12 Important metrics for short selling

Posted on July 24, 2016July 24, 2016 by fqzhang

Intro:

In my previous experience in short-selling, many different quantitative and qualitative metrics were used to filter through prospective short-sell candidates. Many of these that I am about to discuss are frequently used in the entire industry, and you will definitely find a list that are even more comprehensive elsewhere on the web. Of course, as the sophisticated investors know, each fund is unique in its approach in determining what metrics are important and weigh it accordingly in their overall model. For instance, some more quant-driven funds prefer to include as many variables within their models as possible and to encompass all possible factors that can affect a company’s earnings (causing the earning to go lower, in the case of short-selling); while more fundamental funds focus on a few core variables and do more in-depth investigations to build up a story of the company and decide then whether or not to short the company’s stock.

Most of the information presented here can be found through one of the financial services websites/tools commonly used in the industry. Personally, I have used Capital IQ for many of the financial metrics. More sophisticated investor may decide to use a combination of different services and/or build their own tools to gather data. In this article, I have used the words “quantitative” and “financial” rather loosely and at times interchangeably; and “qualitative” and “non-financial” as well. I apologize in advance some of the confusions this may cause.

Without further ado, here are some of the most important metrics, 6 each for both quantitative and qualitative factors:

Quantitative/Financial factors:

Short Interest: This ratio essentially tells us what percentage of the shares outstanding is held for purposes of short-selling a stock. The higher the short interest, of course, the more likely the investor believed that the stock is likely to fall in price.

What it means: For investors, this can be an indicator that the market is overly pessimistic on the stock or that everyone already knows that it is a bad stock. I would recommend that investors not get into stocks with high short interest for a few reasons. First, this suggests that there is likely few profits to be made if everyone already recognized the mispricing. Second, for short-sellers to profit, they must buy back their position, which causes a spike in the price. This can be a rapid increase if too many short-sellers “cover” at once, resulting in a situation that is termed as a “short-squeeze”. Investors many not profit in this case. Finally, as hedge funds and active investors in general want to “beat” the market, it is important to realize that you can’t “beat” them if you invest like what the rest of market is thinking.

Stock Loan Fee: This is the price that an investor will have to pay to borrow a stock. This is provided in a percentage (the cost of borrowing/share price). Generally the short-seller’s prime brokers (the guys who loans out the stock) will provide the borrowing cost number to the borrower.

What it means: As with short-interest, a higher percentage of borrowing cost suggest that many investors are expecting the stock value to fall. Depending on the demand and supply, borrowing cost can become exorbitantly high, and investors should be aware that this interest can eats away at returns substantially the longer the short position is held out.

Days Inventory Outstanding: This financial ratio from the balance sheet is simply how long the company takes to collect its inventory. It is calculated by (inventory/COGS)*365. This ratio – also going by the name of “Days Sales of Inventory” – generally gives a good indication of how long the inventory is held by the company before sales occur.

What it means: In general, the longer the inventory is stored, the worse it is for the company. This means that the company is having a ton of inventories but aren’t able to generate sales on those inventories. This can suggest that a firm is incapable of selling goods due to operational issues. As with all ratios, comparisons over time is crucial, if the firm has been increasing its in Days Inventory Outstanding, that is definitely a bad sign. Similarly, horizontal analysis between different firms within the same industry tells us how the firm is doing in comparison to its peers.

Days AR Outstanding: like its cousin “Days Inventory Outstanding”, this ratio also measures a company’s collection period. In this case, it measures how long it takes for companies collect on their accounts receivables, and turn them into cash.

What it means: This ratio is frequently used in forensic accounting due to the fact that many accounting frauds involve 1) overselling to their buyers even when there are no demands, and thereby increasing their revenues or 2) companies book fictitious AR sales when in fact no such transactions happen. Higher Days AR outstanding is certainly not good, and a pattern of increase days AR outstanding is certainly worrisome.

Comparison between cash flow from operation increases and net income increases: There probably is an actual name for this type of comparison, but the name is escaping my mind right now. Company’s net income and cash flow from operations should move in the same direction, and with some exceptions, be of the same magnitude.

What it means: comparisons between cash flow and net income is important because this tells us whether or not the company is truly turning those “net incomes” – which is an accounting construct – into something more tangible – cash. The general idea is that while earnings (net income) can be easily manipulated, cash flow is much harder to be tinkered with.

EV/EBITDA: This is perhaps the most commonly used and the most important among all the ratios discussed. It is calculated by EV: (market common stock value +debt + preferred equity + minority interests – cash/cash equivalents) divided by EBITDA (Earnings Before Interest, Tax, Depreciation, and Amortization). This is the theoretical value that an outsider buyer would have to pay to by this company from the market.

What it means: Value investors use this frequently to find the whether or not a company is undervalued, and this offers a much more comprehensive look than the more commonly used P/E ratio, since it takes into consideration debt. It is often thought of as giving a “truer” value of the company.

Experienced investors will notice from the above list that several of the mostly important metrics that the long-side use to discover “value” stocks are not used; namely: P/E ratio, P/S, Debt/Equity, Interest Coverage ratios, etc. These ratios are absolutely necessary to look at as well, but for the purpose of this article, I am emphasizing only the important ones for short-selling. Value investing and short-selling are in fact two-sides of the same coin; whereas value investors want to find undervalued companies, short-selling want to find overvalued ones.

Qualitative/Non-Financial Factors:

This section is much more open to debate and I included only the 6 that I have come across the most often to give a sense of the wide variety of non-financial factors that can affect stock performance. Many of these can be tracked, and especially with advancements in natural language processing, these qualitative factors can in fact be quantified and placed into a model.

Location of firm’s headquarters, region of operation, etc.: Always beware of where the company is based at, as some locations are inherently more questionable than others. An investor should also beware of constant changes in a company’s location as well.

What it means: Location, location, location. This matters in more than just a real estate sense of the word. Where a company is headquartered matters and having its operation based in a region with more governmental oversights versus less oversights is vital in evaluating the firms’ long-term survivability when the regulations do tighten.

Number of years of experiences of management team: Looking at the average number of years of experience for the managers of a company can give a good idea of how the firm will be able to weather the next financial storm.

What it means: A younger average age for a management team is not necessarily a bad thing, as the young can always bring fresh ideas to the top. It is however, always questionable when someone with no real prior experience in managing companies suddenly becomes a more senior member of the team. Experience at the top is generally a desired quality.

Number of documented SEC filing changes: This is a very well know one, and academic studies have been done on this subject. Firms must file to the SEC certain material changes to their operations, namely that of 8-K (current report), and other mandatory press releases. More frequent filing generally does not bode well for the company.

What it means: It has been found that firms that file more SEC filings have a tendency to engage in fraudulent activities, since they may be constantly trying rebrand themselves to investors. Firms, as a rule, should expand orderly and methodically, and any changes to its operations should be done infrequently and with plenty of preparations. Frequent SEC filings suggest otherwise.

Number of CEO/Top Management changes: Technically this counts as part of SEC filings. But I would like to break this out because management is such a critical component of a company. As with SEC filings, the more frequent the management changes, the less credible the company becomes.

What it means: As the people in charge of setting a strategic direction for the company, we want to see consistency in the direction-setting for the company. Frequently changes at the top affects the morale down to the employee, and suggests that the company do not really have a good sense of where is heading toward.

Executive pays in relation to firm’s performance: While it is difficult to fix a ratio to executive pay to firm’s net income, a much more realistic ratio lies with percent of executive pay increases versus earnings increases. Executive pays tie into stock performance (This is all part of the “shareholder model” of corporations where there is a perceived “principal-agent’s problem” and be partly solved by incentivizing management with stocks), and the pay can be lopsided in favor of management even when they are not really delivering value to shareholders.

What it means: When management team have been paying themselves a handsome salary while the firm is still deep in the red or have a lackluster performance, that should most certainly be a red flag.

Insider transactions: SEC also requires this to be disclosed, as it shows how much stocks the company’s executives are buying or selling.

What it means: While insider buying almost always is a good sign for the company, as it shows the insider’s confidence in the company’s ability to generate revenues and profits in the future, insider selling can be a bit mixed. However, if all insiders are unloading their stocks simultaneously over roughly the same time period, this is certainly not a good sign.

Here again, I must emphasize that the non-financial factors are highly controversial and every firm approaches it differently, and these lists are far from exhaustive.

Conclusion: As we can see above, a number of ratios and metrics have been used by professional investors in identifying short-sell candidates. When using these metrics, always make sure to compare it with the same company over time (i.e. vertically), and with similar firms within the same industry (i.e. horizontally). Valuation does not mean much if you cannot compare it to another firm or the same firm over time.

