What Would Warren Buffet Do? Big Tech vs Productivity

When Warren Buffet speaks, people listen. In 2017, 42,000 showed up for the annual Berkshire Hathaway meeting and another 17 million streamed the event online. While it is his views on cryptocurrency (he hates it) that grabbed the headline this year, I believe his bit on productivity (from 2015) below is far more relevant, especially in the current environment, which has many calling for breaking up big tech and universal basic income.

“Too few Americans fully grasp the linkage between productivity and prosperity. To see that connection, let’s look first at the country’s most dramatic example – farming – and later examine three Berkshire-specific areas. In 1900, America’s civilian work force numbered 28 million. Of these, 11 million, a staggering 40% of the total, worked in farming. The leading crop then, as now, was corn. About 90 million acres were devoted to its production and the yield per acre was 30 bushels, for a total output of 2.7 billion bushels annually. Then came the tractor and one innovation after another that revolutionized such keys to farm productivity as planting, harvesting, irrigation, fertilization and seed quality.

Today, we devote about 85 million acres to corn. Productivity, however, has improved yields to more than 150 bushels per acre, for an annual output of 13-14 billion bushels. Farmers have made similar gains with other products. Increased yields, though, are only half the story: The huge increases in physical output have been accompanied by a dramatic reduction in the number of farm laborers (“human input”).

Today about three million people work on farms, a tiny 2% of our 158-million-person work force. Thus, improved farming methods have allowed tens of millions of present-day workers to utilize their time and talents in other endeavors, a reallocation of human resources that enables Americans of today to enjoy huge quantities of non-farm goods and services they would otherwise lack. It’s easy to look back over the 115-year span and realize how extraordinarily beneficial agricultural innovations have been – not just for farmers but, more broadly, for our entire society. We would not have anything close to the America we now know had we stifled those improvements in productivity. (It was fortunate that horses couldn’t vote.)

On a day-to-day basis, however, talk of the “greater good” must have rung hollow to farm hands who lost their jobs to machines that performed routine tasks far more efficiently than humans ever could….The answer in such disruptions is not the restraining or outlawing of actions that increase productivity. Americans would not be living nearly as well as we do if we had mandated that 11 million people should forever be employed in farming.”

In other words, society should welcome progress, but also help those left behind. Buffet’s maxim is simple enough, but do monopolies and the speed of disruption complicate things? Is there a case for breaking up big tech because it actually hurts progress and productivity?

Investors have always recognized and valued productivity. As a result, the market rewards technology stocks with high valuations even if they make no money. Today, investors have become even more enamored with them. Given the monopolistic positions companies have built using their network effects and ecosystems, Apple, Microsoft, Amazon, Facebook, and Alphabet (Google) now have a market cap of $3.78 trillion dollars (March 12). These five make up of 15% of the S&P’s market value, more than the entire financial, health-care, or industrial sectors. Taking a step back, one finds that the tech sector’s 25% share of the S&P is the highest since the dot-com bubble, when it peaked at 35%.

A big question now is if these companies are monopolies, what are their implications for productivity? Do they help productivity in the short-run, but harm it in the long-run? Would they resist the temptation to buy out competitors and hike prices on consumers in the future? On the other hand, is it possible that they keep their disruptive spirit and drive productivity gains? Just as Amazon is entering into healthcare, is it possible that it will upend the DMV and save the day too?

Another big question is whether the technological disruptions today are any different for their effects on the labor market. While the farmers who were put out of work by machines may have found other jobs, is it possible that future disruption will be so widespread that the farmer equivalent today will not be able to find any job? This is presidential hopeful Andrew Yang’s view. He says that “we’re going to have a million truck drivers out of work who are 94 percent male, with an average level of education of high school or one year of college.” In other words, self-driving trucks “will be enough to create riots in the street. And we’re about to do the same thing to retail workers, call center workers, fast-food workers, insurance companies, accounting firms.” To play devil’s advocate, one can then ask whether technology actually improves productivity if it puts a large part of the labor force out of a job. If people are constantly asked to re-train their skills because technology keeps on making them obsolete, then maybe society’s productivity has not improved much after all.

