Saturday, May 17, 2008

Dumb, Dumber, And Dumbest – What Is The Republican Party Doing?

What the heck is wrong with the Republicans these days? The once grand old party of Lincoln that had vision and fire is now floundering with series of miscues, inappropriate comments, and actions unbecoming of a representative of the people of the United States.

To start, here is President Bush doing his open-mouth-insert-foot foreign policy move when he said on May 2: “So, for example, just as an interesting thought for you, there are 350 million people in India who are classified as middle class. That's bigger than America. Their middle class is larger than our entire population. And when you start getting wealth, you start demanding better nutrition and better food. And so demand is high, and that causes the price to go up.”

What an insensitive thing to say. No wonder the Indians are upset. Instead of accepting them into prosperity and encouraging them to aid the less fortunate, Bush blames them for causing the food prices to go up.

Not to let someone else out do him, a dumber Bush moment was in Israel when he addressed the members of the Knesset on May 15: “Some seem to believe that we should negotiate with the terrorists and radicals, as if some ingenious argument will persuade them they have been wrong all along. We have heard this foolish delusion before. As Nazi tanks crossed into Poland in 1939, an American senator declared: "Lord, if I could only have talked to Hitler, all this might have been avoided." We have an obligation to call this what it is -- the false comfort of appeasement, which has been repeatedly discredited by history.”

OK, that ‘Nazi’ quote was made by William Edgar Borah, a Republican Senator of Idaho. Perhaps Bush identifies with stubborn and headstrong person that Borah was, traits that Bush has exhibited during his Administration. Moreover, the quote was highly inappropriate in such a setting as the Knesset.

Since 2002, Bush has been aiming comments like this toward North Korea and Iran, two of three nations in the axis of evil: “States like these, and their terrorist allies, constitute an axis of evil, arming to threaten the peace of the world. By seeking weapons of mass destruction, these regimes pose a grave and growing danger. They could provide these arms to terrorists, giving them the means to match their hatred. They could attack our allies or attempt to blackmail the United States.”

Since then, Bush is negotiating with North Korea and sending them food aid. Sending aid to a rogue country that professes to have nuclear weapons; why are we negotiating with and sending aid to North Korea while posturing with Iran? One of the two key arguments about Iran is that it has weapons of mass destruction. If this is true, then should we not project the same posture with North Korea?

The second of two key arguments is that Iran supports and sponsors terrorism. OK, then, using this argument, we should be including Syria in the “axis of evil.” After all, our own State Department had labeled Syria as a security threat: “Syria remains a security concern not just because of terrorism, but also because of its pursuit of weapons of mass destruction.” Moreover, Syria “has been on the U.S. list of state sponsors of terrorism since the list's inception in 1979.”

Why should we not negotiate with Iran if we are willing to force Syria to peace negotiation through legislation and hold talks with North Korea? Even the U.S. Military is suggesting that we negotiate with Syria and Iran to bring peace to Iraq. A November 2007 memo from the Strategic Studies Institute of the U.S. Army War College recommends that the U.S. negotiate: “A diplomatic option involving Syria and Iran appears to be worth exploring if done within the context of a broad regional initiative that includes our regional friends and allies as well as our adversaries.”

What is the deal with the double standard? Perhaps someone should remind Bush of his own statement on negotiating with terrorists and radicals. On January 10, 2008, Bush said the following, after meeting with President Abbas.

On negotiation: “Achieving an agreement will require painful political concessions by both sides.”
On negotiation with Terrorists: “On the Palestinian side that includes confronting terrorists and dismantling terrorist infrastructure.” And “No agreement and no Palestinian state will be born of terror.”

President Nixon flew to China in 1972 and met with Chairman Mao and Premier Zhou En Lai in Beijing and, later that year, he went to Moscow and negotiated with Leonid Brezhnev, General Secretary of the Soviet Union on the SALT I treaty. This was a surprise since Nixon was avowed anti-communist and China and Soviet Union were the enemies, the then axis of evil. The U.S. and the Soviet Union fought each other through proxy battles in the Middle East during the Yom Kippur War and the U.S. and China fought each other through proxy battles in Vietnam.