In practice, I believe that all of the metrics can be quantified in one way or another, perhaps some can be quantified with a greater precision than others. Short-selling is certainly filled with risks and dangers, but with the right tools and the correct analysis, I do believe that “Alpha” can be generated on the short-side. Good luck investing.

Disclosure: This article represents opinions that are entirely my own, and should not be taken to be the opinion of any individual/company that I have worked for, past or present. I am not and do not purport to be a registered investment advisor. This is not an offer to buy, sell or market any securities. Short-selling is risky and you may lose all of your initial invested capital. Short-selling is recommended for experienced investors only.

Revisiting the issues of labor discrimination

Posted on March 1, 2016April 21, 2016 by fqzhang

It is generally accepted by economists that discrimination is an influential factor in affecting the functioning of a modern day economy. Theories regarding discrimination – its impacts on the global economy and possible solutions to the problem – have been debated and argued by influential economists over the decades. A key question that we ask ourselves is: will the market regulate itself and be able to eliminate discrimination, or does the government have to intervene? If so, what is the best approach to government intervention? This question can be seen as a part of the larger debate between the neoclassical economists and the Keynesian economists over the role of government in our economies and social lives.

This problem of whether or not to regulate the issue of discrimination has been debated by politicians and economists over the years, especially since discrimination is not only an economic issue, but also a social one. Historically, governments have taken a generally laissez-faire approach to economics in society, and regulations are few, especially in the US. This changed dramatically starting in the late 19^th century, with the emergence of populist movements such as women’s suffrage, and accelerated dramatically during the two World Wars and the Depression era, when governments began to take a more active economic role in society and mandated fairness in hiring in order to receive federal funding. Finally, the Civil Rights movement of 1950s and 60s pushed the issue to the forefront and the government enacted broad legislations regarding labor employment practices. Two of the most notable legislations of the period are the Equal Pay Act of 1963 and Title VII of the Civil Rights Act of 1964. The Equal Pay Act have stated that firms should take into consideration a person’s gender in the determination of wages using the theory that that the same amount of work deserve the same amount of pay. Title VII of the Civil Rights Act made it illegal to discriminate based on a person’s “race, color, religion, sex or national origin”, and implemented a comprehensive list of anti-discriminatory methods.

However, in more recent years, the problem of discrimination takes on a new turn with the rise of “Deregulation” and the stepping away of government from some of its historic stances on promoting more equality in the market-place, and igniting the debates anew.

The current consensus is, in a way, a reaction against the free-market advocates, which have become especially popular in the US since the 1980s. In fact, it has been argued by economists that discrimination has increased from the ‘80s onward, in large part due to the popularity of this line of argument. We can examine this opposite side of the argument by looking at the positions taken by two of the greatest economists of the latter twentieth century: Milton Friedman and Robert Lucas. Friedman had argued that the free market will resolve the problem of discrimination itself because discrimination is inefficient in the long-run (“Capitalism and Freedom”, 1962). In one of his most often quoted passages, he stated “It is a striking historical fact that the development of capitalism has been accompanied by a major reduction in the extent to which particular religious, racial, or social groups have operated under special handicaps in respect of their economic activities; have, as the saying goes, been discriminated against.” Friedman believed that the employer’s self-interest will cause them to overlook the other categorical attributes of an individual in favor of whoever can work the cheapest for the most amount of productivity.

On an interesting note, Friedman was himself the subject of discriminations during his times at the University of Wisconsin at Milwaukee, and one of the chief reasons he chose the University of Chicago for its PhD program was due to its open and more tolerant environment. In a sense, Friedman affirmed the idea that discrimination is detrimental to the employer (in this case the university) by “voting with his feet” to a location that was more tolerant.

Writing along a similar line, Robert Lucas stated that any irregularity in the “Market” introduces a distortion that will resolve itself over time. And in his view, government attempts in ending discrimination will simply introduce new inefficiencies in the marketplace that has to be resolved. What both of these economists suggested is that firms are very rational and they pursue the maximum amounts of profits possible. In order to do this, it only makes them to only care about costs and benefits, and since race/ethnicities/gender, etc. does not have a specific benefit or cost associated with them, firms will not discriminate. For those firms that do discriminate, in the long run they will become inefficient and the competition will eliminate them from the marketplace. The free market is the best left alone, according to Friedman and Lucas, since the mechanism of incentives in a rational society will help to eliminate discrimination and get rid of these inefficiencies.

Meanwhile, the mainstream have taken the view that in order for discrimination to be solved, the markets must be regulated through governmental legislations and acts. They are essentially arguing for a top-down, command-and-control method in regulation approaches to enforce those regulatory methods. Many noted that more regulation has been the historical trends, as more legislations have come on board over the years to prohibit certain behaviors from employers. They outlined two main approaches by governments to combat discrimination. The first is what is generally referred to as “Nondiscrimination” where employers are essentially blind to race, ethnicity, or sex, and to determine that those factors should not play any role in the selection of workers (This is the principle behind the Equal Pay Act). The other approach is termed “Affirmative Action”, where employers MUST take race, ethnicity, and gender into account to ensure fair representation, especially for historically disadvantaged groups. These two approaches have proven to be somewhat contradictory, i.e. how to ask ask employers to be blind to the differences between workers while at the same time be cognizant of the fact that certain groups should be considered more highly, holding other factors constant? This contradiction made it difficult to implement some of these methods in ending discrimination, and it is somewhat flawed as a result.

In addition, Title VII also distinguished between disparate treatment and disparate impact; where disparate treatment is defined as being proof that the workers are intentionally being discriminated against, while disparate impact are defined as result from actions, however unintentional, that results in some groups being disproportionately impacted. All of these are important considerations for firms that are trying to avoid discrimination.

In cases where it can be difficult to implement equal for equal work, they introduced the idea of comparable worth to help measure employee value. Often, many noted, it is impractical to “achieve equal pay for equal work”. Therefore, some have supported the goal of equal pay for jobs of “comparable worth”, and what determines the comparable worth is market forces. Comparable-worth policies have generally relied on job-rating schemes by employers to determine or justify pay differentials. However, this job-rating scheme is highly subjective and subject to great controversies.

As a case example, many pointed to the example of the Federal Contract Compliance Program, where governments monitor hiring and promotion practices of federal contractors. This program utilized affirmative action to ensure that groups that have been historically disadvantaged received preferences. In terms of absolute numbers, the federal contract compliance program increased opportunities for minority groups tremendously. The concerns with these programs is that when underrepresented groups are given preferences in hiring, this might result in less qualified workers being hired. And since the programs only covered the federal contractors, it is possible that while the program attracted talented minorities, there might be no overall gains in employment due to other sectors of the economies being neglected. As evidence of the effectiveness of the government programs, some have pointed out that government policies have distributed new employment opportunities among federal contractors towards blacks and Hispanics. The ratio of black to white incomes has risen since the 1960s, but we cannot effective draw causation relationships between this and the governmental legislations.

Finally, the mainstream believed that it is important to continuously monitor the economy to catch discriminators. One way to do this is to conduct an audit where blind experiments are conducted, telling auditors to look at firms and measure the effects of discrimination. However, these studies are very difficult to conduct since the auditors cannot know the purpose of the experiment (since that will introduce an element of bias), while at the same time, they are very difficult to conduct due to cost constraints. In another famous experiment, which has since been replicated worldwide, experimenters send out resumes to a number of different firms. It was found that white-sounding names needed 10 resumes to receive one call back, while black sounding names required 15 resumes to receive one call back, a 50% difference in employer response rate. However, even this experiment can be subject to bias, as the names may in themselves be a signal on the quality of the workers, and not necessarily having anything to do with race itself. For instance, it is possible to have a name of “Jared” being associated with a bad worker, but not necessarily to that person’s race.

I believe that while the the mainstream’s position is elegantly argued for, and we agree with the general premise that the markets need to be regulated. However, I believe that regulations may not work in all cases. The solutions many economists presented are excellent, but may not be adequate since it doesn’t allow a degree of freedom to the individual to decide in specific cases of discrimination. Governments can do a number of other things that can combat the effects of discrimination, besides direct, top-down regulation. I believe that the government should embrace a comprehensive, top-down approach in fighting discrimination, while at the same time, it might work with other players in the market so that anti-discriminatory laws can be used effectively and efficiently.