In response to these questions, I am sure Warren Buffet will hold his ground, but I do not know the answer to these questions. Maybe it is inevitable that information technology’s network effect produces large companies and only they can be productive given the high fixed costs. Maybe savvy consumers, activist shareholders, and conscientious employees can prevent big tech from doing evil. Maybe robots will takeover, but people will find something else to do like people have always done.

One thing I do know is that when big tech takes over the market, may be the only active management left will be for tech analysts (sarcastically). 

Source - WSJ graphics 

Don’t Buy What You Don’t Understand: ETF for Millennials and Finance Nerds.

What is an ETF?

With the rise of robo advisers such as Betterment and the word of mouth praises for how cheap and good it, more and more have dabbled in ETFs, but many may not know much more than what the acronym stands for and how it is a stock that buys a basket of stocks. Here is my ETF primer for my fellow millennials and finance nerds.

According to Bloomberg analyst Eric Balcunas’s ETF origin story, one of ETF’s inventors Nate Most said the idea of ETFs came from commodity warehouse receipts. Given it is costly and difficult to move commodities around the globe, commodity traders keep them stored at the warehouse and trade the warehouse receipts around. ETF does the same thing, except the commodities are stocks and they are stored at a custodian bank rather than in a warehouse.

ETFs are essentially the same, except slightly more complicated. To begin, the ETF issuer finds a fund custodian to store the basket of stocks. The ETF shares are created off of the basket of stocks stored at the fund custodian. Then, the ETF issuer finds a broker dealer bank to serve as the authorized participant (AP) to help manage the size of the ETFs and the basket of stocks stored at the custodian bank. For instance, if people want to buy more shares of ETF than created, the AP may buy stocks and exchange them for newly created ETF shares and sell these ETFs to the investors. Thus, the AP helped increase the size of the ETFs and the basket of stocks stored at the custodian bank. Similarly, if people want to sell their ETFs, the AP may buy ETFs and exchange them for stocks from basket of stocks stored at the custodian bank. Thus, the AP helped decrease the size of the ETFs and the basket of stocks stored at the custodian bank.

If this again sounds like gibberish, here is an analogy that might help. The basket of stocks is gold, the ETF is gold standard British Pound, the ETF issuer is the Bank of England, the custodian bank is Bank of England’s vault, and the AP is the Bank of England’s bankers. During the gold standard era, one could theoretically go to the Bank of England to exchange one’s British Pound into gold from its vault. As a result, gold and British pound are interchangeable (this requires the ridiculous assumption that there is no fractional reserve banking and there is enough gold to cover all the British pound). Similarly, the ETF and the basket of stocks are the same because one could theoretically exchange one’s ETF into the basket of stocks from the custodian bank. Also, when Bank of England has more gold, it can issue more British pound, which is no different from the ETF issuer creating more ETFs when it has a bigger basket of stocks. This is how ETF works.

What are its risks? (More for finance nerds)

First, what if the gold in the vault is impure or fake? In that case, the people who bought British Pound for the gold would have lost all faith in their British Pound. They will rush to the bank to exchange whatever pure or real gold in the vault and sell the rest of their British Pound. This could happen to ETFs. Since many ETFs hold financial derivatives that mimic the value of the basket of stocks rather than the actual stocks, it is possible that when investors rush for the exit one day, the financial derivatives will fail to mimic the value during extreme periods, leading to panic. Second, what if Bank of England changed British Pound’s conversion to include silver because it ran out of gold? In this case, people may also lose faith in their British Pound and rush to the exit. This could also happen to ETFs. There have been instances where too many people wanted to buy ETFs and not enough stocks to back them up. In this case, the ETF issuer decided to add other stocks into their basket of stocks so that they could keep on creating and selling ETFs. Third, what if many new countries are formed and they all start creating their own precious metal backed currencies? How will it affect the normal mining and trading of precious metals? The liquidity of ETFs and stocks are now called into question as ETF continue its explosive growth both in terms of size and number.

