A brief review the Week

Lots of things happened this week. German football team left the World Cup, the Chinese stock market has fallen to a bear market territory, Foxconn opened its factory in Wisconsin in the US, Japan reported a historically low unemployment, the world stock market stabilised by the end of the week. These are the highlights of the week; and of course, many other things also happened during this week.

This week is a week that people see increasing uncertainties caused by the international trading environment shift. The US president is continuing his previous threats of imposing high tariffs on imports from its allies and China. In addition, within the EU, Brexit is keeping the European economy as well as the politics facing increasing uncertainties that even within the UK conservative party there is no agreement on what Brexit should look like. Th current UK Prime Minister, May, is in danger of being overthrown by her own party due to the disagreement on the issue of Brexit negotiation. Meanwhile, China is trying to be the new world leader and expand its influence and show its openness to the rest of the world while the US seems to withdraw itself from the global matters. China has reduced the number of industrial sectors closed to foreign investment and been trying to build good relationship, especially trade relationship, with the European countries. In addition, China continues to build its long term project, 'One Belt One Road' and helps many developing countries in Asia as well as Africa to build their infrastructure , such as railways, harbours and roads in order to build up a new world trade network with China as the centre.

Although the uncertainty seems increasing, the market seems to stabilize towards the end of the week. This could be caused by the Friday effect, as people are going to have their weekend and feel happy, so they act much less negatively in the market, the sell-offs happen less frequently and investors may feel more optimistic due to their weekend mood. In addition, nothing surprising has happened on Friday yet, this certainly has helped the market stabilize.

The Chinese stock market

The Chinese stock market is relatively unmatured comparing with the stock markets in those developed economies, such as the American stock markets and the UK stock markets. As I discussed yesterday, the Chinese industries are actually performing well with high profit growth rates. In general, the stock market co-moves with the economy that when the economy is performing well, the stock market will also perform well. However, in China, it seems there is a contradiction.

Such phenomena could happen in the reality with sensible reasons. Firstly, when the listed companies are already overvalued in general, it is possible to see that the market correction pulls down the values of these companies even if they are making good profits. Secondly, it is possible to see a company is performing well but does not pay good contributions to its investors, then investors may decide not to hold this company's assets any more, then sell-off will drag the price down. Thirdly, when the economy is performing well but facing increasing uncertainties in the near future, then investors could become panic and rush to sell their assets during the good period which they fear will end soon. Such panic will result in a steep market fall. This is the most that is happening to the Chinese stock market right now. Investors are fearing that the ongoing trade war between the US and China will deeply damage the two economies and result countless firms in the situation of bankruptcy. However, the other player in this trade war, the US, did not experience such market fall, of course, it did experience some sharp market fall over the past few days, but such market fall has not lasted as long as the Chinese market fall has. It could imply that investors have more confidence in the US economy than they have in the Chinese economy and more investors believe that the US will eventually win the trade war.

Of course, other factors also contribute to the contradiction between the economic performance and the market performance in China. Because the market fall is mainly contributed by the increasing uncertainties caused by the ongoing trade war, the market fall seems to continue for more time until investors can have a much clearer picture about the future of the Chinese economic performance during the trade war.

Chinese stock market and Chinese currency

The Chinese stock market seems to enter bear market territory as the benchmark Shanghai Composite index was 20% lower than its peak in January after Tuesday's market close. Meanwhile, the Chinese currency, Renminbi, depreciates beyond the lowest level against dollar since last December. However, although the market seems against the Chinese economy, the Chinese economy is actually performing well that profits at China's large industrial companies jumped over 20%. According to the National Bureau of Statistics, Chinese industrial profits rose 21.1% year on year in May. Profits of ferrous metals producers rose 44.6%. The performances of the Chinese stock market and the Chinese economy are contradicting against each other. It shows the sign of lack of the global financial market's confidence in the Chinese economy, which is also implied by the weakening Chinese currency.

The problem here is that the global financial market has some different views on the Chinese economy and such disagreement becomes even stronger since the US president Trump declared a trade war on China. Then there is a possibility of existing overreaction or mis-estimation (mis-calculation) over here, providing a good opportunity for speculators.

Should Uber operate at London?

Uber today won a big victory in court fight that Uber will be able to continue operating for 15 more months. London is Uber's biggest European market and Uber definitely does not want to lose this market.

Transport for London did not renew Uber's license of its operation in London. The judge ruled that the decision had been made correctly but as Uber has changed its ways, now Uber's license should be renewed.

