep in the wilderness. He’s lived for weeks at a time in a tiny cabin a two-mile hike from the nearest road. He travels around the globe. He’s a skilled cook, an avid swimmer, a fluid dance partner. Essentially, though in a way that is unfamiliar to nearly any other human being, Kish can see.

Full Article

Print me a Stradivarius

THE industrial revolution of the late 18th century made possible the mass production of goods, thereby creating economies of scale which changed the economy—and society—in ways that nobody could have imagined at the time. Now a new manufacturing technology has emerged which does the opposite. Three-dimensional printing makes it as cheap to create single items as it is to produce thousands and thus undermines economies of scale. It may have as profound an impact on the world as the coming of the factory did.

It works like this. First you call up a blueprint on your computer screen and tinker with its shape and colour where necessary. Then you press print. A machine nearby whirrs into life and builds up the object gradually, either by depositing material from a nozzle, or by selectively solidifying a thin layer of plastic or metal dust using tiny drops of glue or a tightly focused beam. Products are thus built up by progressively adding material, one layer at a time: hence the technology’s other name, additive manufacturing. Eventually the object in question—a spare part for your car, a lampshade, a violin—pops out. The beauty of the technology is that it does not need to happen in a factory. Small items can be made by a machine like a desktop printer, in the corner of an office, a shop or even a house; big items—bicycle frames, panels for cars, aircraft parts—need a larger machine, and a bit more space.

At the moment the process is possible only with certain materials (plastics, resins and metals) and with a precision of around a tenth of a millimetre. As with computing in the late 1970s, it is currently the preserve of hobbyists and workers in a few academic and industrial niches. But like computing before it, 3D printing is spreading fast as the technology improves and costs fall. A basic 3D printer, also known as a fabricator or “fabber”, now costs less than a laser printer did in 1985.

Full Article

The Printed World

FILTON, just outside Bristol, is where Britain’s fleet of Concorde supersonic airliners was built. In a building near a wind tunnel on the same sprawling site, something even more remarkable is being created. Little by little a machine is “printing” a complex titanium landing-gear bracket, about the size of a shoe, which normally would have to be laboriously hewn from a solid block of metal. Brackets are only the beginning. The researchers at Filton have a much bigger ambition: to print the entire wing of an airliner.

Far-fetched as this may seem, many other people are using three-dimensional printing technology to create similarly remarkable things. These include medical implants, jewellery, football boots designed for individual feet, lampshades, racing-car parts, solid-state batteries and customised mobile phones. Some are even making mechanical devices. At the Massachusetts Institute of Technology (MIT), Peter Schmitt, a PhD student, has been printing something that resembles the workings of a grandfather clock. It took him a few attempts to get right, but eventually he removed the plastic clock from a 3D printer, hung it on the wall and pulled down the counterweight. It started ticking.

Engineers and designers have been using 3D printers for more than a decade, but mostly to make prototypes quickly and cheaply before they embark on the expensive business of tooling up a factory to produce the real thing. As 3D printers have become more capable and able to work with a broader range of materials, including production-grade plastics and metals, the machines are increasingly being used to make final products too. More than 20% of the output of 3D printers is now final products rather than prototypes, according to Terry Wohlers, who runs a research firm specialising in the field. He predicts that this will rise to 50% by 2020.

Full Article

Sunday, July 10, 2011

3D Printer - Amazing!

Truly unbelievable! Must-watch.

Meet David Einhorn: The cutthroat, charitable and possible New York Mets savior

In a vault somewhere on the island of Manhattan, the prospective partner of the New York Mets has a secret stash of gold. He is not saying where - hedge-fund heavyweights may be even better at keeping secrets than they are at turning profits - but his hunch is that gold is a good investment, so he has made his buys and piled up the bars, a glistening, gilded stack that he hopes will keep appreciating in blessed anonymity.

David Einhorn, founder of a firm called Greenlight Capital, doesn't win big with every investment he makes, but in the high-risk, huge-reward realm he operates in, he has done it often enough to become a very wealthy whiz kid in the $2 trillion hedge-fund world - and now a potentially big player in New York sports, a place that seems entirely fitting for a guy who has spent most of his 42 years wowing people with his precociousness. A government major at Cornell, Einhorn interned as a junior at the SEC's Office of Economic Analysis, and wrote a thesis on the cyclical regulation of the airline industry.