President Regan called Soviet Union the “Evil Empire” but met with Mikhail Gorbachev, the General Secretary of the Soviet Union multiple times to conclude the Intermediate-Range Nuclear Forces Treaty.

Even President George H. Bush (a.k.a. Bush senior) favored diplomatic solutions with Iraq and Saddam Hussein. Even after Iraq invaded Kuwait, he was still willing to negotiate with Iraqis.

Perhaps, President Bush should have listened to his dad a bit more: “Whose life would be on my hands as the commander-in-chief because I, unilaterally, went beyond the international law, went beyond the stated mission, and said we're going to show our macho? We're going into Baghdad. We're going to be an occupying power — America in an Arab land — with no allies at our side. It would have been disastrous. We don't gain the size of our victory by how many innocent kids running away — even though they're bad guys — that we can slaughter. ... We're American soldiers; we don't do business that way.”

Now, we come to the dumbest Republican moment: Mike Huckabee. Upon hearing a loud bang during his speech to the NRA, Huckabee quipped: “That was Barack Obama. He just tripped off a chair. He's getting ready to speak and somebody aimed a gun at him and he -- he dove for the floor.” (Click here for the video.)

Huckabee is a Southern Baptist Minister. As a man of faith, there is no excuse for such a comment. Even if he had just said “Obama tripped off a chair,” it would have been in very bad taste as it insinuated that Obama was standing on a chair. Now, why would anyone be ‘standing’ on a chair? Was Huckabee insinuating that Obama is uncivilized and therefore standing on a chair? Or was it more insidious?

What’s with the comment about aiming a gun at him and having him diving for the floor? Any reasonable person would dive, run, duck, or do everything possible to avoid a gun pointed at said person. Why would a person be aiming a gun at Obama in the first place? Is that a statement that a man of God would make? If you see the video, Huckabee’s comments came out very naturally. There was no hesitation on his part to comment on the sharp sound at Obama’s expense.

Now, in politics, one can sling mud about an opponent. That’s acceptable. If Huckabee said something along the lines of “That’s Obama slamming the door on American’s right to carry guns”, then Huckabee would have won a very savvy political battle while slinging mud at Obama.

Mr. Huckabee, for a person who has a sharp mind and wits, to have said what you did is inexcusable. Perhaps, sir, you should re-read Leviticus 19:18.

NOTE: I had a difficult time choosing between the “DUMBER” moments since Mr. Bush has offered up a lot of them. However, his Nazi comment won out over his ‘I gave up golf to show my respects for the families of fallen soldiers.’ This is only because his comment about giving up golf was made some time ago. (Keith Olbermann has a great commentary on this. Click here for the YouTube video)

Have a great weekend!

Ed Kim
Practical Risk Manager

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Sichuan Earthquake Fallout: Which CPC Officials Will Bear The Blame?

With the news getting grimmer by the day in Sichuan Province, there are more angry voices being raised on the shoddy construction that led to so many buildings’ collapses. The most tragic of the building collapses are the schools in which thousands of students died.

In fact, Juyuan middle school, a magnet school that attracted the smartest kids in the province lost nearly all of its 900 students and a high school in Beichun County has lost nearly 1,000 students and teachers. In a country where there is typically only one child per family (see China’s population policy), deaths of so many children will certainly result in major protest and anger by its citizens.

According to some accounts, the schools ‘pancaked’ so quickly that most students didn’t even have a chance. The complete collapse of nearly 700 school buildings is evidence of shoddy construction. Housing Minister Jiang Weixin acknowledged this at a news conference in Beijing: "At this stage we cannot rule out the possibility that there has been shoddy work and inferior materials".

