A giant, flaming pile of fraud

Reading the blogger Deep Throat IPO’s commentary on the matter, one gets the impression that Alibaba is the dark heart of the dysfunctional global economy. Bear in mind that the Chinese e-commerce firm is listed on the New York Stock Exchange and that the author is commenting on the company’s own SEC filing and earnings call, i.e. all of this information is out in the open:

Alibaba management (Joe, Daniel, Maggie and Robert) and their “analysts” spent much of the hour collectively congratulating themselves on the greatness of their fake 51% revenue growth and their unverifiable, fake, GMV [gross merchandise volume], which has now ballooned to US$853 Billion. This “ecosystem” GMV, due to these phenomenal, dubious growth rates, is now roughly the same size as the Global GMV of both Amazon ($277 Billion) and Walmart ($625 Billion including estimated Third Party GMV) combined. Alibaba GMV has increased roughly ten fold since 2012. They are on pace to Reach $1 Trillion by next year. Alibaba’s GMV sold, according to management, has quickly grown to roughly the same as Switzerland’s GDP, with about the same level of opacity. Miraculous…..perhaps even unbelievable, to say the least. […]

2.) Speaking of “earnings” there was not one question, comment or slide in the deck that mentioned earnings. NOT ONE….an entire hour of fluff….. and “earnings” wasn’t discussed, described, commented on or mentioned. This is odd for an “earnings” call….don’t you think? When we look at the press release, we can understand why. On page 40 there is a $2.974 Billion accounting “Gain on the revaluation of assets” which was roughly equal to net income for the quarter. i.e.) If we exclude this gain, the business had no earnings from operations. […]

They’ve gained 36,000 employees since last year, a 55% growth rate. Perhaps they are getting away from that “asset/people light” business model.

To put this in perspective, Alibaba’s e-commerce rival, JD.com, announced in March it would hire 10,000 people for its JD Logistics arm “as couriers, warehouse staff, and entry-level managers.” Alibaba claims to have hired 4 times that amount of people in a year. STO Express, the logistics giant in which Alibaba proposed to take a 14% stake in March, has over 14,000 employees, so Alibaba’s employee growth in one year would be roughly 2.5 times the entire headcount of STO Express. Does this make any sense?

[Ed: I would also note that Lazada, the Singapore-based e-commerce firm in which Alibaba bought a controlling stake in 2016, has an estimated 8,000 employees according to Wikipedia.]

The other ratio I find fascinating is GMV per employee. Walmart’s GMV per employee is $284,000. Amazon’s is $428,000. Alibaba’s is $8,366,000 per employee. They are truly masters at doing more with less.

The author doesn’t mince words in his conclusion:

My crystal clear message to the analysts who were on the call is, when this eventually blows up, and there’s no question that it will, you have to understand that the “Sorry I’m just a dumb-ass” defense won’t work anymore. The times, they are a changin’.

You analysts (yes I’m speaking directly to you now) are all highly educated, smart, professional people. You are experts, or at least you are supposed to be, and you, and your respective employers are held to a much higher standard than the rest of the investing world and blogosphere. It’s assumed by naive American Investors that you know exactly what you are doing. Your endorsement means everything. Unfortunately, in this particular case, and many others, it looks like you are accepting a nice paycheck to do exactly what you are told by the Chinese Communist Party. You are also committing, aiding and abetting securities fraud. When you see the accounting travesties and inconsistencies described above, your job is to investigate them, ask tough questions, and if you find the explanations provided by management to be unsatisfactory, you must resign from the account. Your inaction, congratulatory “we” tone and your tacit endorsement of this charade makes you an accessory, not an unwitting pawn. You and your employers have significant legal and political liability for what’s about to happen. There will be no escaping it this time.

A reckoning is coming. Where is the American business press on this? You’d think this would be a top story.

Good news: Rare earths ain’t so rare

Well, this is an actual relief. Rare earths may not, in fact, be America’s Achilles heel (as China appears to think and as I previously thought):

Experts in the field, though, are much less concerned about such a chilling scenario. They say that while a restriction on rare earth exports would have some immediate adverse effects, the US and the rest of the world would adapt in the long run. “If China really cuts off supply entirely then there are short term problems,” Tim Worstall, a former rare earth trader and commodities blogger tells The Verge. “But they’re solvable.”

