The AI economy, Roger Bootle

Paradoxes

  • Polanyi Paradox
  • Moravec’s paradox

Key skill sets for the AI era

  • complex communication
  • Creativity
  • Strategic thinking / critical thinking
  • Empathy / humanity

Key themes

  • AI as labor cost versus AI as capital expenditure
  • Taxes on AI development versus edge in global competition
  • Labor versus leisure
  • Global positioning
  • Population size as advantage for big data

Thoughts on the Corona Virus stock market crash

Key takeaways on White house press releases

  • White house has taken very decision steps since the start of the spread in China to limit the import of viruses within the US
  • It has followed through with further travel bans of air travel from Europe
  • The next step is the 15 day shelter at home notices as of 15th March 2020
  • Its a trade off between financial markets turmoil and health system turmoil
  • To reduce maximum potential casualties, White house has opted to drag out the time it takes for the virus to spread throughout the community through social distancing measures.
  • The process can be modified to have each state go through its own bell curve of peaking
  • When health facilities are not overload, healthcare workers can afford to provide the necessary level of care to patients so as to limit the number of fatalities
  • In times of crisis, democratic systems after much bickering will align and perform execution with tremendous velocity. Private sectors will get mobilized to deal with the crisis as well.
  • Crisis are opportunities to remove red tapes and refresh platforms that are otherwise outdated. This makes the system more robust and able to handle future scenarios
  • Media do not always accurately report what is the official communication from the White House. When possible always seek out the original communication.
  • Targeting to reopen the country by 12th April 2020, Easter

Stock market price actions

 

  • In prior two pandemics (2003 SARS, 2009 H1N1), the height of the shock was experienced during the month of March before a subsequent rebound was observed
  • Federal reserve announcements of interest rate cuts ironically caused markets to dip
  • During period of turbulence, euphoria and subsequent price spikes due to government promise of bail out will not be long lasting
  • Oil is a leading indicator
  • Percentage coverage of media on pandemic is also a leading indicator of drops in markets
  • SPY might go through periods of denial before acknowledging pandemic is cause for concern
  • Gold which is considered a safe haven during time of crisis will dip when traders experiencing margin calls on their equity positions start unloading their gold to fulfill margin calls
  • US Treasury yield curve will start steepening when Federal reserve starts lowering interest rates and performing quantitative easing
  • Gold and bond prices decline will quickly follow the steepening of the yield curve.
  • Global markets will experience sharp retreat as funds exit from global markets for US treasury when steepening compared to negative interest rates worldwide
  • US dollar exchange rates will start surging as liquidity exit from emerging markets
  • Execution of fiscal policies will usually lag monetary policies
  • Share prices levels of directly impact companies can be seen trading at
    • ratios on 19th March 2020
      • PE ratio: 1.5 – 2.5X
      • PB ratio: 0.25-0.30
      • Discount from peak: 80-90%
        • 2020 Corona Pandemic: NHCL, RCL, CUK, CAR, MGM
        • 2019 California forest: PCG
    • affected industries: cruises, hotels, airlines

Related references

 

Federal reserve rate cuts

3rd March 2020

  • reduce interest rates from 1.5-1.75% to 1-1.25%
  • purchase of government bonds
  • purchase of agency back mortgage securities

15th March 2020

  • reduce interest rates from 1-1.25% to 0-0.25%
  • effects are in very early stage within the US
  • First signs affected industries
    • Tourism
    • Hotel
    • Travel industry
    • otherwise not showing up in data but sentiment forecasts

Key take aways

  • mandate
    • maximum employment
    • price stability
  • Context
    • Economy propped up by US consumers
    • US unemployment is low
  • Dealing with corona issue
    • Actual impact of US economy is uncertain
    • Ultimate solution will come from health professionals
    • Broader spread of the virus is what changed hence potential risk to the economy
    • Uncertain how long the economy will take to recover
    • Health care, Fiscal and Monetary policies

Conversations with Garis

  • When trading Forex the most important skill is to master the reversal.
  • Unlike shares of individual companies, due to heavy daily trading volume price movements goes both ways
  • It makes better sense to execute on the reversal instead of opting to totally exit the market

Book summary: What it takes, Stephen Schwarzman

Profile

  • Partner at BlackStone

Personal effectiveness

  • the bigger the goals the more significant the consequences
  • since you can only do one important thing at a time, always pick the most important one to start with
  • most important lessons are learned at inflection points between when failure turns into success
  • the best executives are made not born, they absorb info, study their own experiences, learn from mistakes and evolve
  • The goal of education (questioning and thinking) as a discipline is to learn how to think, it only ends when you die
  • there are as many realities as individuals, study more individuals
  • find a great mentor
  • Cultivate inner fortitude: Helps preserve morality and ethics in the face of fear and greed
  • The harder the problem the more limited the competition
  • The first job is foundational. Always look for one with a steep learning curve and strong training.
  • when caught in a tight spot, don’t become fixated on your own problem but on someone else’s
  • when seeing a huge transformative opportunity don’t worry that no one else is pursuing it.
  • never get complacent
  • make decisions when you are ready not under pressure
  • objectively assess the risks of every opportunity.