Uber has started the proactive reporting of violent incidents to the police. Violent incidents are happening in many Uber-like car hiring companies' cases, including some cases in China as well. Many people argue such companies should not be allowed to operate. However, making such judgment needs careful evaluations.

Some parties which are against Uber-like car hiring companies are those traditional car hiring companies, such as traditional Taxi companies. Their objections are understandable but does not contribute to the judgment. The costs and benefits of such car hiring companies should be done based on the benefits they bring to cities and the increased risk of their clients being attacked. In general, once a client is willing to use such a car hiring company, he or she should finish a costs and benefits evaluation and sees benefits are greater than costs before he or she makes the decision. Therefore, such car hiring companies should be allowed as their clients believe benefits are greater than costs. However, the problem is whether their clients have complete knowledge about their costs and benefits.

I think that once clients have full information the potential risk (cost) and the benefits about Uber-like car hiring companies, including Uber, these companies should be allowed to be run on their own.

The stock market and the US-China tension

The stock market falls today due to the increasing tension between the US and China, the Nasdaq fell by over 2% as the Wall Street feared the restriction on Chinese investment in US companies would reduce the investment in the US stock market and the demand for the US shares. Many US companies, including many tech companies, have earned billions of dollars in the Chinese market. Once the US has put a restriction on the Chinese investment, it is very likely for China to fight back and make American companies' businesses more difficult, then these US companies which are making billions of dollars in China will suffer significant losses. 

It is obvious that when the US and China continue this trade war, the stock market is highly likely to keep falling. Moreover, the US is only fighting with China. The US Treasury secretary, Steven Mnuchin, states that the US not only targets China but also targets other countries which try to steal US technology. And the ongoing trade tension between the US and its allies, the EU, Canada and Mexico. This is definitely bad news for the world stock market, because the world stock market is influenced by the global economy and trade wars between the US, the biggest economy and most powerful country, and other countries will definitely do a huge damage. 

Overall, unnecessarily all companies will suffer. Some companies provide domestic goods and services with inelastic demands, their businesses are less likely to be affected international trade tension and bad economic status. 

Heathrow airport’s third runway

The expansion of London’s biggest airport, Healthrow airport, has been widely discussed for years. London is one of the largest cities in the world and the bridge between Europe and the US and has been the financial centre in Europe; it is almost surprising to see that London has been struggling to expand its biggest airport.

Healthrow airport is a company which does not have sufficient funding to build its third runway; therefore, if the third runway is going to be built, Healthrow airport has to seek substitutes from the government. The vote for whether a third runway is going to be built or not is held next Monday and the London Major has outspoken that if the parliament passes the plan to build a third runway, he will join the rally against the government decision. The people who are against the project believe that their tax money is unfairly paid to a company to build a third runway which do not benefit them significantly, especially many Londoners.

However, some of these people certainly ignore the externalities of expanding Healthrow airport. Yes, there are several airports in London, Healthrow is not the only one; however, Healthrow airport is probabily the most well-known airport. Expanding any other airport in London might not have as many positive externalities as expanding Healthrow airport. Of course, it is an option to build another new airport; however, expanding Healthrow airport could give a greater upgrade of its economies of scale, and building a new airport may not have a similar marginal benefit.

In general, I think that expanding Healthrow airport is a good thing for London as well as the UK; yes, it is expensive but worth it.

Probability in Football

The World Cup is undergoing and many football fans like guessing the results of the games. Before a game finishes, no one can be certain about the result of the game unless if there is a fraud. Then guessing game results is a game of probability.

If a strong team is defeated by a relatively weak team, some fans may think that other strong teams could also be defeated by relatively weak teams. If a positive correlation between these strong teams can be found, then this conclusion is reasonable; however, I do not see any existence of such correlation, then such conclusion might not be reliable.

Of course, football fans tend to exam teams’ future performances based on their history. This could be reasonable. As we can see this from a time series model, a team’s performance could be a model consisting a variable containing its previous period’s performance and a time factor. If the team is improving over time, then this time series model has a fixed effect (at least an always positive effect) from the time; if the team is worsening over time, then the time effect is opposite. Some teams’ performances volatile a lot, this might signal these teams’ performance models follow random walk.

If we can actually create such models, it might help to improve our predictions about football games; however, because there are too many factors and relatively very small samples, it is hardly for ordinary people to create models to make predictions; of course, it would very time consuming to build such models even if people could have sufficient information.