Far from being an ace in the hole, it turns out rare earths are more of a busted flush.

The reasons for this are numerous, and span geography, chemistry, and history. But the most important factor is also the simplest to explain: rare earths just aren’t that rare.

They can be mined in other places, like Australia, India, Brazil, Canada, and the U.S. China only mines about 80% of the global supply (not the 95% we often hear about). The Mountain Pass mine in California is apparently up and running again. And all is right in the world.

Luckin as tech startup

Tim Culpan of Bloomberg notices an oddity about Luckin Coffee, China’s answer to Starbucks:

The pending Nasdaq debut of China’s Luckin Coffee Inc. begs the question of whether it’s a purveyor of beverages, or a technology company.

As I pore through its 286-page IPO filing, I find myself struggling to decide. It’s kind of like Starbucks Corp., I guess, but also a lot like food-delivery giant Meituan Dianping and ride-hailing pioneer Uber Technologies Inc. […]

Luckin posted 841 million yuan ($125 million) in revenue last year, exploding from 250,000 yuan the year prior. But its operating expenses were three times higher than sales at 2.4 billion yuan. And it wasn’t even materials, store rentals or admin expenses that blew out the bottom line.

Marketing costs were 746 million yuan last year. To make every 100 yuan from selling coffee, Luckin spent 152 yuan to produce and market that cup – not including rent and general expenses.

Spending three times more than revenue makes Luckin a tech startup, not an F&B company.

Is it also part of the Belt and Road?

I previously wrote about Luckin here.

What has changed

The Simpsons

Tweet by Paul Musgrave, assistant professor of political science at UMass Amherst:

The Simpsons used to be viewed as a portrait of a lower-middle class family. They had a house, car, job security, and a single wage-earner who didn’t graduate college. These days, that’s beyond unattainable.

The Simpsons premiered in December 1989. What has changed in the intervening 30 years is the destruction of the middle class and Middle America. The US is not wisely led.

PS:

1989: mr. burns is a dick. 2019: i would literally weep with relief if my boss offered me this kind of job security.

Mr Burns The Simpsons

Fuzzy GDP math

It’s hardly a secret that China’s reported GDP growth figures are less than reliable; premier Li Keqiang actually acknowledged that the numbers are “man-made and therefore unreliable” more than a decade ago. A new study from economists at the Chinese University of Hong Kong and the University of Chicago estimates just how inaccurate those figures are:

China has overestimated its nominal and real growth rates by about 2 full percentage points on average between 2008 to 2016, with the miscalculation increasing each year, according to a new study published on Thursday.

The results indicate that the actual size of China’s economy at the end of 2018 was well below the government’s official estimate. […]

Using the study’s findings and applying them to government figures starting with the level of nominal gross domestic product (GDP) at the end of 2007 and the growth rate for 2008, calculations by the South China Morning Post show that the current nominal size of the Chinese economy is about 18 per cent lower than the official level of 90 trillion yuan (US$13.4 trillion) at the end of 2018. […]

SCMP calculations show the adjusted nominal GDP level in China is about US$11.5 trillion using current exchange rates, still more than twice the size of Japan’s economy at US$5.16 trillion, but well below the economy of the United States at US$20 trillion.

Some economic doom & gloom

David Stockman says it wouldn’t be prudent

A sobering assessment of America’s economic health by a former Director of the Office of Budget and Management (OBM). Whether you agree or disagree with his analysis, it’s worth a listen:

Listen to “Josh Jalinski Talks to David Stockman, Author & Former Budget Director” on Spreaker.

Quoth David Stockman:

The trade war with China is aimed at the wrong problem: it’s not bad trade deals or even nefarious activities by the Chinese state, the problem is bad money – this tremendous money-pumping that the Fed has done over the last 20 or 30 years, which has really undermined the Main Street economy and caused production and good jobs to shift offshore.

[…]

At the federal level, we now have [$]22 trillion of debt… If you take households that have 15 and a half trillion of debt, business that has about 14, you take the federal government, state and local, and then financial institutions, the total debt in our society today is $70 trillion, sitting up there on top of a GDP that’s barely 20 trillion. So we have three and a half times as much debt as we have income, and if you look at history… that is off the charts, that is a warning sign that this system is not sustainable. When we had a healthy economy, pre-1971, we had in fact a whole century of good economic prosperity and progress, from 1870 to 1970, the average debt-to-GDP ratio for the whole economy was 150%, not 350%.

