What can be explained by economics and what cannot be explained? 3

Today I want to continue with this topic and discuss how rational sophisticated investors can still create a bubble in the stock market. Let's talk about bank-run first. There is one explanation for bank-run that bank-run is caused by a black swan event when many individuals unintentionally take out their money out of their banks at the same time. This could also happen to the stock market. When many people unintentionally sell off their stocks at the same time, this will create a phenomena of bubble bursts that the stock market will fall sharply. This does not create a bubble but definitely creates a phenomena of a bubble burst. 

When we are talking about bubbles, there is always a difficulty of defining a bubble before a bubble bursts. For example, we cannot be certain about if there is a real bubble in the cybercurrency market. Moreover, because of the constraint of receiving and analyzing information, no one is certain if they actually know the fundamental of the stock market; therefore, it is normal for rational investors to misestimate the fundamental of their stocks. In addition, because of the uncertainty of the future, the stock prices in the future are always uncertain, they will be revised after resolution of uncertainty every period. Therefore, when a state with a very insignificant probability actually takes place, there will be a sharp price drop in the stock market. When this stock attracts lots of attention because it is less risky and generates good capital returns, such event takes place, it will influence a large amount of investors. When a large amount of investors suffer capital losses, their live standards might be impacted and they may need to liquidate some of their other assets, this will influence the entire stock market. This will also produce a phenomena of bubble burst. 

To conclude, we still cannot define a bubble before a bubble actually bursts. Since we only recognize a bubble after a bubble bursts, if we can see a similar pattern in the market as a bubble bursts, we can see that rational investors can still create such pattern in the stock market and we can refer this to what we usually call as a bubble.

The UK gender pay gap

The UK government requires some companies to report the gender pay gap within their companies and only half of the companies submit their reports before the deadline. The reports generally show the females receive lower incomes than the males on average. However, I do not think the reports can fairly represent the issue of gender pay gap because of its design. The main issue in this report is too many variables are omitted in the reports.

The report represents the gender pay gaps overall and in several quantiles. However, we do not have any idea about what exactly causes the pay gaps. The differences in salaries could be caused by many factors, not only their genders. Without gender discrimination, we have to admit females and males are different. In addition, females and males do choose different career pathways. Some people may argue the different career pathways are caused by the gender discrimination that exists in our society; however, we cannot truly blame the companies that force the females to choose such career pathways unless if the companies forces females to fit in the positions that they do not want. In addition, de jure discrimination is much easier to be corrected, but de facto discrimination is extremely difficult to be corrected. The UK government wants to use the report to observe; however, if the government identifies it is a de facto discrimination, it should observe the early stage of people's live, such as education and entry jobs. Because after people overcome their early stages of career, their future incomes are far more predictable. Therefore, it is more important to observe the early pathways people choose rather than observe the entire labour population as a whole.

What can be explained by economics and what cannot be explained by economics? 2

I would like to continue my topic, "what can be explained by economics and what cannot be explained by economics". Today I want to talk about what can be explained by economics in the stock market.

Let's talk about the volatility in the stock market. Normally we calculate stock price as a function of the sum of all future discounted returns (dividends); however, this is not how we judge our stocks' values. Companies are growing, so their values are not constant and can change over the long run. This is a very important source of uncertainty. Once there is a source of uncertainty, then the people's expectations do not agree with each other because of their constraints to receiving sufficient information and analyzing information. Such constraint exists and it is impossible to remove such constraint, it is as natural as the production constraint (we can see the outcome of analysis is our product). Because people have different expectations, then they will sell when the market price is above their expected prices and they will buy when the market price is under their expectations. This is why trading takes place in the market. The difference between trading in the stock market and trading in the good is that traders in the stock market do not consider the cost of trading, instead they make decisions based on their expected outcomes with their expected probability distributions.

In addition, some people say it is irrational for investors to be influenced by others. However, we can explain why it is rational for investors to be influenced by others. Everyone in the stock market is potentially a buyer as well as seller. When you see a market price increase, it indicates that your potential buyers are now willing to accept higher prices, and this also increases the probability of meeting your price targets (in the case that your price target is above the current market price), as we believe price increases are caused by resolution of uncertainty. Moreover, because we know our constraints and ability limits, it is rational for us to adjust our evaluations and expectations with the professionals who have more information and are more capable of analyzing financial issues.