Supply and demand of migration

The US President promised a tougher border controls during his election campaign while the UK is restricting its number of migrants and it is more difficult to get a Tier 2 working visa or a Tier 1 investor visa (even the owner of Chelsea FC, Roman Abramovich‘a visa is still in process).

There are so many reasons for the domestic population to dislike migrants. They could believe migrants take their jobs or “steal” their social resources. Furthermore, some politicians believe more migrants could potentially create more hostile within the society between different racial groups, leading to possible social chaos. This is why countries tend to control the quantity and quality of migrants into their countries.

There are pros of encouraging migrants into countries as well. Migrants could be highly intelligent and bring the countries with better quality labour force and increase the countries’ innovation and invention rates. Furthermore, it could increase the supply of labour in general and solve the issue of labour shortage which some countries have the problem of.

Some countries supply migrants, and these countries are normally developing countries. Losing manpower seems bad for countries; however, it does have many benefits. It can increase the supply of social resources as migrants can bring overseas resources back home and feed the locals, and reduce the demand for domestic resources as migrants seek resources from other countries. In addition, some migrants can bring back intelligence that they gain from their overseas experience and accelerate their home countries’ development. However, some intelligent people may leave their home countries and never come back and this is a negative effect of supplying migrants.

Overall, if we see the global as a whole, allowing completely free border may be seen as a complete free market and people find the best positions (prices) to fit themselves.

The increasing tension between the US and other countries

The US president Trump has asked his administration to draft plans of another $200bn tariffs on Chinese imports, this is definitely a sign of increasing tension between China and the US; and we can now say that the trade war between China and the US is undergoing. China and the US are the world largest economies and an all-out trade war is very likely not only to destabilised these two countries’ economies, but the entire world economy as well.

In addition, not only the tension between the US and China is increasing, the tension between the US and other countries is also increasing. Not mentioning about the disagreement during the G7 meeting, Turkey is criticising one US Senate vote that could block transfers of the F-35 fighter jet to Ankara. Turkey said this vote was against the spirit of the NATO and Ankara could seek for alternatives; this would make the US lose its long term customers (most are its NATO allies) of its military industry, and could cause potentially billions of dollars.

To conclude, the US is not only starting a trade war with China, but also fighting with other countries regarding not only trade but also other matters as well.

How to make health care correct?

The UK has spent billions of pounds on its national health care programme, NHS, every year. The British people love the NHS, the Brexit campaign promised that the UK would use the money saved from joining the EU to fund the NHS and gained so much support and won the referendum eventually. However the government expenditure on the NHS is increasing over time and the issue of aging population will make the government even harder to afford the NHS.

It is really a difficult question to make the public health care right for the entire population. Firstly, it has a hard moral issue. It is the most difficult situation for anyone to make a decision about other people's fate and health issue matters people's fate. Secondly, to what extent should the government support individuals' health issue is another question. Governments should of course help the disadvantaged group; however, it does not mean governments should take care everything about the disadvantaged group, as this could make the disadvantaged group lose their ambitions and incentives to improve their own skills and social status. Thirdly, governments have constraints to provide a health care scheme covering everything. Governments may not have sufficient numbers of doctors, and/or money, and/or many other factors. Fourthly, how can we tell whether a health care scheme is efficient or not. Efficiency is a measure of inputs and outputs; however, in the matter of health, it is really difficult to measure the outputs, especially the value of outputs.

Overall, a public health care scheme is something that governments have to spend lots of money but find it difficult to measure the efficiency of the scheme.

The US $50bn tariffs

The $50bn tariffs announced last Friday is about to be exercised within days, it will mean that the earlier previous efforts made by China will become completely useless; of course, the benefits planned to give to the US will be abandoned, such as the duty cut for autos imported from the US.

The US stock market volatilely responds to this tariff action. The companies, such as Boeing, which are more likely to be suffered from the trade war between the US and China, suffer significant drops in their market values. China has been trying to be more and more self-sufficient, and more and more independent. China has developed its own planes and now moved onto the semi conduct industry. Once China becomes more and more self-sufficient, it is harder and harder for the US to use blocking technology and intellectual property from China as a threat (or bargaining). For China to fight back on the US tariffs, it is easy to fight back in the sectors where China has already been self-sufficient, and cars and planes are highly profitable and can be made by Chinese companies as well, so the US auto industry and plane industry could be potentially hit hardest.