Given these evidences, I think there will be several high-ranking officials in Sichuan Province and its cities that will be blamed for the earthquake deaths of school children.

Some of the senior communist party officers[i] in Sichuan Province that may be held responsible are:

  • Jiang Jufeng, governor of Sichuan Province
  • Liu Qibao, top provincial legislator in Sichuan Province
  • Li Chuncheng, CPC Provincial Committee Secretary
  • Wei Hong, responsible for key construction and temporarily in charge of Sichuan Provincial Department of Education
  • Wang Ning, responsible for Sichuan Provincial Department of Construction
China has one of the strict penalties for corruption and malfeasance, including execution[ii]. With China’s leaders clearly sending a very strong message that it will not tolerate corruption and malfeasance at any level, I do expect to see some high-ranking provincial officials being severely punished for the poor construction quality of schools and other public buildings. The only questions now are (1) who will be blamed and (2) how long will it take for the CPC leaders to make the announcement.

Have a great weekend!

Ed Kim
Practical Risk Manager =================================================================================
[ii] China executes party official in mine disaster
China Executes Senior Official for Graft
Execution of the nation's former drug safety chief, July 2007

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Friday, May 16, 2008

Risk Of Taxpayers' Bailout Of Fannie Mae Just Increased

Just when you thought: “things couldn’t get any worse.” It just did. According to MSNBC, “Fannie Mae says it is doing away with higher minimum downpayment requirements for borrowers in distressed real estate markets.”

Reducing their minim down payment from 5% to 3% is just the reckless action that Fannie Mae and Freddie Mac should be avoiding at this time. Here is the official excerpt from Fannie Mae:

“Starting June 1, 2008, Fannie Mae will accept up to 97 percent loan-to-value ratios for conventional, conforming mortgages processed through its Desktop Underwriter® (DU®) automated underwriting system, and 95 percent loan-to-value ratios for loans underwritten outside of DU, in all geographic locations in the United States. The new national down payment policy will supersede the policy the company adopted in December 2007 that required higher down payments in markets where home prices are declining.”

What this means is that mortgage banks can use an automated underwriting system to reduce the minimum down payment requirements to 3% instead of the usual 5% minimum. So, what do you think the banks are going to do?

Like you, I expect a tremendous increase in loans filed through the DU automatic underwriting systems.

Here is a heat map of the foreclosure in the U.S., as of April (source: RealtyTrac):

Here is the data from RealtyTrac April 2008 U.S. Foreclosure Market Report™ [bold and italics added for emphasis]: “foreclosure filings — default notices, auction sale notices and bank repossessions — were reported on 243,353 properties, a 4 percent increase from the previous month and a nearly 65 percent increase from April 2007. The report also shows one in every 519 U.S. households received a foreclosure filing during the month.”

With the news that people at all levels of income are defaulting on their mortgage, Fannie Mae and Freddie Mac should be tightening up on their lending standards, especially banning the “piggy-back” loans from qualifying for sale to Fannie Mae. Sadly, this has not been banned; rather, it is highlighted in their May 16 public release [bold and italics added for emphasis]:

“Fannie Mae will continue to provide support for homebuyers that need down payment assistance, and will continue to allow loans with Community Seconds® up to a maximum 105 percent combined loan-to-value ratio. Community Seconds allow a borrower to obtain a second-lien mortgage to help cover down payment and closing costs, with funding typically provided by a state or local housing agency; an employer; or a nonprofit organization. Fannie Mae also offers MyCommunityMortgage® and Flex mortgage products, which permit down payment assistance programs in the form of gifts and grants. “

What this means that the risk of taxpayers bailout of Fannie Mae and Freddie Mac has gone up substantially. I think that the bailout will have to occur as more areas show declining housing value and increased defaults. Since Fannie Mae and Freddie Mac securitize the loans using the implied government guaranty, the ones who will suffer first would be the investors who bought their MBS bonds at initial offering.

