Thursday, August 16, 2007

Conundrum

My friend Krishna Praveen sent me a picture that he took for a photo contest. The photo typifies India today. However, what bothers me is the conundrum of modern life that is hidden in this snap.

No one seems to talk to the person beside him/her. Therein lies one of the biggest puzzles of modern life.
The ones beside you are so close, and yet so far, and the ones who are not are so far, and yet so close.

Osmosis and globalization

Osmosis - a physical phenomenon in which flow of physical particles occur through a permeable membrane from one side to another. Read about an example of water-flow here.
I think osmosis is an analogy for what is happening with the global economy now.  As long as there was no globalization (read the presence of a impermeable membrane), the low-quality, cheap, toxic, bacteria-infested food stayed in the developing countries, where people had become immune to common microbes.  However, once the effects of globalization started kicking in, the seemingly impenetrable membrane turned permeable and lo and behold we have toxins and microbes flowing into the developed world.

One would have expected that the permeability should have enabled the flow of technology and quality control processes into the developing world, raising the average quality of goods and services overall.  However, that seems to occur with a certain degree of selectivity.  Some sectors in the developing world did experience improvement due to increased competition and he presence of good, well-managed large western firms.  However, the developed world did not get back quality goods and services - but lower prices on goods and services (read cheap IT programmers).  In summary, while the quality of goods and services in the developing world improved, the prices of goods and services in the developed world reduced.

Clearly, there is an imbalance.  However, there was no other way this could have happened.  Globalization is a juggernaut, that once set rolling is unstoppable.  Be it the Chinese financing US mortgages (through the Chinese government's purchase of US treasury bonds) or the US consumers financing the military expansion of the Chinese by buying Walmart goods (Walmart sources almost entirely from China - where it is difficult to tease our the government from private enterprise), the world surely is a different place.


The market crashes - good time to enter

If you are someone like me - investing primarily in 401 (K) or some sort of a retirement account, take heart.  Don't worry too much about the market crash. You are in it for the long run and therefore short term fluctuations should not worry you.  As long as you have a diversified portfolio, I believe this is the time to boost up your 401K holdings.  Increase your contribution and max out the 15,500 contribution limit.  The market is now at an appropriate price - 10% drop that set it back by almost 6 months.  It also means that you gain six months in terms of when you entered the market! 

If you are the type - who thinks, I am not going to be in the US for long, well, then you are a free man(or woman).  Don't watch the markets - because it is going to be a bloody ride ahead!

Wednesday, August 15, 2007

Call this globalization

Today, a Swedish company warned global consumers, about batteries made by a Japanese firm in China.  This is globalization!  On a serious note, Nokia issued the warning about defective batteries. Don't you see an increasing trend towards blaming China - refer to my earlier post on this issue.

I believe that consumers should have a right to penalize firms when they issue such recalls and warnings.  There should be a bill of rights for users which gives them the right to claim the full-value of the product when firms issues such warnings after five or six years of a product's launch.  Increasingly, it is becoming acceptable for firms to release defective products, defective - due to lack of oversight and due diligence, and then recall them or issue warnings. In way , the market does penalize these firms through the stock price and consumers penalize them by not buying the firm's products, probably, in their future purchase incidence.  However, I call for a more stringent active penalty - paying back existing customers who have been using the defective product unknowingly.  The issue is beyond whether a firm did this with malice or otherwise.  To me, the firm did not follow due-diligence.

On an even more serious note, I see patterns in how pharmaceutical firms recall drugs as well.  Although many would like to blame the FDA for not having a fool-proof system in place, the issue is more to deal with how firms manage their "potential" block buster drugs.  To satisfy wall Street's hunger for consistent blockbuster drugs, many firms push their clinical trials too fast and this often results in lack of large-sample and long-term studies.  Clinical trials using small sample sizes with a frequentist approach to estimation are a recipe for disaster.  The interpretation of effect sizes is almost always absent and more often a 95% significance is seen as a "significant" effect.  Almost every drug has a side-effect, and therefore, the issue is whether the benefits outweigh the costs.  The last decade has seen a lot of drug-recalls and it seems to me that this is a fallout from decreasing due-diligence on the part of firms and lack of statisticians who can meaningfully interpret findings at FDA.  The time has come for a change.

You can't have the cake and eat it too!

The latest in thing after the Paris Hilton saga and Lindsey Lohan's DUI is blaming the Chinese, at least in mainstream US media.  Yesterday, Mattel announced one of the largest recalls of toys ever!  Who are they blaming? - a sub-contractor in China. I am not surprised.

