At Ambit, we spend a lot of time reading articles that cover a wide gamut of topics, including investment analysis, psychology, science, technology, philosophy, etc. We have been sharing our favourite reads with clients under our weekly ‘Ten Interesting Things’ product. Some of the most interesting topics covered in this week’s iteration are related to ‘America’s disproportionate weight in MSCI World Index’, ‘Lessons from an active investor who lost to Warren Buffet’ and ‘Baumol’s cost disease in today’s world’.
Here are the ten most interesting pieces that we read this week, ended May 12, 2017.
1) America’s disproportionate weight in global stock market indices [Source: The Economist] According to this piece, the American market has a weighting of 54% in the MSCI All country world index, as high as it has ever been (it reached the same level in 2002). In other words, anyone using the index to monitor the market is seeing a picture heavily distorted by the Wall Street. The relative performance of international fund managers against the index will largely depend on how much exposure to America they are willing to take on. Anyone buying a tracking fund is, in effect, making a big bet on the American market. Things are worse if investors track the MSCI World Index, which covers only developed markets. In that benchmark, America’s weight is 60.5%. There are worrying parallels with the way that Japan dominated the index in the late 1980s. At its peak, the Japanese market was 44% of the MSCI index. That was far more than double the Asian economy’s share of global GDP. Investors were enthusiastic about Japanese multinationals like Toyota and Sony; the talk then was of the rest of the world needing to learn from the Japanese model. Japan’s companies were free from the threat of takeover and able to pursue long-term plans without worrying about short-term profits. Incidentally, the American stock market’s index weight is also more than double the country’s share of global GDP. The gap has widened since the start of the millennium, because America’s share of world GDP has been on a downward trend. Like Japan in 1980s, today’s investors are wildly enthusiastic about America’s all-conquering technology groups, such as Google, Facebook and Amazon.
2) Lessons from an active manager who is set to lose the 10-year bet against Warren Buffet [Bloomberg] Ted Seides, a hedge fund manager recalls how nine years ago, he and Warren Buffett made a 10-year charitable wager that pitted the returns of five funds of hedge funds against a Standard & Poor’s 500 index fund. With eight months remaining, for all intents and purposes, the bet is over. Ted has lost. While he agrees that high fees charged by hedge funds are a big reason for investment underperformance, he believes that’s not the whole story. Warren Buffet’s recent shareholder letter had a “footnote” that describes some of the additional investment lessons we can draw from their experiment. This article discusses such lessons.
3) Cricket goes for gold in its Olympic bid [Source: Financial Times] The Olympics, labeled as the “greatest show on earth”, is still not delivering in the subcontinent of India, Pakistan, Bangladesh and Sri Lanka, which form one-sixth of the world’s population. Put cricket on the schedule and you solve that problem overnight. But some in cricket fear the sport is only being pursued because of the IOC’s desperate search for new sources of revenue. The idea divides cricket. Traditionalists, like national and local administrators that have ruled over the sport for decades, see little appeal in changing the global cricket calendar and surrendering power to Olympic officials. But modernisers believe entry to the games is crucial to efforts to “globalise” the sport, allowing it to reach into new countries, such as the USA and China. But for the IOC to accept any proposal, it demands unanimity of support from within the sport’s governing body. In the past, this has proved impossible and much will depend on the stance taken by India. For years, the Board of Control for Cricket in India has blocked any attempt to apply to enter the games. Several people close to the organisation say its reluctance has been due to fears of a loss of control, domestic and international, over the sport. 4) The online marketplace that’s a portal to the future of capitalism [Source: NY Times] The author of this piece recollects how three years ago he became acquainted with an app called Wish. Wish ads appeared in his social-media feeds without explanation or context, peddling a deliriously weird selection of heavily discounted products. By the end of 2015, though, these posts were appearing with striking frequency. That year, Wish’s parent company was reported to be one of the largest advertisers on Facebook and Instagram during the holiday season. Finally, he signed up and found that ordering on Wish, is dangerously easy. However he found that his experience as a recipient was more informative. Packages sent to him arrived in waves over the next month, carrying with them a hint at what makes operations like Wish possible: their shipping labels. Most were classified as “ePacket,” courtesy of the United States Postal Service and China Post. These shipments were made in accordance with a bilateral trade agreement between the United States and China that originated in 2010, meant to address the rising tide of cross-border e-commerce. This obscure trade deal has become the quiet conduit for an explosion in a new and underexamined American consumer behaviour: buying things directly from their countries of manufacture.: Because of ePacket, and the decades-old international postal agreements that serve as its foundation, lightweight product shipments from China are heavily subsidised by the US Postal Service.