I will discuss it is possible for bubbles to exist in a rational market tomorrow.

What can be explained by economics and what cannot be explained?

An economic man is often used in some economic theories to portray rational and self-interested humans that involve in economic activities. Many people use Kahneman’s book, “Thinking, Fast and Slow”,  to point out there is irrationality in human beings. In his book, Kahneman points out there are two systems of thought: one is fast and following instinct and emotion, the other is slow but logical. The fast system is considered to be the irrational system; however, it is so useful that it helped our human beings to survive in the wild, it is just not so helpful when we are making complicated decisions nowadays. Our human beings have lived for millions of years and we only have our civilisation for under ten thousand years, this means only for under ten thousand out of millions of years, we need more of the help from the second system than the help of the first system; therefore, it is sensible to say that the existence of the first system is good for our human beings and it is rational for our human beings to use the first system for most of our time (here, I mean our entire species). Therefore, this argument may not be true. Thinking about our species’ entire time, we might just be in a transferring period of transferring more work from the first system to the second system.

There is another argument that support the irrationality in human beings, which is loss aversion. However, if we are able to use the concept of marginal returns, maybe we can explain loss aversion. The concept of marginal returns suggests when we get more of one kind of goods, the marginal utility gained from one extra item becomes small from the last one. If the utility gained from get one particular item equals the utility lost from losing the same item (assuming we already have some of this type of goods), the marginal utility lost from subtracting one good is greater than the marginal utility gained from one good, since the concept of decreasing marginal utility tells when the amount increases, the good has a decreasing utility and when the amount decreases, the good has an increasing utility, the goods subtracted have a higher utility than the goods added. And this can explain loss aversion, which is an important concept in behaviour economics, which is considered to the subject of studying irrational behaviour in economic activities.

Is it possible for a long-lasting trade war?

Many people are talking about the ongoing “trade war” between the US and China and the leaders of the two countries have had some very tough words on this issue. Some people focus on the tariffs on steel and aluminium and see this as the start of the trade war; however, I do not think this is the key in the trade relationship between the US and China and I even do not think the fear of trade war would last long.

I think that the key between the US and China focus at the hi-tech sector. The most important and significant advantage of the US, not just in the trade but also in other many sectors (including military), is its hi-tech. Undoubtedly the most advanced and innovative technologies are in the hands of the US. If China has the ambition of catching the US up, China has to catch the US up in the hi-tech field. China has been trying to use acquisitions and merges to get high technologies from foreign companies. The US has been trying hard to avoid such situation from happening (not just from China, but other countries as well), the government shut up the merge between Qualcomm and Broadcomm is one example. The semiconductor industry is the sector where China has a relative disadvantage; and the semiconductor is a very important sector, the technology in this sector is believed to be the driver of the next generation revolution, the AI revolution. All countries, especially China and the US, want to take a lead in this revolution. Therefore, I do not think steel and aluminium, these traditional industries will be the key in the trade relationship between the US and China.

In addition, the US has a democratic political system; therefore, the policies are influenced by the population. If a trade war significantly worsens the population’s life standards on average, the population will turn against the trade war decision, even though it may have a long term positive influence. Moreover, even all politicians may know the positive effects in the long term, their voters may not have the patience to wait that long for the positive effects to come, so if they want to win the election, they have to give up some of these policies. From this point of view, China is more capable to fight a long term trade war.

To conclude, I think the semiconductor industry is the key in the trade relationship between the US and China, and I do not think a wide scale trade war between China and the US has a high probability; and even if it happens, I do not think it can last long.

Financial decisions when the market is "boiling"

I want to use "boiling" to describe what the current financial market looks like. The market is as volatile as boiling water, it could hurt people in the market as well as create "steam" (opportunities) for the market. The function of financial markets is a place for people to borrow or lend their money, investment is a type of lending money. Consumption and investment could be put into separate categories that people do not make decisions correspondingly. This is because once people put some money into investment, they do not use the money generated by investment for consumption in short run. Because people expect their investment will generate positive returns eventually, they will not change consumption levels unless their salaries change significantly.