The US consumers have come to expect low prices on almost every conceivable good there is, thanks to the happy "outsource" manufacturing strategy adopted by many US firms.  However, what seems to be lost in this euphoria of low prices is that, such low-price regimes come with certain quality constraints.  One of the main reasons that I see why US firms are keen to outsource manufacturing is because federal compliance laws concerning safety standards are quite high and require the manufacturing firms to invest millions in testing, standards, quality control and using quality materials.  To get around this, firms have managed to outsource their manufacturing to China and elsewhere, where such requirements are often absent.  However, what I cannot comprehend is how Mattel or any other firm can act as if they did not know this was happening.  Aren't they responsible fir the debacle ? Weren't they supposed to oversee what was going into their products?  Before they can blame the Chinese, they should start blaming themselves, for lack of oversight.  I cannot simply believe that they just sat here in their board rooms assuming that the Chinese would do it right, without them overseeing the process.

The federal government has to take the blame as well.   Having a system in place that sets controls for manufacturing in the US and does not check imports for non-compliance, is nonsensical.  They let 8 million toys come into the US and did nothing! 

Although, I personally think Mattel is responsible for this debacle, I also feel they deserve credit for announcing the recall.  Finally, one cannot have the cake and eat it too!  US consumers are waking up to the realities of low prices.  Low price does not come magically - it often comes with lower quality!  I hope this is just a wake-up call for all of us before we buy something cheap at Walmart or elsewhere.

Tuesday, August 14, 2007

Thank you, I want my pills from Dr.Garrison

Dr. Garrison was my physician when I was at Penn State.  He was a nice man.  I used to see him for my cholesterol levels and with his able advice, and "no medication" I managed to keep my cholesterol under the wraps.  I admired his knowledge and trusted him completely to give me competent advice on the matters of my heart, and I don't mean figuratively.

Increasingly, consumers of health care services are relying on websites such as webmd.com and rvolutionhealth.com, for example, to gain insights on health-related issues. read moe here.  It is a good thing that consumers are more aware of the options they have, however, it is not a good trend that they can now self "pseudo-diagnose" social anxiety disorder by reading about its symptoms on such sites.  Knowledge should enable consumers to make better decisions - not stupid ones.  Firms such as google and microsoft that are spending tons of money into organizing health-information of patients are towing a dangerous line.  Such forays of commercial interest should not lead to cholesterol patients self-medicating on Aspirin because it thins their blood!

Given the pace at which mankind's knowledge is being reorganized, I can trust no one but Dr. Garrison.  I trust his old-school training and his instinct.  Once I am sure there is a bot that is as capable as Dr. Garrison, I will listen to it, and I am not so sure that day will come.  Till then, I want my pills from Dr. Garrison.

Monday, August 13, 2007

Simple Wisdom

I am no expert in investing.  However, I do believe a few things sacred to small investors - 1) think long-term, as you cannot be a day-trader and beat the market in the long run. 2) develop a diversified portfolio, it is tempting to put all that money in google shares, but it is wise to buy ETFs and index funds instead.

Reading this article brought a smirk on my face.  No matter what the unusual conditions on the markets might be, it does not make sense to bail out a hedge fund in trouble.  I am pretty sure that most of the aforementioned fund's investments must be in mortgage backed securities (read sub-prime mortgages).  When a low income family is actually living in a house that is worth 500k on paper, sure, there is something fishy in there.  And, belive it or not, a lot of hedge funds have invested in such "zombie" assets.  To begin with the house was not worth 500k, second, the family could never have sustained payments when interest rates rose, and finally, the #$%^& bankers cared nothing for except their closing costs anyways.  The reason i say that is because you never know who the final underwriter of such loans will be. For our house in sterling heights, MI, we started with lendingtree.com and finally ended up with Chase Home Finance.  It turns out lendingtree.com is just a sales-lead portal which referred me to Rock financial owned by Quicken Loans - which first signed us up for the loan and then finally it turns out that Chase was the final underwriter. Now, don't even ask me who Chase actually sold it to and which hedge funds have invested in the securities that are backed by the mortgage that I own.

Now, when I actually refinanced the home, the appraiser estimated my house at 215K, and I don't know which magical algorithm he had used to come up with that figure. I am sure that his firm must have been paid off pretty well  - to hyperinflate the house prices so that they can offer poor souls like me huge home equity at enticing prices. 

All this falls apart, when there is a correction in the market, the real value of the house goes down - house owners end up with mortgages larger than their houe values, and on top of it are also saddled with home equity (that never existed) debt. 

Talk about bailing our hedge funds.  Perversely, I am happy that a large wall street firm like Goldman has done this. Because, I want them to suffer, and realize that it is their own wrongdoing. Amen.