On finance and trading

  • master uncertainty: finance is a dynamic world where you will need to adjust to situations, people and new information quickly
  • build a model to explain a certain phenomena and then test it
  • do not mistake interest in making money versus interest in psychological comfort
  • market tops
    • loose credit conditions and a rising tide
    • buyers generally overconfident
    • number of people you know who become “accidentally” become rich
    • number of IPOs increase at the top, so does the valuations and size
  • market bottoms
    • very hard to bring companies to IPO
    • difficult to detect
    • markets are declining and economy weakens
    • most buy too early or under-estimate the severity of recessions
    • usually takes a year or two for market to get out of recession. even then asset value takes time to recover
    • risk is the least after a crash
    • best time to enter is after position has experienced 5-10% recovery from a crash
  • practice discipline and sound risk assessment
    • wait till the cycle fully plays out
  • Cycles are powered by supply and demand characteristics
    • understand and quantify them
    • e.g. real estate top is when building is valued significantly above replacement cost
  • Sometimes a trend especially negative ones will exhibit symptoms spread across various territories (escalating land prices Spain, India and US prior to 2008)

On building a company

  • fund raising from an LP for a new fund you are starting yourself will be harder than the prior company whom the LP already has a relationship with.
  • make sure there is not sole decision maker for important decisions to avoid getting blind sided
  • Accessing an idea
    • big enough for you to devote your life
    • unique enough as an offering that people will want it
    • timing must be right
  • transition from gut to system during the middle of the life cycle to continue further scaling
  • a business is an integrated system. Understand how one part works by itself as well as in relationship with other parts. Information is the most important asset in business

On management

  • being a strong and accurate accessor of talent is the most critical skills of entrepreneurship.
  • look for cultural fit.
  • Get the candidate into conversation mode
  • its as hard to start and run a small business versus a big one. Choose one with potential to be huge. Why waste time asking for 5-10 million USD when you can ask for 50-100 million USD?
  • find people who sense problems, design solutions and takes the business in new directions
  • be proactive in addressing personal differences over day to day operations

On deal making

  • ultimately comes down to a few key critical points
  • clear away the clutter and focus on these points to be effective
  • learn to slow things down
  • practice intense listening

Related readings

  • Outliers, Malcom Gladwell

The alchemy of finance by Georgo Soros

  • A gap exists between perception and reality
  • The theory of reflexivity
    • herd mentality dictates that the market driven by momentum will eventually over extend itself.
    • the herd will eventually realize its over extension and revert to mean
    • however momentum will once again do its work and result in over extension in the opposite direction
  • at times you will need to be somewhat schizophrenic by keeping in mind two equally plausible but conflicting mental models and predictions while doing your trade.
  • What matters most is your gain when you are right and your losses when you are wrong
    • When you know you are right, go for the jugular
    • it is the correct but non-obvious trades that generate the most outsized returns
  • A country with poor fundamentals, high level debts and limited foreign reserves will have limited ability in propping up its foreigns reserves much as it attempts to do so
  • maintaining a wide network spread across multiple territories will help in forming a better informed mental picture on the state of things

Chat with Joe and his dad

On Kaoshiong

  • KaoShiong is where the bulk of industrial manufacturing occurs
  • Taiwan is a Japan trend follower

On strategy

  • When macro economic environment is not conducive for continued operations, stop operations to conserve resources for future opportunities.
    • Decision to close wooden frame manufacturing factory
      • Europe became more environmentally conscious
      • Malaysia reduced the yearly quota of timber to be harvested
      • These two trends reduced demand for wooden frame and increased cost of raw wooden material

