CFA Society Chicago Book Club:

Age of Ambition: Chasing Fortune, Truth, and Faith in the New China by Evan Osnos

age of ambitionMost of us have a well-formed macro perspective on China. It’s the world’s second largest economy and a key U.S. trading partner with growing influence in Asia and globally. In Age of Ambition Evan Osnos takes us beyond the statistics, building a complex portrait of China through its people. The author introduces us to citizens from all walks of life with widely different views on politics, the economy, social issues and the Country’s future. He reveals the monumental changes, challenges and contradictions China faces by telling their stories, tracing their lives over the years and exploring their goals, aspirations and attitudes. It’s an up close and personal look that’s highly engaging.

We follow several progressive reformers like Ai Weiwei, a famous artist who publicly mocks inequities; Han Han, a snarky and wildly popular blogger who takes aim at rampant hypocrisy; Liu Xiaobo, a leading voice for human rights who won a Nobel Peace Prize while imprisoned for advocating political reforms; and Chen Guangcheng, the “blind peasant lawyer” who helps his poor rural neighbors fight injustice by local officials.

We also meet conservative nationalists like Lin Yifu who defected from Taiwan to China in 1979 with the dream of helping China reclaim its greatness. He became a chief economist at World Bank and evangelized China’s central planning methods. Tang Jie is a graduate student whose viral patriotic video inspired Chinese people to stand against protests of China’s repression in Tibet. He and other nationalists view foreign criticism as part of an ongoing plot to encircle and weaken China. Interviews with these and other personalities span years and it’s fascinating to observe how their views develop as the country rapidly evolves.

The author takes us beyond the headlines of scandals and disasters like China’s real estate boom, organized crime and explosive growth in Macau, riots in the Uighur region, earthquake in Sichuan, conflict with Japan over the Diaoyu Islands and the “Harmony Express” bullet train crash. State controlled media tries to shape these stories but is often undermined when details emerge. The collapse of schools in the Sichuan earthquake and the “Harmony Express” crash were eventually linked to corruption that allowed shoddy building practices. Fraud was so widespread in the railroad ministry that its chief Liu Zhijun was convicted of taking kickbacks and bribery to win a Party Central Committee post. However, the truth-seeking public also can pay a price. After the Sichuan earthquake, parents who demanded information about missing children were detained.

Several book club attendees thought the author could have quantified the material better. And we also noted he doesn’t take a position or recommend action to resolve the country’s challenges. It’s true, Age of Ambition isn’t China-by-the-numbers, but it does offer rich insight into the Chinese worldview and their perspective on the country’s challenges. Our discussion was made especially interesting having Yunjin Wang and Yang Xu, CFA, add clarity and context about their home country. Both felt the book was accurate, but also noted significant changes have occurred in the short time since it was published in 2014, including the crack down on fraud and tightening of the “Great Firewall” by incoming President Xi Jinping, as well as the profound effects of ongoing economic shifts.

Key takeaways from Age of Ambition were the existential threats facing the Communist Party and their hold on power:

EXTREME WEALTH INEQUALITY

Market-based policies have created dramatic growth, but the benefits have gone mostly to politically connected businessmen and officials. China’s true Gini coefficient of wealth distribution is estimated at 0.61, among the world’s worst. This inequality stands in stark contrast to the Party’s ideal of a classless society. There’s growing frustration with the lack of social mobility. Wages for college grads have been flat since 2003 and there are six million new college grads per year. Meanwhile economic growth is slowing. “Parental connections” were found to be the most decisive factor in a child’s earning potential instead of “parental education,” the typical factor in other countries.

THE INTERNET

The Party is wary of fast-moving ideas, even those that support the government. Control of information is absolutely crucial to them and the book gives a fascinating look at their methods: the “Great Firewall,” text message monitoring, “Fifty Centers” paid to disrupt sensitive online conversations, orders issued to news outlets and publishers on forbidden words and topics, etc. But despite this censorship we see how artists, bloggers and activists use the internet to expose corruption and express their views, often with tragic consequences. Internet and mobile phone penetration are growing fast, so this challenge will continue.

