2005 is off to a rocky start

This market scares me.

There are always strange internal inconsistencies in markets — efficient markets are a myth — but not usually like this.

6 straight days of down days on the Dow, and the financial news is pinning this on dollar strength and inflation fears. That reasoning does not hold water.

If inflation is the underlying issue, then why are commodity prices falling? Specifically, why aren’t we seeing the flight to quality that normally lifts the price of gold. And if this is a strong dollar story, then why are foreign stock markets falling essentially in line with US markets? And why is the VIX (Volatility index) down? Normally, with trending stocks, the VIX moves up. When the VIX moves down, options prices generally fall.

It’s a strange combination: Stocks down, bonds flat, options down, commodities down, foreign stocks down.

Pure conjecture:

Maybe some big funds had to do some major asset allocation. For example, if i maintain both stocks and bonds at specific percentages of my portfolio, and my stocks went up more than my bonds in 2004, then rebalancing would mean selling some stocks to buy bonds just to keep my asset allocation constant. If the asset allocation included global stocks, bonds, and commodities, then clumsy execution of that kind of trading could lead to the kinds of moves we saw today.

Another possibility might be that large scale selling of global stock markets, commodities, and options (to a smaller degree) by smaller investors is moving capital into US dollar-based cash.

Implications:

Prices are lower and the risks do not seem to have fundamentally changed. However, this feels like a red flag for possible crash in order of 8 to 15%. I’d put those odds at 5% for the next month. If markets right themselves – or at least reestablish their normal linkages – then I’ll feel much more comfortable again, and would overweight international equity beta with a weak dollar emphasis.

International Stock Watch

Exchange traded funds can be a good way to access you international stock markets. This is particularly helpful in markets where you should be seeking broad diversification. EWT and EWH can give you access to the Taiwan and Hong Kong Indices; two markets.

CHU is actually China Unicom. China Mobile is CHL. I hold both, but about 2x as much CHL as CHU. CHU is smaller, more volatile, and between the two, you can cover CDMA and GSM systems in China.

Japan is pretty negative in world view right now, but I still like it very much. I think their currency is overvalued relative to the dollar, and that their stock market is simply not considered by Japanese individuals to be an investment option. Cash is still king there. Also, in terms of international investment characteristics, I think they will become to the rest of Asia in the next 20 years what the United States was to Europe in the last 20 years.

I do like Taiwan. I think that the long term conflict with China will be resolved as China ironically moves more toward Taiwanese policies. They are receiving smart and hard working people like Singapore and Hong Kong. I like all those places. The companies in their indexes probably represent the companies that will be serving major new populations of consumers. These economic centers of influence are the indexes I’m trying to focus on. My time horizon is 10-20 years, though, and I’m sure it will be a bumpy ride.

I sold ECA. I think my positive energy view is really a growth story in electricity, rather than fossil fuels.

Honda Reveals Sweet Technologies for Next-Generation ASIMO

Honda rocks.

They announced yesterday the development of new technologies for the next-generation ASIMO humanoid robot, targeting a new level of mobility that will better enable ASIMO to function and interact with people by quickly processing information and acting more nimbly in real-world environments.

Key technologies include:

1) “Posture Control” technology* making it possible to run in a natural human-like way

2) “Autonomous Continuous Movement” technology enabling flexible route to destination

3) Enhanced visual and force sensor technologies enabling smoother interaction with people

1.Posture Control technology:

The combination of newly developed high-response hardware and the new Posture Control technology enables ASIMO to proactively bend or twist its torso to maintain its balance and prevent the problems of foot slippage and spinning in the air, which accompany movement at higher speeds. ASIMO is now capable of running at a speed of 3km/hour. In addition, walking speed has been increased from the previous 1.6 km/hour to 2.5 km/hour.

2.Autonomous Continuous Movement technology:

The next-generation ASIMO can maneuver toward its destination without stopping by comparing any deviation between the input map information and the information obtained about the surrounding area from its floor surface sensor. Moreover, ASIMO can now autonomously change its path when its floor surface sensor and visual sensors located in its head detect obstacles.

3.Enhanced visual sensor and force sensor technologies allow for smoother interaction with people:

By detecting people’s movements through visual sensors in its head and force (kinesthetic) sensors which have been newly added to its wrists, ASIMO can now move in sync with people allowing it to give or receive an object, shake hands in concert with a person’s movement and step forward or backward in response to the direction its hand is pulled or pushed.

By continuing to advance these new technologies, Honda will pursue development of an ASIMO that will be useful to people.–Key specifications of the new model:

1. Running speed: 3km/hour (airborne time: 0.05 second)

2. Normal walking speed: current model 1.6km/hour — new model 2.5km/hour

3. Height: 130cm (current model: 120cm)

4. Weight: 54kg (current model 52kg)

5. Continuous operating time: 1hour (current model 30 min)

6. Operating degrees of freedom: Total 34 degrees of freedom (current model: Total 26)

–Hip rotational joint:

Increased walking speed was achieved by the proactive rotation of the hips in addition to swinging of the arms, which cancel the reaction force generated when the legs swing forward during running or walking.