On personal growth

  • Adversity in youth provides an opportunity to build character and gain experience.
  • restricting the amount of resources your offspring has access to might be a good thing but it breeds resentment
  • Good things come from seemingly bad experience too

on DDP policy in KaoShiong

  • Too radical in their actions and lacks calibration in their policies. Really good at manipulating the press
  • Stance
    • Anti China
    • Pro resource less young
    • Pro taxing businesses for social welfare
    • Pro reducing pension to retired
  • Equally corrupt as the KMT but too aggressive in their policies leaving nothing for the business to continue operations
  • manufacturing businesses has been negatively affected with over regulation and rising administrative cost
  • Worker protection makes overtime illegal severely restricting the throughput volume businesses are allowed in their operations
  • Workers not making enough from their day job due to such restrictions are forced to take on a second job on top of their main one
  • 30,000 to 40,000 businesses have failed within the KaoShiong area over the past 12 months at the point of writing with more set to fail if policy should persist
  • While GDP growth rate has been reported at 2% in 2019, shipping volume through KaoShiong has continued to drop

On KMT

  • A more mature party with measured policies which lost leadership due to lackluster performance
  • Stance
    • Pro-China
    • Pro-business
    • Pro-protecting pension of the retired

Social security system and the aging population

  • Social security system is in a state of flux. Employers are required to contribute to two systems. The contribution for the old system is 5X the new system and was too much overheads for the employers.
  • Retirees are concerned their pension will get cut while the young are concerned their contribution to the social security system is to heavy a burden

On China

  • China has imposed restrictions on independent Chinese tourist to Taiwan
    • Chinese tourist are easy customers who engage in indiscriminate spending
    • Night markets looked empty
    • Quite a few restaurants have closed down along the main street due to the lack of tourist spending
  • The bulk of Taiwan’s export has been to China it makes economic sense for both territories to become unified
  • noteworthy to observe Joe’s shift to a pro Chinese stance the on Chinese Taiwan relationship as compared to the high school days.
  • Observation of Taiwan style politics in contrast to Chinese style politics leads me to have reservation about how these two systems can be resolved.
    • the Taiwanese have no reservation with injecting outrageous humor into the legal framework afforded to them by their political system with candidates as outlandish as Mr Crazy Friday and Mr Fortune God
    • China’s one country two system need to become more robust for this undertaking
    • Recent HongKong riots has caused concern for Taiwanese and has lead to increased support for the DDP whose leader English Tsai is known to be a strong negotiator

On Korean Japan trade war

  • Huge influx of Korean tourist observed during this period of tension (Sept 2019)
  • Korean tourist are more discriminate in their spending, hence a lower per capita spending as compared to the Chinese tourist.

Dinner with Mansu

On financial industry

  • Lots of quant funds operating within the South Korean market
    • Very fund has its own strategy and model
    • Things will work until they don’t.
    • The long tail where shit happens can be very fat
    • Funds tend to graduate towards excessive leverage overtime. This is the nature of an industry largely driven by fear and greed
  • KoStar, Korea’s equivalent to Nasdaq is the exchange of choice for Quant operations
    • illiquid/inefficient
    • more volatility
  • Merrill Lynch in South Korea
    • their two largest clients are quant funds
      • Citadel capital
      • Susquehanna Capital group
        • drives 10% of all daily transactions on the Korean stock market
        • up to 100 times per day on each listed company
    • client requirements
      • lesser demand for sales and account representatives
      • demands for high throughput cable connection to their exchange networks
    • client technology stack
      • large scale utilization of neural networks
    • Equities sales representative teams has been reduced from 8 to 3 over the past year
  • On valuation and economy
    • Multiples are becoming exceedingly high given free money provided by Federal reserve and central banks around the world with low to negative interest ranks
    • largely driven by decoupling of interest rates and inflation
    • global deflationary pressures
      • aging population
      • productivity driven by technology proliferation
    • asset prices will contract when interest rates increases

On real estate industry

  • property prices has more than doubled in prime Gangnam area in Seoul over the past 4 years
  • In times of economic recession property valuation at the center of premium districts will remain stable while those at the fringes will become soft
  • segments within the prime Gangnam area
    • integrated apartments
      • situated in complexes with amenities day care services and grocery stores
      • USD1000/sqft – USD1 million for a 3 bedroom apartment
    • normal apartments
      • up to 16 units within a building
      • USD700/sqft – USD750K-800K for a 3 bedroom apartment
  • While governments of both Japan and Korea are trying to further decentralize urbanization across their countries, organic tendency thus far has been towards centralization. Seoul and Tokyo occupy major proportion of the population with smaller townships in the outer fringes dying out. Same thing is observed with San Francisco, coastal cities of Australia and Auckland in New Zealand.