In such boiling market, people could have two directions that they can think that the trade war is undergoing and destroying the current world trade and business order, or they can think that the market is overreacting to the tariff increases. If you belong to the first group, then you will sell off all your holding risky assets and even short some assets; if you belong to the second group, then you think it is the time to buy assets at cheaper prices. Either side can provide reasonable argument to support their opinions. If you have made the mind, then do what you think is right to do. However, many people may be swinging between the two sides. Under such circumstance, you can either give up the opportunities or impose a hedge strategy.

However, it would be very risky for any investors to invest in the current financial market (of course, it implies there are more profitable opportunities in the market). Stock prices are very sensitive to information, bonds might abe a good alternative to stocks for those who are more risk averse.

The day has come

The trade war has come since 25% tariffs on $60bn Chinese imports were announced. Though China has been trying to influence the White House and political parties via lobbyists, it seems useless or at least insignificant so far. If two countries both make their decisions to enter this disastrous trade war (whose damage has been reflected by today’s stock performance partially), then there are multiple tools that the countries can use to actively improve their goods and services more competitive within and outside their domestic markets.

Firstly, monetary policies can be helpful to depreciating currencies. When a country has a relatively cheap currency, its goods and services are relatively cheap in the global market, so they are competitive in terms of prices. Secondly, monetary policies also need to control the domestic inflation. When the domestic inflation rate is low, the domestic products and services are cheap, especially compared with the goods and services from the countries where have higher inflation rates. This might be contradicted by currency depreciation policies. Thirdly, fiscal policies can provide companies with subsidies to be more competitive. Fourthly, governments can create difficulties for foreign companies to cooperate within their countries. Fifthly, governments can even further create legal barriers to keep foreign companies out of their countries.

To conclude, countries have multiple tools to use in a trade war.

The most deadly threat of extremism

The rise of extremism is socially dangerous that it is not only dangerous in terms of the events that extremist groups could do, but it is also dangerous that it will encourage more people to become extreme. Many people may have a similar experiment to mine, when I get into a verbal fight with someone else, I am very likely to say something that is more and more extreme when the argument continues, the one who I argue with is also doing the same. I am not here to blame anyone for starting it; however, from this example, we can see that when one side is becoming more extreme, the counterpart will also become more extreme. This is understandable and could be explained.

Suppose our society always delivers the result of the mean of the aggregation of the entire population’s preferences; then if one group becomes more extreme, the mean will be shifted in favour of the extreme group. Of course, the counterpart does not want to see that, so in terms of shifting the outcome backwards, they also need to be more extreme. Once both sides become extremely extreme that they cannot be any more extreme, in order to grow in influence, they will try to increase in their sizes, so they try to make the neutral people more extreme towards them. Because they are extreme groups, we assume they do not offer any median options, so the median group can only choose 0 (not cooperate) and 1 (cooperate and become extreme), there is no option between 0 and 1. Under such circumstance, the median group would be divided by the extreme groups. If the people do not want to accept either group, they will shift to a different dimension and become a new extreme group in a different dimension. So eventually everyone in the society becomes extreme. Although a triangle shape is a stable situation, if we assume there are more than just two dimensions, the whole system becomes very instable, this raises the probability of social unrest. There are more than two dimensions of opinions.

To conclude, extremism will drive more people to be extreme; no matter if the new extreme groups fight along the existing extreme group or against them, it is almost definite to increase the probability of social unrest.

Stock market and auction

I am thinking about the similarities between auctions and stock markets. I think stock market is like two auctions happening at the same time that there is one auction for investors to bet for buying stocks and there is another auction for investors to bet for selling stocks. Investors on the sell side want to sell their stocks at as high price as possible and investors on the buy side want to buy their stocks at as low price as possible. Though the stock market can be seen as a simple perfectly competitive market, but if we look into one small time period, we would be able to see a small auction. When one side's willingness dominate the other's, it will lose market power and they will be bidders. However, it is possible to someone else to enter the market and break the dominated side's market power and make the both sides even again. Moreover, they are auctions with common values that investors value their stocks depending on each other's evaluation. For an auction with common values, there does not exist an equilibrium, this could help to explain the volatility in the stock market, since there is no equilibrium strategy in the stock market, given the property of common values.

How can we be manipulated by data companies?

