FuYao is a Chinese manufacturing company that products glass for automobiles companies:
The company setup a factory in Dayton Ohio in 2013 to take advantage of the abundant supply of cheap skilled labor in the region resultant of the 2008 recession.
- globalization continues to apply downward pressure of wage growth around the world for commoditized labor
- automation continues to eliminate entire categories of jobs around the world
In depth analysis of FuYao Glass America
The opening of a plant in the new country can be seen as a acquisition of sorts. Acquisition activities is considered a merge of the following components:
In this case, it could be seen as a merging of FuYao’s culture and process with Dayton Ohio’s asset which is cheap skilled labor.
Below are the key conflicts with the merger
- highly structured and propagandized environment (Chinese) versus loosely structured and casual environment (USA)
- processes built around social norms in a weak union environment (China) versus social norms from a strong union environment (USA)
- productivity and throughput focused paradigm (Chinese) versus safety and family focused paradigm (USA)
- workers paid USD29/hr when working for GM before it shuttered are now paid USD17/hr under FuYao
- governor and grassroots were encouraging unionization to encourage more say American say in the running of the plan
- removal of locally hired senior management (USA) with Chinese senior management (USA) for effective implanting of culture within company
- battling against worker unionization
Leaders impact is more on shaping the attitudes more so than setting legislations
Income inequality caused by globalization and technology has eliminated entire categories of jobs. Wealthy people with excess money to invest due to this aggregation of wealth at the top seeks to maximize their wealth by investing in more and more kinds of financial instruments to return generates. This in turn creates bubbles.
Cost of health care and college education continues to rise as corporate America continues to optimize its monetization engine.
Online media channel consolidation and structural deepening of algorithmic social media newsfeed (Facebook and Twitter) continues to drive polarization of views. The media is primarily geared towards eliciting a response so as to drive conversion rate instead of helping audience develop well rounded perspectives on social issues through holistic presentation of facts.
US is a divided country holding two conflicting points of view which are both very valid given existing set of evidences. This is the inherent drawback of democratic systems when faced with foreign threats. The dysfunction of the Roman military during periods of the Punic Wars is a fine example.
It is noteworthy to observe how populism and militarism tends to rise in times of extended economic hardships and during periods immediately prior to major outbreak of wars. Trump is the modern day equivalent of Franklin Roosevelt and Winston Churchill who were both considered populists during their times.
A democratic nation divided
The technology arms race
The economic warfare
The escalating military tension
Other related readings
This book describes how the 1997 Asian Financial Crisis transpired.
- South Korean
- Hong Kong
- Only 2 of these three conditions can be allowed to be true without causing inflationary recession
- Fixing the currency exchange rates against other reserve currencies
- Control over domestic interest rates
- Control over capital inflow
- On foreign capital flows
- huge volume of foreign capital flows into a country
- economic growth rate increases
- inflation rate stays low
- huge volume of foreign capital flows out of country
- economic growth rate decreases
- inflation rate goes up
Common pattern across countries
The build up
- Long periods of high export lead GDP growth attracts high levels of foreign investments. Huge volume of foreign funds originated from Japan which was having a very loose monetary policy
- Countries peg their exchange rates to reserve currency to ensure stable prices for both imports of raw materials and exports value added products
- Countries currencies are not reserve currency, hence foreign loans were denominated in foreign currency
- Excessive leverage within the country by domestic parties who take on short term loans denominated in foreign currencies at lower interest rates to finance long term projects that generate returns in domestic currencies
- Stocks are purchased with borrowed money. These stocks are then further used as collaterals to borrow more money
- Real estate are purchased with borrowed money. These real estates are then further used as collaterals to borrow more money
- Moral hazard due to corruption of financial system
- banks are arm twisted to finance projects that are not financially viable by governments and politicians
The economic headwinds
- countries face increasing export market pressure
- Competition at the low end of the export markets from China
- Competition at the high end of the export markets from Japan
- Japanese government instructs central bank to tighten monetary policy to reduce real estate. This severely restricted liquidity from Japan and reduced availability of short term foreign loans to affected countries
- Borrowers within these countries increasingly experienced difficulties rolling over their foreign denominated short term loans to finance their long term illiquid domestic projects
- Many of them started defaulting on their loans
- Foreign investors started getting spooked and started withdrawing their funds or refusing to allow their loans to roll over
- Non-performing loans builds up amongst banks within these countries
- Capital flight continues causing downward pressure on the exchange rates of these countries
- Countries continued defending their exchanges rates by buying up their own currency and selling off foreign reserves (assets held in foreign currencies)
- Countries deplete their foreign reserves and are unable to uphold their exchange rates. Since most debts are denominated in foreign currencies, they are not able to print money to pay off these loans.