INNOVATION

To transition its economy toward domestic consumption and grow its service industries, China needs to foster innovation, but official propaganda aiming to have citizens “sing as one voice” and a deeply-rooted requirement for conformity work directly against building a culture of creativity and innovation.

INDIVIDUALITY

The Party controls the legal system, education, industry, media, communications and faith groups, but as Chinese people become educated, urbanized and wealthier they’re craving more autonomy in their work, family and spiritual lives. This works against Party efforts to “harmonize” society.

Overall, Age of Ambition is a well-written and highly insightful book that’s sure to enrich your understanding of China’s people, challenges and future.

CFA Society Chicago Book Club: “The Age of CryptoCurrency: How Bitcoin and Digital Money are Challenging the Global Economic Order” by Paul Vigna and Michael J. Casey

Bitcoin with its underlying blockchain technology is by far the most controversial and least understood of the fintech innovations revolutionizing financial services. Since it was conceived in 2008 it has generally been viewed with suspicion, even outright derision. But both the currency and the technology are gaining legitimacy and there’s growing interest in its potential, as shown by these informal indicators:

  • Strong growth in startup funding by top VCs and investors: bitbetween 2013 and 2015 venture investments grew from $95M to $622M per this recap http://www.coindesk.com/bitcoin-venture-capital/
  • Improvement in price volatility (but still far from stable): high/low in 2013 was $1,147/$13, and in 2015 was $456/$214
  • Robust discussions at the 2016 World Economic Forum, European Parliament, IMF, CFTC and other venues to consider the value, drawbacks and risks of bitcoin and blockchain
  • Continuing evolution of regulations: New York’s BitLicense requirements, IRS and CFTC rulings, general openness in the UK, Hong Kong, Switzerland, Bulgaria, Romania and elsewhere

At the February CFA Chicago Book Club meeting we discussed Paul Vigna’s and Michael J. Casey’s excellent book on all things bitcoin and blockchain. The two Wall Street Journal reporters thoroughly explored the origins, mechanics, personalities, motivations, recent developments and future of this fascinating technology.

There’s a shroud of ambiguity around bitcoin. It can be characterized as a currency, commodity, payment protocol or an expansive platform for trading anything of value, and the authors clearly explain each of these perspectives. They also describe the underlying technology and its two key breakthroughs: a universal ledger that captures every transaction and is continuously verified, and an incentive system for “nodes” to maintain the ledger. Bitcoin exists as a chain of digital signatures. Owners privately transfer coins by digitally signing a hash of the previous transaction and the public key of the next owner, adding their signatures to the end of the coin. Note, a “hash” is just a long string of characters and hashing is a common technique used in encryption and data-storage. The open source blockchain code tells computer nodes how to collaborate in maintaining the integrity of the universal bitcoin ledger via a process called mining.

Everyone’s heard about bitcoin “miners” who dig up newly minted electronic currency, but mining is really a misnomer. Networked computer nodes do the work of confirming that transactions are valid, verifying the ledger is correct, getting all other nodes to agree, closing the previous block of transactions and opening a new one. While doing so they can earn new bitcoin as a reward. There’s more to it, but essentially this is mining. The sequential blocks of transactions form the chronological blockchain ledger. One block, or group of transactions, is closed and a new one is opened every 10 minutes or so. Anyone with a computer and internet access can establish a node and mine, but to increase the likelihood of earning bitcoin miners employ massive computer power. There are dedicated server farms in the U.S. and abroad using computers designed just for this purpose. China is especially active in bitcoin mining.

