The Stalwart

Is the CPI Useless?

Don Boudreaux, writing for Pittsburgh Live, pokes some pretty big holes in the Consumer Price Index:

Here's an example to make the point clearer. Back in 1972, basic pocket calculators cost $100. They were so expensive that ordinary Americans didn't buy them. So statisticians at the Bureau of Labor Statistics understandably excluded calculators from the basket of items used to determine the CPI.

As time passed, of course, the price of calculators plummeted. A calculator similar to one priced at $100 in 1972 sells today for about $7.95. (In real terms, this is a price decline of about 98 percent.) So, ordinary Americans now routinely buy calculators. But because calculators weren't suitable to be added to the basket of items used for calculating the CPI until their prices dropped and they became affordable, much of the price decline of calculators was ignored by the CPI.

Relatedly, as consumers substitute away from goods whose prices rise and into goods whose prices fall, the relative importance to consumers of these higher-priced goods declines as the importance of the lower-priced goods rises -- but the weights that the CPI gives to these goods aren't immediately adjusted.

The result is that, in the CPI, items whose prices rise are weighted too heavily while items whose prices fall are weighted too lightly -- or (as in with the calculator) not at all.

At the same time, today, ink is again being spilled by those arguing that inflation is understated, since the housing portion of the CPI measures rents, as opposed to purchase prices of homes.  As many have pointed out, rents haven't kept pace with home prices over the last several years, and in some cases have actually gone down, as landords lower their price to attract people away from buying a home.  Ok, but this argument ignores the fact that while the nominal price of homes has risen, low interest rates have kept homes affordable.  We know they've been affordable, because home-ownership has grown dramatically.

It seems that wage and inflation statistics are more confusing than helpful, which is disturbing given how much emphasis is placed on these numbers in the economy.

Avoiding Quotas Ain't Rocket Science

The other day was talking to a bright chinese entrepreneur, who is interested in exporting all sorts of goods from Beijing. Nevertheless, he told me a quick story about his friend who sells some sort of clothing good- tee-shirts I believe, though it could have been something else. In any case, the point was that in order to get around import quotas in the US his friend simply shipped his products to Japan and then re-routed them to the US, making his products "Japanese" exports. Granted this must have increased the cost a little, but it still goes to show how easy it can be to skirt around simple-minded laws.

The thinking can be extended out to bilateral FTA's as well though, I've heard of problems in recent FTA negotiations whereby my both sides argue over the Rules of Origin for different products, i.e. what defines a product as from one country or another. There are apparently many work arounds to FTA's. A multinational can just locate a factory in a different country and finish off its products there. Through accounting games it can even claim varying percentages of a products total value as having come from one place or another.

Quote of The Day: Analyst Day Edition

Continuing on yesterday's theme of beating up on research analysts, check out Carlo Longino's post at Mobhappy entitled "Analysts Predictions, Or Just Making Stuff Up" in which he discusses a particularly dubious report on the Chinese mobile market.

... even with all that uncertainty, the experts over at Analysys International (which shouldn’t be confused with another analyst and consultancy firm called just Analysys) throw out that 10 million number, apparently without any sort of caveats. Which is helpful. There are plenty of good analysts out there — but there are plenty that just stick a hockey stick on a chart and send out a press release, too (emphasis added). I guess there will always be a market for wild predictions that may or may not be grounded in reality, particularly in mobile, as long as there’s the next big thing.

A China Bust?

Tyler Cowen discusses the possibility of a Chinese economic meltdown:

If you are not convinced, raise your right hand and repeat after me: "China in the 20th century had two major revolutions, a civil war, a World War, The Great Leap Forward [sic], mass starvation, the Cultural Revolution, arguably the most tyrannical dictator ever and he didn't even brush his teeth, and now they will go from rags to riches without even a business cycle burp."  I don't think you can do it with a straight face.

Cowen adds that the prospect of a Chinese economic bust is the single biggest threat to the US economy, which is the exact opposite of so many who claim that  a US collapse is the biggest threat to the Chinese economy.  On the whole, it would seem that collapses aren't good for anyone.

More on Analysts

Per our earlier post on the future of research analysts, check out Andrew Schmitt's post entitled Market Research Firms Shouldn't Forecast.  Suffice to say, the firms shouldn't be relied upon for market forecasts.

Ok, so the question we have is why do companies pay so much for third-party research from the likes of Gartner or Jupiter?  Is it because their reports actually help the companies make better business decisions, or is it for face-saving, so that if things go awry, at least someone can say, "well we were operating under the assumptions in the report"?  Reputation insurance, basically.