–Wrist bending joint:

Due to two additional axes in each wrist, the movement of the wrist area is more flexible.–Thumb joint: Previously, one motor operated all five fingers. With addition of a motor that operates the thumb independently, ASIMO can now hold objects of various shapes.

–Neck joint:

With an additional axis added to its neck joint, ASIMO’s expressiveness has been enhanced.

*More about the new Posture Control technology:

In order to realize “running,” two major obstacles had to be overcome. One was an accurate leap and the absorption of the landing impact, and the second was prevention of the slipping and spinning which accompany movement at higher speeds.

1. Accurate leap and absorption of landing impact:

In order to run, a robot has to be able to repeat the movements of pushing off the ground, swinging its legs forward, landing within a very short time cycle and without any delay, absorbing the instantaneous impact shock of landing. With a newly developed high-speed processing circuit, highly-responsive and high-power motor drive unit, in addition to light-weight and highly rigid leg structure, Honda realized highly accurate and responsive hardware with performance levels more than four times faster compared to that of the previous model.

2. Prevention of spinning and slipping:

Due to reduced pressure between the bottom of the feet and floor, spinning and slipping are more likely to happen right before the foot leaves the floor and right after the foot lands on the floor.

Overcoming the problem of spinning and slipping was the biggest control element challenge related to increasing running speed. Combining Honda’s independently developed theory of bipedal walking control with proactive bending and twisting of the torso, Honda developed a new control theory which enables stable running, while preventing slipping.

Through these technologies, ASIMO is now capable of smooth human-like running at a speed of 3km/hour. Moreover, walking speed was increased from the previous 1.6 km/hour to 2.5 km/hour.

When a human runs, the step cycle is 0.2 to 0.4 seconds depending on one’s speed, and the airborne time, when both feet are off the ground, varies between 0.05 to 0.1 seconds. The step cycle of ASIMO is 0.36 seconds with an airborne time of 0.05 seconds, which are equivalent to that of a person jogging.

Renminbi Valuation

The renminbi is pegged to the US Dollar, and has been for a long time, so what would a revaluation of the Chinese currency mean? Without an exchange rate determined by the marketplace, how can we anticipate the magnitude of the difference between the pegged rate and the appropriate market rate?

It is clear that the yuan is cheap relative to the dollar, but by how much? Our economies are different, and these differences lead to different relative pricing, but looking at a variety of prices can give us some sense of purchasing price parity.

Unskilled Labor:

Textile workers in China are paid about 1/30 of the amount paid for equivalent work in the United States. If this ratio were to equalize through currency revaluation, the yuan would increase by 3000%. However this is almost certainly too high, as China has an oversupply of unskilled labor. This number provides the high-end boundary on the scope of the question.

Gold:

Gold can be purchased in yuan At the time of this writing, $442 worth of gold costs 3670 yuan, implying an exchange rate of about 8.303 Yuan/$. If this ratio were reflected in the currency echange rate, the yuan would increase a negligible amount (Because the exchange rate peg is currently 8.27 Yuan/$). However this is almost certainly too low, as it is illegal for chinese citizens to invest in Gold. This number provides an low-end boundary on the scope of the question.

Basket of goods:

Depending on the basket you select, purchasing price parity implies different undervaluation of Yuan. I estimate approximately 40% undervaluation, clearly with different classes of goods and services.

Trading:

Under a fair and open market, I envision a 40% inflation on Cinese imports would greatly imporove the stature of US companies that have been drowning under Chinese import competition. Similarly, Chinese companies that earn their revenues from Chinese will see a US Dollar denominated revenue increase of 40%.

[UPDATE 1/25/2005]

Senator Lindsey Graham, (R) Judiary Committee and

Senator Charles (Chuck) Schumer, (D) Finance Committee

are announcing bill to impose a 27.5% tarif on Chinese imports, implying their view that the Renminbi is near 27.5% discounted against the Dollar.

[END UPDATE]

Let’s speculate that Chinese currency will reflect market forces within 2 years. In this speculative possible environment, investors might benefit from:

underweight Chinese companies with revenues largely based on exports

overweight Chinese companies with revenues largely based in China

underweight US companies who import from China

overweight US companies who compete with Chinese imports

Now let’s speculate that Chinese currency will remain pegged to the US Dollar. In this speculative possible environment, investors might benefit from exactly the opposite positions.

How can the US exploit a currency peg that is clearly an unfair trade practice?

Cut taxes and issue more debt.

This increases the Federal deficit, diminishing the value of the US Dollar, and also increases the after-tax pay rates for US workers.

Is there a growing rift between the US and Russia?

Putin has denounced the idea of elections in Iraq so long as the US is an occupying force.