The origins of bitcoin have contributed to its mystique and notoriety. A person or group named Satoshi Nakamoto conceived the open-source computer code on October 31st, 2008, by posting on a message board for cryptographers. It caught the attention of Hal Finney who dabbled in encryption technology in his off hours. He and Sathoshi worked to get the open-source protocol running in 2009, and slowly others began to adopt and use bitcoin. The cryptocurrency also appealed to “Cypherpunks”, an anarchic, libertarian group concerned with privacy protection and subverting the power of banks and governments to create economic crises and serve corporate interests at the expense of citizens. Satoshi’s true identity and motivation for introducing bitcoin aren’t known. He or she essentially disappeared in 2011 and past communications were encrypted, sparingly worded and didn’t elaborate on philosophy.

The current system for handling credit card transactions illustrates the problem bitcoin intends to solve. The authors walk through an everyday coffee purchase: seven entities are involved, including the merchant, front-end processors, payment processors, banks, credit card associations, clearing houses, etc. These entities share our banking and personal information, and of course earn fees which are paid by the merchant and ultimately you and I. Fees can total 3%, and much more when traveling abroad. This same transaction using bitcoin is strictly between the merchant and purchaser. The universal ledger confirms funds are available and validates the transaction. No personal information is shared because bitcoin is encrypted. No third party intermediaries are needed and no transaction fees are charged. In this scenario there’s no need for banks, credit cards, payment processors, dollars, euro or yen. Bitcoin proponents envision huge economic benefits from eliminating transaction fees.

A growing list of merchants accept bitcoin as payment for some or all of their products, including Dell, DISH Network, Microsoft, Expedia, Overstock, Newegg and many others. However, there are good reasons to be skeptical. Public perception suffered after several hacking incidents. For example, Mt. Gox, an early bitcoin exchange lost 650,000 of its client’s bitcoins and finally collapsed, impacting 127,000 users. Silk Road was another high-profile debacle. It was an Ebay-like site for trading in illegal drugs and assassinations that used encryption to hide web traffic and the anonymity of bitcoin to keep transactions private. Its operator, Ross Ulbricht was sentenced to life in prison for money laundering and trafficking narcotics. There’s also conflict within the bitcoin community itself, most recently related to a proposal to expand bitcoin transaction volume capacity, which is a small fraction of established payment systems. The argument exploded very publicly into death threats, virus attacks and censoring bitcoin discussion boards. Breakdowns like these, coupled with extreme price volatility in past years and other concerns damage public trust in bitcoin as a reliable currency.

Trust is a recurring theme in the book. In our current system banks and other central institutions maintain the central ledger that establishes the essential trust in who owes what to whom. Various parties in this system dedicate enormous resources to verify their records match and confirm trust. But with bitcoin, trust is automated. To be effective as currency bitcoin must be widely held and widely accepted. It’s the classic “chicken or egg” dilemma. Money must be a unit of account, a store of value and a medium of exchange, three conditions banks are currently tasked with safeguarding. But there’s an enormous cost for this in money, privacy, and economic damage banks are perceived to cause in crises. The authors deftly explore multiple perspectives on trust and the central role of banks:

  • In developing countries millions of people lack access to banks. Bitcoin may be an ideal solution for countries with limited banking infrastructure, weak legal systems, 10%-20% fees on transfers from citizens working abroad and a high degree of self-employment.
  • Russia’s and China’s national security depends on controlling their national currencies, so unregulated and encrypted bitcoin may be a threat to government’s hold on power.
  • Developed countries incur hundreds of billions in transaction fees that could be used productively. But unlike bitcoin, the incumbent system allows for Keynesian intervention during crises to offset currency hoarding.

