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 ‘The inevitability of market bubbles’, ‘Norway’s ability to avoid Dutch disease’ and ‘Poland’s rise to economic superpower’.
Here are the ten most interesting pieces that we read this week, ended July 07, 2017.
1) The inevitability of market bubbles [Source: collaborativefund.com] This piece provides an insightful perspective into why market bubbles are inevitable. The author of the article says that despite suffering through several financial bubbles over hundreds of years, there is still a lack of a good and clear definition of what 'market bubbles' actually are, and how they form. Consequently, we end up attacking other factors, like the Federal Reserve (the US central bank), banks, and the Congress; and worse, every market bubble is assumed to be a one-off accident. This report argues three points: a) Bubbles are not anomalies or mistakes. They are an unavoidable feature of markets where investors with different goals compete on the same field; b) Bubbles have less to do with rising valuations and more to do with shrinking time horizons among people playing a different game than you are; and, c) Protecting yourself as an investor is mostly a function of understanding and acting upon your own time horizon, accepting that other people’s goals are different than your own.
2) The devil’s excrement: How Norway warded off the oil curse [Source: Livemint] This article talks about how Norway has been able to ward off the fate of other “petro states” such as Venezuela, Saudi Arabia, Nigeria, Algeria, and Iran. Unlike other petroleum-rich states, first, Norway had the benefit of not discovering petroleum until much after it had already built a stable, wealthy, and equitable economy with high standards of living. Second, Norway succeeded in avoiding the oil curse thanks to its bureaucracy and institutions. Social scientists and economists have argued that Norway has long been a “civil servants’ state” - that by the 1900s, their bureaucracy was already independent, relatively incorrupt and highly specialised. Importantly, Norwegian bureaucrats were not competing socioeconomic elites through much of the 19th and 20th centuries, and did not rely on external influence for career advancement. Third, Norway avoided the “oilification” of its economy by moderating welfare spending with the need for fiscal prudence after oil was discovered.During the international economic slowdown in the 1970s, the Norwegian government pursued a counter-cyclical expansionary fiscal policy by borrowing from abroad. Public expenditures went from Kroner 1.5 billion (approximately $230 million) in 1970 to Kroner 14.5 billion (approximately $2.2 billion) in 1975, and continued to rise until 1979. The ruling Labour Party increased spending in social services, pensions, agricultural and industrial subsidies, and public employment. This debt was planned to be paid back from the anticipated windfall oil revenues from the 1980s. The government had also set up a Petroleum Fund to insulate the nation from the boom and bust cycles of oil. The idea was that the revenues from oil exports will not be converted into the domestic currency, thereby avoiding exchange rate pressure on it, and that domestic government budget would not become too reliant on oil revenues. Revenues would accumulate in a fund that would be invested into the international financial markets. To ensure prudent domestic use and maintenance of the size of the fund, there is a budgetary rule that prevents the government from withdrawing more than the annual expected returns of the fund. This fund is independently run and transparent, with every investment listed online. 3) The next economic powerhouse-Poland? [Source: NY Times] Since Poland completed the transition from communism to democracy in 1991, its economy has been growing at an average annual rate of 4 percent and, remarkably, has not suffered a single year of negative growth. In these 25 years, Poland’s average income has risen to near $13,000 from $2,300, and it is now on pace to pass the $15,000-mark by the turn of this decade. This is testimony to the long-term fiscal sobriety of Poland’s leaders, and its sharp break with communism. After the collapse of the Soviet bloc, Poland set out to distance itself as far as possible from Russia, and embraced American-style entrepreneurship with an enthusiasm rarely found elsewhere in Europe. It is working its way up just as the Asian miracles did, as a manufacturing power, even though this path is much harder now. Manufacturing is declining as a share of the global economy, and with China taking much of this shrinking pie, few other major manufacturing nations are still expanding their share of global exports. That select group of around half a dozen includes South Korea, the Czech Republic — and Poland. No other sector can come close to the impact that manufacturing has in a country, in generating jobs and the productivity gains that can make a nation rich. With its cheap currency and relatively low wages — still one-third to those in Germany — Poland is more than competitive with the Asian manufacturing powers. Moreover, the secret to getting rich is less about speed than stability. Many emerging economies have managed to generate spurts of rapid growth, often well above Poland’s 4 percent average, only to lose all their gains by running up debts and heading into a crisis.