It won the highest academic honor in his department.

Fifteen years ago, Einhorn and then-partner Jeffrey Keswin founded Greenlight with just $900,000 in seed money - $500,000 from Einhorn's parents. Today the firm manages close to $8 billion.

Five years ago, Einhorn jumped in on the World Series of Poker and wound up finishing 18th - and winning $660,000, which he donated to the Michael J. Fox Foundation. Clearly, this is a man whose mind moves quickly, and whose nerves are sturdier than Gibraltar.

"He's an outside-the-box thinker," says Whitney Tilson, who runs the T2 Partners hedge fund, as well as the annual Value Investing Congress, a conference where Einhorn is a regular speaker. "His portfolio doesn't look remotely like anybody else's. He does extraordinarily detailed work."

David Einhorn lives in the Westchester town of Rye with his wife and three children, takes the train to his office, a check swing away from Grand Central Station, and is said to be a big believer in the power of the afternoon nap. Just over six weeks ago, Einhorn emerged as the surprise winner of the sweepstakes to own a piece of the New York Mets, whose well-chronicled financial problems include $70 million in annual losses; an outstanding $25 million debt to Major League Baseball; and the ongoing specter of the $1 billion lawsuit filed against Fred Wilpon and Saul Katz by the Madoff Trustee, Irving Picard.

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Saturday, July 09, 2011

Greenlight Capital Q2 2011 Letter

Mental Model: Redundancy

This introduction to redundancy includes wisdom from Warren Buffett, Charlie Munger, Confucius, Norman Fuqua and others.

"The reliability that matters is not the simple reliability of one component of a system, but the final reliability of the total control system"

—Garrett Hardin

We learn from Engineering that critical systems often require back up systems to guarantee a certain level of performance and minimize downtime. These systems are resilient to adverse conditions and if one fails there is spare capacity or a backup system.

A simple example where you want to factor in a large margin of safety is a bridge. David Dodd, longtime colleague of Benjamin Graham, observed "You build a bridge that 30,000-pound trucks can go across and then you drive 10,000-pound trucks across it. That is the way I like to go across bridges.

Looking at failure, we can see many insights into redundancy. There are many cases of failures where the presence of redundant systems would have averted catastrophe. On the other hand, there are cases of failure where the presence of redundancy caused failure. How can redundancy cause failure?

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Joel Greenblatt's Interview with Steve Forbes

"Tiger Mother" Amy Chua speaks to Channel 4 News

Buffett Says ‘Bet Very Heavily’ Against Double-Dip Recession

Billionaire Warren Buffett said he is wagering on continued economic expansion and doesn’t expect a second recession.

“I would bet very heavily against that,” Buffett told Bloomberg Television’s Betty Liu on the “In the Loop” program today after data showed slowing U.S. job growth. “How fast the recovery will come, I don’t know. I see nothing that indicates any kind of a double dip.”

The unemployment rate unexpectedly climbed to 9.2 percent in June, the highest level this year, and hiring by companies was the weakest since May 2010, Labor Department data showed. U.S. employers added 18,000 jobs last month, less than the 105,000 median estimate in a Bloomberg News survey.

“It means that we’re still a ways off from getting to where we should be,” Buffett said in the interview, in Sun Valley, Idaho. “We’re seeing growth around the world, but it’s not mushrooming.”

Buffett’s Berkshire Hathaway Inc. added about 3,000 jobs last year after cutting more than 20,000 positions in 2009. The Omaha, Nebraska-based company employed about 260,000 people at units from insurance and shipping to consumer goods and energy, Berkshire said in February. Employment gained last year at Berkshire units including car insurer Geico and railroad Burlington Northern Santa Fe. Staffing fell at carpet-maker Shaw Industries.

“Jobs come with demand,” Buffett, 80, said today. “We’re seeing demand a lot of places but we’re not seeing it in the construction field.”

Bricks, Carpet

Berkshire owns a real estate brokerage, a maker of manufactured homes and units that construct roofs and sell bricks and carpet. Buffett said in February that a housing recovery would begin “within a year or so” and that he’s preparing the company’s businesses for growth. Buffett is chairman and chief executive officer of Berkshire.

