Articles for the first week of 2009

Here are some articles may be worth checking out:

• New York Times review of Jim Grant's Mr. Market Miscalculates (New York Times): Although I consider Jim Grant to be one of the top financial thinkers in America, I probably won't get this book any time soon (primarily because it is a collection of his past essays, rather than his future thoughts.) For instance, I could personally care less about housing or some of the bubble assets right now. However, if you are a contrarian-type and have nothing to read and want something, you may want to check it out. Jim Grant--I think it's him--is "famous" for saying that science is cumulative but finance is cyclical. So it is always benefitial to read a contrarian's view, such as those of Jim Grant, of events as they unfolded over the last decade. (On a side note, I still maintain that Grant and the rest of the hard-money advocates are completely wrong with their views of gold. How come these guys seem to gloss over the fact that USA was on a gold standard in the 20's and yet credit ballooned? Similarly, there was nothing to stop the government from issuing debt while it was on a quasi-gold standard until early-1970's (debt did decline in that period but that has nothing to do with gold)? If they really looked at politics, they would know that whether something is backed by gold is almost irrelevant. What matters is whether the government is fiscally conservative or not. Gold provides an illusion of control, similar to how banning guns makes people feel safe even though it has no positive impact on violent crime (e.g. compare lax Texas vs strict California))
  
• China slowdown (Edward Hugh, via SeekingAlpha): China may be the story of 2009. The author goes over the current situation in China, with manufacturing contracting significantly. If China implodes, it will definitely be the story of the year; but even if it doesn't, it could turn out to be the story of the year if it starts a trade war by de-valuing its currency. The way I look at it--this is a view shaped by Michael Pettis, among others--China is the USA of the 1920's. This doesn't mean the outcome will be the same but the situation is eerily similar.
  
• Is this 1932? (Financial Times; original mention by Naked Capitalism): Everyone has their favourite comparison and this FT article goes with the assumption it is 1932. If so, then we will see huge rallies along with declines. The article points out that the market actually rallied 100% in 2 months at one point, yet finished the year lower. It's an interesting article. I personally am not in the 1930's camp yet. Even though the overcapacity in China and the huge increase in credit in the past decade resembles that period, I do not believe the world economy is in as bad of a shape as then. The fact that we are not on a gold standard now also should mean that steep economic contraction is unlikely (exceptions would be a war which destroys economies or, more importantly, world trade; or a huge policy mistake, such as enacting tariffs or countries like China significantly de-valuing their currency).
  
• Rise and fall of an Irish real estate Tycoon and his country (New York Times): Ireland was one of the success stories in the last few decades. Unfortunately, like Iceland or even USA to some degree, capitalism ran amok and the economy is facing the consequences. I'm really interested to see how the shakeout will ultimately impact the various countries of the world. The extreme free-market proponents had maintained in the past that countries will little government inteference (USA, Ireland, some Eastern European countries, etc) were better off in the long run. But the current crisis is showing the problems of unregulated capitalism. For example, many Eastern Europeans took out mortgages in foreign currency (Euro) which has turned into a disaster now that their local currencies, and hence their salary/income, have plunged. Countries where the government blocked such free-market actions have fared better. Iceland, of course, is the best example where the private banks essentially bankrupted the country because there was little control over their (foreign) activities. Conversely, countries that had stronger regulation and hence were bureaucratic and inefficient are faring better--at least so far. For instance, I had been superbearish on India because it was inefficient, corrupt, had heavy government intervention, and was running a current account deficit. But it seems that India would fare better than the rest once all is said and better. I'm stil bearish on the country but less so than before.