The US is also trying similar tactics on other countries including its allies, such as Canada and the EU. It seems that the US wants these countries can be like China to negotiate with the US in order to make the US be able to gain more; however, these countries have been tough and foot rooted on not negotiating with the US under threats, since Trump is a thin skinned person, it is hard for him to withdraw his previous proposal without any achievement.

To conclude, the US has put itself in a very difficult position and the trade war between the US and China is about to start and it might be the time when the US is launching a total trade war with the rest of the world.

Waste export

The UK exports plastic waste to other countries, and the Malaysia is currently the importer of British plastic waste. China used to be the world’s biggest importer of plastic waste; however, following Beijing’s decision to close its borders last year, the amount of UK plastic waste imported into China fell 97 per cent. The major reason that why the UK exports so much plastic waste to other countries is the UK does not have sufficient recycling infrastructure to process it domestically, though the UK government is keeping encouraging people to put their plastic waste into recycle bins.

It might be more and more common to see countries are trading their waste. Some countries in the future might be even specialised at processing recyclable waste. This is related to the issue of efficiency. Processing recyclable waste requires certain technology, investment and infrastructure building. It is impossible to deny the importance of processing recyclable waste, given it has been more and more urgent to improve the global environment. However, not every country is possible to cut their waste and emission, because countries need some early stage industries which usually produce high levels of pollutions to generate some initial incomes to generate future growth of their economies as well as societies. This comes to a problem if these countries which produce high levels of pollution can afford exporting their waste and pollution to the countries which are specialised at processing waste. This means the countries which choose to be specialised at processing waste should be the developing countries in order to make recycling waste process more affordable, and this does have positive externalities and should be encouraged.

To conclude, it might be a good path for some developing countries to be specialised at processing recycling waste and pollution, as this certainly has a large market, especially when people are paying more and more attention to the environment.

The US Fed is raising its rates

The Federal Open Market Committee raised the target range for the federal funds rate to 1.7 to 2 per cent. Furthermore, the Fed also suggested that there would be another three rises this year, followed by another three next year. It seems that the US Fed is accelerating its pace to raise its rates.

The US Federal Reserve believes that the US economic growth will continue to last for another several years. Such belief is understandable, because of the current low unemployment rate and the steady economic growth happening in the US economy. However, how likely is such economic growth to last for long?

Firstly, once the US Fed decides to raise rates, it could potentially slow down the economic growth, as it will increase the transaction cost and make investment and borrowing less attractive. Secondly, the current US unemployment is already very low, it means there is very little room to further reduction of unemployment left. Of course, when the unemployment rate is really low, the wage level is likely to increase faster, as there could be an excess of demand for labours. Thirdly, the US economic future might not be so assuring, given the trade war that the US president Trump has brought the US into.

To conclude, I do not think that the US Fed will increase its rates as many as another six times by the end of next year, since I do not have complete confidence about the future of the US economy.

What can a large sports event bring to the society?

The World Cup is only two days away and this year’s World Cup is held in Russia. Recent years, it seems that many developed countries are losing their interests of holding such large sports event and many developing countries are competing for this kind of opportunities. However, in the past, developed countries held the majority of these events. Such behaviour change is understandable.

In the past, especially during the Cold War period, sports events were very important opportunities to show the countries’ strengths. However, after the Cold War, such motivation disappears and developed countries no longer need such opportunity to show their muscle. Meanwhile, some developing countries become richer, so they need to show others and their own people that their countries are growing stronger to bring in more opportunities, including investment opportunities and trade opportunities. In addition, cities in developing countries may not have sufficient funding to build so many sports centres and infrastructure at the same time; however, if they can hold such major events, they are able to be sponsored by their centre governments and have a boost of their urban development.

In the future, there are highly likely to be more and more cities from developing countries to host many of these world sports events.

Which team is going to win the World Cup?

The first match of this year’s World Cup is taking place this Thursday between Russia and Saudi Arabia. The World Cup probably is the most important event in the gambling industry and thousands of gamblers put their money into betting the World Cup. Not only the gamblers may be interested in the results of the World Cup games, other football fans would also be interested in the results of the games. Therefore, which team is going to win the World Cup is the hottest topic at the moment.