Berkshire expanded its Acme Brick unit with a $50 million acquisition, and Johns Manville, the roofing subsidiary, is building a $55 million plant in Ohio, Buffett said in his annual letter. Shaw will spend $210 million on plant and equipment this year, Buffett said.

“We will come back big time on employment when residential construction comes back,” Buffett said. The unemployment rate will drop to 6 percent “within a few years,” he said.


Friday, July 08, 2011

Building Boom in China Stirs Fears of Debt Overload

Building Boom in China Stirs Fears of Debt Overload

WUHAN, China — In the seven years it will take New York City to build a two-mile leg of its long-awaited Second Avenue subway line, this city of nine million people in central China plans to complete an entirely new subway system, with nearly 140 miles of track.

And the Wuhan Metro is only one piece of a $120 billion municipal master plan that includes two new airport terminals, a new financial district, a cultural district and a riverfront promenade with an office tower half again as high as the Empire State Building.

The construction frenzy cloaks Wuhan, China’s ninth-largest city, in a continual dust cloud, despite fleets of water trucks constantly spraying the streets. No wonder the local Communist party secretary, recently promoted from mayor, is known as “Mr. Digging Around the City.”

The plans for Wuhan, a provincial capital about 425 miles west of Shanghai, might seem extravagant. But they are not unusual. Dozens of other Chinese cities are racing to complete infrastructure projects just as expensive and ambitious, or more so, as they play their roles in this nation’s celebrated economic miracle.

In the last few years, cities’ efforts have helped government infrastructure and real estate spending surpass foreign trade as the biggest contributor to China’s growth. Subways and skyscrapers, in other words, are replacing exports of furniture and iPhones as the symbols of this nation’s prowess.

But there are growing signs that China’s long-running economic boom could be undermined by these building binges, which are financed through heavy borrowing by local governments and clever accounting that masks the true size of the debt.

The danger, experts say, is that China’s municipal governments could already be sitting on huge mountains of hidden debt — a lurking liability that threatens to stunt the nation’s economic growth for years or even decades to come. Just last week China’s national auditor, who reports to the cabinet, warned of the perils of local government borrowing. And on Tuesday the Beijing office of Moody’s Investors Service issued a report saying the national auditor might have understated Chinese banks’ actual risks from loans to local governments.

Because Chinese growth has been one of the few steady engines in the global economy in recent years, any significant slowdown in this country would have international repercussions.

As municipal projects play out across China, spending on so-called fixed-asset investment — a crucial measure of building that is heavily weighted toward government and real estate projects — is now equal to nearly 70 percent of the nation’s gross domestic product. It is a ratio that no other large nation has approached in modern times.

Even Japan, at the peak of its building boom in the 1980s, reached only about 35 percent, and the figure has hovered around 20 percent for decades in the United States.

China’s high number helps explain its meteoric material rise. But it could also signal a dangerous dependence on government infrastructure spending.

“If China’s good at anything, it’s infrastructure,” said Pieter P. Bottelier, a China expert at the Johns Hopkins School of Advanced International Studies in Washington. “But right now it seems the investment rate is too high. How much of that is ill-advised and future nonperforming loans, no one knows.”

For the last decade, as economists have sought to explain China’s rise, a popular image has emerged of Beijing technocrats continually and cannily fine-tuning the nation’s communist-capitalist hybrid. But in fact, city governments often work at odds with Beijing’s aims. And some of Beijing’s own goals and policies can be contradictory.

As a result, China’s state capitalism is much messier, and the economy more vulnerable, than it might look to the outside world.

In the case of Wuhan, a close look at its finances reveals that the city has borrowed tens of billions of dollars from state-run banks. But the loans seldom go directly to the local government. Instead, the borrowing is done by special investment corporations set up by the city — business entities whose debt shows up nowhere on Wuhan’s official financial balance sheet.

Adding to the risk, the collateral for many loans is local land valued at lofty prices that could collapse if China’s real estate bubble burst. Wuhan’s land prices have tripled in the last decade.

The biggest of the separate investment companies set up by the municipal government here is an entity known as Wuhan Urban Construction Investment and Development, created to help finance billions of dollars’ worth of projects, including roadways, bridges and sewage treatment plants.

