China and the Economy, China and Innovation, China and Climate Change

The extra emphasis on China in the media culminates this week with the US visit by President Hu Jintao. Much has been written about the visit and much posturing has taken place to set a “proper” tone. It’s hard not to comment on some of what has been said before hitting on the important topics of Innovation and Climate Change.

Economy. Let’s start with the currency. I don’t quite get all the noise about China needing to increase the value of the Yuan relative to the dollar. Secretary Geithner says it will help them control their inflation and will be “fairer,” whatever that means. The prices of Chinese goods are already going up which is a result of wages rising and productivity, particularly in low value goods, not offsetting labor costs. A rise in the value of the Yuan would increase prices more and would also increase the buying power of the poorer segments of the Chinese population while doing just the opposite for that segment in the developed world.  It would have the effect of creating jobs outside of China—not in the US, but in Mexico, Vietnam and other countries that will have a labor cost advantage relative to China. The rate of inflation would likely fall in China, but, of course, it would rise in the developed world. The short-term effect on the relative trade balance would be negative for the US, as it would take time for US corporations to shift purchasing to other countries. Plus, commodity prices, particularly oil, would likely rise in dollar terms, increasing our trade deficit in energy. Anyone who really expects that such an action would create jobs or a significant enough cost advantage to stimulate US exports or US buying of US goods vs. creating exports for other low cost countries isn’t looking at what China exports and imports vs. what the US makes. Odds are the media and our wonderful congress will spend more time on the currency issues than anything else. I think President Hu is here to go shopping. By that I mean putting China in a position to buy US assets that will be of value to its growth plans, primarily access to technologies that can allow it to meet its objectives of being a leader in innovation over the next several decades. The tradeoff will likely be further access to Chinese companies and markets by the US.  I reach this conclusion from a thorough read of China’s Patent Policy put forth this past fall.

Innovation. China’s National Patent Development Strategy (2011-2020) is a scary read. China sets very high targets for patent filings over the next 5 years, dwarfing filings by the US and Japan (which already exceeds the US in patents in force). It establishes a budget for Patent services that could reach US$16 Billion annually at current exchange rates. It proposes to have ten model cities focused on utilizing the patent system and the incentives to create a vigorous intellectual property market. It will seek to acquire intellectual property from others. A couple of direct quotes from the Strategy are worth noting: “A large number of core patents will be acquired in some key fields of emerging industries and some key technological fields in traditional industries. …Encourage enterprises to acquire patent rights through innovation on the basis of digesting and absorbing imported patented technology. …Support and foster exports of patented technologies and increase the proportion of exported patent-intensive commodities and strengthen guidance on patent policies for enterprises in the process of overseas mergers and acquisitions.”  Implied in the budgets for patent services is a vigorous enforcement of patent rights. Once China has intellectual property rights (IPR) to defend, it will likely be one of the more aggressive enforcers of those rights. The number of patents in force today with their origin in the US and Japan are each almost 20 times those of China. When those numbers get closer to parity it may very well be the US that finds itself on the defensive for not respecting IPR.  This was last the case in the early days of the Industrial Revolution when the US was the upstart and more intellectual property resided in Europe, primarily the UK.

Climate Change.  China’s plans for Patent Development raise significant issues about where intellectual capital will ultimately reside. When it comes to capitalizing on two significant areas of expected (or should we say required) technological innovation and value over the next decades, China is explicit as to their importance:  “…Balance the relationship between the patent policies and some major public policies such as public health and climate change.” (My emphasis)  Others can hold forth on the health front. In the patent document and others, China continues to highlight Climate Change as a focus of its policies and its technological efforts. It is clear that China sees the requirement to respond to this threat as political as well as societal. We will ultimately be a buyer of what China and others produce unless we also look at what policies we can put in place to be competitive.  At the moment we have the intellectual leadership existing in a variety of our institutions. Shame on us if we let that leadership slip away.

California Climate, Iben Browning and the Business of Weather

Southern California lashed once more by rain, slides

The tail end of a storm that dumped rain on Southern California for nearly a week gave the region one final lashing on Wednesday, burying houses and cars in mud, washing hillsides onto highways, flooding urban streets, threatening dozens of canyon homes and spreading filthy water that prompted the closure of 12 miles of beaches. – Los Angeles Times, December 2010.

