Tag Archives: revised

[REVISED] Who Touched My RMB?

It’s always interesting to see how economic predictions and financial manipulations fail in China. The ridiculously high population/resource ratio turns China into a hungry giant that can easily overturn any rules: the Wall Street tycoons lost to Chinese housewives during the “gold battle”; Chinese government tried to stop the housing market’s craziness but ended up being one of the biggest obstacle to the success of taming the market. The list goes on and on.

And now it’s the RMB issue again. Bear with me if this topic is becoming increasingly boring for you. As the RMB’s behavior is totally going against the theory, it’s tempting to looking into the reasons behind all the weirdness.

Ever since the year of 2005, RMB has been appreciating internationally while depreciating domestically.


Picture source: XE


Picture source: Trading Economics

As explained clearly in this about.com thread, the value of a currency should be synchronized domestically and internationally. On one hand, when the exchange rate of RMB goes up, in theory, the demand of RMB will increase, leading to a decrease in the amount of liquidity, therefore the inflation will be alleviated, and eventually the value of RMB will go up. On the other hand, a higher value of RMB attracts investment from oversea, which will lead to a higher demand of RMB in the foreign exchange market and therefore drive up its exchange rate. However, historical data suggested differently: internationally up, domestically down. Why?

It’s a known fact that RMB was long undervalued in the foreign exchange market because of the government’s intervention. As Beijing gradually loose the leash, the exchange rate is bound to increase. So it must be the inflation, which comes from within the country, that’s causing the mismatch problem.

About the inflation, the government claims that “there exists measurement error that skews the statistical data”, and “the CPI data doesn’t fully reflect the reality”. Of course these official speech is too ambiguous to be believed, let alone the “CPI misreporting” can be interpreted both ways. As I see it, this inflation is due to the governments’ over-manipulation to the economy.

This manipulation is not the usual fiscal and monetary policy we’ve seen everyday. The level of governmental intervention in China is much higher than that. Since it’s difficult to explain this in theory, I’ll demonstrate it with China’s “land finance” example.

By constitution, all lands of China are owned by the central government. Therefore, Chinese government has control over the real estate pricing. To stimulate the local economy, local governments make huge spending every day, which almost always yields to budget deficits. To compensate the deficit, the most effective way is to sell the lands that are owned by the government. This is when things get crazy: since the government has control over the lands’ price, it can sell a certain piece of land at an extremely high price. And thanks to the heated housing market, there’s always a buyer. As a result, the price of houses almost doubles every year. House owners’ pockets are therefore inflated. The liquidity drastically increase in the market, and hence the inflation.

This kind of government intervention to the economy is not something foreseeable from the textbook, and the “land finance” is merely one piece of the puzzle. In a not-so-liberal economy, the government’s overexertion of its power to gain short-run benefit is clearly bringing problems to the economy. The mismatch of RMB value is one such example. What’s next? How to prevent these problems from happening in the future? Beijing needs to give better answers to these questions.

[REVISED] Bitcoin. Yea or Nay?

Was the shutdown of Mt. Gox, one of the major Bitcoin Exchanges, signifying the doomsday of Bitcoin?

No. Although $400 million worth of Bitcoins have lost as a result of the heist on the exchange, Bitcoin is far from a failed attempt. As an up and coming cyber currency, Bitcoin is going through the roughness during its infancy of being a “cyber product” and a “currency” at the same time.

Like every other cyber product, flaws and bugs are inevitable. Therefore Mt. Gox’s incident is not completely unforeseeable. Sooner or later, another bug will be exposed, some people will be hurt, some agency will lose its reputation, and some superhero will come to save the world. The release-bug-fix-release loop of software development has defined the imperfectness nature of bitcoin from day 0.

Bitcoin as a currency, although rebellious in nature and virtual in existence, is still exposed to the risk of being stolen. In fact, the $200 million heist is not the biggest heist on currencies. Beside no firearms involved and nearly untraceable, I don’t see the Mt. Gox meltdown any different from other bank robberies.

So, does Bitcoin have no problem at all?

Absolutely not. When it comes to security and trustworthiness, Bitcoin is much inferior to the dollar bills. In terms of security, in good days, Bitcoin is safe because it’s untraceable. When things go south, however, Bitcoin can be very dangerous, also because of the untraceablility. In the Mt. Gox’s incident, no one can find the suspect, let alone reclaim the money. The double-edged sword of information privacy makes Bitcoin a perfect choice for illegal transactions, and the worst option ever for people who want to secure their money.