To the extent bitcoin has obstacles; the underlying blockchain technology has opportunities. Financial institutions are using it to create more efficient financial payment, trading and settlement systems. Major firms actively exploring blockchain solutions include Bank of America, Banco Santander, IBM, ING, Mizuho, NASDAQ, PwC, UBS and many others. Meanwhile, startups like Next, Ripple, Mastercoin, Ethereum, BitShares, Counterparty, Stellar and others are developing digital asset exchanges for peer-to-peer trading. The authors explore a variety of blockchain applications that extend beyond digital currency. Decentralized autonomous corporations (DACs) are similar to crowd-funding but DAC shareholders participate in ownership and any increase or decrease in value. Reputation markets for restaurateurs, contractors, freelancers, etc. use blockchain to hold their record of customer reviews, which can then be securitized to monetize goodwill. Voting can use an encrypted private key to send a tiny amount of bitcoin to a polling wallet. Votes are time-stamped and permanent in the blockchain to prevent fraud. Smart contracts, where bitcoin payments are made to a neutral wallet and disbursements are triggered automatically. Examples include homeowner’s escrow for insurance and tax payments, and credit default swaps where a credit event automatically triggers payment to the CDS owner. Smart property, where digital ownership tokens are assigned as property deeds, titles and certifications of ownership, makes them easily tradable with other digital asset claims. There are endless applications using the blockchain platform, and it’s seen by some as the internet all over again.

Blockchain clearly has a very bright future. As for bitcoin as digital currency, the authors present several future scenarios and discuss potential government reactions and the impact on various stakeholders:

  • Bitcoin is adopted worldwide: The UK, Canada, Switzerland and Singapore are poised to lead due to their innovation-friendly regulations. The U.S. would take a back seat given the restrictions here. Banks and governments would have greatly diminished power. Millions of unbanked people in developing countries would gain access to an efficient financial system.
  • Bitcoin is not adopted: The obstacles to realizing the grand vision are never overcome and a ‘just good enough’ option with lower fees and greater efficiency takes hold within the existing system.
  • Hybrid system: Bitcoin grows alongside the existing system and national fiat currencies continue to be used. Exchanges are needed to convert to and from digital currency. Blockchain technology is used by institutions to improve transaction confirmations, payment systems, etc. Credit card companies, payment processors and currency traders could disappear. Or bitcoin could be adopted principally for online and certain other types of commerce.
  • Multi-coin world: Currency itself becomes less important. The principle means of exchange could be smart property trading on blockchain-based exchanges where property items are divided to level needed. Commerce becomes a form of barter without the limitations of trading physical property. The authors posited selling half a horse for a flight to LA!
  • National cryptocurrency: Countries launch their own digital currency using blockchain technology. People trade currency peer to peer without intermediaries, but control is still centralized leaving the state as the ultimate counterparty. Governments retain the ability to use policy measures to stimulate the economy. Cross-border transfers of digital currencies are difficult to restrict which undermines capital controls. The U.S. digital dollar has an enhanced role as a reserve currency, but the Fed is more accountable to the global marketplace. For example, if the U.S. digital dollar were mismanaged other currencies would become favored.

Regardless which of these scenarios is realized, bitcoin and blockchain have staggering potential to reshape financial services and other areas of the economy. They can no longer be dismissed as a fringe, radical movement. It will be fascinating to observe this space in the coming months and years.

 

Upcoming Schedule:

March 15, 2016: My Side of the Street: Why Wolves, Flash Boys, Quants, and Masters of the Universe Don’t Represent the Real Wall Street by Jason DeSena Trennert

April 19, 2016: While America Aged: How Pension Debts Ruined General Motors, Stopped the NYC Subways, Bankrupted San Diego, and Loom as the Next Financial Crisis by Roger Lowenstein

May 17, 2016: TBD

To sign up for a future book club event, please click here:

http://www.cfachicago.org/apps/eve_events.asp

CFA Society Chicago Book Club:

On Saudi Arabia by Karen Elliott House

The CFA Society Chicago Book Club met July 21st for a lively discussion of On Saudi Arabia: Its People, Past, Religion, Fault Lines – and Future by Karen Elliott House.  The book is a fascinating look at the perspectives and interests propelling Saudi society and we were all surprised at how little we knew of this important trading partner and regional power including the following surprising facts:

  • 60% of the population is under 20 years old0307272168-195
  • 40% unemployment among 20- to 24-year-olds
  • 90% of private sector jobs are held by foreign workers
  • Individual initiative and risk-taking are frowned upon
  • Cinemas, music, men and women shaking hands, and books on Saudi Arabia are all forbidden
  • Saudis aren’t interest in democracy: seen by some as forbidden under Islam and by others as chaotic