As rating agencies begin to negatively assess the Fannie Mae and Freddie Mac issued MBS traunches, prices of these bonds will go down. This will set the stage for the taxpayer bailout since Fannie Mae and Freddie Mac have very low reserve, thanks to the OFHEO reducing the capital reserve requirements in March. I wrote about this as being a potential liability to the taxpayers in my write up “Fannie And Freddie Reduces Capital Reserve: Risk Of Taxpayer Bailout Just Increased.”

In that article, I estimated that the taxpayers would be liable for potentially $20.6 billion in bailout. However, with this news, the amount of the liability will go higher. How much higher would be determined by the assessing the increase year-over-year of mortgage origination, beginning in June. Hopefully, the banks that are selling the mortgages to Fannie Mae and Freddie Mac will continue to use stricter underwriting and realistic appraised value, thereby reducing the potentiality of the risk.

We will keep an eye out on this issue, as it develops.

Have a great weekend!

Ed Kim
Practical Risk Manager

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Thursday, May 15, 2008

Risk Assessment of the 2008 Presidential Race – Part 2 (Assessing the Risks of The Presidential Candidates)

It seems we now have a Presidential race between John McCain, and Barack Obama. The only question that is of interest to the voters is who will be the Democratic vice presidential candidate. It seems that has been answered by John Edwards’ endorsement of Obama Wednesday in Michigan.

It is no secret that Barack Obama and Hillary Clinton have engaged in a very bitter nomination campaign. Given the race and Obama’s stance on issues, it would be to his disadvantage to turn to Hillary Clinton as his running mate. The fallout from her and her staff’s many gaffs would invite more criticisms than benefits. Moreover, the general election requires connecting with the Southern ‘red belt’ voters - the very voters that do not have the warm and fuzzy for Clinton. John Edwards, being a southerner is better suited to bring in the southern votes. Moreover, he has connected very well with the working class (if you can forget his $200 haircut gaff)

So it appears to be Obama-Edwards for the Democratic ticket, a very strong ticket against McCain and a very short list of non-contenders. I think that the best Republican ticket would be McCain-Huckabee. Mike Huckabee provides a nice conservative counterbalance to McCain, whom the conservatives distrust. Moreover, Huckabee is well spoken and carries a youthful image, which should provide some comfort to those who feel that McCain is ‘too old.”

Since McCain is older than Ronald Regan, the issue of age will haunt the Republicans unless they bring in a vibrant youthful vice presidential candidate to the ticket. This would be Huckabee

So given the scenario of Obama-Edwards versus McCain-Huckabee tickets for the presidential race, it is going to be a very interesting race.

The Risks Of Each Presidential Candidates
Domestic Spending: There is very little difference between the two candidates on domestic spending. The difference comes on Universal healthcare (Obama for federal funds for universal healthcare; McCain for universal healthcare through the private sector), Abortion (Obama for Woman’s right to decide; McCain for making abortion illegal), and taxes (Obama to roll back Bush tax breaks and provide tax breaks for the middle class; McCain to keep the Bush tax breaks but eliminate ATM).

On the domestic front, there is no glaring difference, just shades that are moot (debatable). If one desires to debate the subtle difference between ATM and rolling back Bush tax breaks, click here for a Brooking Institution write up). The moot point is whether the middle class will actually benefit from either candidate. Ultimately, the middle class will not benefit from either candidates as Obama’s platform does very little to relieve the tax burden while McCain’s platform obfuscates the tax process by suggesting two tax systems to be used at once: “…an alternative tax system, while keeping the current one in place for those who want to use it, with “two tax rates and a generous standard deduction.”

Foreign Affairs: Again, the two candidates are very similar on foreign policy: they both have nothing else aside from a myopic focus on Middle East, particularly Israel-Palestine, Iran, and Iraq. It appears that their world consists of the U.S. and the rest. This is a very dangerous perspective. However, McCain’s view seems to have higher risk potential as he explicitly notes “Fighting Against Violent Islamic Extremists...” as one of his key foreign affairs points. Someone should remind both candidates that Islam does not own the rights to religious extremism. All religion has their ‘extremists’ and ‘liberals’. This label is moot as it only reflects the view of the speaker, not the religion.