What are the implications of its risks? (definitely for finance nerds)

If the financial derivatives that back up many ETFs fail or lose value unexpectedly, many will take big losses. This may be just another market sell-off like the dot com bubble or it could lead to a bigger financial crisis where large systemically important financial institution are challenged. One reason to feel downplay this risk is that the global ETF market is only about $3 tn compared to the $240 tn total wealth worldwide and it is unfeasible that all ETFs will suffer big value losses due to the unforeseen risks mentioned above. However, one must also refrain from being complacent. The supposed infallibility of Mortgage Backed Securities led to the massive credit default swap bets on the side. While the MBS market at the time was only $8 tn, the notional value of the CDS was around $60 tn! It is often difficult to see the risks lurking in the shadows until it is too late. Lastly, even if it is unlikely ETF will be a trigger of a financial crisis, it is possible that ETFs’ explosive growth in terms of number and size have introduced changes to the market ecology that increase the system’s vulnerability. 

How Technology Has Disrupted the NBA and What Does It Mean?

Technology changes everything, including in basketball. While I have only watched basketball since the mid-2000s, I can’t help but to notice the effects of technology disruptions in the past 10 years alone. Like all disruptions, it creates winners and losers. This thought motivated me to tally the effects and see if there are lessons to help me navigate the changes in my own field as well.

Well, here are my observations below and my conclusion comes at the end.

1. More 3 pointers and faster pace.

Competing against streaming, the golden age of TV, to apps, NBA evolved to garner viewers (and also win games). The league average 3 pointer field goal attempts increased from 18.1 in 2007 to 28.7 in 2017. Likewise, the league average possessions per 48 games increased from 92.4 to 97.8 in the same period.

Winner – J.J Redick signing a 1 year $23 million a year deal with the Philadelphia 76ers. Making 3 pointers help.

Loser – Roy Hibbert went from an All-Star in 2014 to a 2^nd round draft pick trade piece in 2016 and out of the league in 2017. Being 7’2 and setting good screens don’t help anymore.

2. Social media.

Facebook, Instagram, snapchat, twitter, etc have given players and participants a platform and access unlike anything we have seen before. Charles Barkley even said young players are forming super teams of social media. There is no taboo in talking to each other when one can bypass calling each other’s household.

Winner – ESPN Columnist Adrian Wojnarwowski’s name has become synonymous with NBA break news. His tweets during the free agency season has been termed “Woj bombs.” 

Loser/Winner – Eric Bledsoe. After a disastrous start to the Phoenix Sun’s season and the firing of head coach, Bledsoe tweeted “I don’t wanna be here.” It led to a $10,000 fine from the NBA and benching, but it worked out in the end. He got sent to a good team in the Milwaukee Bucks. He got himself fired from his job, but he also got him to an even better job.

Loser – D’ Angelo Russell’s leaked snapchat video of his then Laker teammate Nick Young’s cheating confession led to Young and Iggy Azalea’s broken engagement and his expulsion from the team.

3. Content Platforms.

The strong network effects of social media content sharing and high smartphone penetrations have given life to content producers across multiple platforms. The days when sports content creation is limited to papers, radio shows, and TV are long gone.

Winner (Youtube Entertainers) – Brandon Armstrong’s basketball impersonations under BdotAdot5 has led to invitations to NBA All Star Weekend’s celebrity games and appearances on the Jimmy Kimmel Show.  ChrisSmoove’s NBA 2K video game playing led to his collaboration videos with NBA players Tony Parker and John Wall. He is also selling T-shirts based on his catch phrases.

Winner (Youtube Video Editors)- The Frishberg brothers’ basketball mixes on Youtube under Maxmillion711 has garnered him over 45,000 subscribers and over 20 million views. He has also become an in-demand editor for a number of sports organizations. There are also lots of NBA highlight reel editors who constantly play a mouse and cat game with Youtube over copyrights issues.

Winner (Podcasters) – Bloomberg’s article on Dunc’d On, a basketball podcast by Duncan and Leroux, says it all. These two NBA outsiders quit their law professions to produce between 5-15 hours of content each week and they are commercially profitable. Podcasts from active/former NBA players, J.J Redick, Randy Foye, Richard Jefferson, Channing Frye, etc have also become a thing.

Winner (New Media Groups and Writers) – Bill Simmon’s The Ringer, Lebron James and Maverick Carter’s The Uninterrupted, and Nate Silver’s FiveThirtyEight have all found success with or without the affiliation of large media organizations.