Y’all aboard

Texas bullet train

I admit I was surprised to learn that a private company is planning a high-speed rail line between Houston and Dallas, and construction is expected to start as early as this year:

  • Texas Central Partners could begin construction on its $12 billion Dallas-to-Houston high-speed rail project in late 2019 or early 2020, according to The Houston Chronicle. The developer also has tentative plans for a midway stop near Texas A&M University in College Station or Bryan.
  • The bullet train will be modeled after Japan’s Shinkansen high-speed train system because of its safety and efficiency track record. Texas Central says that the train’s two-track system — one northbound and one southbound — will not share tracks with freight lines.

This looks like a far better place for America’s first high-speed rail line than, say, LA to San Francisco, as the land between the two Texan cities is mostly flat, making the construction far simpler and therefore cheaper than the $77-98 billion California project.

From developer Texas Central’s website:

The main challenge, as noted in the press releases, is connecting the Central Valley to the main centers of population in the Bay Area and Los Angeles. This is why the current range of expected cost in California is between $77 billion and $98 billion. Out of this figure, the tunnels required to link the valley to San Jose (Pacheco Pass) and Los Angeles (Tehachapi Mountains) collectively, could cost well over $20 billion with significant underground risk.

To put this in perspective, the potential cost of these tunnels alone, is more than the total projected cost of Texas Central’s 240-mile project to link Houston and North Texas.

More about the project:

Nearly 50,000 Texans, sometimes called “super-commuters,” travel back and forth between Houston and Dallas/Fort Worth more than once a week. Many others make the trip very regularly. The approximately 240-mile high-speed rail line will offer a total travel time of less than 90 minutes, with convenient departures every 30 minutes during peak periods each day, and every hour during off-peak periods – with 6 hours reserved each night for system maintenance and inspection.

[…]

Capable of operating at speeds in excess of 200 miles per hour and moving passengers between Dallas and Houston in less than 90 minutes

[…]

JRC’s Series N700 rolling stock features 16-car trains running between Tokyo and Osaka, Japan. To serve the Texas market, Texas Central anticipates an eight-car train with seating capacity for an estimated 400 passengers, and the room necessary to provide them the comfort, amenities and service options they will expect and deserve.

And more background on the selection and financing of the project:

Our project is in Texas intentionally. After reviewing over 90 pairs of cities to determine the most commercially successful place to deploy a high-speed train, Houston to Dallas was the answer. The Houston to Dallas/Fort Worth region is by far, the most rapidly growing region in the nation. In 2018, Dallas and Houston combined added 224,700 jobs, compared to number two city, New York, at 115,500 jobs. No other region even comes close.

This generates significant congestion in roads and air travel infrastructure, which gives rise to a third choice: high speed rail. At the right distance, with the right economic links between Dallas, Houston and the Brazos Valley, and without the complexities now evident in California, our approach is more financially feasible.

As an investor owned project, not a government project, our financial discipline is rooted in the economic model and timelines for significant, public use infrastructure. Given economic realities, this is the right way to build this large-scale infrastructure for the public good, at the right time, to alleviate the growing congestion growth is bringing to our area, and so reduce public investment in other infrastructure.

We know the market and economics between North Texas and Houston match and exceed those of successful train routes globally. We are confident the Texas line will provide the ridership to sustain the operations, repay the debt and provide a return to the investors.

Sounds great. I hope they actually build it.

Pork

This is an interesting thread by investor Adam Townsend about agriculture and US-China trade that sheds light on China’s monumental takeover of Smithfield Pork in 2013. What happens when you sell domestic farmland to a Chinese government-supported company? Worth reading in full, despite the terrible formatting (thanks to its origins on Twitter):

1/ This is a kick a*s thread about China, tech theft, its food supply and its pollution. You are about to become an expert, lets begin…
Technology…
CFIUS (Committee on Foreign investment in the US) is made up of 32 different federal agencies…
2/ that review foreign purchases that could affect U.S. security such as access to technology, military contracts, installations or other sensitive information. Agriculture isn’t part of the CFIUS mandate nor is the USDA or FDA.
3/ The committee isn’t required to review any deals, relying instead on outsiders or other government agencies to raise questions about the appropriateness of a proposed transaction.