4) Japanese CEO takes a cult underwear brand global [Source:Financial Times] For most of the 17 years since it was founded — anonymously and by a Japanese artist — Toot has been in no doubt about who its core customers are. They are gay, discover the brand by word of mouth, and yearn for something meticulously well-made with a distinctively Japanese eye for detail. Since becoming its CEO in early 2015, its CEO Keiya Masuno has expanded the brand outside its comfort zone. In the past two years, sales have increased by 10 percent, while overseas they have risen from a single-digit share to nearly 30 percent of the total market share. Till now, Toot had never sought mass-market sales. Even now, the founder and private equity investors want a slow transition from a niche label known for quality, to a global luxury brand such as Hermes or Louis Vuitton. While Masuno has been trying to meet the demand, the underpants, whose designs veer suggestively between lurid, luxuriant and ludicrous, have gained a wider market among heterosexual men. In their strut to the mainstream, the pants have become a knowing gift exchanged by Tokyo’s fashion cognoscenti. Priced between ¥3,000 and ¥5,000 (approximately $27-$45), they are more expensive than Uniqlo’s wares yet within reach for young professional urbanites. A huge turnover of designs—in 2016 Toot launched 194 items—coupled with short production runs of limited stock, means they appeal to a fastidious Japanese strain of collectors. Toot pants lurk beneath the designer suits of Japan’s wealthier executives and CEOs, says Masuno. They have broken decisively into markets in China, Korea, and Southeast Asia—so much so that there is already a brisk black market in Chinese counterfeit Toots.
5) Asia’s colossus threatens a tiny state [Source: Japan Times] Bhutan, one of the world’s smallest nations, has protested that the Asian colossus, China, is chipping away at its territory by building a strategic highway near the Tibet-India-Bhutan trijunction in the Himalayas. Bhutan has security arrangements with India, and the construction has triggered a tense standoff between Chinese and Indian troops at the trijunction, with the Chinese state media warning of the possibility of war. Bhutan says “China’s construction of the road inside Bhutanese territory is a direct violation” of its agreements with Beijing. China, however, has sought to obscure its aggression by blaming India for violating the trijunction points and the boundary between Tibet and the Indian state of Sikkim, which is also contiguous to Bhutan. An increasingly muscular China has also waged stealth wars to change the status quo in the South and East China seas; it has been making furtive encroachments across its Himalayan frontiers with the intent to expand its control in strategic areas. If its land grab is challenged, China tends to play the victim and to mask the real issue involved, it chooses to wage a furious propaganda war. 6) The true star of financial innovation is the humble ATM [Source: Financial Times] Innovation is all the rage right now — especially in finance, where disrupters range from blockchain to crowdfunding. But the author believes that the most groundbreaking innovation in the sector may actually lie behind us. Fifty years ago next week, one of the greatest financial inventions in recent history was unveiled-the Automated Teller Machine or the ATM. In 2009, Paul Volcker, berating a banking industry that had taken finance to the brink of disaster, quipped that “the ATM has been the only useful innovation in banking for the past 20 years”. Apart from this praise from the former chairman of the US Federal Reserve, the ATM has been omnipresent but under-appreciated. Like a late-developing child, it sits mute and misunderstood in our high streets, appearing to do little more than dispense banknotes. Yet the ATM is far from dumb; with more than 11,000 working parts and linked to “intelligent” software systems, it is one of the most sophisticated inventions to come out of the UK.
7) Where good ideas come from? [Source: TED] The speaker at this talk-Steven Johnson has studied various forms of spaces to understand the impact of environment on innovation. He went from coffee houses to the world wide web to coral reefs-places that have been at the center of intelligent innovation, looking for signature patterns common across these environments. What he found was that our rich vocabulary is to blame for the very idea of flash ideas-phrases like flash, epiphany, strike suggest that an idea is a single thing. Something that happens in a moment. However, an idea is a network at the most elemental level. A new idea is a new network of neurons firing together inside the brain. So how do you get yourself into an environment where the formation of such new networks can be facilitated? More often than not, our ideas are not ours alone. They come about from a cobbled network of ideas we take from people we meet on a daily basis. We just stitch these ideas together in new forms to generate our own ideas. This means we need to change our perception of what innovation and deep thinking really look like. Rather than a flash of brilliance striking in isolation, ideas come about in a chaotic setting with lot of people discussing various and varied topics. One of the problems with establishing this fact is that people themselves are unreliable in recollecting the history of settings in which their ideas were born. People often do not recollect ideas emerging in a social setting but rather attribute it to themselves. People also have a tendency to shorten the timeframe of idea generation–like ‘I was at this store and had a Eureka moment’. Historical records however show that a lot of ideas have very long incubation periods. Calling it ‘a slow hunch’, he says that a lot of great ideas linger on in people’s mind for a long time but do not come to fruition as people lack the resources for it. Darwin is a great example of this theory. He says in his autobiography that his theory of natural selection was born out of a eureka moment. But his notebooks from the time where he wrote every little idea or hunch suggest that Darwin had the whole theory of natural selection for months and months.
