BEARNOBULL’S WEEKENDER

StreetAccount Summary – US Weekly Recap: Dow (1.28%), S&P (0.99%), Nasdaq (1.28%), Russell 2000 (1.02%)

China’s Best Bet: Doubling Down on Reform, Not Stimulus Slowing growth isn’t a sign of disaster, but it also can’t be cured by pumping money. What’s needed is freedom. (By HENRY M. PAULSON JR.)

(…) If, as Beijing has promised, the slowdown is accompanied by deep and serious structural reform that opens up new growth opportunities, such as allowing the private sector to compete against state monopolies in service sectors like banking and telecommunications, then China will still grow robustly compared with all other major economies. Here’s why: China is engaged in a historic transformation, a politically fraught effort to reboot a $10 trillion economy beset by debt, overcapacity and structural inefficiencies. By any measure, turning such a ship around is no small or simple task.

China stands at a critical juncture. The country’s model for nearly four decades of growth has run its course, a victim of a sharp, cyclical downturn and structural flaws laid bare by the 2008 global financial crisis. The prevailing model relied heavily on government investment, exports, industrial policy and privileges for a bloated state sector that gobbled up land, energy and credit at subsidized prices. The Chinese economy became energy intensive but is energy inefficient, a toxic combination that damaged both the economy and the environment.

So reform is needed—but at a moment when the days of double-digit growth have disappeared, probably forever. Quality growth that can be sustained over the long haul is President Xi Jinping’s goal. Beijing aims to establish a new model, one that is compatible with a clean environment, based on consumption, competition and a fairer shake for the private sector. (…)

As Mr. Li put it to me in a November 2013 meeting, “we have to remove all those unreasonable and irrational shackles and constraints” to “unleash the creativity of the market.” But freeing private firms requires genuine competition in sectors long dominated by state-led oligopolies. And that also means ending their preferential access to energy, land and other resources.

Nor are these the only prices that will have to rise: Letting the market play its proper role also means liberalizing interest rates. That is something my longtime counterpart Zhou Xiaochuan, currently governor of China’s central bank, has committed to. Beijing has removed the floor on lending rates. In recent weeks, Mr. Zhou has also committed to liberalizing deposit rates, an important signal about reform.

(…) The success of China’s reforms will be determined by how fast and to what extent the country rolls back subsidies and regulatory advantages for state-owned enterprises, opens key industries like energy and finance to the private sector, and fosters competition from foreign companies.

Can Mr. Xi do it? I wouldn’t bet against him. He has amassed power at a rate and to an extent unprecedented, at least since Deng Xiaoping and possibly even Mao Zedong. But Mr. Xi will need every bit of that power to make the fundamental changes necessary in a country where vested interests are deeply dug in and there is no consensus on the most difficult economic reforms ahead.

I believe the market can work magic. And paradoxically, the Chinese Communist Party says it wants to rely on that magic too. In the most important economic policy statement in decades, the November 2013 Third Plenum, it declared that the market would henceforth play the “decisive role” in the economy. So the Communist Party must face this paradox: For all its efforts and successes since launching economic reform in 1978, what the party must do, if it truly wants China to evolve into a global leader, is the hardest thing yet. It must commit itself to setting the economy free. (Chart fro MGI via BI)

Andy Rothman (Matthews Asia’s strategist) asks two important questions about this state of affairs. First, how worried is the Communist Party about the gradual deceleration? Second, how worried should investors be?

Party leaders do not appear particularly worried. They have refrained from opening their wallets for a significant stimulus: the growth rates of credit outstanding and of fiscal spending have continued to decelerate. The Party has, however, given a modest boost to infrastructure investment, which rose 22.3% in 1Q15, compared to 20.7% last year and 19.7% in 2013. In my view, this is designed to put a floor under growth by compensating for weak housing investment, but the Party shows no signs of wanting to reaccelerate GDP growth back beyond the first quarter’s 7% pace.

Investors should keep the slower growth rates in context. GDP growth of 7% is significantly slower than 10%, but because of the larger base, that 7% will deliver far larger incremental expansion of the economy than 10% a decade ago, meaning greater opportunity for investors. And, 7% is still 7%! U.S. GDP rose 2.4% last year.
Many parts of the economy are clearly still doing well. While traveling in China last week, I heard from small private manufacturers who told me they were planning to raise wages by 5% to 8% this year. Income growth of 8% compares favorably to 3.2% growth in the U.S., as does Chinese retail sales growth of 10.8% vs. 3% in the U.S. The number of new business registrations in China rose 38% in 1Q.