In terms of trustworthiness, since Bitcoin is decentralized by design, there’s no institution backing it up. Columnist Megan McArdle explained this very clear in her article:

“… as yet, no currency exchange (for bitcoin) like the ones we use for regular currency — backed by large institutions that can be sued if things go wrong. … for folks in the regular old economy, that’s a problem. It’s hard to get enthusiastic about saving in a system where hundreds of thousands of dollars can disappear overnight, leaving you with no recourse.”

Now, what’s Bitcoin’s future?

I’ll argue that Bitcoin will continue to exist, but not as a full-fledged currency.       On one hand, a currency must be durable, divisible, transportable and uncounterfeitable. Although Bitcoin satisfies the latter three, it fails to be durable in terms of retaining the same value over time, which is the most important characteristic of money. On the other hand, even if someday Bitcoin managed to stabilize its price-to-dollar and became a reliable currency, it’ll receive enormous pressure from the government. The better it does at evading governments’ surveillance, the harder the governments try to shut it down. At the end of the day, it is the government that controls the ecosystem, and never will it allow the existence of a currency that poses a potential threat to the homeostasis.

As a result, for Bitcoin to be a successful currency, it has to fundamentally alter the economy system and take “government” out of the equations. Ironically, in order to be strong enough to fight with the government, it has to be accepted by the vast majority first, and that’s only achievable without the big brother’s interference. Simply put, Bitcoin can’t beat the government without first beating the government. This paradox has decided the cryptocurrencies’ defeat: you can be either a crypto product, or a type of currency, but you can’t be both.

Revised: New IPOs Could Signal Future of Tech Stocks

If all goes well, this week has the potential to mark the biggest week in IPO’s since November of 2007. With the current market conditions of a strong S&P 500 and a continued demand for US stock mutual funds, many companies have pushed to expedite their listings to occur before the holiday breaks. The significant take away from this week will not only be the $4.8 billion raised, but rather the reaction that Wall Street has to high growth tech company IPOs. (WSJ – US IPO Market Expects Busiest Week Since 2007)

I have been writing a lot recently about the absurd valuations and acquisitions occurring in Silicon Valley and it appears that this view has caught on in Wall Street. This past month multiple high growth tech companies that have business models based off the “cloud,” “social media,” or “big data” dropped significantly in share price.

According to Wall Street Journal writer Dan Gallagher, “The Nasdaq Composite is down about 5% over the last month, but has seen short-term drops of about 10% on at least four occasions over the last five years. In those instances, the losses were erased in a matter of weeks.” (WSJ – Opening the Box on Tech Stocks Next Move) Despite this recent correction, many of these companies that fell in share value are still trading at valuations much higher than their peers. For example, cloud based software provider Workday (WDAY) fell over 20% this month yet today was still trading at 17.6 times forward sales, whereas its biggest competitors Oracle and SAP are only trading at four times forward sales.

It appears that Wall Street is finally reaching an inflection point where they are forced to question whether or not the premiums attached to these high growth tech companies are warranted. Many of these companies have shown the ability to increase revenue rapidly. But with this being said, many still operate net losses as their sales and marketing expenses increase in order to fuel revenue growth.

An example of such a company that has been successful at increasing revenue but not fending off losses is cloud-based data storage company Box. Box has seen year over year revenue growth of more than 100%, but has also increased its net losses just as quickly. Box plans to initiate its public offering later this month. The degree of success of Box’s IPO will be a good signal to the street of how the market is currently perceiving high growth tech companies. A failure in Box’s IPO will inevitably slump the market for all high growth tech companies.

In my opinion, as these new Silicon Valley tech companies are undergoing a consensus check a safe market play would be to move out of these companies and place money in proven tech giants such as Cisco and IBM. The drop in share prices of high growth tech companies this past month may prove to be a great entry point for speculative investors, but as long as these companies have valuations exceeding their proven competitors by four to five times I believe that they are far too risky for investment.

[REVISED] Why Google Will Live and Facebook Will Die

Give me a good reason why Facebook spent 19 billion for a 55-employee company with 450 million monthly users, 2 billion for a virtual reality headset that’s never been shipped and 3 billion trying to acquire a mobile app company that only let’s you stare at a picture for 10 seconds.

If you separate facebook.com the website from Facebook the company, the reason behind all these ridiculous moves should not be hard to see. Let me explain.

Like I said in my other blog post, facebook.com is no longer a pure social network, it’s a giant ad board. To maintain its revenue stream, Facebook uses all its resorts to keep on fine-tuning its ad engine and keep on spamming all its users to get a better click-through rate. Little effort was spent on improving user experience. We, the users, are annoyed. And for that reason, facebook.com is not cool anymore.

“I’m 13 and none of my friends use facebook.” True story.

To steal some wisdom from Burton G Malkiel’s book “A random Walk Down Wall Street”, where he explained the two traditional asset valuation approaches: the firm foundation theory and the castle-in-the-air theory, I’d like to relate Google’s success and Facebook’s fatal destiny to the two theories.