One advantage that Obama has is that he does mention Africa as part of his foreign affairs policy view. Perhaps, it is because his dad was African. However, the world does need to look at Africa and try to understand how colonialism is still leaving its marks in Africa. Until Africa reverts back to tribal lines, which will never happen, there will be continual strife and warfare. It is unfortunate but innate to humans to develop hate based on nothing more than a subtle difference.

Obama’s risk factor is leaving Iraq too quickly and having it devolve into a full blown civil war. If this occurs, the U.S. would be left fighting for the governmental faction against Sunnis, Kurds, Shiites, and off-shoots radicals of each group. It will also open up Turkey to invade northern Iraq in pursuit of Kurdish rebels, Saudi Arabia covertly funding the Sunnis in Iraq, Iran funding and openly assisting the Shiites, and Israel using this opportunity to push the Palestine out of contested territories. In a word, a ‘mess.’

McCain’s risk factor is leaving a weak dysfunctional government in Iraq perpetually supported by the U.S. military, thereby continually being a drain the resources of the U.S.

While both options are distasteful, from a risk / reward view, McCain’s position is more palatable for the U.S. and the rest of the world as it hopes to prevent the Iraqi civil war turning into a regional proxy war between Turkey, Saudi Arabia, and Iran.

Economy:Hand’s down the McCain’s platform is pro business. The very idea of being able to write off the full amount of equipment and technology investments in the first year is great for corporate America as it has not upgraded its technology in any substantial amount since 2000-2001. However, as with all great ideas, there are going to be loop holes. And I already see a loop hole in the definition of “equipment and technology.” Depending on how one parses the definition of these two words, it is possible for smart tax accountants and bankers to come up with ways to have perpetual write offs of goodwill purchases of “equipment and technology.” Heck, I already have thought up about three different ways to write off millions using a creative definition of “equipment and technology.”

With loop holes around the “equipment and technology,” there will be very impact of McCain’s proposed rollback of corporate taxes from 35% to 25%.

Obama does not have much of an economic policy except for suggesting vague patches to existing issues. However, he is not proposing anything radical as McCain. Obama’s position suggests minute changes that will not upset the apple cart

The risks are high for McCain but the rewards could be there if he does it right. However, history has shown that plans are not always implemented correctly and that compromises made with Congress will lead to a Frankenstein-like creation that will potentially do more harm than good.

Energy:Obama is more specific on energy than McCain. McCain only has carbon cap trading and a vague statement on protecting the environment and lessening our reliance on foreign oil by going more on nuclear power. Click here for his other public statements on energy, which are still vague.

Obama on the other hand has specific plans on energy. However, a lot of what he proposes is a dust off of previous presidential candidate’s proposal for energy independence (biofuel – Bush; increase fuel standard – Bush & Clinton). Moreover, Obama’s biofuel proposal is only going to exacerbate the growing food problem and grain shortage.

This would be a great time for someone to step up and propose that since we, as a nation, use too much natural resource and therefore need to slow down, use less, conserve more, or pay higher taxes like they do in Europe. However, this is unlikely as all energy promises made by a president since Nixon has been broken.

The risk here that we will not change our ways at all, leaving us dependent on imports of oil and natural gas. The only thing that seems to change our ways, is a combination of severe shortage and high prices.

Given that presidential candidate’s promises are often broken, the risks of promises on domestic spending, energy, and taxes are deemed to be moderate severity. This means that if they occur, the impact will be material but limited to financial consequences, which will result in either inflation or deflation. Since this is a normal cycle of economic norm, there is nothing that could be considered to be a ‘tail’ event (risk term for an extreme risk factor).