Firstly, I believe that free markets are efficient in the sense that it generally can allocate resources as needed to the market actors. Markets generally have a very remarkable ability to become efficient with the right incentives. However, in the case of discrimination, it may become inefficient due to the lack of those incentives. In many cases, discrimination can be good for businesses since they are able to charge different wages to different individuals, and they are able to get the same amount of work out of some workers while costing a fraction of the wage expense. This has historically been the case with what we call the “gender wage gap”, where men and women are paid different wages for essentially the same amount and quality of work. In addition, we often see firms hire workers whom they or their employee knows well (a network effect). This can be discriminatory because the results (disparate impacts) can be discriminatory in nature. The only way to solve these issues is by having firms being regulated directly by the government to change the historic legacy.

Secondly, I believe that governments should take a leading role, but not the only role in helping to end discrimination. A government’s approach should be based on both “carrot” and “sticks”. Governments can directly punish the worst discriminatory offenders, while at the same time, they offer incentives to encourage diversity in the workplace. Governments should consult the private sector to see why they may not want to hire women/minorities, and work with them to help design incentives to help end discrimination.

Thirdly, governments can also utilize other methods that are not direct regulations, for instance through education in non-discrimination. This in fact has been promoted in the schools’ educational curriculum in the past few decades and have been credited with helping new generations of workers and employers understand the value of diversity in the workplace. Educational changes can cause the deepest changes in the way workers interact with others and in a firm’s hiring practices. In many cases, the markets simply are not aware of the potential benefits a diverse workforce can bring along, and it takes some educational efforts, in part facilitated by the government, to change the firm’s hiring practices.

Lastly, I believe that the free movement of people has been extremely beneficial for firms and discriminatory practices would stop this free movement of people. Government should do all it can to make sure that worker mobility is not impacted, as historically, workforces that move around tend to reward firms that are the fairest and most efficient at utilizing labor. For instance, during mass construction projects that are undertaken by the government or large corporations in the past, people of different ethnicities often come and work together, albeit sometimes on different parts of the same project (i.e. the transcontinental railroad). This has been very beneficial for the employers as they are able to attract the best talents due to the mobile workforce.

To conclude, I believe that our solution is a compromise between the neoclassical, free-market advocates on the one hand, and the regulation-heavy advocates on the other. Businesses exist in an environment where discrimination exists and governments need to ensure that workers do not encounter discrimination through regulations, workplace incentives and education programs. At the same time, governments need to consult with private companies to see what works best to end discrimination. A collaborative environment between governments and businesses, we believe, is often the best one in ending discrimination. Behind all of these proposals in ending discrimination is our firm belief that markets, when given the right incentives, will come to the rational conclusion: Discrimination results in an inefficient utilization of resources, firms will lose out on some of the best talents, and in the long run, only firms that do not discriminate can survive in our global, interconnected world.

On the overall tech industry from an investment perspective

Posted on November 19, 2015November 19, 2015 by fqzhang

In this blog, I will focus on some of the recent trends in the tech industry and where I think it is headed to in the future.

Prospective future growth: there is still a lot of inefficiencies in different industries. For instance, the media industries, with bundled products, will face increasing challenges from pay-per-view medias. Internet will be applied to more and more company. We can save people a lot of time. Another area filled with inefficiencies is in healthcare; however, the risk in this category lies in government regulation.
The current tech boom: One key reason for the current boom is the result of Infrastructure costs have dramatically cut down. The bandwidth, processer, storage cost, down 25% each year. Fundamentally deflationary trend over time.
The competitive landscape: More competitor. The business models have all been working, unlike 1999, when so many business models do not work at all. Management team and competitive risks will be the most important as we go forward and analyze a company. This is also in part due to the lessening of the costs over time.
Buzzword of 2015, a “unicorn bubble”. Unicorns are defined as private companies valued at over $1 billion, and currently there are over 150 such companies in existence. The market has been generating tons of free cash flows.

Money generating models:

Ad, subscription, and retail models
- The models are very important:

Who are the winners over the past few years?

The “FANGs” – Facebook , Amazon, Netflix, and Google

Who might be prospective buys in the future?

Top picks: Amazon, LinkedIn, Priceline , Expedia, Google
Negative outlooks: Twitter, Groupon, Yahoo

How to identify great value?

Successes:

Google and Facebook accounts for over 50% of all online advertising revenues around the world. Adverting model can be declining due to saturation. Can you come with a great advertising proposition for the company?
You have to catch the trend right. Google is like a tax on all internet usage, since searches are powered by Google. They need to get everything and anything they can put it online.
- Strategic acquisitions and developments are important. Even though Motorola seemed odd, but it actually give Google significant patent protection. Google’s android development is great.
As identified before, we need to look at: advertising, retail, travel (revenue generating model).
Companies need to be willing to make long-term bets. Yahoo failed to make a long term bet while Google did. For instance, Yahoo did not jump on the train for mobile software, for social media, and a number of other things.
Study in failure: Ebay did not significantly innovate instead. Ebay, the only reason that the stock prices are staying high is because they are buying back shares and using other accounting tricks to boost their earnings (of course, this cannot last). Look at the company’s acquisition, Ebay made a certain number of acquisitions that are not related to its core business (they were owners of Skype at one point, what does Skype have to do with selling things online).
Amazon has super thin margins, but it is able to consistently generate growth to make itself bigger and more important. For Amazon, market share is key.

On Tesla specifically:

The unknowns about what a stock like tesla can do is enormous, and what the firm’s potentials are somewhat questionable. It generates a lot of optional value in the sense that we aren’t sure what they are doing. High volatility expected.

Companies that are not yet public but have interesting prospects:

Snapchat: key question is in how to expand snapchat, user base?
Airbnb: we are still looking at broad range of model.

Analyzing a company using the 4M framework:

Management team, (have to meet them face to face).
Business Model (social media is beautiful business model, 90% margin business).
Moats can also change over time (Ebay, competitive advantages are not very sustainable for too long, because they miss the next coming trend). Yahoo missed a lot of these new trends (video, social media). A lot of moats are based on the network effect. Network businesses can be undermined, but they can create a good moat for a couple of years. Are they global moats or are they local moats? Important to determine if they can be undermined.
Market opportunity. The greater the end opportunity the better it is. Google generated a large amount of TAMs (total addressable market). The market that Google enters contains huge amounts of end values.

Some specific things to be aware of when looking at these stocks:

Remember that each publication may have some sort of bias to them; for instance. Barron’s has more of a value bend to the articles they write, so they might exhibit bias against high growth tech companies.
Financial practices of companies: The management teams increasingly make up their own Adjusted Ebitda, rather than using standard GAAP measures
Specific example of a risk: Alibaba, it is possible that they are over-stating their numbers? Can we trust the financials? The average Alibaba user spends more with Alibaba than with the Amazon user spends with Amazon, even though incomes per person in China is about 1/3 of the US. Perhaps this goes back to the idea of the inefficiency in China? Perhaps there are simply no other choices (brick and mortar stores simply aren’t on par with online products)
We must also look at the industry in more detail as well:
- Why is music a much more lousy business? There are only like 4 major labels, power is with the record labels. For instance, Pandora have gross margins of around 17%. Not much room to spend in r and d really.
- Contrast this to the Netflix. Netflix faces significantly more players in the movie making landscape.

The Importance of 1979 in World History

Posted on November 10, 2015 by fqzhang

When we think of the most important events of the past 100 year, certain years are particularly crucial in determining the course of history. Among the most important are those that marked the end of a period of conflict and the beginning of a new era of peace, namely: 1918/19 (End of WWI, Peace of Versailles), 1945 (End of WWII, beginning of the United Nations), and 1989 (end of the Cold War and the new era of globalization). However, for this blog, I would like to point to one lesser known year that marked not only the end of a period of conflict or start of peace, but also the beginning of a new period of global interactions, which, for better or worse, still shape the world we live in today.

Why 1979?

In the year 1979, several major events occurred around the world. I will list them by geographic region (East Asia, the Americas, and the Greater Middle East, in no particular orders of importance), and then discuss the impact of each of these events.