Losers – other content creators. There are only so much eye balls to go around and the competition is fiercer than ever.

4. Big Data. 

Sports analytics have been around since econometrics and popularized since Michael Lewis’ Money Ball, but the NBA is undergoing a big data revolution, credit the abundant hardware, software, and human resources.

Winner – Noah, a sensor technology company, used to track basketball shooting is employed by the Toronto Raptors to help players train. NBA has hosted its 2^nd annual hackathon in 2017 to promote and recruit basketball analytics talents. Houston Rockets GM Daryl Morey has long been a proponent of sports analytics. He co-founded the MIT Sloan Sports Analytics Conference and may get the last laugh one of these days if his Houston Rockets wins the championship.  

Loser – Coaches, scouts, trainers, and managers from the last generation. Also, Charles Barkley, a long and strong opponent of analytics.

After going through all the winners and losers, I did learn several things about industry changes and career paths. 

Don’t be stubborn and ignore trends.

If you are on the court, learn how to shoot some 3s. If you are behind the scenes or on the sidelines, know some analytics. It is fine to recognize one’s limited aptitude for whatever is trending and focus on one’s strength, but it is important to stay relevant and literate.

Stay alert and seize the window of democratized opportunities.

Successful basketball content producers seized the leveled playing field created a path despite their lack of degree or access. The window of democratized opportunities is limited because the first mover advantage disappears and new barriers to entry are inevitably rebuilt. When seizing opportunities, there is a balance between preparing and acting. Don’t go in unprepared, but don’t act only when you are 100% prepared because by then it is too late.

Build on what makes you unique, including what you might perceive as your disadvantage.

Reading Bloomberg’s coverage on Dunc’ed On, I learned that Duncan and Leroux leveraged their lawyer background into being experts on NBA’s Collective Bargaining Agreement, a key puzzle in understanding NBA salaries, trades, and teams.

Also, it reminded me of what I read about Kyrie Irving and Xi Jingping. Kyrie said he developed his acrobatic layups because he grew up playing on a hoop with a broken backboard. He joked that he imagines how much better he would have been if he played on a good hoop. However, my thoughts are the opposite. It is precisely because of the broken backboard, he developed his now unstoppable acrobatic layups. Similarly, Xi learned from his disadvantaged youth and turned it into a strength. “Many of Xi’s generation agree that when their schooling stopped and they learned to survive on their wits, they developed emotional toughness and independence of thought. Xi later reflected on his ability to listen to other points of view without necessarily bowing to them. I had to learn to enjoy having my errors pointed out to me, but not to be swayed too much by that. Just because so-and-so says something, I’m not going to start weighing every cost and benefit. I’m not going to lose my appetite over it.” (quote =/= endorsement)

Either ETFs cools down or I am dead

I may be chicken little and think the sky is falling, but it is unclear what my financial analysis skillset in will get me in the future, especially the long run.

Financial professionals often tout the power of free markets. They speak highly about creative destruction and speak with ease about re-training programs for those left behind. However, they, including me, may get a taste of their own medicine. Challenges from passive investing may render the traditional finance skillset useless and anachronistic for many. Either ETFs cools down or I am dead.

It came fast and furious, passive investing through ETFs will account for about 50% of all assets under management by 2017-year end. As more people put their money into ETFs, fewer people are putting their money in mutual funds and hedge funds. So far, there is a good reason for this. Since QE started in 2008, the broad market has been performing very well. While good stock/bond picking is nice, investors say no thanks when the whole basket of stocks/bonds was rising. It is reasonable to say that ETF will cool down because the market will eventually underperform active management, especially when global QE stops.

However, I worry this won’t be the case. Overtime, it may be become a habit that is hard to kick. After Japan suffered its bubble burst, cheap 100 yen stores selling daily items sprung up and became part of life. 30 years later, it does not matter whether one is rich or poor, they all go to the cheap 100 yen stores because it is a part of life. It also may be a genuine low cost disruption that is here to stay. Regardless of whether it is piggy backing on QE or not, ETF is a true innovation in terms of its efficiency and cost. Similarly, fast fashion, ecommerce, ride sharing, and streaming have toppled their incumbents in recent years and have not looked back. Lastly, the case for ETF may be tied up in the same mystery of low inflation. In this low growth and low return era, it is reasonable for investors to want to minimize their management fees because they lack confidence.

