GaveKal, by Edward Humbert
This week’s Barron’s plugged GaveKal’s idea of the “platform company”. This is a polite illustration of Bacon’s concept of the public’s being always behind the form, as pointed out by Victor and Laurel. GaveKal has been on this theme for at least three years. I’ve been a subscriber to their services since the late 1990s. GaveKal is smart. I’m talking super smart. They are a small team of French, English and Americans based in Hong Kong and I have met the team a few times. It amazes me how their output is consistently informative, rational and timely. They beat the pants off the big guns on the Street like Steve Roach et al.. It shows how a small team of highly motivated individuals can outperform their much better capitalized peers. There is a lesson in that for all of us. By the way, I highly recommend their book Our Brave New World. The tome is a cage match between market memes and logical quantitative thought. I am in no way associated with the authors, other than being a regular subscriber to their services and do not in any way benefit from increased sales of their book, etc.
Gabriel Ivan replies:
There is no doubt in my mind that Charles Gave is “super smart” but his Barron’s interview is riddled with half-truths, smoke and mirrors, which shows crystal clear he’s got an agenda. Just a few remarks were:
Reading his comments on the “platform companies” I experienced a NASDAQ 2000 deja-vu all over again. Back then, the smart folks that run Legg Mason today, also had a pretty compelling argument on how dotcoms can generate cash flow indefinitely through working capital and low Capex layouts. The “new economy” model, and we know how that story ends. Furthermore, he presents the valid r&d expenses argument, but conveniently forgets to adjust the Motorola capital to cash flow example accordingly.
In the current-account deficit argument he starts by anchoring the reader in the 7% of GDP as being a banana republic level, but then he switches immediately to the net worth comparison where the 1.5% looks better. This jumping around between income statement and balance sheet would make any Shenanigan CFO blush.
Including the volatile stock and bond holdings in the U.S. net worth calculations, (although a favorite shill of the Fed. Reserve), is not comforting if the trade policy is based on it.
He claims most of the U.S. consumption goes towards healthcare and education like it’s a positive thing per se, with no regards to the return on that capital spent. The quality of healthcare and education (esp. undergrad) per $ spent might have been a better read.
The nail in the coffin is the play-down of the real estate problem. It is the true mark of poor salesmen — lying about the obvious. The growth in real estate prices, in other countries says nothing about their affordability, own to rent analysis, etc., nor do the interest rate increases have an effect, when such increases have much lower impact due to central banks’ lower reach onto business cycles, the absence of mortgage markets, etc..
It concludes with the reassuring and economically sound remark:
More workers now are ensconced in the recession-resistant service economy and have the additional security of a working spouse and the prospect of parental financial assistance in a pinch. This, perhaps, explains why consumer delinquencies have dropped so drastically.
Ronald Weber offers:
I couldn’t agree more with Mr. Humbert and Jonathon Lang (below) regarding Gavekal. There are indeed few research boutiques and brainstorm platforms that manage to bring much needed original views and help stretch your brain in the process, Daily Specs being one of them.
Regarding the US C/A and accounting deficits, I recommend reading the article from ex-fund manager turned author Andy Kessler on the iPod economy entitled We Think They Sweat.
Mr. Kessler describes the iPod statistics flow between China and the US:
- Apple send an email file to China (zero value in the statistics)
- China assembles the iPod for close-to-zero margins
- China sends the iPod to the US (= 200USD trade deficit)
So would you rather be Apple with its enviable margin, unique brand and soaring market cap, or would you rather be the (no-name and easily replaceable) manufacturer in China?
Regarding analysts, I am constantly amazed how much of a quasi oligopoly on views and ideas Wall Street still exercise. That a Stephen Roach still manages to be in business is a riddle, maybe he is just a good investors’ crowds entertainer? I have nothing against getting the market or the economy wrong, but I do not understand how you can remain stubborn in your narrow views for so long without even questioning them or admitting that you have missed something. Notice also the Wall Street fallacy on the link between the USD and the US trade deficits, the state of the economy or the savings ratio — the totally missed estimates on the Yen is another one of my favorite.
As we all know, at the end of the day it is all about “opinions follow price” and “career risk” (more about analysts and their careers). It may also explain why one of the few respectable analyst, Andy Xie, was fired for being to outspoken on his ideas, (where is he now by the way?).
But, thanks to God, this is the beauty of our business: it is mainly a function of the brain, not scale (save for marketing, administration and distribution functions), and one unknown individual may get it right while another respectable 100 analysts may get it wrong.