China

Although China and the United States don’t always agree on everything, their recent dealings have suggested that they were meant to be together. After spending so many years courting China, trying to get the timid nation to open its doors to global trade and business, China eventually came around and the two nations have been riding a honeymoon high ever since.

But things have been a bit rocky recently. They are staring right into each other’s eyes, faces void of expression, suppressing contempt for all the annoying things the other one does, realizing that they don’t have very much in common, and trying to search through the haystack for reasons to stay together.

In January of this year, I posted a piece discussing how we are witnessing the decline of the US dollar as it slowly loses status as the world’s reserve currency.

The price of gold, which was the world’s original reserve currency for centuries, continues to rise, as Investors try to find a safe place to park their money. Greece is being bailed out as it would otherwise have defaulted on its sovereign debt. In the past, this would have been a time where investors blindly purchase the Treasury notes of the greatest nation on earth.

But institutional investors are hesitating as America’s balance sheet continues to accelerate towards insolvency. There is no plan in place to reverse this. Let’s not even bring up the fact that they will have to incur more debt to finance further stimulus in an attempt to end the recession (or what they like to call “jobless recovery”).

Until now, America’s saving grace has been its relationship with China. China is the largest lender to the US, and the main reason is trade. China’s explosive growth for the last two decades is completely attributable to their ability to export manufactured goods, and America is their largest consumer. However, the natural balance of trades when one nation (US) continues to import from another (China) is that China’s currency will rise in value versus the American Dollar. As this happens, it becomes more expensive for Americans to purchase the same goods. That isn’t good for production (China), or consumption (US).

To offset this natural movement in the foreign exchange rate, China lends money to the US by purchasing American Treasury bills. Because these amounts are so large, it pushes the value of the American dollar back up relative to the Yuan. America takes the money it receives from the proceeds of these T-bills, and subsequently lends it out to banks. Banks lend it out to the rest of the economy, and they continue to purchase goods from China. This relationship is what allowed China to experience an industrial revolution for the very first time.

I encountered these facts in one of my most recent readings, The Ascent of Money by Niall Ferguson. He continues by saying, “…the importance of net exports to Chinese growth has declined considerably in recent years.” This implies that making goods affordable for Americans is becoming less important to the Chinese economy.

That statement explains a recent move in the markets by the Chinese government. In this article, the Associated Press mentions how a $5.8 Billion sale of US T-bills by China can potentially raise the cost of borrowing for the US in the future.

The value of bonds is inversely related to interest rates, so such a market move would raise interest rates in the US economy. However, rising interest rates will have detrimental consequences for an economy mired in a recession, as it would contract the money supply and stifle growth.

To top it off, China is trying to have its cake and eat it too. It is in the unique position of centrally controlling its foreign exchange rate, which means as it slowly tip-toes away from being America’s biggest lender, it can simultaneously offset the natural rise of its own by setting its currency exchange rate too low in order to retain its export advantage. The Americans find this practice unfair, as a low Chinese currency means they are able to retain an export advantage over the US and other nations. Because the US is trying to spark production in its own economy, things are heating up.

So now it becomes a political exercise for America to have other countries continue to purchase their bonds and hold the value of the US dollar up. We used to call America the most powerful nation in the world, but that’s no longer true. Power comes from position – you can only have power if others are dependent on you.

I mention Ferguson’s book as he spends a chapter discussing what he calls the symbiotic relationship between the two nations. He makes a bold prediction that we should expect to see tensions between the two nations as China becomes less dependent on the US. He even goes as far as saying we shouldn’t be surprised if it comes to war. In this Newsweek piece, he elaborates on some of the ideas he introduced in the book.

As alarming as that sounds, it’s not an unreasonable conclusion given that every single war mankind has fought could easily be expressed as a battle for economic resources and prosperity. Sure, there are other reasons too. China’s policy on human rights, the questionable credibility of its economic data, currency manipulation…the list goes on. America happily swept most of this under the rug while times were good.

But I understand what America is going through. It hurts to think about China going off on her own, making new trade relationships. At G20 meetings, every nation is hovering around her, laughing at all her jokes even though she’s not that funny. It’s almost as if she used America’s ability to consume goods in order to develop her own manufacturing infrastructure. And now she thinks she’s all that? Does she honestly think she can do better? The natural economic response to a situation like this is that America has to get a much hotter trophy girlfriend instead of whining and complaining about how annoying China is.

We Are Hunted

Here's a new way to find music. Sure, it's just another list. But how they have compiled it is what intrigues me. In their own words:

We listen to what people are saying about artists and their music on blogs, social networks like Facebook and MySpace, message boards and forums, Twitter and P2P networks to chart the top songs online everyday.

You can listen to the entire song and buy it directly from the site. We are beginning to see very unique commercial uses of social networks like twitter and facebook. By organizing all of the clutter from our Twitter/Facebook pages and tracking popular songs, We Are Hunted is able to extract and compile a list we have never seen before.