In East Asia:

The events in East Asia revolved largely around what China had done during that year. Two important event occurred:

China’s economic reform and opening up: In December 1978, during the 3rd Plenary Session of the 11th Central Committee of the Communist Party of China, a national meeting of China’s policy-makers, a new national political and economic policy was implemented. First, the meeting confirmed the role of Deng Xiaoping as the undisputed leader (or “Paramount leader”) of China. Deng had been well known as a reformer who wanted to implement changes to China’s bureaucracy and the way the economy was run. Secondly, in part due to the first, a new national economic policy was set whereby a new model of economic organization was first introduced in the countryside (the Household Responsibility System), and leading to a dramatic increase in agricultural productivity and output. These reforms marked the first stages in the transformation of China from an economic backwater into one of the fastest growing economic entity of the past 35 years.
China and Vietnam fought a brief border war: The Sino-Vietnamese war of 1979 (or the Third Indochina War) was nominally fought over the Vietnamese invasion of Cambodia, whose Khmer Rouge government was supported by China, and at least launched in part by China to test Soviet resolve in defending its Vietnamese ally. However, the real significance of the war was not in the conduct of the war itself, but rather what the war represents. First, the conflict was the last conventional war in East and Southeast Asia. After a series of on-and-off conflict among East Asian nations from 1931 (when Japanese forces first invaded China) to 1979, the nations of East Asia is finally at peace with one another. During this period, the clashes of a variety of ideologies such as militarism, colonialism and anti-colonialism, national and ethnic nationalism, and finally communism all served to fuel a state of continuous conflict in the region. The end of the conflict also marked the beginning of a period of rapid economic growth for not only China, but also for other nations of Southeast Asia. The trajectory of East Asian history was forever altered after 1979.

The Americas:

The role of the United States during this time period cannot be exaggerated. It was the world’s foremost economic power; and by most measures, the world’ leading military power as well. The economic difficulties experienced by the United States during the latter half of the 1970s can be explained as an economy in transition from an export-oriented industrial economy to one based on services and high-tech information, along with a significant rise in imports for manufacturing goods. Nevertheless, the United States faced two difficulties as its economic output continues to grow, all with respect to energy:

The Second Oil Shock: In 1973, the United States experienced what is later termed the First Oil Shock, whereby, due to a confluence of factors such as a tightening of the oil market (where supply is barely keeping up with demand), instability in the oil producing regions, and finally an outright embargo on the part of the OPEC (Organization of Petroleum Exporting Countries) against the United States for its role in supporting Israel, led to a massive increase in the price of oil. However, this Second Shock of 1979 was due to quite different causes. The Iranian Revolution (to be discussed below) led to a sudden increase in the price of oil as several million barrels of oil were removed from the market. This event helped to trigger a recession in the United States, along with significant political fallouts for President Carter and the Democratic Party, and marked the rise of conservative, neoliberal thinkers in economic circles (The Chicago School of Economics, mot vocally represented by Milton Freidman). Moreover, the Oil Shock leads to increasing financial instability in the US and Europe, and helped to make an already fragile economic situation even worse by introducing an element of inflation along with economic stagnation into the economy.
The nuclear meltdown of Three Mile Island: The nuclear accident at Three Mile Island (a partial meltdown) was another significant event in the energy landscape of the United States in 1979. The accident, while not particularly significant in terms of destruction or radioactive materials released, did lead to a change in perceptions in the public eyes on the issues of nuclear power. This event helped to energize the environmental movement on the issue of nuclear power, and eventually this led to a freeze on all new nuclear power plant construction in the United States. Nuclear energy, which had seemed so promising to many Americans as a reliable source of energy, had now been relegated to the fringe. Another consequence of this event is the increasing dependence of the United States on petroleum as an energy source. Increasingly, the United States began to intervene on a larger scale in oil-exporting regions to ensure that a reliable source of energy supply does not become a problem for the United States.

Greater Middle East:

Soviets invaded Afghanistan. The Soviet Union, through the invasion of Afghanistan in support of the Afghan communist government, in effect launched a series of chain reactions that had the most profound consequences today. First and foremost, the Soviets hastened its own collapse by expending an extraordinary amount of resources (something that it cannot afford due to its fragile economic situation), in both manpower and money. In addition, the image of the Soviet Union as offering an alternative to the “imperialism” of the United States was destroyed, and its influence in the world stage declined drastically. More importantly for the trajectory of world history, the conflict generated a huge response across the Islamic World, in both fighters and money, in support of the “holy war” conducted by the resistance fighters (known as the mujahedeen) to the Soviet Union. Over time, the conflict takes on an increasingly religious nature, where it is seen by many Muslims as a conflict to end the oppression of the Afghan people. Thus, Political Islam in its modern form was born. Another event also took place during the latter half of the conflict which have strong ramifications today. Among the thousands of young foreign Jihadists was a young man by the name of Osama Bin Laden. Indeed, it is in Afghanistan that Al-Qaeda first started. It is important to note the name Al-Qaeda translates as “The Base”, the base by which Islamists in Afghanistan organized themselves and fought against Soviet aggression.
Islamic extremists took control of the Grand Mosque of Mecca: In late 1979, religious militants took over the Grand Mosque of Mecca and openly challenged the Saudi family’s religious authority. (The Sauds have claimed in their title that they the “Custodian of the Two Holy Mosques.) Later, Saudi security forces moved in and forcibly cleared out the insurgents, resulting in hundreds of causalities. The event, played out on televisions in the Arab World, shocked many who watched it. At the time, many in the Islamic world, from Philippines to Turkey to Pakistan, blamed the United States and Israel for this attack, which in turn led to massive demonstrations, including the burning of US embassy in Pakistan and Libya. The perpetrators were dealt with harshly, and all 68 rebels were captured and beheaded. However, what is truly significant about this event was that the role of religious authority in Saudi Arabia did not diminish after this attack. Instead, the religious conservatives were given more power. In order to appease the religious scholars and social conservatives, the Saudi government turned toward religion to uphold their own legitimacy. Religious schools became more prevalent; the social roles of women were cut back, and in some cases were removed from public altogether. After 1979, Saudi Arabia increasingly became a religious theocracy, with profound influence on the rise of Political Islam.
Iran’s Islamic Revolution: The final event in the Middle East that is crucial to our understanding of the year 1979 was the conservative Islamic revolution in Iran. By the end of 1978, the government of the Shah of Iran was in its last throbs. The question facing many Iranians was not whether or not the Shah should go, but rather, what sort of government should replace it. The solutions were far ranging, from the Tudeh Party (Communist Party of Iran) to religious ultra-conservatives. While the average Iranian was debating and fighting among those alternatives, the Shah suddenly left the country and left a large power vacuum in a country where the heavy hand of the state had been ever present. Into this power vacuum, an exiled religious teacher – Ayatollah Ruhollah Khomeini – made a landing in Iran. The masses suddenly found a leader that they can unite themselves around, and within weeks, a religious theocracy, as though something coming out of the Middle Ages, was born. The Ayatollah possessed hatreds towards many groups around the world – communists (both inside and outside the country), Israel and the Zionists, and above all, the “Great Satan” in the form of the United States. This hatred only increased over time as he gained more political power. The impact of the Revolution can be seen immediately, from the Iranian Hostage Crisis with the United States to the inauguration of the decade long war with Iraq, all stemming from this watershed event of the Middle East.

Now that we have come to the end of our list of major events of 1979, I would like to make note of a few more things:

First, even though in this article I have treated world events as separate in their geographic scope, in reality, all of these events are intimately connected and one often feeds off the other. For instance, American dependence on foreign oil increased just at the same time as Iran’s Islamic Revolution, which removed several million barrels/day from the world market; the fuel crisis of 1979 was certainly worsened by the conflicts in the Middle East. No event in the world took place in isolation, and each one influenced and shaped the outcome of the other.

Secondly, due the scope of this article, I am unable to discuss many of the important events in detail, but they are often important in their own right. 1979 was a year of many changes, yet it has frequently been ignored by many who are not as familiar with world history. I hope that through this article, I can at least spark some interests among my blog readers in the world around us, and view current events through a historical lens.

Finally, the history of the world since 1979, the fall of the Berlin Wall, the War on Terror since the early 2000s, the economic rise of China and increasingly East Asia as a whole, the challenges and benefits of globalization, all directly or indirectly traced their root to the tumultuous year of 1979. In many ways, the events of 1979 is still influencing the world around us, and we are still living in its shadows.

Another look on Valeant Pharmaceuticals (VRX)

Posted on October 25, 2015October 27, 2015 by fqzhang

Given the latest scrutiny over Valeant Pharmaceuticals, I would like to point to some of the inferences that I had drawn over this issue based on the facts; and the facts does not add much confidence for investors in this company.

The bombshell: Citron Research’s report[1]

Much of the recent decline in prices can be attributed to the publication of a negative report by Citron Research on Tuesday, October 21^st, an online newsletter that has exposed many corporate frauds of recent years. Citron Research is fairly credible as a research group; based on a recent Wall Street Journal analysis[2], out of the 111 stocks that Citron has wrote about since the website was founded in 2001 (including its predecessor, StockLemon), 90 were lower one year later, and experienced an average stock price decline of 42%.