“The weather in California has been ‘abnormal’ for most of this century. It will begin returning to the ‘normal’ weather of the 19^th century. You can expect colder and wetter winters and hotter and dryer summers.” — Iben Browning, c. 1975.

In the early days of my analytical career in the ‘70’s, I was fortunate to be a part of Mitchell Hutchins, a research boutique that ultimately was merged into PaineWebber.  Among the many assets of Mitchell Hutchins was its consulting program with the likes of Otto Eckstein, Bill Moyers, Henry Kissinger, David Broder and others spending time internally with us and with our clients.  One of those “others” was Iben Browning, who originally was hired by our food analyst, Roger Spencer, to do short term and seasonal weather forecasting, in order to help us predict soft commodity prices. While Iben’s work turned out to be quite useful on the short-term weather front, he was a man of many talents. His PhD was in zoology. He wrote several books, had over 60 patents, was a test pilot, spent some time with the DOD on geopolitical strategy related to weather patterns and the ability to influence same, and developed a keen interest in long term weather forecasting and climate change. He was an engaging speaker and quickly became a regular with our investing clients as much in demand as some of those with significantly higher profiles.  He ultimately developed some fame as a forecaster of earthquakes and volcanic activity based on changing gravitational pulls on the earth from the alignment of other celestial bodies.  Unfortunately, a rather precise but unfulfilled prediction of a quake in the Mississippi Valley in late 1990, which generated enormous media attention, turned fame to infamy.  He died of a heart attack 7 months later in his home in Tijera, New Mexico; a home rumored to be a house trailer (safer than a real house,  in his view, when an earthquake hits) on rather barren land that he ultimately expected to become arable and fertile as weather patterns shifted over the next century. As with many involved in forecasting, one is only as good as one’s last prediction. Iben does not get much credit for a long history of fairly accurate forecasts done with flair and more data than “An Inconvenient Truth.”  He is remembered for the “New Madrid” quake prediction which even became a country and western song. You can view several renditions on You Tube, if you choose: http://www.youtube.com/watch?v=C5QCeSS03RE&feature=related.

Iben used to start every presentation with a standard punch line: “The next Ice Age will occur in about 10,000 years.  Those people who say it begins in 2000 years are just trying to scare you.”  His other perennial statement was the one that started this post and to me of most interest. At the time I did not totally understand his logic. It consisted of looking at historical weather patterns as reflected in tree rings and other data points, an expected reversal of the pattern of emissions–particularly in Southern California, sunspots and a warming of the east-west currents in the Pacific. In retrospect, the changing weather patterns in California may reflect a combination of increased CO2 emissions globally, producing generally more extreme weather patterns, combined with a more localized moderation in emissions which has eliminated some of the heat trap effects as California has benefited from national improvements in emission controls combined with even more stringent efforts within the state. In other words, the combination of the effect of global emissions on weather patterns with relative improvements locally may be returning California weather to its 19^th century patterns with more seasonal extremes from today’s changes in climate: colder and wetter winters and hotter and dryer summers. At the moment, Browning’s predictions seem to be on point.  It’s all relative, though. I am not suggesting that coastal Californians need to move—yet. Nor should they reverse their efforts to slow emissions.  It may just be another interesting phenomenon of the Climate Change we are experiencing, or another Iben Browning prediction that will ultimately prove to be wrong. I would bet on the former.

This also brings us somewhat full circle to the value of understanding weather as a part of one’s investment decisions. As we have become a more global economy where supply  of soft commodities, or lack thereof, in one part of the world affects worldwide prices, the ability to predict positive or negative weather patterns can be quite important to investment and business decisions. I think this is being magnified by the more extreme variations in weather patterns that can come out of these early stages of Climate Change. I would only expect these patterns to become even more extreme as temperatures continue to rise.  Corporations involved in the agricultural industries have always paid attention to the weather. Investors, as evidenced by Iben Browning’s popularity, have as well. Today, those making the most use of weather forecasting would appear to be a number of hedge funds with the ability to place bets using a wide variety of instruments, where value is affected by a change in the monsoon season in India or extended drought in the Sacramento Valley. As these extreme weather events become more frequent the Iben Brownings of today’s world may become more prominent features in both the investment community and the media. Climate Change will continue to produce a new class of celebrities some of whom will stay with us for a long while.