However, foreign policy is often fraught with severe risk factors that include the risks of loss of lives, violence, disruption of society, and famine. In this regard, Obama’s position on Iraq is a potentially high risk factor. Whichever candidate wins the election, I do hope that they quickly realize that Iraq issue is something that we had created, a legacy of Bush that we can not simply walk away from. Iraq is a quagmire that is a major drain on the U.S. and its military. However, if we walk away from Iraq by drawing down our forces too quickly, it will result in a power vacuum that can incite major strife and regional war.

From a strictly risk factor perspective, Obama’s foreign policy views poses more risk to the world economy than McCain’s. From a commonsense perspective, excluding foreign policy, Obama’s views are more pragmatic than McCain’s.

Regardless of who becomes the next President of United States, I hope that:

  1. the individual would build a cabinet filled with competent, experienced, and pragmatic people,
  2. that the President would take their advises, and
  3. learn to use their compromises with Congress in a way that benefits the nation.
In Obama’s case, I hope he will pull out of Iraq slowly and with a clear exit strategy and work to develop more alternative energy and conservation other than biofuel.

In McCain’s case, I hope he will disavow Bush’s legacy, modify the first year tax write off to be targeted to true investments that aids in economic growth, and develop a bipartisan plan for alternative fuel development.

Ed Kim
Practical Risk Manager

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Wednesday, May 14, 2008

Risk Impacts Of The Earthquake In Sichuan Province, China – Part 2

This updates my previous analysis on the prices of commodities as noted in Beijing Summer Olympics' Impact On Commodities Prices.

Expect to see a spike up in the prices of oil, natural gas, coal, coke, steel, copper and other base metals, cement, building materials, petroleum derived industrial chemicals, fertilizers, and rice.

Sichuan is a major supplier of products in China:
Factors For The Prices Spike

  • So far, an estimated 15,000 people have died with millions currently displaced from their homes. Given the chaotic condition, it is difficult to ascertain how quickly the region’s manufacturing, mining, farming, and fabrication works will be back up and running. Right now, everyone’s concern is survival, food and water, and shelter. Basic services as electricity, sanitation, and portable water are still out and will be for some time.

    It will take months before the area recovers sufficiently to begin producing in any meaningful quantity due to:
    • missing, dead, or injured skilled workers will need to be replaced
    • basic services need to be back online, including semi-permanent shelters, electricity, sanitation, and portable water
    • factories and mines need to be thoroughly inspected for safety prior to resumption of activity
    • areas close to damaged dams may be off-limits until the damages have been properly repaired

  • Travel into Sichuan province is extremely difficult due to its geography (click here for a map of Sichuan). Historically, there are only three access points into and out of Sichuan province, according to Xinhau News Service: the dangerous Yangtze Gorges in the east, the treacherous Changtao road across the mountains in the north, and the deep canyons and swift currents of the Dadu River and Jinsha River in the west.

    Given the extensive damages to the rail, bridges, and roadways, access into Sichuan province is even more difficult. This will make the influx of search and rescue operations, relief supply, and commodities a very slow process, resulting in substantial reduction in exports of products out of the region and necessary raw materials into the region.

  • Sichuan region is currently in its rainy season. According to Xinhau News Service, the rainy season begin in April and peaks in July and August. Given this, the rescue and cleanup process will take longer and will require more rescue and cleanup personnel.
Items That Will See A Temporary Price Spike
  • Agricultural products, especially rice - “Sichuan is also one of the major agricultural production bases in China, its output of rice, wheat, rapeseed, citrus fruit, peach, sugar cane, sweet potato and Chinese herbs all account for a significant share of China’s total.” “In 2006, its added value in the primary industry ranked 4th among all provinces.” - Hong Kong Trade Development Council. Due to the earthquake, agriculture production in Sichuan province will fall far short of its normal output, putting additional strain on staple supplies and prices. Since rice is a staple grain of China, there will be a need to import rice. This will further drive up the price of rice.