The main issue, as pointed out by the report, revolves around the issue of Philidor, which appears as a distributor of Valeant Pharmaceuticals that most sell-side analysts were unaware of until early last week. Citron reached out to the Philidor’s founders and key people that are associated with its operations; but they refused to talk about the company and its relationship with Valeant. However, as it turns out, Philidor is actually an exclusive distributor of Valeant’s products. Another issue came up when a company by the name of R&O Pharmacy filed a lawsuit claiming payment from Valeant in the amount of $69 million; however, based on Citron’s investigations, it appears that Philidor OWNS R&O pharmaceuticals. Moreover, it also appears that Valeant also have a network of other pharmacies, including westwilshirepharma, safexpharma, orbitpharmacy, that only does business with Valeant.

Before we delve into what these facts meant, we need to dispel several misconceptions regarding Citron Research. Many have made the argument that Mr. Left, the editor in charge of Citron Research, is a short-seller, and therefore have every incentive to beat the stock price down, and that this report is nothing more than a “bear raid”. However, before we start criticizing the short-sellers, investors should understand the enormous risks that Mr. Left had taken on by publishing this report. If it turns out that Mr. Left is wrong, the lawsuits that he will face will no doubt force him into serious financial distress. This report is not written without thoughts to its consequences. As Mr. Left himself have stated, he had been more right than wrong, and this is how he remain active.

The question that we have to ask ourselves is what exactly is the purpose of Philidor? It is simply very difficult to understand what is the purpose of these subsidiaries when a company like Valeant can distribute their products more directly. Philidor, as far as anyone can tell, is a secret distributor that Valeant tries not to publicize. Philidor ONLY distributes Valeant’s products and nothing else, and it appears that Valeant is selling to an off-balance sheet entity that buys only from Valeant.

Let’s assume that the intentions of Valeant are benign, and in this best case scenario, they have created a complicated financial structure and is simply making the accounting more opaque. If the intentions of the Company are more malicious, they have created a fairly convenient venue for them to conduct fraud and create fictitious transactions and sales (this is what Citron alleges). Next Monday, October 26^th, the company will discuss Philidor and respond to criticisms; how the management explains the purpose of Philidor will be an issue of great importance.

Before moving on, I would like to point out on October 19^th, the famed investigative reporter Roddy Boyd, had also discussed Valeant Pharmaceuticals in his article with the Southern Investigative Reporting Foundation[3] (SIRF) the extent to with Valeant Pharmaceuticals tried to obfuscate the relationships between the two companies.

Here are other issues of concern in addition to those that are brought up in Citron’s report:

Flawed business model:

Valeant operates by buying smaller drug companies and then raise the prices of those drugs to make a profit. The company does not really engage in original R&D and acts more as a marketer of pharmaceuticals. The company, therefore, was able to enormous margins on the drugs that they are selling. Hedge Funds, Bill Ackman’s Pershing Square Capital included, are absolutely in love with this model as shown by some of the largest holders of Valeant[4] as of Q2 2015,

Pershing Square (Bill Ackman): 19,472,993 shares, 5.71%
ValueAct Holdings (Jeff Ubben): 14,994,261 shares, 4.39% (sold 4.39 million shares in Q2)
Paulson and Co. (John Paulson): 9 million shares, 2.64% (added 6.95 million shares in Q2)
Lone Pine Capital (Steven Mandel): 5,310,143 shares, 1.56% (sold 259,317 shares in Q2)
Viking Global (Andreas Halvorsen): 4,616,738 shares, 1.35% (added 558,395 shares in Q2)

In fact, at the annual Sohn Investment conference, Bill Ackman even claimed that Valeant could be the next Berkshire Hathaway due to its strategy of acquiring diverse companies in the pharmaceutical space[5].

Last year, Valeant attempted to take over Allergan in a much publicized deal. Valeant offered a tremendous sum to purchase the company using shareholders and lenders money. In many ways, this deal resembled the AOL-Time Warner deal in which an overvalued company attempts to take over another company with a more well-developed network of product and services. The deal failed and called into question the model that the company had been operating under. The company aims to grow through acquisitions at all costs and it is highly doubtful that they will be able to grow through outside purchases alone. In fact, the Company’s CEO stated that soon the Company would start having to produce their own drugs, as the prospective markets for future acquisitions have lessened[6], Valeant is running out of smaller drug companies and drugs to acquire. The market was not expecting this, and the stock traded down a bit on the news. To put it quite simply, Valeant’s model of growth up until this point is unlikely to continue forever.

Here is partial list of acquisitions that the company has made in the last couple of years[7]:

2014

PreCision Dermatology, Inc. (“PreCision”). July 2014

Solta Medical, Inc. (“Solta Medical”). January 2014

2013

B&L August 2013

Obagi Medical Products, Inc. (“Obagi”). April 2013

Natur Produkt International, JSC (“Natur Produkt”). February 2013

2012

Medicis. December 2012

OraPharma Topco Holdings, Inc. (“OraPharma”). June 2012

Certain assets of Gerot Lannach. March 2012

Divestiture

2014

Facial aesthetic fillers and toxins. July 2014

Metronidazole 1.3%. July 2014

Tretin-X® (tretinoin) cream and generic tretinoin gel and cream products. July 2014

2013

Divestiture of certain skincare products sold in Australia. October 2013

2012

Divestitures of 1% clindamycin and 5% benzoyl peroxide gel (“IDP-111”) and 5% fluorouracil cream (“5-FU”). February 2012

In addition, the company’s way of raising the price of the drugs (sometimes by over 1000%) had also faced serious scrutiny. Currently the company is facing a Congressional investigation on the price increases of two medications[8]: Isuprel, which is used to treat cardiac arrest, was raised from $215 to $1,346; while Nitropress, a medication used to treat congestive heart failure and life-threatening high blood pressure (hypertension), was raised from $257.80 to $805.61 a vial. As the New York Times have put it, “Valeant’s Drug Price Strategy Enriches It, but Infuriates Patients and Lawmakers”[9]. On October 14^th of this year, the company issued a press release stating that the CEO, Michael Pearson, is now responding to these allegations and talked about Valeant’s reasoning “underlying Valeant’s pricing decisions, and Valeant’s programs designed to improve patient access, among other topics.”[10] As the regulators continue to scrutinize the company’s pricing decisions, we can expect certain regulatory actions that can impact the firm’s margins.

Aggressive and questionable sales techniques:

Valeant is aggressive when it comes to generating sales for its products, and they offer a number of incentives for the patients to purchase the company’s medications. For example, for several of the medications that the Company sells, Valeant’s venders offers to pay for the patient’s copay and to essentially give it off free of charge for the customer. Neither the doctors nor the patients have asked for it. The patients, of course, do not mind this as long as they need to pay nothing, and the patients end up having more medications than they possibly need. For Valeant, however, they are able to increase their sales volume and revenue tremendously. Moreover, the margins on those products are tremendous, and paying for the copays of the customers if it meant more sales made economic sense for Valeant.

However, the Company itself believes that their ability to generate sales is all due to organic growth. In the Q3 earning held by the company on Monday, October 19^th, the company’s CEO, in response to a question regarding how Valeant was able to recognize revenue of about $460 million after initial projections of around $300 million, stated, “… again, there’s no sales incentive, I think it’s all growth. The products continue to grow above what we had forecasted in our deal model…”[11] The company insists that sales incentives are not the cause of their product sales, and that the Company’s products are extremely popular among users. This argument appears shaky at best.

In addition, the company received subpoenas from the U.S. Attorney’s Office for the District of Massachusetts and a subpoena from the U.S. Attorney’s Office for the Southern District of New York. Both are now requesting “documents with respect to our [Valeant’s] patient assistance programs, and also include requests relating to financial support provided by the company for patients, distribution of the company’s products, information provided to the Centers for Medicare and Medicaid Services, and pricing decisions.”[12] These “patients assistance programs” are highly problematic, and is one of the key drivers of sales for the company and what enables it to have such high sales growths year-on-year.

As can be imagined, insurance companies are the ones that are cheated by this deal. While the strict legality of these actions are questionable; in the past, several insurance companies have filed lawsuits against surgeons who waived copays for patients and who instead charge enormous fees on the insurance companies. It remains to be seen in court whether or not it is legal for drug distributors paying the copays of the patients[13].

Other new developments since Tuesday, 10/20:

Earlier in the week (10/21), the company halted the trading of the company’s stocks and called Citron’s report “erroneous”[14]. At that time, the stock was down 40%. On Friday, October 23^rd, the stock rallied for a bit as many hedge funds, including Pershing, reiterated their commitment in going long on the stock, as well as Valeant’s announcement that they will address these issues at Monday’s conference call[15]. Other pharmaceutical companies – Akron, Allergan, Endo – all issued statements stating that they do not own other pharmacies for distribution and attempts to distance themselves from Valeant.