Cambridge Analytica, a data company located in the UK, is claimed to use the leaked information to help the current US president Trump win the election; the data company had a data usage contract with Facebook, the largest social networking company in the world, and now Facebook has banned Cambridge Analytica. Such report about how a data company exploit users is unpleasant; however, it is necessary to question why we are so easy to be exploited.

There are several reasons for this question. Firstly, we have constraints when we are collecting and analysing information that we need. Collecting and analysing information is very costly, it can cost our money as well as our time. When we are making decisions about how we accept the information we find, we are judging the costs and the benefits of further analysing the information and collecting more information; if the cost is significantly greater the benefit, then we may just simply accept the information we already have and not find any more information or do any further research. In an election, this is very the case. An individual's vote is not going to change the result of a presidential election, so the benefit of doing research is not significant, but the cost of finding more about the candidates is very time consuming; therefore, there is no incentive for any individual to voluntarily find more about the candidates and they could just accept any information they are given. Secondly, our human beings have a "weakness" in analysing information, information analysis has a property of "first come, first served" that it costs more for the second to overcome the information first arrives. Therefore, if a piece of specific information is sent faster than all other information, this piece of information could be taken much more seriously and weighted greater when people are using the information to make decisions. Thirdly, we tend to trust information from the senders with particular properties. Let's think about the company mentioned above. If I tell you there is a piece of information provided by Cambridge Analytica without letting you know what they have been doing so far, you may trust the information, because the company has "Cambridge" in its name, makes you think about the famous university Cambridge University. There are other properties that can make you trust the information sources, such as figures, "powerful" or "influential" people. People are influenced by the properties of the information sources may be caused by their constraints of collecting and analysing information, because when people face constraints, they need to use indirect information to judge the information they are given, the properties of the information sources definitely can help them to judge the information to some degree.

To conclude, the main reason for data companies are so easy to exploit people is because of people's constraints of collecting and analysing information, data companies can create certain properties to make information more acceptable for individuals to use.

What if a government taxes a company on its revenue

Many multinational companies create a system for tax efficiency that they almost do not have to pay any tax in most of the countries where they operate. The UK government as well as the British people have been angry about such situation that multinational companies do not pay much tax but earn huge profits every year; therefore, the UK government is thinking about taxing these multinational companies based on their revenues instead of their profits. However, this has one problem that the government has to decide which type of companies the government will tax based on their revenues. It is impossible for the UK government to tax all companies based on their revenues, because this will hurt many British local businesses, especially those small and medium businesses which do not generate high profit returns. Then taxing companies based on their revenues is difficult in practice. Moreover, to compensate the losses in taxes, some multinational companies which have market power will increase their prices, this would create a cost pull inflation in the economy, which is something that the government does not want to see.

Therefore, although the UK government is publicly discussing how to tax these greedy multinational companies based on their revenues instead of their profits, such solution is not practical and even if it is used, it is possible to create a cost pull inflation and prevent foreign direct investment.

Stock market in China

Today I would like to share some of my personal opinions and views about the Chinese stock market. I need to make a disclosure first that I have never invested in any stock in mainland China, so I do not have any experience in the Chinese stock market and my opinions and views purely come from my observations.

I think that Leshi is a quite classic case for the Chinese stock. I am not here to tell you the story about Leshi, since you can easily find the story online. I never think that Leshi's stock price can rise at any point, and I will not be surprised if it files its bankruptcy paper. However, such a stock rose in its stock price because many buyers believed there would be a miracle to bounce back from the bottom. When Leshi's shares were reopened for traders to trade early this month, the number of shareholders increase by over 80%, this shows the number of retailer investors definitely increases. This is one feature of the Chinese market, the retailer investors are an important force in the market. Comparing with institutional investors, retailer investors are poorly informed and could be seen as noise traders. Sometimes they even trade based on techniques, rumors (they call it as "inside information") and other non-fundamental things. Some of them are retired, so they can spend more time on trading, this will increase the irrational activities in the market. This could create abnormal bubbles and volatilities in the Chinese stock price.

In addition, there are many stock market commenters who seem to be able to answer questions for each specific stock. This seems really amazing; however, it is impossible for them to provide credible information about each specific stock. For an experienced asset manager, they often handle assets of around twenty to thirty companies; these commenters generally provide their conclusions without reasons and many of they do not publish their portfolios like many Westerners do, so retailer traders do not know how good they are, but some retailer traders do follow their advice. Furthermore, in China, there is a phenomena that only people themselves can lose their own money in the stock market and when they seek for the help of the financial institutions, they want guaranteed returns rather than risky returns.