The most common foreign investor that hits the CFIUS radar is China. Let’s peel that onion
4/ President Obama stopped a Chinese investment fund from acquiring the U.S. subsidiary of a German semiconductor manufacturer
In September 2017, Trump halted a China-backed investor from buying the American semiconductor maker Lattice
5/ A Chinese company’s plan to acquire the American money transfer company MoneyGram fell apart after CFIUS expressed their concerns that the personal data of millions of Americans would be exposed
6/ CFIUS advised against a Chinese group’s attempt to buy Xcerra, a Massachusetts HQ’ed tech company
Trump blocked the purchase of the chipmaker Qualcomm by Singapore-based Broadcom Ltd.on the advice of CFIUS

Now we gotta talk about Chinese pollution. Buckle up…
7/ Only (about) 11 percent of Chinese land can be farmed. Most of its tremendous land mass is inarable, degraded by erosion, salinization, acidification, industrial effluent, sewage, excessive farm chemicals and mining runoff.
8/ Chinese rivers have been drying as demand from farms and factories have depleted them. Of the ones that remain, 75 percent are severely polluted, and more than a third of those are so toxic they can’t be used to irrigate farms,

Now we gotta talk about food…
9/ Chinese authorities have encouraged companies to gain greater control over the entire supply chain for imported agricultural products.

Enter the United States…China’s average annual water resources are less than 2,200 cubic meters per capita. The United States, by contrast
10/ is about 9,400 cubic meters of water per person
The United States has six times more arable land per capita
Pork
The Chinese currently eat 88 pounds per capita annually (Americans eat 60 pounds) They produce and consume half of the world’s pork, so…
11/ when there are fluctuations in their domestic production – even small fluctuations – it can really increase their need for imports.

To meet the growing demand, China’s hog farms have grown and multiplied, and more than half of the globe’s pigs are now raised there.
12/ But even so, its production can’t keep up with the pork emand
US pork exports to China went from about 57,000 metric tons in 2003 to more than 2.31 million metric tons (mt) in 2016 which converts to $5.94 billion

It’s cheaper to produce pork in the US than in China.
13/ Our meat industry churns out hogs for about $0.57 per pound, versus $0.68 per pound in China’s new, factory-scale hog farms. The main difference is feed costs. US pig producers spend about 25% less on feed than their Chinese counterparts. We have more abundant land, water…
14/ …and grain resources.
“Control oil and you control nations; control food and you control the people.”
So, China buys Smithfield Pork…

In an effort to cut out the middleman, China is trying to circumvent the American farmer. Instead of buying food from farmers who…
15/ … work their own land, they want to own and operate these American farms themselves—as well as the livestock barns and slaughterhouses.

Chinese consumers, pay a large premium for US pork as it is viewed as higher quality due to our strict food safety laws.

Shaunghui,…
16/ a Chinese meat-processing company in 2013, purchased Smithfield for 30 percent over its market value. It was the largest purchase of a U.S. company by a Chinese firm and the first acquisition of a major American food company by a Chinese business.

U.S. Treasury Department
17/ allowed the purchase to go forward after assurances from Smithfield CEO Larry Pope that there was no connection between Shaunghui and the Chinese government. A year later it was discovered that the Chinese government did have a connection to Shaunghui.
18/ he Communist Party supported the Smithfield purchase with “preferential policy”, as well as “investment,” Zhang Taixi, the government-appointed president of WH Group (the corporate name Shaunghui adopted in 2014), told reporters!
19/ The WH Group advanced the China Communist Party aims to own the entire production chain for pork with the least geographic distance between U.S. pork production and the Chinese market.

One of the benefits to owning every aspect of production from feed through packaging…
20/ is that you can increase production on demand.

ChemChina, a China Communist Party owned company, recently bought Syngenta, a Swiss agrichemical company, for 43 billion dollars, and this creates a bigly foothold in feed production.
21/ What if the Chinese government becomes of the largest players in American agriculture.