Finally, investors in this company should be aware of the fact that Valeant now have to face new lawsuits coming their way, such as Morganti Legal’s lawsuits[16] alleging that the company issued “materially misleading business information to the investing public including potentially inflating revenues by recording intercompany sales in its revenue figures” and many others; in addition, on Thursday October 22^nd, a class-action lawsuits was filed against the company accusing the company of creating phantom accounts aimed at defrauding investors[17].

It remains to be seen after Valeant responds to these allegations on Monday what the market will do. Until then, investors beware.

[1] The full report can be found here: http://www.valuewalk.com/2015/10/valeant-pharmaceuticals-vrx-citron/

[2] http://www.wsj.com/articles/the-short-who-sank-valeant-stock-1445557157

[3] http://sirf-online.org/2015/10/19/hidden-in-plain-sight-valeants-big-crazy-sort-of-secret-story/

[4] http://www.businessinsider.com/hedge-funds-that-own-valeant-2015-10

[5] http://fortune.com/2015/05/04/bill-ackman-valeant-could-be-next-berkshire-hathaway/

[6] http://www.fiercepharma.com/story/valeant-changes-its-spots-promises-limit-price-hikes-spend-more-rd/2015-10-20

[7] Company’s 2015 10-K

[8] http://www.mccaskill.senate.gov/imo/media/doc/20150923McCaskilllettertoValeant.pdf

[9] http://www.nytimes.com/2015/10/05/business/valeants-drug-price-strategy-enriches-it-but-infuriates-patients-and-lawmakers.html?_r=0

[10] http://ir.valeant.com/investor-relations/news-releases/news-release-details/2015/Valeant-Provides-Update-Regarding-Government-Inquiries/default.aspx

[11] Earnings Transcript,

[12] http://ir.valeant.com/investor-relations/news-releases/news-release-details/2015/Valeant-Provides-Update-Regarding-Government-Inquiries/default.aspx Emphasis are mine.

[13] http://www.bloomberg.com/news/articles/2012-07-19/silicon-valley-surgeons-risk-moral-authority-for-200-returns

[14] http://www.zerohedge.com/news/2015-10-21/vrx-halted-down-40-news-pending

[15] http://www.thestreet.com/story/13336555/1/valeant-pharmaceuticals-vrx-stock-rebounds-ahead-of-call-to-address-allegations.html?puc=yahoo&cm_ven=YAHOO

[16] http://finance.yahoo.com/news/shareholder-alert-morganti-legal-announces-155700510.html

[17] http://www.usatoday.com/story/money/2015/10/23/valeant-class-action-lawsuits/74457788/

China’s Future, a demographic perspective

Posted on August 24, 2015August 24, 2015 by fqzhang

Headlines around the world have often captured the economic rise of China in vivid details: its ever-expanding industrial output, its rapid increase in the amount of mega-corporations that threatened to upset the status quo (think of Lenovo, Huawei, and Alibaba), and above all, its mass market of consumers, who are only beginning to consume in quantities not hereto imagined. But in this blog post, I want to focus on another core aspect of its economy that perhaps is more crucial for China’s economy in the long run: its labor force.

Mao had famously said something to effect that the more populous a nation is, the more strength that it has. Initially, what he meant to suggest is that because China is so populous, it is able to survive a nuclear confrontation or any other national catastrophes that could have easily crippled other nations. And for a long time, China’s demographic growth had been remarkable, seeming to heed his words, growing from 543 million in 1950 to 814 million in 1970 (see graphs), wh en the median age in the country is only 20. Of course, many nations have growth much fast than this, but for a nation the size of China, the impacts are quite noticeable. However, simply by adding raw number of people to the economy does not suggest that the economy has been growing as well. In fact, in certain years (see graph 2), the economy contracted quite severely during the Mao era. Overall the pace of growth is only from the duration of the period from to .

This lack of growth during the Mao era can be contrasted to the beginning of the Deng Xiaoping era, where following a series of liberalizations, the economy had become more robust and dynamic, growing at over 9% percent each year for the period from 1979-2014. The implementation of economic reforms in the form of special economic zones, etc, helped to propel the economy into new economic heights. Another factor that propels this growth that is often neglected is the so called “demographic dividends”.

The past 35 years had witnessed what is often termed as a demographic dividend, whereby the nation have both low old-age population and low younger generation. This period in a nation’s history (particularly in the case of East Asia, where this effect is the most pronounced) is characterized by high economic growth. For instance, look at the demographic pyramid for 2012. The majority of the population is of working age and contributing to national economic output, at the same time, less economic resources are required to take care the elderly (in the form of healthcare, etc), and less is needed to take care of the young (in the form of education, etc). This saving of resources freed up more capital and labor for the economy, and enabled the phenomenal economic growth that we came to associate with the East Asian countries.

However, one can readily see that there is a catch to this scenario. Population all eventually age and the working population today is the retirees of tomorrow. With a rising share of the elderly, the demographic boom will quickly turn into a demographic bust. In China’s case, this will become an acute problem (see graph). Decades from now, when 20, 30 or even 40% of the population is over the age of 65, what do we do then? Economically, the burden will be ever greater on the central government to provide for the elderly, increasing tax burdens on already a smaller working age population. If there is a lesson from the Japanese experience for China, it’s that population is at the center of any comprehensive national development strategy. Failure to take into account the demographic factor will have catastrophic consequences.

Good versus Evil: international relations through American eyes

Posted on July 26, 2015 by fqzhang

Recently, I finished reading of the biography of Kissinger by Walter Isaacson. Isaacson is an excellent biographer (he had completed biographies of Benjamin Franklin, Albert Einstein, and more recently, Steve Jobs.), who brought out the best of Kissinger and his brand of diplomacy. But what intrigued me the most is its comment on the way that Americans have historically viewed conflicts between nations; as a battle between Good and Evil. Invariably, the American nation saves the world from fascism, militarism, and during the Cold War, communism. This lens of good versus evil is how many Americans have historically viewed the role of the United States in the world.

This have lead me to think about issues of international relations based on this perspective. What is it like to apply this “Good versus Evil” mentality to the world stage? Does this sort of thing apply today, and is there an “evil ideology” or foreign entity that sought to overturn American democracy?

As mentioned before, Americans have traditionally viewed the world through black and white lenses, nations are either good or bad with scarcely any shade in between. As problematic as this may seem firsthand, in fact throughout America’s history, this has not presented problems for its foreign policies. Historically, American foreign policies have shifted between isolationism (it appears currently, we are in a state of isolationism, after years of conflict in Afghanistan and Iraq), and advent internationalism. In periods of Internationalism, we as Americans tend to think of the world as suffering from an evil that we must save the world from. And throughout much of America’s engagement with the world at large, the enemy does seem evil or capable of inflicting great damage and cruelty; and in the early 20^th century at, does appear to be in great danger. I will list a few examples below:

Spanish American War: Spain’s oppression against the people of Cuba is indeed extreme, and American intervention (whatever the cause or intention) does succeed in removing the brutal Spanish rule
World War I: American involvement in the war can be thought of as to end a genocidal conflict resulting from extreme nationalism. So while it might not be a “War to end all wars”, it did end a bloody one more quickly than it might have been otherwise
World War II: This war is the classic example of the American view of Good versus Evil. Nazism’s evil influence cannot be disregarded or downplayed; without American intervention, it is doubtful that most of Europe and Asia will be free from the tyranny of German or Japanese rule.
Cold War: the menace of the Soviet Union in Europe cannot be exaggerated, even though, of course, no shooting war actually took place. American presence and intervention indeed secured many governments from revolutionary forces who would have had devastating consequences. (As to what the right-wing governments that the American government had done, that is topic for another day.)

Historically, both foreigners and Americans have characterize American role in the world in such terms as well. David Lloyd George, the prime minister of Great Britain who represented that country at the Paris Peace talks after World War I, even refers to Wilson as Jesus Christ. Ronald Reagan, the American president, referred to the conflict with the Soviet Union in Biblical terms, referencing the war od Gog and Magog.

When applying these ideas to the world at large, this meant that Americans intervened in the world stage after it is convinced that the enemy is evil (of course, there are other considerations as well, but the portrait of the enemy as evil is one of the chief reasons for the intervention, at least that’s the public perception of it). Nations could be in ranked in the world on a line of good to evil, and nothing captured this better than the label “Axis of Evil” initially applied to Iran, Iraq and North Korea, applied by president Bush and Secretary Rice during their time at the White House.