According to city records, Wuhan U.C.I.D. has 16,000 employees, 25 subsidiaries and $15 billion in assets — including the possibly inflated value of the land itself. But it owes nearly as much, about $14 billion.

“U.C.I.D. is heavily in debt,” a company spokesman, Sun Zhengrong, conceded in an interview. “This may lead to potential problems. So we are trying to make some adjustments.” He declined to elaborate, saying the state company’s finances were “our core secret.”

Dozens of other cities are following a similarly risky script: creating off balance-sheet corporations that are going deeply into debt for showpiece projects, new subway systems, high-speed rail lines and extravagant government office complexes. And they are doing it despite efforts by the central government in Beijing to rein in the excess.

To limit the cities’ debt, Beijing has long prohibited municipalities from issuing bonds to finance government projects — as American cities do as a matter of course. Lately, too, China’s central government has put tighter limits on state-owned banks’ lending to municipalities. But by using off-the-books investment companies, cities have largely eluded Beijing’s rules.

Zhang Dong, a municipal government adviser who also teaches finance at the Zhongnan University of Economics and Law in Wuhan, estimates that less than 5 percent of the city’s infrastructure spending comes from Wuhan’s general budget. “Most of it comes from off-the-books financing,” he said.

This system is not a secret from Beijing, which now says there are more than 10,000 of these local government financing entities in China. In fact, because Beijing now takes a large share of government tax revenue, local governments have had to find their own way to grow, and land development is primarily how they have done it.

But it is a risky game. A recent report by the investment bank UBS predicted that local government investment corporations could generate up to $460 billion in loan defaults over the next few years. As a percentage of China’s G.D.P., that would be far bigger than the $700 billion troubled-asset bailout program in the United States.

As frightening as that may sound, many analysts see no reason for panic — no imminent threat of an economy-collapsing banking crisis in China. That is largely because of Beijing’s $3 trillion war chest of foreign exchange reserves (much of it invested in United States Treasury bonds), and the fact that China’s state-run banks are also sitting on huge piles of household savings from the nation’s 1.3 billion citizens.

Because all that cash is protected by government restrictions on money flowing in and out of the country, a global run on China’s banks would be unlikely.

The real problem, analysts say, is that municipal government debt in China has begun casting a large shadow over the nation’s growth picture. If instead of investing in growth, China had to start spending money to gird the banks against municipal defaults, some experts see a possibility of China eventually lapsing into a long period of Japan-like stagnation.

A Recession Peril

Kenneth S. Rogoff, a Harvard economics professor and co-author of “This Time Is Different: Eight Centuries of Financial Folly,” has studied China’s boom. He predicts that within a decade China’s lofty property bubble and its mounting debts could cause a regional recession in Asia and stifle growth in the rest of the world.

“With China, you have the ultimate ‘this time is different’ syndrome,” Professor Rogoff said. “Economists say they have huge reserves, they have savings, they’re hard-working people. It’s na├»ve. You can’t beat the odds forever.”

By Beijing’s estimate, total local government debt amounted to $2.2 trillion last year — a staggering figure, equal to one-third of the nation’s gross domestic product. A wave of municipal defaults could become a huge liability for the central government, which is sitting on about $2 trillion in debt of its own.

And Beijing’s estimate of what the cities owe might be too low, in the view of Victor Shih, a professor of political economy at Northwestern University who has studied China’s municipal debt. He says that by now, after even more borrowing in early 2011 and some figures hidden from government audits, total municipal debt in China could be closer to $3 trillion.

“Most of the government entities that borrow can’t even make the interest payments on the loans,” Professor Shih said.

Around the clock, seven days a week, the construction crews burrow to build Wuhan’s $45 billion subway system. One segment snakes beneath the mighty Yangtze River.

“For most areas we dig down 18 to 26 meters,” said Lin Wenshu, one of the planning directors of the Wuhan Metro. “But for part of this line we’ve had to go down 50 meters because there’s high pressure and a lot of mud from the river,” he said. “But the citizens want a subway system, and so we’re going to build it as fast as possible.”