More from Andy:

You can also listen to my comments on this topic in an interview with public radio’s Marketplace program:

http://www.marketplace.org/topics/world/chinas-growing-just-7-percent

Finally, you may have seen a 60 Minutes TV program about China’s ghost cities.  It first aired in 2013 and has been rebroadcast several times.  I recently went to Zhengzhou, where 60 Minutes filmed, and found that, well, it is no longer very ghostly.  Our short video on China’s ghost cities is available here:

http://matthewsasia.com/perspectives-on-asia/video-detail.fs?artID=922

• Trying on the Apple Watch and the weekly roundup in tech and retail by Leah Grace

(…) functionalities aside, people will buy it for the looks. The bands alone made me want to switch back to iOS, that’s how beautiful it was and I’m not alone. (…)

• Apple’s watch is a must-have. But is it a must-keep? (FT)

(…) Marketed as the most personal piece of kit created by Apple, its design has been built on our making a deep connection with the wearable technology: time-telling being the least of it. I tried one last week and quickly fell for its sinuous design and sleek contours. I loved its cutesy animated emojis and the Mickey Mouse interface where his feet tap-tap away the time. I even quite enjoyed the Pavlovian pulsing vibration it emitted to notify me of incoming emails, texts — or cardiac failure (as monitored on the “heart rate” app). (…)

I could foresee a future in which myself and the Apple Watch might never be parted. (…)

As a personalised object, the Apple Watch is extraordinary. It unifies hundreds of tiny technologies so that we can drive and take phone calls and follow directions and sing along to our favourite songs at the flick of our wrists. I have no doubt we will come to love the Apple Watch. (…)

• Apple Watch review:A beautiful, bold watch, with complications (CNET)

THE GOOD The Apple Watch is a beautifully constructed, compact smartwatch. It’s feature-packed, with solid fitness software, hundreds of apps, and the ability to send and receive calls via an iPhone.

THE BAD Battery barely lasts a day and recharge time is slow; most models and configurations cost more than they should; requires an iPhone 5 or later to work; interface can be confusing; sometimes slow to communicate with a paired iPhone.

THE BOTTOM LINE The Apple Watch is the most ambitious, well-constructed smartwatch ever seen, but first-gen shortfalls make it feel more like a fashionable toy than a necessary tool.

GENERATIONAL SPELLING GONE FULL CIRCLE

Teddy Roosevelt, Rough Rider Over Spelling Rules An executive order tried to make changes like ‘pur’ for ‘purr.’ Critics got their claws out.

Much as President Obama’s critics might yearn for it, he has never withdrawn one of the executive orders that he deploys to circumvent Congress. There is a precedent for presidential second thoughts when it comes to executive orders, but when Theodore Roosevelt withdrew one of his directives, it wasn’t because matters of state were hanging in the balance. The subject of the executive order was spelling—that’s right, s-p-e-l-l-i-n-g. (…)

A reformer who took on the railroads and big corporations, Roosevelt joined a movement that had its roots with early Americans, notably Noah Webster, who was appalled by the often seemingly random spelling rules for English that could make writing a torture for children and adults alike. George Washington,John Adams and James Madison spelled every which way they pleased, and their words still became legendary. But as the 19th century unfolded and the quest for literacy became democratized with the spread of public education, American orthography became a hotly debated educational matter.

TR’s motivation, as well as that of another supporter, industrialist Andrew Carnegie, was multifaceted. Both men were poorly educated as youngsters yet longed as adults to become educational pacesetters. They looked at spelling reform as efficient and cost-cutting, meaning that newspaper, magazine and book sizes could be reduced, as could class time devoted to spelling. The men hoped that English and French spellings of common words that added more letters than was necessary would give way to an American imprint.

After Carnegie in 1906 put his money into what came to be known as the Simplified Spelling Board, Roosevelt issued an executive order on Aug. 27 of that year directing that all publications of the executive department adhere to the board’s new spellings for 300 words delineated in his order. Many of the spellings were already in use, including “arbor,” “ardor” and “clamor,” (instead of the British arbour/ardour/clamour) or “judgment” and “acknowledgment” (without the silent “e”).

What set off a firestorm of criticism was TR’s capitulation to phonetics: “blessed” became “blest,” “kissed” would be “kist,” “passed” would become “past”—no matter that this last spelling mirrored the word for time gone by. The double letter “r” at the ends of words were gone, so a cat’s “purr” was softened to “pur.” The combined letters “oe” as in “subpoena” became an e; “though” was reduced to “tho,” and “through” became “thru.”