5) Flying cars taxi for takeoff [Source: Financial Times] Silicon Valley technologists have become obsessed with transportation, from driverless cars and superfast trains to space travel. But their latest infatuation seems improbable even by those ambitious standards: flying cars. Uber recently promised that it would start testing an aerial taxi service in Dubai and Dallas as soon as 2020. Kitty Hawk, a start-up backed by Google co-founder Larry Page, unveiled a prototype of its “flyer” — a single-person ultralight aircraft powered by eight electric rotors, which it promised would go on sale “by the end of this year”. Jaiwon Shin, associate administrator for aeronautics research at NASA, the US space agency, said it was a matter of “not if but when” such vehicles begin to swarm over American cities. The technological breakthroughs powering this renewed enthusiasm are similar to those underpinning self-driving cars: the shift to electric propulsion, driven by improvements in battery technology, and advances in machine learning that enable machines to “see” and pilot themselves. Another driver is the emergence of consumer drones. While much smaller and lighter, they are helping to drive down the cost of some components — just as the smartphone supply chain enabled the creation of products such as DJI’s Phantom quadcopters in the first place. One Chinese drone maker, Ehang, has already created a passenger vehicle it plans to test in Dubai this summer.
6) Baumol’s cost disease explained [Source: vox.com] In the 1960s, William Baumol noticed that musicians weren’t getting any more productive — playing a piece written for a string quartet took four musicians the same amount of time in 1965 as it did in 1865 — yet musicians in 1965 made a lot more money than musicians in 1865. The explanation wasn’t too hard to figure out. Rising worker productivity in other sectors of the economy, like manufacturing, was pushing up wages. An arts institution that insisted on paying musicians 1860s wages in a 1960s economy would find their musicians were constantly quitting to take other jobs. So arts institutions — at least those that could afford it — had to raise their wages in order to attract and retain the best musicians. The consequence is that rising productivity in the manufacturing sector of the economy inevitably pushes up the cost of labour-intensive services like live musical performances. Rising productivity allows factories to cut prices and raise wages at the same time. But when wages rise, music venues have no alternative but to raise ticket prices to cover the higher costs. This became known as Baumol’s cost disease, and it had implications far beyond the arts. It implies that in a world of rapid technological progress, we should expect the cost of manufactured goods to fall, while the cost of labour-intensive services — schooling, health care, child care, haircuts, fitness coaching, legal services, and so forth — to rise.
7) The economics of despair [Source: Livemint] If inequality was the talking point across the globe three years ago, poverty seems to have replaced it today. And no, it is not the poverty seen in Niger or Burkina Faso that people are talking about. Instead, it is the poverty in the First World, in countries, such as the USA, which has got people worried. In a 2015 book titled “$2.00 a Day: Living on Almost Nothing in America”, the sociologist Kathryn J. Edin and her colleague H. Luke Shaefer estimated that there are nearly 1.5 million American households who are living on fewer than $2 a day. Their argument is backed by Nobel Prize-winning economist, Angus Deaton, who compared the poverty in Mississippi to that in Bangladesh. However such comparisons are wrong. The $2 per day figure that Edin & Shaefer used, for instance, includes cash income (and excludes most welfare benefits received by poor citizens of the US), and hence is not comparable to the $2-a-day international poverty line, under which many in the Third World live. Nonetheless, poverty and poor health in the US seems to be a growing problem. In their 2015 paper, Anne Case and Deaton tabulated mortality rates for Americans by age and race. They found one group to stand out in terms of mortality: middle-aged white Americans. The duo found that average mortality rate amongst middle-age whites in the US has been increasing for the last couple of decades even as mortality rates for most other groups have been on the decline. In 2016, the average mortality for those with just high school degree was about 30% higher than other groups.