*ETFs may also blow up and start a financial crisis due to its now wacky construction, liquidity concerns, and bubble characteristics. However, this discussion deserves a blog post of its own.

As of now, it is hard to say conclusively whether this is a big fad or a big seismic shift, but either way it is impacting the financial industry ecosystem. Due to the accessibility and popularity of ETFs through robo advisors, financial advisors who make commission from helping investors are hurting investors opt to “Do It Themselves.” Trickling down to the next level, since people are buying ETFs instead of mutual funds, money managers who charge a fee off their assets under management are pressured. Further down the chain, investment banks who relied on money managers’ trading business are also hurting. There is a chance that a counterbalance will set in since the ecosystem change will impact the market in the long run, whether in its liquidity, asset allocation, or productivity. However, until then, the pie for financial analysts has shrunk and is shrinking.

Additional forces that threaten to reduce the size of the pie are regulations. A European regulation called Midfid II will dictate how money managers pay for research and it will lead to job losses. Before Midfid II, money managers paid for research through soft dollar, which means they paid for research through their trading commission they pay to the bank. Banks agreed to it because at the very least, research was another service differentiator that helped them stand out amongst the competition. Given the debates around the usefulness of investment bank research and the squeezed margins for money managers, many research firms will be caught swimming naked. Eventually, the bottom performing research will get cut. Another US based regulation called Fiduciary Duty Act, which aims to improve transparency and accountability, will force financial professionals act in the best interest of their clients. One direct effect is that financial professionals will now opt for the cheapest and most convenient options because they want to stay out of trouble. Since ETFs are cheap and popular, they will direct clients to ETFs because they don’t want to have to explain themselves.  

The passive management and current regulatory trend may be the perfect storm for industry professionals. The laid off investment bank research analysts will rush to get jobs at money managers, but money managers are constrained. Not only is their revenue shrinking due to challenges from ETF, but also their expenditure is growing because are forced to pay for research. This means that a crowd of people will rush to squeeze into an already crowded and possibly shrinking room.

As I said before, it is unclear what my financial analysis skillset will get me in the future. If ETF is here to stay in the long run, then a financial analyst may become no different than the horse breeder in early 20^th century. Both professionals have nice skills and both were valuable when horse carriages and active management mutual funds ruled the world. However, if ETFs becomes what car is to horse carriages, then financial analysts may suffer the same fate. They either have to become the best analysts in the world and work for Warren Buffet, similar to the horse breeders who work for the few domestic and race horse owners, or they have to re-train and find a new job. They either have to find something translatable or go into the automobile or new finance industry.

I maintain that either ETFs cools down or I am dead. Just kidding, I won’t be dead. I will just have to think hard about where else I can apply my skills or re-train for a new craft. I will not be the first to experience this type of industry shifts, nor will I be the last.

*I will follow up with my own rebuttal piece about why I may also be wrong and why the sky is not falling down. 

Casino Like Financial Markets

In this world where too much money is chasing too few assets, asset price inflation and subsequently, gambling on prices, become inevitable. This means that financial markets may turn into casinos, but this outcome is better than the alternatives.

To begin, money and assets are different in that money is cash, deposits, and cash like funds while assets are things that provide future benefits. In the past 70 years, the combination of post WWII peace, globalization, and the break from gold standard has led to the creation of lots of money. Peace allows households to just live and enjoy life, giving them the opportunity to make money without interruption. Globalization enables those who are good at making money to make lots of it. Lobster men in Maine and miners in Mongolia can now sell their goods far and wide at speeds and scales unseen before. Fiat currency made money printing possible. Whether the printing is to meet genuine economic demand or spurred by government stimulus, central banks no longer had to worry whether they have enough gold to back their money up. Putting it all together, it has been a perfect storm for money creation.

As for assets, there is simply not enough of it. There are lots of consumption goods, but there are not enough investment goods. While they both provide future benefits, only investment goods are assets worth chasing with one’s money. Since consumption goods’ values expire and depreciate, it makes little sense for people to park their money in these assets that lose value. As a result, money naturally gravitates toward investment goods, lured by the promise of capital preservation and appreciation. (Preservation is important because inflation eats away the value of money and appreciation is desired because what is a better way to make money than to make money with money).