The reality of the world is far more complex of course. Many nations are what can be called “Freemies”, not exactly friends, but also not exactly an enemy either. Almost all countries can be fit along those lines in the middle, since in one area, they may be considered to be “friends”, such as security, while in other areas they are direct competitors, i.e. the economic sphere. Many are baffled by this contradiction and how to resolve it using diplomacy.

The American public needs to be convinced that the world does not really operate on a principle of “good” vs “evil”, but in large measures are based on interests. Nations cooperate with one another not really because they are “friends”, which will stand by each other through storm and calm. But rather, they are working together because they have a shared interest in seeing each other succeed and that they can get the most out of the international system through working together. Lord Palmerston, prime minister of the United Kingdom, said it well when he stated: “We have no eternal allies, and we have no perpetual enemies. Our interests are eternal and perpetual, and those interests it is our duty to follow.” These are the governing principles of international relations that most of the world adheres too, and if America as a nation are to adapt to the conditions of international relations as it exists currently, we must adhere to this concept. Of course, that is not too say that we should be a hyper-Realist and see the world only in terms of interests and forget our roots in democracy and freedom, but that simply, we need to recognize that this is how the rest of the world operates and if we are a member of this global community of nations, it is in our best interest to be moderate in our thoughts and actions and to see the world not as a black and white image of good and evil, but rather as a collection and patchwork of interests and ideas that needs to be looked into.

A musing on the word “farmer”

Posted on July 25, 2015July 25, 2015 by fqzhang

Here in the United States, we frequently use the word farmer to describe someone who engaes in agricultural pursuits or who derive a large source of their income from farming activities. Accoding to the most commonly used definition (as defined by the Merriam-Webster dictionary): “a person who cultivates land or crops or raises animals (as livestock or fish).” Based on this definition, a large portion (over a billion in fact, according to official figure, but like with all statistics, the true figure is much higher) is engaged in agricultural pursuits. Farmers have always been recognized as one of the largest groups of people in society, and their role in the production of food is very well appreciated. But are all “farmers” created equal?

I remember hearing about people in my hometown who are considered to be “farmers” (in rural areas of California) but were in fact large landowners who owned thousands of acres of land (chiefly planted with almond trees) and whose revenue is in excess of 10 million dollars a year. Now compare a picture of this individual with a sub-Saharan “farmer” who engages in subsistence farming (like other 60% of the population of Sub-Saharan Africa), and whose produce can barely feed his own family of 7, and you quickly get a picture of the diversity in the word “farmer”.

The word “farmer” in its modern usage is essentially an American construct, as it implies ownership of the land you are working on and have to be associated, at least in America, with large estates and strong independent ownership. The millions of people who work on those farms on a contractual basis are termed “farm workers” rather than farmers, since they are merely needed for the harvesting and planting of fruits/vegetables/crops. In many ways, being a “farmer” in the United States doesn’t seem to be a bad occupation: you receive a steady source of income and derive a sense of satisfaction from working for yourself. Granted, no one in a capitalistic society is entirely free from the fluctuations on the market or the uncertainties of weathers, but with economy of scale (which many farmers in the US enjoy), over the long run, farmers seemed to be living a decent life. With increasing consolidation in the United States in the farming industry, the small family farms are increasingly becoming a thing of the past, and we entering an age where large corporate farmers are becoming the way of the future.

For the rest of the world, “peasant” is the more appropriate term. Even in advanced developing nations like China, over 30% of the labor force engaged in farming as their daily occupation, and in the rest of the developing and underdeveloped world, the peasantry ranges from 40% to 80% of the population of the area. The peasantry is a poor lot with none of the connotations that we associate with being a “farmer”. But unfortunately, this is also the state of the world that we live in. However, to capture the true state of the world’s farming community, we should use the word “peasant” a little more.

Fertility Rates: Why are they so different around the world

Posted on April 6, 2015 by fqzhang

I wrote about this topic recently for a class of mine, and I thought I would share this topic here, since it’s an issue that have interested demographers and other social scientists for a long time.

Introduction and Significance of the Study:

It has been frequently observed that women around the world today have vastly different fertility rates. Last year, a news article from CBS news suggests that the dropping birthrates, especially in developed nations, is threatening global economic growth rate.(CBS) This is indeed a worrisome issue for policy-makers, from Germany to Japan. At the same time, we note that these developed nations are also among the most densely populated regions in the world, suggesting that these nations in the past have had high population growth rates, but subsequently slowed their birth rates. At the same time, many nations in Sub-Saharan Africa have relatively low density populations and abundant agriculturally productive land (Kenya, Tanzania), yet are economically underdeveloped. In class, we spoke about the “demographic transition”, i.e. each of these countries are in a different stage of this transition from high to low birth rates (Goldstein). However, given the observation that many nations that have low birthrate already have a high population concentration, we wondered if population density in fact affects the number of children a woman will have and if other underlying factors – such as governmental actions, social norms (especially for women), and levels of economic development – will affect the number of children a women have over the course of her lifetime.

Hypothesis: Regions with high population density would have lower fertility rates; this is due to economic development over time, the role of women in society and government policies.

In this study, we looked at 3 broad geographic regions: East Asia & Pacific, Middle East & North Africa, Sub-Saharan Africa and compared their developments over time. These 3 regions were used since the cultural practices, economic fortunes, and governmental influences were vastly different and provides a good cross-sectional study for analyzing the changes in global fertility rates. We will determine if the changes in fertility rates in these three regions are indeed negatively correlated with population density and other underlying factors such as economic development, women’s employment and other factors such as the availability of contraception.

2) Data Extraction and Methods:

All data for this study came from the World Bank Data, from 2012 and 2013 depending on its availability. We utilized all available data the following variables to complete the study:

Total fertility rates: the average number of children that a woman is expected to have over the course of her lifetime (for 1960-2013)
Overall population density: total population of the country divided by its total land, in people/km^2 (for 1960-2013)
GDP Per Capita. The Gross Domestic Product (GDP), a measure of total national economic output, divided by the country’s population for a given year (for 1960-2013)
Female labor force participation rate: percentage of women active in the labor force, aged 15 or older. (for 1990-2012)
Contraception prevalence: the percentage of women (or her partner) who were practicing any form of contraception; for women ages 15-49. Data available only for 1990, 2000, and 2010.

In this study, we used several different prospective factors that may affect the overall population density and were associated with changes in fertility rates for women: GDP per capita, female labor force participation and contraception usage. The three regions were chosen based on their differences in changes in Total Fertility Rates, such as timing and speed of decline, in order to study what could have contribute to this different variations in their respective patterns of decline. The observed period of time was selected as the maximum number of years for which data was available to ensure that whatever correlation we observed was not do to random variations within the data set. In addition, a separate study was done for China to measure a special case of the effect of government policies on the decline in birthrates.

For the sources of data, our date ranges are from 1960 to 2013 for fertility rates, overall population density, and GDP per capita; and ranged from 1990 to 2013 for female labor participation and contraception usage. We use the largest date range available for each variable in order to more accurately determine the long-term trends for each variable.

Methodology: We decided to analyze the data by presenting the relationship between the variables in a graphical format. For readability, we divided the variables into two sets of 3 graphs each, with each graph representing a separate region. The first set of graphs presented fertility, population density and GDP per capita in each of the graphs. For the next set of 3 graphs, we presented fertility rates with women’s labor force participation and access to contraceptives. Then we calculated the correlations between the fertility rates with each of the other variables to give a more definite, mathematical result. The final graph measured specifically China’s decline in birthrate and increasing per capita income.

3) Presentation of Results:

Graphs 1-3 records data for the three regions from 1963 -2013. It measured the changes through time of fertility rates, population density and economic output. Graph 1 depicted Middle East/North African fertility, GDP per capita and population density trends over time. There were several trends common to all. First, there was a very strong negative correlation between the fertility and population density/GDP per capita in all three regions measured (a correlation between -0.8 and -0.98). Second, population density had been steadily increasing for East Asia & Pacific and Middle East, while the Sub-Saharan African density had been increasing much more dramatically. Thirdly, the most rapid phase of GDP per capita increase occurred in all regions after 2000.

For Graph 1, we saw that the fertility rate for the Middle East steadily decreased from 1960 to 1985 (6.87 to 5.88) and then had a steeper decline from 1985 to 2000 (5.88 to 3.04), and finally the decline in fertility stabilized at around 2.75. Meanwhile, the population density increased dramatically from around 10 people per square kilometer to around 36 people per square kilometer, increasing roughly linearly. Therefore, there was a strong negative correlation between population density and fertility decline in this region. Meanwhile, per capita income in the region has also increased, most significantly from 1973 to 1980 and from 2000 onward. Graphs 2 and 3 told a similar story. East Asian &Pacific fertility declined drastically from late 1960s, from 5.5 children per woman in 1968 to 1.85 per woman in 1998; economically, the region’s per capita income steadily increased until 1995, and then stagnated from 1995 until around 2002, before starting to increase drastically once again. For Sub-Saharan Africa, the decline in fertility occurred much later, starting around 1987, and had been declining at a slower pace than for the other two regions discussed. Likewise, sustained per capita increases only occurred starting around 2001.