8) China’s corruption clampdown risks policy paralysis [Source: Financial Times] Before President Xi Jinping assumed power in 2012, paying bribes and showering cadres with lavish meals and gifts were seen as part of ordinary public life. It was difficult to get into good schools and hospitals without greasing the palm of authorities supposedly there to safeguard the public good. Promotion to higher-level posts often involved paying bribes to superiors. But corruption reached a tipping point, inflaming public attitudes to the extent of endangering the legitimacy of the political system. In response, the government launched what has turned out to be the longest and most systematic anti-corruption campaign in Chinese Communist party history. The various and largely ineffective anti-corruption agencies were centralised into one agency: the Central Commission for Discipline Inspection, led by Wang Qishan, who took office in 2012. As of 2016, more than 100,000 officials have been netted for corruption, including a dozen high-ranking military officers, several senior executives of state-owned companies, and five national leaders. Cynical observers claim that the whole thing is a means of going after political enemies. But what distinguishes this anti-corruption drive from previous ones is that it also creates many political enemies, which seems irrational from the point of view of political self-preservation. Whatever the motivation, the effect is clear: the anti-corruption crackdown has worked. The problem is that the anti-corruption drive has worked almost too well and the decision-making has become almost completely paralysed.
9) Book review: “Option B” by Sheryl Sandberg and Adam Grant [Source: CNBC] Since the publication of "Lean In," Facebook COO Sheryl Sandberg has urged readers to see possibility while acknowledging the limitations of reality. In her new book, "Option B: Facing Adversity, Building Resilience, and Finding Joy," co-authored with psychologist Adam Grant, she reassesses life in the aftermath of the sudden death of her husband, Silicon Valley luminary Dave Goldberg, in 2015. "Life," Sandberg writes in the introduction, "is never perfect." In the book, Sandberg and Grant explore the many permutations of trauma, misfortune and grief, and the ways in which different individuals react to events that she describes as those that rob us "of the sense that life is controllable, predictable and meaningful."A significant chapter in "Option B" is devoted to exploring "post-traumatic growth" — situations in which individuals experience positive changes after trauma — and how Sandberg found renewed professional purpose in reflecting on her husband's life. She writes, “Many of these [trauma victims] experienced ongoing anxiety and depression. Still, along with these negative emotions there were some positive changes. Up to that point, psychologists had focused mostly on two possible outcomes of trauma. Some people struggled: They developed PTSD, faced debilitating depression and anxiety or had difficulty functioning. Others were resilient: They bounced back to their state before the trauma. Now there was a third possibility: People who suffered could bounce forward.”
10) There are diseases hidden in ice, and they’re waking up [BBC] Climate change is melting permafrost soils that have been frozen for thousands of years, and as the soils melt they are releasing ancient viruses and bacteria that, having lain dormant, are springing back to life. In August 2016, in a remote corner of Siberian tundra called the Yamal Peninsula in the Arctic Circle, a 12-year-old boy died and at least twenty people were hospitalised after being infected by anthrax. The theory is that, over 75 years ago, a reindeer infected with anthrax died and its frozen carcass became trapped under a layer of frozen soil, known as permafrost. There it stayed until a heatwave in the summer of 2016, when the permafrost thawed. The fear is that this will not be an isolated case. As the Earth warms, more permafrost will melt. Frozen permafrost soil is the perfect place for bacteria to remain alive for very long periods of time, perhaps as long as a million years. That means melting ice could potentially open a Pandora's box of diseases.