What does this mean altogether? It means that asset prices will rise over time since there is too much money chasing too few assets.  Money has to go somewhere and it will pour into available assets. However, the process is messy and unpredictable (largely). The inflow of money is disorderly, unlike water filling an ice cube tray. Money will come in and out and assets will rise and fall. This volatility makes it difficult for assets to find and stay at an equilibrium price. Such opportunity to make quick bucks by predicting the direction of prices draw people in and those who captured by their animal spirits turn into gamblers. Also, as markets become more sophisticated, the typical buy low sell high strategy has evolved beyond one’s imagination. Instead of picking good stocks or a good house, there are now strategies betting on prices, interest rates, exchange rates, spreads, volatilities, and everything else.   

However, this is not a bad thing. This casino is better than other forms of gambling. Financial markets create much more good than Las Vegas’s casinos or horse race betting. Furthermore, it is much better to isolate the gambling on investment goods than consumption goods.

First, unlike Las Vegas and race tracks that end up creating lavish hotels and genetically engineered horses, this casino allocates capital, creates endless jobs, and spreads financial literacy. Though gambling sounds bad, the large number of market participants help enable a deep market. This deep market increases the possibility of someone out there willing to take the other side of the trade as a buyer or a seller. Whether it is buying a stock, foreign exchange, or an interest rate swap, one can feel confident that their transaction will go through at a given price. Through this deep market, resources can be allocated more efficiently. Stock picking rewards good companies by giving them a cheaper cost of capital. Foreign exchange forwards allow companies to put their idle foreign exchange to good use to those who wants to buy it now for the future. Interest rate swaps enable companies to swap their less desired fixed interest rates for a preferred floating exchange rate. Also, ever since financial markets evolved from a room of loud traders to electronic markets that now exists in the clouds, financial markets can now create jobs anywhere. In comparison, the jobs created by casino and race tracks are mostly limited to those within the proximity of these sites. Lastly, working as part of the value chain of financial markets, one is able to become an expert in financial matters. These workers are not only able to use these skills for themselves, but also become agents to spread financial literacy to others. Financial skill is much more applicable and useful compared to knowing how to deal in black jack and knowing how to brush horse’s hair.  

Second, it is much better to have this casino on investment goods than consumption goods. If the flood of money is channeled toward chasing consumption goods, it would no longer be known as capital appreciation, but as hyperinflation. The first allows people to preserve and grow their wealth while the second destroys their wealth through the erosion in their purchasing power. One is happy to see his or her 401K investment balance goes up, but one will be distraught to see the price of daily items spin out of control. One observable example can now be seen through housing. Homes are both a consumption good and investment good. People consume housing for shelter, but they also invest in homes for their retirement. The dual purpose real estate serves doubles the demand for this asset. As a result, home prices have skyrocketed in past decades as more and more wealth chases this asset, which often struggles to keep up with the demand. This phenomenon has forced poorer people out of their neighborhoods at best and created destructive housing bubbles at worst. Even till today, housing continues to be a thorny issue despite the numerous painful experiences of housing bubble bursts in Japan, US, Europe, and elsewhere.

In the end, we are left to choose our own poison. By accepting conflict, protectionism, and gold standards, one can create a world with less money. However, the weak and powerless will undoubtedly suffer more. Destruction is more costly to them, protectionism hurts poor nations’ income and deprives rich nations from cheap goods, and gold standards limit stimulus and cheap credits. If one accepts the current arrangement and let money creation continue, then one may be left with hyperinflation or casino like financial markets. I do not know about you, but between the two, I pick casino like financial markets. 

Why Everyone Should be a Fed Watcher

Heading into Jackson Hole, many financial market participants are eagerly watching Fed Chairwoman Yellen’s every move. As if they are not already, they will be glued to their smartphones and tablets, watching out for any pop up news of Yellen’s speech. They want to know if September is a go.