Shifting population and resource equilibrium

Phases in the cycle

  • economy booms
  • competition for resources increases
  • housing and other amenities will become less affordable
  • income gap increases
  • people will have children later or opt not to have children
  • population starts aging at an accelerated rate
  • spending drops as population aging continues and population size starts contracting
  • economy slows down and starts contracting
  • competition for resources decreases
  • labor shortage becomes pronounced and wage levels starts increasing
  • housing and other amenities become more affordable
  • household confidence increases leading to more children
  • economy starts growing

East Asian countries

  • South Korea
    • is in the mid phase where households are feeling the pinch of scarce resources
    • birth rate per woman is starting to fall
    • 2019 fertility rate is at 1.323 per woman
  • Japan
    • in the latter phase where population decline
    • labor shortage are becoming pronounced
    • New college graduates are in high demand and can easily find jobs
    • 2019 fertility rate is at 1.478
    • immigration laws are loosen

On Singapore

  • Money laundry capital of the world
  • Stable government and economy
  • the SGD1000 note receive a premium rate brought to South Korean exchange offices
  • fertility rate is one the lowest in the world at 1.26 per women, the government has long adopted a very loose immigration policy to offset the deflationary effects of an aging population
  • Net effects on the economy
    • continued influx of high income earners and high net worth individuals
    • continued lowering of birth rates
    • average income per capita will continue to increase as low income households continue to die off due to low birth rates

On Korean politics

The legal framework is split into the police and the prosecutors. With the police handling the day to day executive work and the prosecutors given the right to investigate into any issues of concern.

The prosecutors has grown big in numbers over the past few years and the government is trying to curb its influence so as to maintain balance within the system.

The police was involved in a drug scandal in Gangnum where three popular night clubs were closed down. The prosecutors are using this as leverage to remove the brake on their continued growth in influence. Meanwhile Octagon which had been steadily losing popularity due to the existence of the three clubs is now surging in popularity again. This is mainly due to the lack of alternative options in the Gangnum area.

Related references

Book summary: Buffett the making of an American capitalist by Roger Lowenstein

Keep things simple. Simple should not be confused with easy.

Business model assessment

  • Easy to understand economics
  • Strong defensible moat
  • Trustworthy management who treat capital of shareholders with ownerlike care
  • Selling at a reasonable price
  • Able to generate high returns without excessive usage of debts

Guiding principles

  • Stick to companies with your circle of competence
  • Ignore macro economics trends and analyst forecast
  • Choosing between growth and value is a misguided one. See the business model holistically.
  • A share in a business is basically a bond whose coupon rate you need to figure in yourself
  • The character flaws of an individual tend to have very serious spill over effects. Always check for serious character flaws of individuals whose company you plan to invest in.

Float

  • Buy cash generating assets to finance purchase of more assets
  • Insurance is a prepaid model
  • Blue Chip is a prepaid stamp sales model

Management of cashflow

  • Give out dividend
  • Share buy back
  • Reinvest or MnA

The last option is almost always value destroying unless the management can generate ROI above it’s current RoA rate. This is predicated upon a strong defensible moat.

Leadership

  • Confidence
  • Perspective
  • Ability to focus
  • Communication

Book summary: The dollar crisis

Following the  end of world war two, with US being the world’s largest creditor, countries started largely denominating their debts in USD. US in turn pegged USD to a fixed exchange rate with Gold. This agreement was formally known as the Brettonwood Systems.

US experienced difficulty backing this exchange rate during the oil crisis of the 1970s when OPEC started artificially reducing it’s supply of oil thereby driving it’s price in USD. This had a strong downwards pressure on value of the USD which the US propped up through use of their foreign reserves.

Seeing this weakness in US foreign reserve, thereby an discrepancy of the USD against gold, other trading partners started exchanging US dollar for gold. This added further pressure.

To provide relief on their foreign reserves US finally decoupled the fixed exchange rate between USD and gold. This resulted in the collapse of the Brettonwood Systems, leaving USD as the official reserve currency in the world without any underlying backing.

What followed were decades of global growth largely funded by the US government through control of the world’s reserve currency.

Developing countries would sell goods to the US in exchange for USD. Instead of buying US goods in exchange for the USD earned, they would buy US Treasury bills, notes and bonds. This had the effect of maintaining favorable exchange rates for these countries while keeping their products competitive in the US market.

This widespread practice had the long term effect of driving balance of trade deficits in US with it’s trading partners. While negligible in times of strong US domestic GDP growth, this system has of late started exhibiting difficulty sustaining. This is largely due to slow down in US domestic growth and its inability to scale to support trading partners that 4 times times the population size of the US.

It is advised countries which had long relied on this approach to domestic growth transit their economies to become net importers as soon as their economy gains the necessary growth momentum to do so.

Related readings

  • Fault lines, Raghuram Rajan