  • Oil, Natural gas, Coke, and Coal - Earthquake forced closure of natural gas, coke, and coal production. The reduction of coal and natural gas from the Sichuan area will lead to China importing more oil, natural gas, coke, and coal to make up for the shortfall and panic buying and hoarding that will occur.

    Additionally, the earthquake has damaged power generation capacity in Sichuan, which accounts for approximately 8% of all power production in China. Down power lines, damaged the dams, and damaged electric relay stations means that China will have to divert power from other regions to the Sichuan province until the province power generation structure can come back online. This will mean other regions of China may face temporary energy shortage and even brownouts, causing companies to hoard diesel, coal, and natural gas to ensure that they have adequate supply for their back up generators. The combination of these factors will drive the prices of oil, natural gas, coke, and coal higher.

  • Copper - Southern Sichuan region is a part of the major copper deposit in China, according to the China data center. The earthquake will have a material effect on the copper mine production as the mines will be shut down for sometime. Even when the mines come back on line, it will take time to get back to full production due to shortage of fuel, skilled workers, and other vital intermediate items.

  • Steel - Sichuan provides approximately 10% of China’s steel. With iron and coal mines closed, iron and coke will be in short supply, which will negatively affect steel production. Also, current production would most likely be placed on hold due to logistic issues such as how to transport the material in and out of the region and sufficient skilled workers at each production stage. Finally, the rebuilding of damaged areas of Sichuan province will require vast amounts of steel, so the price of steel will not go down. Rather, expect to see major price increases.

  • Chemical Products - Sichuan area supplies nearly 8% of China’s chemical products and raw chemical materials. With the damage to two chemical plants in Shifang, up to 100 plant workers have been buried under debris. Additionally, the spill of liquid ammonia requires extensive cleanup prior to the chemical plants restarting. Some of the chemical plants in Shifang include Hongda Chemicals (dye, pigments, food additive, rubber & plastics, drug intermediates), Shuangsheng Chemicals (phosphate, a key ingredient in fertilizers), Yongchang Chemicals (pigment) and Yunxi Chemicals.

    Given this, intermediate chemicals for producing fertilizers, food additives, pigments, and pharmaceuticals will have to be imported to make up the shortfall from the Sichuan region. This will drive up the price of these intermediate items as well as the finished products that rely on them.

  • Cement and Building Materials - After the cleanup, there is the rebuilding stage. With the rebuilding, there will be a strong emphasis on following proper construction codes and use of proper strength materials. This is the backlash from the use of inferior building materials in existing buildings and poor construction oversight. As the city rebuilds, it will use a large quantity of steel, cement, concrete, and other building materials

    Ed Kim
    Practical Risk Manager

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  • Tuesday, May 13, 2008

    Risk Impacts Of The Earthquake In Sichuan Province, China – Part 1

    First off, I hope that they find survivors under the collapsed school. While it is always sad to get news of such major natural disaster, as a risk manager, the focus is firmly on the risk factors arising from the disaster and what corrective actions can be taken to minimize the losses – both human and material – from these risk factors and to plan accordingly for secondary risk factors that typically comes with a major disaster.

    Human Risk Factors
    Food & Water Shortage: As with any major disaster, electricity into the affected is temporarily disrupted due to downed power lines or deliberate cut off of power to prevent accidental deaths during search and rescue. With the loss of electricity, the potential for food spoilage increases as refrigerators and freezers thaw. Furthermore, regular supply of food and portable water is cut off or reduced substantially as the access into and out of the affected area is restricted to military, government, and fire / life safety personnel first and then for critical medical and search & rescue supplies.

    While we have not yet heard any news of food shortage, I expect that food and portable water shortage will filter out into mainstream media shortly.

