House of Outrageous Fortune

The subtitle is Fifteen Central Park West, the World’s Most Powerful Address and the author is Michael Gross (2014).

If you love New York City real estate, then you should read this book. The first half is more a story and history of development in Manhattan and the Upper West Side, with specific focus on the Zeckendorf family and the adventures in putting together a development site comprised of a full city block that eventually became Fifteen. The second half reads a bit like Page Six, running through a short description of the myriad rich and famous who bought apartments and rent in the building.

As someone who has lived in that neighborhood my entire life, the story resonated – I can remember the Gulf & Western building that preceded Trump’s hotel and condo tower, the Coliseum site that became the Time Warner Center, and the Mayflower hotel that sat where Fifteen now rises. I had not realized that the major draw to the East Side in the beginning (over the West Side) had more to do with topography and an ease of building. In a certain sense, reading about the development of this building adds to the motivation to push ahead in my current endeavors. These are the sorts of projects that I want to work on.

Interesting Links

-I read John Mauldin regularly and his group holds an annual conference where a bunch of well-known investors give speeches. This year’s recent fete included Kyle Bass – and here is a good summary of what he had to say about China and Japan. In particular, short the Yen.

-I thought the title of this new Kuppy article was a play on “Cash Again”. In fact, he makes the bullish case for oil – a position that we at The Binary Trade share, especially in light of recent news about the Monterrey formation in California.

-I am bullish on NYC real estate. These short pieces (here and here) from The Real Deal over the weekend outline some of the reasons why.

Internet Reads

-After finishing the Coyle book, it was amusing to read how Italy is trying to boost GDP by now including prostitution and illegal drug sales in its calculation.

-Poof. Did you catch that? That was America’s energy independence disappearing like a fart in the wind.

GDP

The subtitle is A Brief But Affectionate History and the author is Diane Coyle (2014).

Another short-ish read on an interesting topic. The history of GDP speaks to its politicized nature. Its current conception evolved in the 1940s as a way for the government to measure national income in a time of depression and war, but also as a way to inflate it over previous definitions by including government spending in its calculus. Regardless of whether it was truly for productive ends.

So, on the one hand, we have the Keynesian/fiscal largesse folks using it to show growth by pushing for government spending. On the other hand, you have the MMT/NGDP Targeting contingent pushing for central bank interventions to create growth, as if the appearance of a higher nominal number (regardless of whether it is all inflation-driven) foretells of good times. And there is some correlation there – higher GDP prints are typically coincident with lower unemployment and better times. But, as the book speaks to, in a very deferential way, what GDP measures is not necessarily what matters most. It struggles with technological innovation, does not handle the service sector very well (certainly overstating the relevance of the financial sector), and therefore can mask bubble phenomena beneath the surface.

But, for now, it is still viewed as the best alternative to measure economies and to provide a basis for comparison across countries.

Living with Water Scarcity

The author is David Zetland (2014).

I wanted to read a book about water. I guess this one was good enough. It goes through the issues of increasing scarcity (not shortage) for our most important resource. The author believes that the rules in place are based on a time when scarcity was not a problem, and so a new paradigm is necessary. The most obvious approach is to increase cost and create financial considerations so that people prioritize their water use and reduce excess consumption. The flip side, though, is that reduced demand can mean reduced revenues that lead to a neglect of infrastructure and longer term problems. Politicians create issues, for a change, as they subsidize certain groups (usually farmers) and try to avoid current headaches to the detriment of longer term sustainability. Summarily, water is a basic necessity and people do not want to feel constrained in how much access they have and in their use. There are no easy answers.

The 1 Hour China Book

The subtitle is Two Peking University Professors Explain All of China Business in Six Short Stories and the authors are Jonathan Woetzel and Jeffrey Towson (2013).

First off, I really like the concept of the book – break down the important themes in China, all in a short and accessible format (I must admit, though, it took me closer to two hours to read). And the authors are not simply “Professors”. One is with McKinsey and the other is a private equity investor, so they have some chops when it comes to understanding how the world works outside a classroom.

They identify six “mega-trends” that help to define what has happened, and why things will continue to happen, in China:

(1) Urbanization: Eventually there will be a billion people living in Chinese cities, and it is because of that re-location that so much of the country’s economy is evolving. It’s also why you can sometimes end up with “ghost cities” that reflect speculation around this trend. If you believe in the benefits of agglomeration, and the creativity that follows, then droves of Chinese moving into cities is very important to the global economy.