Due to regulation, traders cannot short stocks and there are no options either. Under such circumstance, the market is more biased towards the long side rather than the short side, mispricing especially overpricing is more likely to happen in the market.

To conclude, the Chinese stock market gives me an impression of high volatility and too much noise, this impression actually stops me from entering the Chinese stock market.

The downside of globalisation

I would like to continue with the discussion about the damages that globalisation might make on our economy as well as society. Firstly, globalisation encourages migration (movement of people), migration does not only bring human capital, especially human intelligence, but also bring social conflicts as well. Many politicians have blamed the loosened border control for the increasing threat of terrorism; nowadays, many countries will propose more and more restricted border controls for migration. Secondly, globalisation has widened the global wealth gap that the rich has become even richer. Under a globalised system, the rich can seek opportunities across countries, since they are easier to get access to much more resources than the ordinary people, they are easier to earn much more money than the ordinary people. The speed of wealth accumulation has been historically fast. This would increase the conflicts between different social classes. This issue becomes much more serious now than previous, since the transferring across different social classes has become very difficult, especially in Europe and the US, these developed countries. When the ordinary people cannot see any surprise or opportunities in their future, they will like to see their governments to do more about the situation, including closing the border and lowering competitions from foreigners, this is the reason of rising populism in the West.

Trump's free from Tillerson

Trump sacks Secretary of State Rex Tillerson and nominates the director of the CIA, Mike Pompeo, as the new Secretary of State if confirmed. Tillerson was seen by many people to “contain” the inexperienced current president along with Chief of Staff, John Kelly. The fire of Tillerson might have been caused by the long-time disagreement between Tillerson and Trump; once Tillerson left the house, Trump would become freer to follow his own thoughts, such as his trade policies. Previously Trump announced that he wanted increases in tariffs on steel and aluminium for all foreign countries; however, under the pressure within and outside his Party and office, Trump was forced to mitigate his tone and allowed exceptions for friendly countries.  Since Tillerson left the office, in the future, Trump is likely to face less pressure from opposition, especially the pressure coming from his own people. Trump is inexperienced so he does not follow the rules that ordinary politicians follow, he is able to use the presidential power upon the limit, just like the time when he sacked the former FBI director, that a president has the power to sack the FBI director but most presidents do not want to do that since it could raise the concern of obstruction of justice; however, Trump will not care about such concern. When Trump looses one of his chains, he will be easier to promote his deglobalisation plan and pull the US out of many global systems, and he has already successfully pulled the US out of the Paris Agreement. In the future, I think it is almost certain there would be some degree of trade war, the degree will depend on how countries increase tariffs on each other.

What damage has globalization brought to us?

I believe most people understand the benefits that globalization has brought to us; however, currently in the world, there are some people who want to shift back away from globalization, especially in the US, their current president seems to start a deglobalization process and want to pull America out of the existing global body (at least partially).  So I want to discuss some damages that globalization brought to us, at least some of us.

Firstly, globalization reduces many governments' tax incomes, especially corporate taxes. There are multiple reports that claim that in some countries, such as the UK, multinational companies are paying almost nothing to the local governments since they are able to transfer their profits to the countries that have extremely low tax rates. Secondly, globalization increases competitions across countries. Many small producers lose their jobs since the large producers from overseas are much more cost-effective; therefore, they are worse off under globalization. Thirdly, there is a balance between sovereignty and openness. If a country wants more openness, it has to give up some of its sovereignty, as openness includes openness in borders. Fourthly, globalization is a process of resource reallocation. This process is generally believed to improve our efficiency of resource usage; however, since resources are reallocated, those who get fewer resources will be worse off under globalization, they will complain about globalization.

And globalisation has damaged the benefits of some people in other ways and I will continue to discuss it later.