8) How Facebook is changing democracy [Source: Financial Times] The usage of Facebook and other social media sites to influence election outcomes has been gaining traction. This is how it works: Let’s say that, in the UK election, you wanted to sway forty-something women in a particular Kensington street who own homes abroad. You make a video of Theresa May saying “Brexit means Brexit” and you experiment with formats. One might be a question: “Is hard Brexit risky?” Another is a statement: “Hard Brexit: Insane.” You vary colours. You pay Facebook to send out the videos, and see which gets the most clicks. Then you re-target those who clicked it. 'Only they, and friends with whom they share it, will see your ad.' So you can send an entirely different ad, maybe even a pro-Brexit one, to voters elsewhere. It’s practically a secret campaign. And it’s cheap. It costs about €50,000 to reach four million voters and you’ll probably never be found by regulators as you don’t work for a party. These methods are going global. Matthew Oczkowski, head of product at Cambridge Analytica, the big data company that worked on Donald Trump’s campaign and reportedly advised the Leave campaign in the UK’s Brexit referendum, says: “We have elections going in Africa and South America, and Eastern and Western Europe.” Facebook has changed democracy. That may help explain recent surprising election results. Targeting keeps getting more precise. Until about 2012, Facebook kept ads separate from user content and shared little user data with marketers. But then it floated on the stock market and investors demanded more ad revenue, especially from smartphones. Now ads appear in the user’s feed, amid media news items and updates from friends. By now, Facebook knows everything about its users. You may be living as heterosexual but it can deduce from your tastes that you’re gay. Facebook also lets marketers use more personal data. That helped Trump’s campaign to target, say, gun-loving high-school dropouts in Pittsburgh suburbs.
9) Single women downplay career goals and salary expectations [Source: Chicago Booth] Single women routinely downplay their career goals and subdue their assertiveness in hopes of better romantic opportunities, according to University of Chicago’s Leonardo Bursztyn, Princeton’s Thomas Fujiwara, and Harvard’s Amanda Pallais. The researchers analysed responses of 355 incoming MBA students at a career-center session, where participants filled out a questionnaire about their job preferences. Some of the questionnaires indicated the responses would be kept private, while others indicated responses would be made public. About half the women surveyed were single. “When they believed their classmates would not see their responses, single and non-single women answered similarly,” write the researchers. But that changed for single women who thought their answers would be shared compared to single women who thought their answers would be anonymised, they were willing to work fewer hours, travel fewer days per month, and be paid on average 14 percent—$18,000—less. Single women avoid actions that could help their careers when these actions have negative marriage market consequences. By contrast, women in relationships and men (whether single or not) didn’t show the same tendency. And while both single women and those in relationships reported lower desired compensation than men, women in relationships were just as willing as men to travel and work long hours, and they reported similar professional ambitions and leadership abilities. In another experiment, students in a career class were asked to choose between three hypothetical jobs, and were told their choices would be discussed in small groups. When put in small, all-female groups, coupled and single women gave comparable answers. But when in groups with single men, single women were less likely to choose the option that involved higher pay but longer hours or a better promotion but more travel. 10) Google gives up scanning personal Gmail [Source: Tech World News] Google recently announced the end of its policy of scanning user emails for targeted advertising purposes-a controversial practice that riled privacy advocates and spurred legal challenges. Google attributed its decision to gains it has made in the enterprise. Its G Suite business over the past year has more than doubled in size to 3 million paying corporate customers, who are not subject to the scanning process. "G Suite's Gmail is already not used as input for ads personalisation, and Google has decided to follow suit later this year in our free consumer email service," said Diane Greene, senior vice president at Google Cloud. The policy change represents a major step forward for online privacy, said Marc Rotenberg, executive director of the Electronic Privacy Information Center (EPIC), which has challenged the Google practice in court. "EPIC opposed Google scanning email from the start and won several significant battles, including the 2014 decision to end scanning of student emails," he told TechNewsWorld. "Keep in mind also that Google was scanning the email of non-Gmail users, which raised problems under federal wiretap law and was the frequent target of lawsuits." Rotenberg cited a specific case that is pending appeal before the Massachusetts Supreme Judicial Court. It was launched by a resident who alleged his AOL account had been scanned for advertising purposes. The suit argues that the practice amounts to wiretapping, because Massachusetts is a two-party state that requires both parties' consent prior to recording any information.
- Saurabh Mukherjea is CEO (Institutional Equities) and Prashant Mittal is Analyst (Strategy and Derivatives) at Ambit Capital Pvt Ltd. Views expressed are personal.