- The economy grinds to a halt and hyper-inflation occurs within their financial system at this point
- domestic production stops and locally produce foods is no longer available for sale
- due to shortage of foreign reserves imported products become very expensive in local currency
- Countries approach IMF for loans to tide through this liquidity crunch.
- IMF steps in and with a lack of understanding of the economic patterns imposes these requirements:
- Countries required to impose high domestic interest rate. It has the effect of further reducing the money supply within these countries causing more defaults domestically.
- Countries will reform the financial systems to remove cronyism lead financing
- Riots ensures and Anti-establishment governments get elected in some countries
- IMF releases the misstep in policies and relents
- Countries lower their domestic interest rates to increase liquidity within their financial system
- Countries allow their exchange rates to float freely
- Relatively cheap asset prices within these countries starts attracting foreign investments again
For us to be able to successfully apply artificial intelligence on any domain, the following needs to be true
- The behavior the system to be modeled must not be stochastic
- The state of the system must be decipherable by the data scientist
- it should be possible to understand the state in which the system is at through interpretation of data gathered
- The domain can be modeled
- the parameters for modeling the domain must be well defined
Only when all three premise are true can we determine where the adjustment should be made when a model fails to predict an outcome
The financial markets is stochastic in the short run.
The underlying parameters are constantly changing and thus hard to model due to the emergent nature of impacts caused by human activities. The data is qualitative and thus hard to convert into clean quantitative datasets.
While the price movements are obvious it is hard, it is hard to attribute impact to the various parameters.
As such, it requires human neural networks that consumed all these qualitative data to perform the prediction/decision making.
After the 2008 financial crisis, legislations like the Volcker Rules to inhibit big banks from behaving like hedge funds. They are no longer allowed to engage in any forms of trading or financial innovation which leads to excessive multiplying of money supply leading and excessive leveraging within the banking systems.
Their income is thus restricted to investment banking commissions and net interest incomes.
Long-Sought Volcker Rule Revisions Land on a Changed Wall Street
This book documents the series of regulatory missteps from the 1980s to the 1990s that lead 50% of savings and loans in the US to insolvency. During this period the total number of savings and loans decreased from 3,234 to 1,645.
The savings and loans are a special group of banks that are encourage to grow by the US government to enable affordable housing after the world depression.
They take in short term savings deposits at lower interest rates and lend out long term mortgages at higher interest rates. They profit through the net interest income generated between the short term interest rates and the long term interest rates.
Events leading to massive failure
- During the Vietnam war, inflation which drove short term interest rates increase. This cannibalized SnLs’ profit margins.
- De-regulation of short term interest rates which lead to increased competition by other banks for deposits. This lead to the inability to attract deposits at feasible rates to finance SnL’s long term illiquid mortgage loans.
- The US government instead of recapitalizing these insolvent SnLs opted to de-regulate by allowing them to enter into other high yield investment instruments. This is in hopes of they will be able to rebuild the capital and thus minimize the amount of burden to be imposed on tax payers
- Entrance of new entities
- mutual funds competed for deposits
- Freddie Mae and Freddie Mac competed for mortgages
- SnLs ventured out of their areas of expertise and started buying into high yield corporate junk bonds and unsecured commercial loans.
- With minimal equity stake in the game due to years of erosion and an implied government guarantee for a bail out in case things go south, SnLs began aggressive leveraged into these positions.
- The US government reversed it stance and past regulation against SnLs holding high yield investment instruments. The forced liquidation of relatively illiquid positions further exacerbated the situation.
- Government meddling in market mechanism to further political agenda is generally a recipe for disaster
- Venturing beyond circle of competence in search of high yield is generally a recipe for disaster
- Overt or implied guarantee of government bail out is a source of moral hazard that leads to excessive leverage by operators which is definitely a recipe for disaster