We’ve handed over a vertically integrated system to a foreign government.
22/ Side effect of that is the damage left in its wake, production leads to more barns being built and, in turn, waste coming out of those barns. You need more feed for those pigs, so you’re raising more row crops and putting more of that waste onto the fields.
23/ Between 2007 and 2012, Iowa had the largest increase in hog and pig sales of any state in the country, a jump of $1.9 billion. The number of polluted Iowan waterways increased 15 percent between 2012 and 2014. Not only do the waste pits used to capture manure…
24/ …from large hog operations produce antibiotic-resistant bacteria, the pathogens can travel miles away. When a foreign investor buys land, local population loses farming rights, which can lead to people losing their homes, livelihoods, and access to resources like water.
25/ …to preserve its well-being, Iowa outlawed selling farmland to foreign buyers. The median age of the American farmer is 55, in the next five years about 92,000,000 acres will go up for sale.

China no longer growing at Ludicrous Speed

Guangdong province factory

To the extent that official GDP figures mean anything at all, it’s worth noting that Chinese growth is slackening as trade and manufacturing get hit hard:

China is expected to report on Monday that economic growth cooled to its slowest in 28 years in 2018 amid weakening domestic demand and bruising U.S. tariffs, adding pressure on Beijing to roll out more support measures to avert a sharper slowdown.

[…]

Analysts polled by Reuters expect the world’s second-largest economy to have grown 6.4 percent in the October-December quarter from a year earlier, slowing from the previous quarter’s 6.5 percent pace and matching levels last seen in early 2009 during the global financial crisis.

That could pull 2018 gross domestic product (GDP) growth to 6.6 percent, the lowest since 1990 and down from a revised 6.8 percent in 2017.

We have a culprit:

Surprising contractions in December trade data and factory activity gauges in recent weeks have suggested the economy cooled more quickly than expected at the end of 2018, leaving it on shakier footing at the start of the new year.

Sources have told Reuters that Beijing was planning to lower its growth target to 6-6.5 percent this year from around 6.5 percent in 2018.

Tepid expansion in industrial output and weaker consumer spending is squeezing companies’ profit margins, discouraging fresh investment and raising the risk of higher job losses.

Some factories in Guangdong – China’s export hub – have shut earlier than usual ahead of the long Lunar New Year holiday as the tariff war with the United States curtails orders. Others are suspending production lines and cutting back on workers’ hours.

Beijing slowing credit growth is also to blame:

Qin Nan, the chief executive of a Beijing-based manufacturer, needs to borrow at least Rmb5m ($740,000) to expand production of his company’s air purifiers and air conditioners. But because his company lacks an equivalent amount of collateral in property and other assets, Chinese banks were willing to lend only Rmb2m.

[…]

Mr Qin’s grievances, which he recently aired on social media, are increasingly common among private sector companies in the world’s second-largest economy, which have been hit by a squeeze on lending as Beijing has worked to reduce the economy’s dependence on debt-fuelled stimulus. If their complaints are not addressed, the consequences could be disastrous for Chinese officials as they try to avoid a precipitous deceleration in economic growth, which last year slowed to a 28-year low of 6.6 per cent, according to data released on Monday.

Interestingly, according to data cited by the article, “non-state companies” (including foreign-invested enterprises) received only 11% of new loans issued by the official banks in 2016, despite accounting for more than half of total economic output. (Private sector firms received 52% of new loans in 2012.) More fodder for the great debate about how much of China’s economy is really private.

More:

Mr Xi and Mr Liu [the vice-premier] appear to have underestimated both US President Donald Trump’s willingness to launch an all all-out trade war with China, which has sapped investor and private-sector investment, and also their ability to force the country’s state-controlled banking sector to direct more lending to non-state companies.

Also worth bearing in mind:

Yes, China’s 6.6% growth in 2018 is its slowest in nearly 3 decades. But given the size of its economy, that represents about $1.2trn of additional demand, nearly twice as much as it generated with 14% growth in 2007.

(And yes, we should take official figures with a big pinch of salt. And yes, China faces big downside risks. But it is worth taking a moment to look past the growth rate at the fact that, within a decade, we’ve gone from talking about a $4trn economy to a roughly $13trn economy.)

Here’s another angle on it:

China GDP growth global comparison