This go means Fed hikes rates. To profit and loss minded investors, this will be huge news. The rate hike will determine whether the dollar will resume its appreciation, the equity and bond market will deflate, and international markets will slow down. To casual followers of capital markets and the economy, this means that the government believes in the strength of the US economy and maybe their mortgage rates will go up. However, to most people, this means nothing. Whether young or old, they will look up at their TV, stare across at their computers, or swipe away on their smartphones, thinking “I don’t care and this is boring.”

I do not blame them, but I believe everyone should be paying attention to the Fed and this is to their own benefit. The anticipated 25 basis point interest rate hike, when and if it comes, has a butterfly effect on everyone and those who predict it well has the best chance of survival and prosperity. You may think I am exaggerating, but hear me out.

Just like farmers rely on the weather, modern workers rely on the economy. A farmer can be diligent and resourceful with seeds, but if the weather and conditions are bad, the farmer’s crops will go nowhere. Similarly, a modern worker can be hard working and endowed with money or education, but if the economy trajectory and economy are bad, the workers will have very limited success. A new home buyer couple, a college graduate and a middle management dad during the 2008 financial crisis all suffered. The couple ended up overpaying for a house and are stuck paying mortgage for the next 30 years. The student who did everything right, but still fell short of finding a job after school. The dad, who helped the company throughout the year, got laid off because the corporate said so.

As a result, it is easy to see that the weather and economy have a great impact on the farmer and worker. The difference is that good farmers try their best to predict the weather and adapt to different conditions while good workers generally have little understanding of the economy and allow the economy to batter them around without any adjustment or a clue. At this point, one may have two burning questions: what can workers do and how can they predict the economy?

For the first question, it is no different from the farmer. Just like the farmer who foresaw the poor rains this season and decided to plant a less water intensive crop, one should evaluate conditions before making a big purchase or investment. Whether it is buying a house or going to school, people should make sure their plans (crop) fit the economy (weather). If their plans do not fit, then they should be open, if not eager, to change. The ever growing students at coding schools are a perfect example of this change. Perhaps interested by tech or discouraged by their current field, people adapt to learn skills that seemingly will fit the economy. There is no way for sure to know whether this will work out, but it beats the odds of the stubborn farmer who refuses to leave his barren land.

As for the second question, I say watch the Fed. The Fed is not only stacked with brilliant economists and researchers, but also it is tasked with changing the economy (weather). To understand what I mean here, imagine how farmers observe and predict the weather. The Fed is more than just a wise and experienced farmer who watches the clouds, feel the wind, and observe seasonal patterns to predict the weather. The Fed is an Elon Musk like disrupter who will play god to change the weather and economy. The Elon Musk reference is to his proposal to nuke Mars to induce create a sun and warm up the planet for future inhabitants. Well, unless one thinks Fed’s QE is on the level of Elon Musk’s idea, one should just think of the Fed as a modern day engineer who cloud seeds for rain and build dams and levers to control water. (I will stop here because this is not a blog on Fed’s monetary policy channels, communication, and impact) Therefore, by following the Fed, one should be able to understand the current and future trajectory of the economy. Before people were treated as robots and shuffled inside giant factories or office buildings, they paid attention to and adapted to weather. Today, people should take back this skill and pay attention to and adapt to the economy.

Just like sailors do not set sail without checking for storms, people should not live their lives without paying attention to the economy. The captain and crew can pray to their gods all they want and wish for smooth sailing, but the storm will find them if they do not check and prepare for the weather. People can find “the economy” boring all they want, but the economy will find them if they act like it has no relevance to their lives. Fast forward a few 100 years, it is now easy to find any weather information that is timely and accurate. However, information and accurate views on the economy is more difficult. Given there is no app that will tell you everything you need to know about this week’s weather with just a quick swipe, just do your homework and study the Fed.

So is Murph’s brother Tom a good farmer? He is on a doomed planet, but he does switch around his crops…

Moon, Stars, Wage Growth Next?

We all know the cliched saying, "always aim for the moon, even if you miss, you will land amongst the stars." This saying usually applies to parents who are trying to motivate their children, but it is increasingly taking shape in the economic and finance world. I got the idea reading the diplomat's coverage of the World Bank President, Dr. Kim. Dr. Kim aimed for the moon with his "3-by-5 pledge." He states that he aims to treat 3 mn people in developing countries with an anti- HIV/AIDS drug by 2005 during his tenure at the UN. The pledge ended up being unfulfilled, but the 3 mn target is reached in 2007, earlier than previous expected. Kim says his policies worked because "you have to set a really difficult target and then have that really difficult target change the way you do your work.” He has employed the same philosophy at the World Bank, but tackling poverty's causes and effects simultaneously is a very difficult challenge. Needless to say, he has yet to "land amongst the stars" at the World Bank.