Google based its value on a firm foundation. As a search engine, google.com is the entrance to the Internet. It has the ability to control (on a certain level) the distribution of information, much like Walmart in the real world. People can’t navigate the Internet as smoothly without Google. As a result, Google’s price is set on its intrinsic value.

Facebook, in contrast, is more like a castle in the air. Unlike Google, facebook.com is not a necessity. People can still keep in touch with friends and stay in sync with news without social networks. Facebook was successful not because facebook.com was the prettiest face on the newspaper, but because it was the mostly favored face (A Random Walk Down Wall Street, Page 32). It gained traction when it was cool. Now that facebook.com has lost its “cool” factor, people will stop using it and divert to other “cooler” products shall there be any. The story of how Snapchat beats facebook.com is one great example. In short, most, if not all, of Facebook’s market value relies on the “coolness” of its products.

Facebook is definitely not unaware of that. Hence there came the biggest acquisitions of startups of all time. Through buying Instagram, WhatsApp, Oculus VR and many other companies on this list, Facebook is pouring money out to be cool, because the only way to keep this castle from collapsing is to keep it staying in the air.

Now why Facebook will die and Google will live? Consider Malkiel’s opinion about the Internet Bubble and the market’s response to irrationality: “the market at times can be irrational… But eventually, true value is recognized by the market, and this is the main lesson investors must heed.”

Although Facebook lives in the air thanks to the love from the Internet users, overtime, the market will come back to rational and recognize Facebook’s true value. Facebook can keep on buying all the trending companies to stay afloat, but if it couldn’t find a core value proposition solid enough to build a firm foundation upon, it will fail eventually.

Google, on the other hand, as the central hub of the world’s information, has laid a foundation firm enough to sustain itself. Now with the unbeatable advantages on what it knows about the world and how it interacts with the world through technologies, Google is going to continue its successful stories in the future.

Revised: Explaining the Tech Acquisition Frenzy

Authors Reed Albergotti and Rolfe Winkler try to explain the acquisition frenzy that is currently occurring in the tech marketplace. According to the article they published in the Wall Street Journal titled, “Cash, Paranoia Fuel Tech Giant’s Buying Binge,” the major tech companies are currently experiencing a “combination of fear and primal ambition leading to one of the biggest buying and investing sprees since the dot-com era of the late 1990s.” This article comes after the unexpected acquisition from Facebook of the virtual reality headset maker Oculus VR for $2 billion. (WSJ – Facebook to Buy Virtual Reality Firm Oculus for $2 Billion.)

These acquisitions come in the midst of the struggle for these tech companies to maintain their dominance in the industry and control the entire tech spectrum. Due to the high amounts of cash that these companies are currently sitting on, many of these executives are willing to risk paying premium prices on companies that dominate a high growth niche in the tech marketplace. According to the article, for many of these tech companies, such as Facebook and Google, their business models are based on the information they can obtain from their users and sell to customers in the form of ads. Essentially the more information they can obtain about a user, the more money they can make from advertising to that user.

In my opinion there are two distinct potential outcomes from acquisitions and overall technology expansions. The outcome that it appears many tech executives are using is the Nokia example. Less than a decade ago Nokia was the top mobile phone maker in the world; they sold more handsets than any other company by a longshot. The executives believed that smart phones would be a small market niche that would never scale further due to high costs, so they decided to invest minimally in their smartphone handsets and continue to focus their attention on affordable flip phones. As smartphones took off, Nokia was left in the dust by Apple and Samsung and have struggled to break back into the handset market with their new Windows Lumia line. This side of the story shows a company that was too set on their old ways and was left behind in a fast growing market.

The contrarian example is the Yahoo acquisition of Mark Cuban’s Broadcast.com in 1999. Yahoo made the biggest tech acquisition at the time ($5.7 Billion) and put all their chips on the bet that online video streaming and audio broadcasting would be the future of the internet. By making this one-sided bet on Broadcast.com, Yahoo neglected their fundamental business component – their search engine. As their focus wore off their search engine capabilities, Google was able to surpass Yahoo and seize valuable market share in the search engine market. Yahoo’s misguided acquisition of Broadcast.com has negatively impacted Yahoo to this day as they gave up valuable market share in their most key business component.

Time will tell whether or not recent acquisitions, such as Oculus VR, will pan out for these tech giants. I believe that acquisitions made in order to stay on the cutting edge of technology is essential in the tech industry, but as these companies are willing to risk more and more capital on high risk acquisitions in order to diversify their landscape it will become inevitable at some point that one of these risky investments will prove to be disastrous for the longevity of a company.