Decoupling

Interesting Economist article, found here, about the decoupling of corporate success and national economic conditions.  It relates to several themes which we've discussed including the growing meaninglessness of the nation, as an economic unit, as well the dispersion of outcomes among actors within an economy (i.e. top-line numbers like GDP or the S&P won't necessarily reflect what's going on underneath):

Feb 23rd 2006
From The Economist print edition
The health of companies and the wealth of economies no longer go together
Ronald Grant

“NOTHING contributes so much to the prosperity and happiness of a country as high profits,” said David Ricardo, a British economist, in the early 19th century. Today, however, corporate profits are booming in economies, such as Germany's, which have been stagnating. And virtually everywhere, even as profits surge, workers' real incomes have been flat or even falling. In other words, the old relationship between corporate and national prosperity has broken down.

This observation has two sides to it. First, as Stephen King and Janet Henry, of the HSBC bank, point out, companies are no longer tied to the economic conditions and policies of the countries in which they are listed. Firms in Europe are delivering handsome profits that are more in line with the performance of the robust global economy than with that of their sclerotic homelands. In the past two years, the earnings per share of big listed companies have climbed by over 100% in Germany, 50% in France, 70% in Japan and 35% in America. No wonder Europe's and Japan's stockmarkets have outpaced those in America, despite the latter's faster GDP growth.

Cendant Execs Receive 200% Bonuses

Interesting post about the Cendant (NYSE:CD) conference call whereby an investor questioned management's rich compensation awards. The article quotes the conference call:

Kirk Caras from Relational Investors:

So, with yesterday’s disclosure that the executive management team is receiving performance bonuses close to what looks like their original targets of 200% of based salary, I was wondering if you could provide a little bit more color on what exactly the performance criteria the comp committee uses in awarding those bonuses. And also, provide a little bit more color on what the decision process is going forward on Henry’s performance bonus compensation and why that decision hasn’t been made yet. Thank you.

Henry Silverman, Cendant CEO:

With respect to my colleagues, remember the bonuses were for 2005 and not 2006 and really don’t take into account performance in 2006 as the year obviously doesn’t count for a 2005 bonus. It looks at a variety of responsibilities. In the case, for example, of two of my colleagues, Mr. Holmes and Mr. Smith, their business has actually exceeded their budgets for the year, back in December of ’04.

So, you know, I think this is something we’re happy to discuss with you offline, but we feel very comfortable that our comp committee acted appropriately.

Mr Silverman must have rushed to get some sort of excuse drafted right after the call was completed.

Analysts Under Threat

Here's an amusing little note from Michael Gartenberg of Jupiter Research:

Michael Eisenberg (a VC at Benchmark) calls "bloggers of 2005-2010 are the research analysts of the 1990s." Heh... You're kidding Michael, right? No one, least of all us, would diminish the role of the blogger in the 21st Century but to call them the new research analysts is about as accurate as those that insist bloggers will replace mainstream press. Your point is valid, bloggers can help you generate buzz if you're starting out but if you think that's a replacement for data driven research and analysis, you're totally off base.

We don't know (or care) to what extent blogs will pose a threat to the likes of Jupiter Research analysts, though his suggestions that blogs are good for mere "buzz" seems a little off the mark.

The real issue, for places like Jupiter, is how much of a monopoly they can maintain on  "data driven research and analysis".  At the moment, the biggest advantages a place like Jupiter (or Gartner) has, over mere bloggers, are the barriers to entry associated with the costs of full-time employees who can collect and crunch data. 

Despite the fact that they employ "analysts", the real value-added from these firms comes from their data (e.g. marketshare info for handset shipments in q3 '05.  When you need that kind of info, it's best to find a Gartner report).  The actual insights and opinions of the individual analysts (at places like Jupiter, or even on Wall St.) is somewhat secondary. 

And as for the data collection, that's becoming easier too.  New techniques of scanning the internet to collect sales information and prices are popping up.  The idea of paying employees to call around to collect data may one day seem quaint.  Then were does that leave the Jupiters and Gartners?  Not sure exactly, but the sanguine outlook might be somewhat naive.

Fake Starbucks

The creativity and diversity of the Chinese counterfeit industry never ceases to amaze.  Even Starbucks (NASD: SBUX), which has high hopes for in China, isn't immune to counterfeiters who set up coffee shops resembling the original.

Hedge Fund Registration Exemptions

So how can one be exempt from the new hedge fund regulations in the US? Well first of all the new regulations have begun and operational funds have been required to register with the SEC since February 1st, 2006. TruthOnTheMarkets has a good overview of what the new regulations entail. Also, you can get the information straight from the horse's mouth here. (The SEC) As for who may claim exemption...

Under Rule 203(b)(3)-2 of the Investment Advisers Act of 1940, hedge fund advisers with 15 or more investors and $30 million or more under management will be required to register with the SEC as investment advisers. Advisers with less than $30 million under management will continue to be exempt.

We believe that this quote is partially wrong and that $25m is the cut-off. Also, another more  practical way to avoid registration is to adopt a rule similar to private-equity funds and restrict your investors to a minimum two year holding period. This gives you exemption and allows your fund to be of any size and have any number of investors. Well, there you have it.