This idea has also played out in industrial policies. South Korea's Park Chung Hee implemented policies that led to Korea's future industrial dominance. South Korea is now market leaders in steel, shipbuilding, autos, chemicals, and electronics. By striving to reach difficult output or export targets, chaebols were pressured to make significant breakthroughs in short amounts of time. This achievement did not come easily since the foreigners, importers, consumers, and laborers' interests were sacrificed in the process, but they did it. Though they often missed out on short term targets, the difficult goal helped them move with more urgency in improving their operations, technology, and management. This all sounds well and good, but China under Mao was a different story. Ambitious targets to beat US and UK in steel output during the Great Leap Forward led to disastrous outcomes. Drunk with hopes of a new China, wishes for a egalitarian society, and spells of Mao's cult of personality, people dived into this project with fervor. Seemingly overnight, useful bicycles, cookware, and machinery were dumped into giant furnaces and turned into giant heaps of metal crap. Great Leap Forward's bold goals were equivalent to aiming for mars, but China did not land among the moon or the stars, it landed into an era of shortage, starvation, and social upheaval.

Increasingly, this idea has expanded to foreign currency and inflation. Taiwan, the lagger in the four Asian tigers, has failed to meaningfully upgrade its manufacturing industries. Sure TSMC is a big name, but Taiwan has performed below its potential and created fewer competitive firms than expected. One criticism is that the central banks' cheap currency policy has shielded exporters from competition and deprived them of the urgency to upgrade. Recently the central bank has even released a 33 page report responding to a magazine critical on the central bank and its foreign exchange policy. In Japan, academics like Paul Krugman are calling for a 4% inflation target in Japan; the higher inflation rate is expected to help reflation policies since a failure to hit the target will still result in inflation higher than that of today's 0.7%. This policy also gives the government cover for much bigger forms of monetary policies. These talks seem tantalizing, but foreign currency and inflation targets are complicated and policy makers will always err on the side of caution. Considering it is difficult enough to maintain the status quo rather than improve the current situation, do not expect much aiming for the moon.

One part where the cliched saying may evolve next to is in wage hikes. Seeds planted from the 2008 financial crisis has grown to many social movements. From the on start of the Occupy Wall Street movement to Bernie Sanders and Donald Trumps' rise, economic inequality has played a big role. At the moment, given US's high debt and overall political leaning, wage hikes rather than welfare is a more realistic situation. In a country built by self-sufficient and dreamer immigrants, working to help one escape poverty is an acceptable narrative. As the likes of Wal-Mart laud the positive business effects in paying their employees' above market wage and Dimon announces wage hikes at JP Morgan, more meaningful wage hikes has gradually turned into expectation. Furthermore, as cities around the country, from LA to SF to NYC aim to raise wages to $15 an hour, this movement just keeps on growing.


Despite this trend, there is no lack of opposition. Citing price and quantity crosses featured in economic 101 courses , economists believe that wage hikes will decrease overall employment. This economic law is sensible and logical, but the price and quantity cross is not everything. The supply and demand curves are dynamic and next to impossible to capture in frameworks that assumes "ceteris paribus," or everything else the same. However, the louder the critics sound off alarms on wage hikes' negative effect on employment, the less likely cities and corps will stand idly watching their jobs flow out or payroll bloats up. In anticipation of wages hikes' effect on lower employment, cities and companies may compensate for this by adjusting policies to create more opportunities or productivity. Local governments may remove previous red tabs; companies may use new methods to increase productivity. Overall, despite the set backs, perhaps the wage hikes will be a disruptive force that leads to positive shifts in the supply and demand curves rather than a mere change in the price and quantity cross points. I do not have a good way to validate this narrative one way or another, but I do wonder if wage policy will become the next hot bed for the "aim for the moon and land amongst stars" philosophy.