Graphs 4-6 records data for the three regions from 1990 -2010. It measured the changes through time of fertility rates, percentage of women in the labor force and the prevalence of contraceptives. All three regions witnessed the increased use of contraception: East Asia increased from 73% using contraception to 80% usage rates; Sub-Saharan Africa from 15 to 25%. Graph 4 depicted this increase in the East Asia/Pacific region and showed a roughly steady participation by women in the labor force. Aside from East Asia, there existed strong correlation between labor force participation by women and declining birth rates (-0.95 for both Middle East and Sub-Saharan Africa). Finally, a separate graph (Graph 7) was drawn for China by plotting its decline in fertility rates over time for the purposes of examining the effect of public policy on fertility. We see that fertility rates in China declined drastically from 6.3 in 1965 to 2.71 in 1980. Declining further until 1998, and it has held steady at 1.6 since then.

4). Conclusion

This paper studied the relationship between fertility rates and population density and prospective underlying causes for changing population densities. We found that there was a clear negative correlation between declining fertility rates and each of the individual factors measured: GDP per capita, female labor force participation and the prevalence of contraceptives. However, we cannot isolate any of these individual factors and point to it as a cause for declining fertility rates. Each of these factors are not mutually exclusive and acted to reinforce one another as well. For instance, increasing GDP per capita can increase contraceptive use since more women now could afford these new products; or along the lines of Boserup, increasing population could lead to greater density and more innovations and technological changes, which in turn increases income and decreasing the fertility rates. (Boserup) And it is possible that the variables examined are the result rather than the cause of fertility decline (i.e. a demographic “dividend” from having less child dependency) (Factsheet). The causes of fertility decline were complex and this paper only sought to examine a small amount of variables that can affect it.

The effect of family planning and government measures were more open to debate. For example, in China, we saw that fertility rates has already fallen to 3 by 1980, the year the so called “one-child policy” was implemented (Moore). Thereafter, the fertility rates steadily decreased, but based on comparisons with East Asia as a whole, it appeared that this fertility decline would have taken place even without the said policy. What appeared to be more significant in causing fertility decline remained the other factors discussed, such as increasing economic performances and contraception usages.

Limitations of the study:1. Exclusion of certain countries and regions from the study. There are incomplete information (missing fertility rates etc.) for certain country’s data. Therefore, these countries are not included in the regional averages. Some of the countries excluded have very high population density and relatively high birthrates (ex. some Pacific Island states) which are both factors we are attempting to draw conclusions from in this paper. This exclusion could result in errors that can affect our conclusions based on the graph and these data, once included, may result in slightly altered correlations and possible interpretations.

Numerous other factors that may affect population density and fertility rates. There are other underlying factors that can cause a decline in fertility rates other than the economic development, women’s participation in the economy or government policy. Even though fertility rates negatively correlates between each of these factors, we cannot conclusively state that fertility rates rate is caused by these factors. Other factors that may be impactful include women’s educational attainment, and increasing quality and quantity of public health services. More studies need to be done how the effects of some of these other factors may directly impact fertility rates.
The factors that contribute to fertility decline are not fully independent of one another. For example, the increased distribution of contraceptives may be the result of increasing economic output as measured by increases in GDP per capita, which enabled women to purchase contraceptives in the first place. The variables measured in this study can and do influence each other. Therefore, the conclusion drawn (that a negative correlation exists between fertility rates and all the other variables), may be an oversimplification.

Appendix:

Works Cited

Boserup, Ester. “Population and Technology in Preindustrial Europe.” Population and Development Review 13.4 (1987): 691-701. JSTOR. Web. 01 Apr. 2015.

“Contraceptive Prevalence (% of Women Ages 15-49).” World Bank, n.d. Web. 01 Apr. 2015. <http://data.worldbank.org/indicator/SP.DYN.CONU.ZS>.

“Dropping Birth Rates Threaten Global Economic Growth.” CBSNews. CBS Interactive, 7 May 2014. Web. 01 Apr. 2015.

“Fact Sheet: Attaining the Demographic Dividend.” Fact Sheet: Attaining the Demographic Dividend. Population Reference Bureau, n.d. Web. 01 Apr. 2015.

“Fertility Rate, Total (births per Woman).” World Bank, n.d. Web. 03 Apr. 2015. <http://data.worldbank.org/indicator/SP.DYN.TFRT.IN>.

“GDP per Capita (current US$).” World Bank, n.d. Web. 01 Apr. 2015. <http://data.worldbank.org/indicator/NY.GDP.PCAP.CD>.

“Labor Force, Female (% of Total Labor Force).” World Bank, n.d. Web. 01 Apr. 2015. <http://data.worldbank.org/indicator/SL.TLF.TOTL.FE.ZS>.

Moore, Malcolm. “What Is China’s One-child Policy?” The Telegraph. Telegraph Media Group, 30 Oct. 2014. Web. 01 Apr. 2015.

Agricultural innovations in Israel: reasons and impacts

Posted on March 30, 2015 by fqzhang

Israel is a land of many innovations and the birthplace of many progressive technologies. Here in this blog, I would like to discuss one of the areas that Israel has excelled: the agricultural sector. We often speak of necessity as the mother of all inventions and this is the absolutely true with regard to Israel. The nation is covered over 50% by desert, most of which is in the Negev desert to the south. The amount of land that is agriculturally productive is extremely limited, and whatever land that is suitable for growing crops faced the perennial problem of irrigation. Massive water projects in diverting the water from the Jordan River has been successful, but nevertheless, water conservation is key.

Many companies in Israel is currently working on developing new technologies that relates to water conservation. The most direct way to conserve water is to shorten the growing period for food crops. Many multinationals – Flextronics, Dupont, and even Google[1] – is interested in how to apply the Israeli technologies to market it to the world. The aim of these partnerships is to link up many Israeli startup firms with other large multinationals (most of which is based here in the US) and to leverage off the larger company’s capital, labor pools, counseling, coaching, etc, to develop the products or services that these Israeli companies need to market its product overseas and to ensure its survival in the face of global competition.

Many Israeli partnerships with firms in California is already very well known. The regions (the interiors of both California and Israel) both faces water shortages that disrupts the growing season, despite the strong amount of available sunshine and other factors that are conducive to productive agriculture. Israeli products found a strong demand in these regions of California. What is perhaps less known is the fact that many Israeli companies and technicians also involve themselves extensively with other countries around the world, such as China and India, which desires help to make its agriculture more productive. As world population increases and the amount of land available for crop growing decreases (due to urban sprawl, pollution, etc), there is now more of a demand for more efficient agriculture. Israel can capitalize on this trend of growing global demand and expand its market positions around the world.

We often speak of Israel as a startup nation that encourages innovation, in large part due to compensate for its lack of natural resources and other means of economic growth. While this is true to some extent, the impact of Israeli companies and their innovations are far more than simply economical. In many ways, it is also beneficial for Israel as a nation on the international stage. By encouraging partnerships between Israel and other nations in the form of business and technological exchanges, Israel can also inspire a feeling of goodwill from other nations around the world, which will benefit it diplomatically. In international diplomacy, we often speak of a “hard” versus “soft” power, and the combination of these two is what makes a nation strong. While Israel certainly already has plenty of “hard” power, defined as absolute military or economic clout, it can also increase its soft power, which is defined as cultural or scientific/technological prestige. Israel, through its networks of businesses that assist other nations around the world with their respective agricultural projects, can increase its global influence in areas that might never have anything else to do with Israel. This increase in Israel’s soft power will no doubt last longer in the long run, since respect for a country for what they are and what they do will outweigh any other form of diplomatic tools on the world stage.

As we can see from this discussion, something as small as having a small start-up focusing on agricultural innovations can go a long way in helping a nation to succeed on the international stage. The current path of encouraging innovation as pursued by the government and society of Israel will benefit the nation and the world in the long run.

[1] Google Shows Interest in Israeli Agritech Companies; http://www.israelagri.com/?CategoryID=482&ArticleID=1039

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fqzhang

Hello everyone, this is a blog where I comment on issues I care about, ranging from international relations to technology. Enjoy!

Author: fqzhang