(2) Manufacturing: We know that it represents about 40% of GDP (to the extent that you trust the numbers). The Chinese have a major advantage because of their low cost and economies of scale. Not only that, but because they still largely use labor over automated processes, they are better able to customize products to meet the demands of clients. And the Chinese are able to use that low cost advantage to tackle second and third tier markets where the margins just don’t work for the larger multinationals. The only real defense that the West has is brand equity.

(3) Rising Consumers: It’s relevant that Asia’s share of the middle class will rise from 20% to 66% globally in the next fifteen years. What this cohort demands is what producers will try to supply. And, in China, advancements in agriculture and farming is where the current demand exists. Quite frankly, just pay attention to what the Chinese are buying and you could possibly make a buck. (You might note that Michael Pettis argues in his books that consumption continues to be a very small share of the Chinese economy – but even in the face of too much investment, per capita incomes are still on the rise which is what this trend speaks to.)

(4) Money: The banking system and capital flows across the country continue to gain efficiency and grow in size. It is largely guided by the government, but there is also a larger and larger shadow banking system that caters to the smaller- and medium-sized enterprises. The effect is a surge in credit levels, which probably means a bust at some point. The sub-trend, therefore, is volatility in the future.

(5) Creativity: Most people don’t think of China as being an innovator of new technology. But, when you parse through the data, you see how many of the most desired gadgets and doodads are built in China. At a minimum, they are tremendously successful at cost innovation. And they are definitely producing more and more engineers, and improving the educational opportunities for students. The eventual upshot is a marriage of Chinese manufacturing and R&D that should impact the whole world.

(6) Internet: Chinese is already the most widely used language on the web. As such, the growth in Chinese e-commerce is a trend to follow. And pay attention to how the population spends it time while on the internet.

If you have two hours, give this book a read.

Obamacare and Jobs

Courtesy of John Mauldin, I read an interesting piece by Rich Yamarone at Bloomberg that does a good job of explaining how weak payroll reports should be viewed as an anticipated symptom of Obamacare.

Under the health care law, if an employee works more than 30 hours per week an employer has to offer coverage. So when you parse through the jobs data and see that the biggest increases have come in the retail and hospitality sectors, suddenly it makes sense. A restaurant chain has a lot of employees and does not want to incur that insurance expense – so they reduce weekly hours to less than 30 per employee, and make up for it by hiring more people, while still saving on the bottom line because they fall within the ACA exemption. Simultaneously, without these new low-paying jobs, the payroll reports would look a lot more dismal.

Basically, don’t misconstrue the “strong” job growth.

Follow His Lead

The other day I posted a presentation from Kyle Bass and emphasized his comments on Japan. Even earlier in the video, he talked about the U.S. and mentioned the problems in front of Yellen, by virtue of tying the Fed Funds rate to unemployment levels – specifically, given the way the U.S. calculates it unemployment rate, the 5.5% bogey might be hit very soon, even as the economy remains in the toilet.

Lo and behold, a big "upside" surprise in the NFP today dropped the rate from 6.6% to 6.3%. But, on the heels of a very bad Q1 GDP print, and with an NFP report that was really pretty lousy beneath the surface, Mr. Bass seems to be on the money again.

As for that payroll report, I defer to Zero Hedge to enumerate all the problems:

-More people dropping out of the labor force

-Bad results for workers aged 25 to 54

-Since February 2010, workers have been dropping out of the labor force at a faster pace than jobs have been created

Etc, etc...

Why do we fall?

I must admit, today was not a great day. In this most recent episode of growing pains, we confronted another situation in which our equity “partner” seemed to be anything but. Something of a recurring theme, he is a busy guy – but apparently we only get slotted in when there’s a break between lunch and recess.

And in this moment of disappointment and frustration, the feeling you get is that the momentum will never come. That maybe you should give up and go back to whatever you did before, even if it wasn’t that great, because it was consistent and safe, but it didn’t inspire.

That can’t be the answer.

So, you stand up, dust yourself off, and climb back on the horse. What that means isn’t always clear. You have to improvise and force yourself to think outside the box, and do the things that used to make you uncomfortable. Because you want it to work. Which means it is the thing that you were meant to do, right?

Tomorrow’s another day.

“And why do we fall, Bruce? So we can learn to pick ourselves up.”