This is similar to what I spoke about months ago in the use of Twitter for certain stock market traders. In this piece, market traders who believe that the herd will overvalue/undervalue stocks can use Twitter/Facebook/etc to harness the public market sentiment of a stock at a particular time. If they believe the herd is irrational, then they are trying to time their bets against the herd to profit from massive irrationality.

The technology is out there and it's working. If you can think of a particular piece of information to mine from the Twitter/Facebook data set that would have value to someone, it would appear that you're in business.

Taxi!

Torontonians are tolerant people, but ask them about taxi drivers and they will slap you in the face with their frustrations. I’m no different.



Just the other day, my sister and I were going to a house party and we got this: "Can you tell me where that is? I forgot my GPS at home." I shook my head and my sister rolled her eyes. We kind of smiled and stayed quiet, and then my sister asked him, “Maybe you should know where you're going before you start driving.” She actually knew where it was, but I think we were both in agreement that this guy would have to figure it out. Maybe it was the brash way he spoke to us, or the fact that he put us on hold rather than the person on the cell phone, but we enjoyed watching him struggle.



On our way home that night, we settled into a cab and told him our destination, at which point he conveniently remembered that he had to be somewhere else. No eye contact necessary for this one. “Why couldn’t you tell us this before we got in?” “Why is your light on in the first place?” As we were getting out of the cab, a lone girl was about to get in and we didn’t allow it. “Oh, he’s got to be somewhere else!” and when he tried to talk to the girl we cut him off and told him to turn his light off and go away. At this point, if he was going to get another fare, it wasn’t going to be on this block. We were more than happy to waste our time preventing passengers from getting into his cab.



I understand why he did this. He was trying to be efficient. They don’t want my $12 fare, because those 10 minutes might cost them a $75 fare to Mississauga. In other words, it’s better to sit idle and wait for that fare instead of taking us home.

The best fares are a combination of distance and speed. You only need few of those to have a good night. But in fact, it is illegal for a cab driver to refuse a fare in Toronto (unless the driver feels threatened, or if you’re destination is out of Toronto).

Our taxi force is mostly made up of immigrants that can't find work elsewhere and it's getting crowded. It takes a mere 17 days to get a license. I talk to enough cab drivers to know that driving a taxi is just a bridge until something better comes along (taxis and security are the best jobs to have when you are looking for other jobs). It’s a treat to find a cab driver that is actually interested in being a driver. It begs the question: is there another way?

When it comes to Taxis, there's the London way of doing things, and then there's everything else. To become a Black Cab driver in London, England, there is a rigorous examination process that takes applicants, on average, four years complete. "The Knowledge" requires you to learn about 320 routes covering around 25,000 streets and landmarks.

This means being a taxi driver in London isn’t just a job, it’s a career. Because the process weeds out people who aren’t really dedicated or interested, it secures a better lifestyle for cabbies in London. It protects their income because only they can do what they are doing.

It’s also better for the city overall in terms of productivity. London is moving people around faster, which is obviously tough to measure, but a true benefit in a city riddled with traffic congestion.

However, there are downsides to having talented taxicab crew. Have you ever stumbled out of the bars in London at five in the morning? You won't see any Black Cabs waiting. If you ask around, people will point you to the buses. Of course, you'll completely laugh at this idea. If you ask around a little more, people will tell you a secret.

Depending upon your luck, a stranger will pull up in a car and ask you if you need a ride. He will urge you to quickly get into the car so the police don’t see this happening. The secret is that people in London make extra money in the evenings because they moonlight as unlicensed cabbies. These drivers profit from the fares that content cabbies leave behind. But this leaves lonely passengers susceptible to strangers with cars, a dangerous proposition for a simple ride home.

The way Toronto's current system works is to let taxi drivers figure it out for themselves if they are making enough money to live. It is assumed that the ones that make the least amount of money will drop out. It's self-regulated, dog-eat-dog style.

I'm not suggesting a massive reform to copy London's system, but it can't hurt to make the standards a bit higher. We would be protecting the income of cab drivers that plan to do it for a living. We would improve the quality of drivers on the road as well as reduce congestion. We can also stop raising fares so frequently, because the remaining cab drivers would have more work available (freezing fares and reducing the number of drivers helps the remaining drivers but not the cab companies, but I don’t worry about the companies based on the way they treat new cabbies).

I've had a lot of great cabbies, but there is one I'll never forget. When I entered the cab, he asked my permission to avoid the highways because, as he put it, "I have to keep moving." I looked at the clock and figured we had enough time to pursue his neurotic experiment. Was he actually planning on taking backstreets all the way to Pearson airport from downtown Toronto in the thick of rush hour?

That's exactly what he did, and it took him less than 25 minutes. He drove like he was white-water rafting, recognizing the current and letting it take him, but only occasionally re-directing himself toward our destination.

When I asked for his card he said he didn't have one. This guy knew the magic tunnels to the city and I was never going to see him again. I want to meet more cabbies like him. Don’t you?