    Medical Shortage: With so many traumatic injuries occurring all at once, it is difficult for medical personnel to do anything more at this time than basic triage: prioritize the wounded by severity and life-threat condition and treat the most severely wounded first. Additionally, the local hospitals would be swamped with sudden influx of patients that they would have to begin releasing patients early and begin transporting others to other hospitals in surrounding areas. Further complicating this is the news of a hospital collapse 45 miles north of Chengdu, in Dujiangyan. Given these set of conditions, it is highly probable that more people will die from secondary infection or from long delay in obtaining adequate medical care.

    Sanitation Risk: Chengdu, the provincial capital of Sichuan, has a population of 11 million people. The damaging earthquake has forced some of the 11 million residents to leave the city or to vacate damaged buildings. As people vacate damaged buildings, they will be forced to fend for themselves in makeshift tents, cars, or large enclosed public spaces, such as an auditorium. With so many displaced people, there is increased risk of more garbage and human waste in the street, which when combined with mounds of garbage and earthquake debris would make a fertile ground for serious sanitary risks.

    Until the affected areas are cleaned up, disinfected, and more public toilets made available, there will be news of people suffering from multitude of bacterial and viral infections due to overcrowding and unsanitary living conditions.

    Ed Kim
    Practical Risk Manager

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    Monday, May 12, 2008

    Why Can’t We Have An Ultra Low Cost Cars In The West?

    Renault and Nissan announced their intent to launch a low-cost car by 2011 for the near Asian market, namely India. Their car, priced around $2,500, is to compete with Tata Motors’ Nano, which sells for about $2,500. These “Ultra Low Cost” (ULC) cars get approximately 50 miles per gallon (MPG) per a gallon of gasoline (approximately 22 KM/L) in regular driving scenarios.

    Now, if you think that this is nothing more than a glorified golf cart or a tuk-tuk dressed up, guess again. The Tata Nano was designed at Institute of Development in Automotive Engineering (I.DE.A) in Italy, a concept and design company that specializes in compact car. In other words, the ULC cars are real cars. Think Volkswagen. In fact, the Nano is called the people’s car, i.e., Volkswagen.

    So the ULC cars are real cars in a no-frill format. So, why aren’t the auto manufactures making them for the Western market? Given the high cost of gasoline (petrol) in the West, one would think that the car manufactures would begin introducing a ULC car. The lowest cost economic car available in the West is the Logan, which sells for about $10,000 in Europe.

    The lowest cost economic car in the U.S. is the Chevrolet Aveo, listed at $10,235. With gas prices in the U.S. reaching the $4 mark, people are finally paying attention to MPG and their use of cars. Now our European neighbors already know this and have had very small cars for some time, made by companies such as Renault and Cooper.

    The argument in the U.S. that these very small cars could not pass the crash test was rendered bunk with the introduction of the Japanese compact cars in the 1970’s. The alternative argument that the U.S. consumers will not buy into something so small with very little horsepower was rendered moot with the wide acceptance of the Cooper Mini.

    So, the big question, especially in the U.S. would be “why couldn’t we import ULC cars to or build ULC cars in the U.S.?” I can only speculate that the automotive companies are firmly against it as being ‘un-American’, believe that it will not sell well, or it will not be profitable.

    The Japanese companies have proven since 1960’s that low cost, high fuel-efficient cars do sell well and are very profitable. Companies such as Toyota, Honda, and Nissan (Datsun) became a part of the U.S. automotive lore because of their small fuel-efficient and low cost cars. Where have we lost that sensibility?

    Fortunately, the high cost of fuel is reviving our senses. Even Chrysler has realized that it is profitable to go small. May be GM and Ford will also realize the same and begin to forego building SUV and large trucks for fuel sipping compact cars.

    I am just hoping that Toyota, Honda, Nissan, and other Japanese car companies begin exporting the Kei cars to the U.S. to join the Copper Mini and the Smart car. Small is beautiful and it is intelligent. And if we can convince Tata to begin importing the Nano to the U.S., then going small will also be very financially sensible.

    Ed Kim
    Practical Risk Manager

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