The author conducts probing interviews with princes and religious leaders, stays in the home of a devout Muslim family, discusses the future with teenagers and college kids, and explores criminal behavior with ex-convicts.  She shows how the Saudi royal family uses religion and oil wealth as “opium of the people” to buttress their authority and maintain stability, but serious internal challenges are threatening the status quo.  Easy access to information tops the list.  Saudis are more informed and connected via social media and cable news and as a result are demanding transparency and fairness from government.  They also more openly question the royal family’s lavish lifestyle, which is in stark contrast to the conservative Islamic principles they advocate.  Meanwhile divisions among Saudis along tribal, religious, gender, reformist/traditionalist lines are increasing social tensions.  When the book was published in 2011 the Arab Spring was in full effect, fueled by these same internal dynamics.  This is still seen as a serious threat to the monarchy.

Saudi Arabia’s biggest external threat is Iran and its desire to expand influence in the region.  The Saudi monarchy has positioned itself as the leader of all Islam because the two holiest Muslim sites, Mecca and Medina, are in Saudi Arabia.  To an ambitious Iran these might be tempting to capture.  Increased Iranian prosperity following this year’s negotiated nuclear agreement could make them even more viable targets.  Add to that the increased competition in global oil production from fracking and alternative energy sources and its clear Saudi Arabia, while still strong, has some crucial challenges to address.

We debated various paths forward but ultimately agreed Saudi Arabia faces an unclear and possibly explosive future.  Resolving the poor education system was heavily discussed, since it generally fails to produce graduates with marketable skills and critical thinking ability.  But government corruption, dependence on royal favors and hand-outs hinders a productive working class.  Saudi men are reluctant to take jobs they see as beneath them.  Saudi women are largely sidelined, comprising a mere 12% of the workforce even though they increasingly educated and motivated.  Women are restricted to working only with other women, and often seek “acceptable” teaching or medical positions.  There’s a growing demand among women to lead more fulfilling lives, but many defend the status quo and feel it’s inseparable from their Islamic beliefs.  Women’s rights have become a proxy war between progressives and conservatives.  We also compared Saudi Arabia’s economic prospects to Russian and Chinese models, but its social code and wealth structure are just too different to be relatable.

Royal succession may offer a glimpse at Saudi Arabia’s future.  After his crowning earlier this year, King Salman made 29-year-old Prince Mohammed bin Salman deputy crown prince and concentrated unusually large responsibilities with him.  The prince now heads the state oil monopoly, the public investment company, ministry of defense, and leads the air war in Yemen.  This is shocking for a country that has stayed unified for decades by sharing positions among the royal family.  If this is any indication of its future, Saudi Arabia might become increasingly assertive in the region while enforcing religious conservatism internally.  We were also surprised that Saudis are generally not interested in gaining democratic freedoms.  The country is more a collection of tribes and Islamic factions than a unified state, and Saudis see a need for strong rulers to prevent internal wars.  Democracy is also seen by some as forbidden by Islam because elected leaders promise what they don’t have and praise themselves – both are Islamic taboos.

On Saudi Arabia offered a valuable look at the many layers of Saudi society and the challenges it faces.  It was fascinating to learn about this country that’s so important in the region and the world.

 

Upcoming Schedule:

August 18, 2015: “Superpower: Three Choices for America’s Role in the World” by Ian Bremmer

*NOTE: Author Douglas Sisterson is attending the PDDARI meeting which takes place just before the book club meeting on 8/18. He will be discussing his book “How to Change Minds About Our changing climate”.

September 15, 2015: “The New Cold War? Religious Nationalism Confronts the Secular State” by Mark Juergensmeyer

October 20, 2015: “The Second Machine Age: Work, Progress, and Prosperity in a Time of Brilliant Technologies” by Erik Brynjolfsson and Andrew McAfee

November 17, 2015: TBD

 

To sign up for a future book club event, please click here:

http://www.cfachicago.org/apps/eve_events.asp