Politics this week

Two things this week have attracted lots of attention so far. The first one is Trumps' "trade war", the second one is Trump-Kim summit. The first thing is that although there have been some arguments like China is taking over the US, the US is unquestionably still the centre of the world. Then we look into these two things. Trump's trade war is definitely a war against China. He initially wanted a tariff increase on all other countries but he has softened his tone and suggested there will be exemptions for "friendly countries"; I do not think that China would be included in the "friendly countries", though Trump definitely had a nice trip when visiting China. In today's world, it is impossible for two major powers to have a hot war directly against each other, especially given the two powers both have control of nuclear power; therefore, trade wars and proxy wars are the alternatives. Under the current circumstance, the US is in a much more advantageous position than China since China has more enemies nearby. The other thing this week is the possible Trump-Kim summit. This is described by the Western media as Trump's Nixon Moment in North Korean. Nixon visited China and formed an alliance with China against the Soviet Union, so many people believe during the Trump's visit to North Korea, the US and North Korean may come to some agreements against China. Therefore, China probably has taken Russia's position as the American biggest enemy or target. 

McKelvey’s Chaos Theorem

I would like to explain what McKelvey’s Chaos theorem is. Yesterday I gave the information about the implication of McKelvey’s Chaos theorem that when there are three or more voters and at least two policy dimensions in a majority voting system, any policy outcome is theoretically possible; today I want to provide a simple explanation about how McKelvey has come to this theorem. Because of the majority voting system, to design a policy that wins the election, politicians do not have to make everyone to be happy, they only need to make the majority like their ideas; therefore, they can put different weights on different groups according to their sizes, they can ignore the interests of the minority groups and focus on the interests of the majority groups and win the election. Under such ideology, the politicians can always make their policies a bit more extreme and a bit more discriminated, through a series of such policy making, policies could be very extreme.

Let’s use some mathematical way to further explain the theorem. Firstly, we can make the question a bit simple that we only have three voters and two dimensions. Then we model the system by a triangle, each of the angles represents a different voter, the distance represents their preferences, the shorter the distance is, more favour the voter has. The ideal policy point is in the middle of the triangle; however, we are able to find another point that is preferred by two of the voters over the middle policy and the point could be outside the triangle. In addition, if we want to get a specific policy on the policy plane, we can choose a different point from the policy point at that moment that is preferred by the majority for each period and eventually we are able to deviate the current policy to the policy we want.

Therefore, McKelvey suggests any policy is possible as long as we have more than two voters and more than one policy dimension.

Some problems in democratic politics

 McKelvey's Chaos theorem suggests that in a situation of majority voting with three or more voters and at least two policy dimensions, nay policy outcome is theoretically possible, regardless of the initial policy status quo. In the real world, voters have multiple dimensions of interests that they do not only concern about their financial gains, but also concern about matters, such as health and environment; therefore, according to the Chaos theorem, any outcome in a democratic system using the majority voting rule is possible.

In addition, when the political parties do not know the median voter's interest for certain, the greater the noise is, the more extreme the political parties become. The noise could be caused by many factors, including social unrest, economic difficulties, and social discrimination.  Furthermore, lobbyists are able to influence politicians' decision making.

The US politics reflects all the theorems mentioned above. The current president was an unexpected outcome, this might be the result of the Chaos theorem; there have been some extreme policies making, and even the president is a lot more extreme the previous ones, this could be caused by the noise in the American society; the gun control in the US is significantly affected by the NRA lobbyists.

The cost for shorting assets

There are several asset ratings: buy, outperform, hold, underperform, sell. Some institutions have even more detailed categories, such as strong buy. Let's focus on the five most common ratings. We can find that there is only one rating that signals a possible choice of shorting the rated asset, this rating is sell. None of other ratings mean that we are profitable from shorting the rated asset. Underperform means the returns are not as good as many of other assets in the market and performing below the market average, it does not mean the rated asset delivers a negative return; therefore, when shorting a underperforming asset, instead of beating the market, you actually further widen the gap between your asset return and the market return. If we think the market has a uniform distribution of these categories of assets, then there is only 20% chance for us to short an asset. Finding a 20% chance is harder and costly than finding a 60% chance (buy, outperform and hold).

Then shorting an asset has a cap on the potential gains that the maximum you can get is the price that you short the asset at. However, longing an asset does not have a cap on the potential gains that there are some assets that deliver over 100% annual returns. Therefore, long strategy seems more attractive than short strategy. In addition, shorting an asset involves use of leverage. Use of leverage reduces investors' ability to bear the market volatility; therefore, it is possible that when investors are waiting for the market to fall, the market volatility forces investors to cut their short positions. Furthermore, the market tends to grow over time, this adds an upward environmental pressure on all assets, this means the shot strategy is against the market performance in long run, so short strategy is never a long term strategy. More importantly, timing is impossible to predict. The biggest challenge for short strategy is timing, short too early and short too late will significantly reduce the returns.