In all, city officials say there are more than 5,700 construction projects under way in Wuhan. In some neighborhoods, workers demolish old homes with little more than sledgehammers and their bare hands to make way for shopping malls, high-rise apartment complexes and new expressways.

Having seen Beijing, Shanghai and other coastal metropolises thrive on big infrastructure projects, cities thousands of miles inland, like Wuhan, are trying to do likewise. Wuhan wants to become a manufacturing and transportation hub for the heartland — China’s version of Chicago.

But it is a dream built on debt. This year, relying largely on bank loans, Wuhan plans to spend about $22 billion on infrastructure projects, an amount five times as large as the city’s tax revenue last year. And aspirations notwithstanding, Wuhan is still relatively poor. Residents here earn about $3,000 a year, only about two-thirds as much as those in Shanghai.

But Wuhan has made the most of the soaring value of its land. In the northwest part of the city, for example, bulldozers have cleared a huge tract more than twice the size of Central Park. A dozen years ago it was a military air base.

Giant billboards advertise a new purpose: future home of the Wangjiadun Central Business District, featuring office towers and luxury apartments for 200,000 people. That assumes, of course, that financing for the project — a web of loans and deals based largely on the underlying value of the land — holds up.

Planning began in 1999, when the city decided to relocate the air base. After the city ran short of cash for the project, in 2002, it turned to a deep-pocketed Beijing developer, the Oceanwide Corporation. Oceanwide agreed to chip in $275 million and pay some of the infrastructure costs in exchange for a prime piece of the land.

Since then, the city has sold large plots of the former air base to other developers, while earmarking yet other parcels for future sale to help pay for the new business district.

There is no question that China needs new infrastructure and transportation networks if it is to meet its goal of transforming most of its huge population into city dwellers. Less certain is whether the country can afford to keep building at this pace, and whether many of these projects will ever pay off in terms of the economic development they are meant to support.

Beijing helped ratchet up the municipal building boom in early 2009, when in response to the global recession, it pressed local governments to think big and announced a huge economicstimulus package. That unleashed a wave of government-backed bank lending.

“What we’re seeing was not very common before 2008,” said Fu Zhihua, a research fellow at the Research Institute for Fiscal Science. “Now, all cities are rushing headlong into this.”

And now, try as it might, Beijing seems unable to stop the stampede.

Part of the problem may be incentives in China’s Politburo-driven economic system. Simply put, municipal officials in China keep their jobs and earn promotions on the basis of short-term economic growth.

“The fact is, local governments in China compete to grow G.D.P. in order to get promoted as government officials,” said Zeng Kanghua, who teaches finance at the Central University of Finance and Economics in Beijing.

Ruan Chengfa, Wuhan’s 54-year-old local Communist party secretary, who was promoted earlier this year from mayor, has certainly benefited politically from his “Mr. Digging” reputation.

He declined to be interviewed for this article. But in a speech in February, he said, “If we want Wuhan to have leapfrog development and enhance people’s happiness, then we must build subways and bridges.”

Pressure From Beijing

Wuhan is starting to show symptoms of financial stress.

Despite selling about $25 billion worth of land over the last five years, according to Real Capital Analytics, a research firm based in New York, Wuhan is struggling to pay for its projects. City officials have announced a big increase in bridge tolls. Under pressure from Beijing to reduce Wuhan’s debt, they have promised to pay back $2.3 billion to state-backed creditors this year.

Whether the city would do this by borrowing more money or selling land or assets is unclear. But rolling over old debts with new borrowing is not uncommon among Chinese cities. In 2009, for instance, Wuhan’s big investment company, Wuhan U.C.I.D., borrowed $230 million from investors and then used nearly a third of the money to repay some of its bank loans.

Mainly, Wuhan’s leaders are counting on property prices to continue defying gravity, even if some analysts predict a coming crash.

In a report this year, the investment bank Credit Suisse identified Wuhan as one of China’s “top 10 cities to avoid,” saying its housing stock was so huge that it would take eight years to sell the residences already completed — never mind the hundreds of thousands now under construction.

But criticism has not deterred Mr. Ruan, the local party secretary, who has vowed to keep his foot on the shovel. “If we don’t speed up construction,” he said in the speech in February, “many of Wuhan’s problems won’t be solved.”