In the executive order, Roosevelt argued that the spelling scheme was favored by both the “ablest and most practical educators” and the “popular forces which are endeavoring to make our spelling a little less foolish and fantastic.” And on Dec. 3, 1906, Roosevelt used the new spelling in his annual message to Congress—he urged, for instance, the “formation of rifle clubs thruout all parts of the land.”

Although the president had his defenders, there weren’t many. Newspapers across the country made fun of Roosevelt. The Louisville Courier-Journal: “Nuthing escapes Mr. Rucevelt. No subject is tu hi fr him to takl, nor tu lo for him tu notis. He makes tretis without the consent of the Senit. He inforces such laws as meet his approval, and fales to se those that do not soot him. He now assales the English langgwidg, constitutes himself as a sort of French academy, and will reform the spelling in a way tu soot himself.”

The Supreme Court ignored the new spelling, although the House of Representatives thought it had to more emphatically reject TR’s prescriptions. On Dec. 13, 1906, a sense of the House resolution was agreed to—without dissent—urging that all government documents “should observe and adhere to the standard of orthography prescribed in generally accepted dictionaries of the English language.” Roosevelt immediately withdrew his executive order, forced perhaps for the first time to eat—as he would have spelled it—cro.

• Noah Webster was struck by the inconsistencies of English spelling and the obstacles it presented to learners (young and old alike) and resented that American classrooms were filled only with British textbooks. The spelling reform featured in his first dictionary, A Compendious Dictionary of the English Language, was based on the author’s combined vision of logic and aesthetics. He changed the –ce in words like defence, offence, and pretence to –se; abandoned the second, silent “l” in verbs such as travel and cancel when forming the past tense; dropped the “u” from words such as humour and colour; and dropped the “k” from words such as publick and musick. The “publick” readily accepted many of these changes and just as readily rejected some of the others.
• In 1898, the National Education Association began promoting a list of 12 spellings. They were: tho, altho, thru, thruout, thoro, thoroly, thorofare, program, prolog, catalog, pedagog, decalog. How many of these spellings persist? The NEA later adopted a list of 40 respelled words;
• In 1906, the Simplified Spelling Board was sponsored by Andrew Carnegie and was composed of some fairly famous people, including Mark Twain and William James, the presidents of Columbia, Stanford, and the University of Michigan, a Supreme Court justice, the U.S. Secretary of Education William T. Harris, Isaac K. Funk, the lexicographer (Funk and Wagnall’s Dictionary), the publisher Henry Holt (Holt, Rinehart and Winston), and Col. Thomas Wentworth Higginson (writer and friend of Emily Dickinson), James J. Murray, editor of the Oxford English Dictionary, and other notables.
• Later that year, Pres. Theodore Roosevelt ordered the Government Printing Office to adopt the 300 “simplified spellings” recommended by the SSB. Congress was in recess at the time, but when the representatives returned, they voted 142 to 24, that “no money appropriated in this act shall be used (for) printing documents … unless same shall conform to the orthography … in … generally accepted dictionaries.”
• Joseph Medill, publisher of the Chicago Tribune, was a member of the Spelling Reform Association and forced the Trib to adopt some of its simplified spellings. His grandson, Col. McCormack, continued the tradition, and in 1934 the Tribune began using a growing list of shortened spellings:

  “An unsystematic list of 80 respelled words was introduced in four editorials over a two month period, and used thereafter in the paper, which had the largest circulation in Chicago. On January 28, “advertisment, catalog,” and seven more “-gue” words were among those shortened. The February 11 list included “agast, ameba, burocrat, crum, missil, subpena.” On February 25, “bazar, hemloc, herse, intern, rime, sherif, staf,” were among those introduced. On March 11 an editorial reported that “short spelling wins votes of readers 3 to 1.” On March 18, the final list included “glamor, harth, iland, jaz, tarif, trafic.” The list gradually shortened, and on Sept. 29, 1975, the paper abandoned simplified spelling altogether.

Well, the Chicago Tribune may be regretting having abdicated in 1975. Had it kept at it, it could now boast having been the first to foresee internet phonetic now used extensively in texting and on Twitter and Facebook..

“Anyone who can only think of one way to spell a word obviously lacks imagination.” ― Mark Twain

More on this here.