To conclude, since short strategy is always short term strategy and more risky and the opportunities are limited, it is sensible for us to seek for long opportunities that when short opportunities and long opportunities both exist, we should choose long opportunities over short opportunities when the expected returns are not significantly different, even when they are significantly different, we have to weigh the potential risk when making our decisions.

Please help me with my difficulty in macroeconomics

I confess that I am a bad economics student, I am especially bad at macroeconomics. Maybe I do not have talent in macroeconomics, I find myself having troubles to understand and develop macroeconomic models. I like to compare economics with science, and many economists like to do so as well. For me, microeconomics is like learning how a subject is dropping in a room in Physics, this question is simple to solve, and of course, good physicians will study it into more details such as how air particles in the room react to this subject, which is more complicated and seems doable. However, macroeconomics for me is like trying to predict the movement of every single particle in a room with open doors and windows, this is merely impossible that we do not know any information about the wind from outside. Macroeconomic theories with microeconomics foundations are like studying one particle's movement in the room and apply it to all particles. This sounds sensible, but we know that when we put things together, they will act differently from when they act separately and independently. Moreover, when putting some particles together, some chemistry reaction may happen between them and this will make the entire system much more complicated. Macroeconomics is just like this that individuals behave differently when they are grouping together and some of them may have chemistry between them and generate influential impacts on the system though they are the minority in the system.

To conclude, my trouble with macroeconomics is that I find macroeconomics is studying a field that is way too large, complicated and unstable to be modelled. All macroeconomic theories have many assumptions behind them and some of the assumptions really make me question if the theories are practical in the reality.

Are we heading into another "dotcom" bubble shortly?

 The global financial market has been volatile since Trump asked for tariffs on steel and aluminium imports; in addition, when Trump announced the new chairman for the US Fed, there was also volatility in the global financial market. On the other hand, during the past several years, the global stock market was enjoying very strong growth, especially the US market. When there is volatile in the market, many people look back and re-judge their valuations and opinions about the stock market.

Bitcoin is another asset that has attracted lots of heat, its value has increased significantly. Many tech companies, including Google's parent, Alphabet, Amazon, have increased incredibly in terms of their capital values. When we look back, we start to question how sensible these price increases were. In addition, the US Fed and other central banks have publicly spoken about rate hikes in the near future. The 2007-2008 financial crisis was started by the rate hike. So are we heading into another crisis?

There are some hedge funds that short some European firms that make profits largely in the US because they think the possibility of American tariff increase, which is happening, will weaken these companies' profitability. However, that does not necessarily mean most of the institutions believe there is a crisis ahead. During the dotcom bubble, the average of P/E ratios was 90, which was a lot higher than the current average ratio (although the P/E ratio for Amazon is over 200). Moreover, although the prices in general increased significantly over the last year, the price change was much more moderate than the period just before the dotcom bubble bursts that a company stock price generally increased based on fundamental positive information (news).

Although there definitely is some degree of overreaction and over-optimism in the market, even if the bubble bursts right now, it cannot be as bad as the dotcom bubble as the bubble is highly likely to be much smaller than the dotcom bubble.

The Median Voter Theory

When there are only two political parties and both parties only aim to maximize their winning probabilities, their best strategies to perfectly match the medium voter's interest. In reality, the situation is definitely much more complicated than the theoretical model; however, winning an election is definitely a priority for almost all political parties. In the US, it might be easy to test how different a political party's policy is from the medium voter's interest, since there are only two major political parties.

If two political parties design their policies based on their expected medium voters' interests (their expected medium voters are not the same), their policies are very close to the true medium voter, the votes they will get will be very close. This comes to my first point. When the votes two parties get are very close, the parties are likely to design their strategies to match the medium voter. Secondly, the two parties may not get their expectations right at first place, so they will correct themselves and get closer and closer to the medium voter. This comes to my second point that when an election is process, if parties are trying to match the medium voter's interests, fewer and fewer voters will be shifting from one party to the other.