The most straightforward way to predict the result of one game is to see which team’s squad has a higher value. No prediction can guarantee an absolutely correct result, this one is no exception; however, it is certainly a way to help to make predictions. However, the ability of one player and his value are not necessarily to be linearly correlated, if the ability has a accelerating effect on the player’s value, then the team with a higher total value may not have a higher sum of abilities than a team with a relatively lower total value.

Ability of a single player is not the only determinant of one match’s result, there are many other determinants, such as the chemical reaction between players. Some of these determinants could be quantified or easy to be actualised; however, some can be really difficult for being used for applying econometric methods to predict games’ results.

For most of people, relying on squad value is probably the most reliable way to make good predictions about the games’ results.

What would the world be like without the US?

The US has the largest economy and is the centre of international trading, though the current US president does not seem to like the idea of globalisation. The international trading depends on technology, globalisation, multinational companies, outsourcing.

Technology is one of the drives in international trading, particularly transportation related technology is the most crucial technology. The current cheapest transport way is by ships. The largest ship builders are currently located in Asia. The international trading would not be affected via the technology channel, especially the shipping transportation channel, if the US disappeared.

There are many US multinational companies, which are running multi billion businesses all over the world. If the US disappeared, there would be many people around the world out of jobs; however, this would bring more opportunities for other countries’ companies, especially European companies, since China and Russia have already had their versions of Google, Facebook and other American companies.

Outsourcing would definitely be scaled down if the US disappeared, this would make many businesses close down since they would lose their major business clients. This issue would not be erased because the US is such a large economy.

To conclude, if the US disappeared, the international trading would suffer from the scale-down of outsourcing, but create more opportunities for many European companies.

What would the world be like without the US? (2)

I will discuss what the world financial market would be like without the US. The US is the largest financial market in the world, it attracts the most investment all over the world while it exports investment as well. The world financial market might become incomplete without the US financial market, as the US banks and other financial institutions are providing much more opportunities and financial instruments for investors. Although more complex financial instruments can increase the systematic risk as investors may find it difficult to completely understand these instruments, which leads to the world financial market might have lower systematic risk without the US financial market. Furthermore, the British gilt, the German government bonds and even the Chinese government bonds would become more expensive (their yields would decrease) without the US financial market, since they are the best alternatives to the US Treasury bills.

As I said previously the US is the world centre of investment and other financial activities, the global financial market would require new orders and rules without the US. London is currently the financial market centre in Europe, but its position could change after Brexit. Shanghai, Hong Kong and Tokyo are battling for the financial centre in Asia. The global financial market would have several years without a centre if the US disappeared, this could worsen the efficiency and productivity of the world financial activities and increase the transaction costs.

The world financial market would be worsened as losing efficiency, productivity and even completeness, but the decentralized and simple system might have lower systematic risk, if the US disappeared.

What would the world be like without the US?

America, especially the current president, seems to dislike the idea of globalization and free trade; so let's imagine what the world would be like without America.

America has been acting as the world police since the Second World War. If America no longer intervened in the global issue or regional conflicts, it could have two different results. America has the world's most scaring army, when America does not show its interest in intervention, the conflict could become more chaotic as there is no power to stop it. Or because America does not have any interest in intervention, the two sides may not have enough resources to continue the conflict because America could potentially be interested in keeping some regions chaotic. As we can see right now, it is not the case that there is absolute no country standing up against the US; therefore, without the US, the world order might not be worse than the current situation or even could be potentially improved.

The US is in control of many of the world's most advanced technologies. Without the US, the world might not be able to have access to so many advanced technologies; but if we had enough time, it would not be a problem for the rest of the world to invent the technologies which are only held by the US.

Of course, there would be a significant change to the world finance and economy order when there was no America in the global society. I will continue to discuss this topic tomorrow.

Should investors calm on the trade war?

The stock market seems to calm down on the issue of the ongoing (coming) trade war, the Nasdaq index and the S&P500 index have been rising these days and investors seem to ease on the issue of the trade war between the US and other countries. However, here comes a question that whether the investors should worry about the trade war or not.

Investors want to maximise their investment returns while minimising their investment risk. Trade war definitely increases their investment risk since the future global economy becomes much more uncertain and unpredictable. While their risk increases, they tend to seek higher investment returns to compensate their risk. When all investors tend to seek higher investment returns, this could potentially increase the stock return. 

This may imply when the stock market rises in a short period, it does not necessarily mean the stock market is in "a good mood", it might be caused by investors seeking higher returns to compensate suddenly increased risk in the market. Of course, we do not see the entire market increase in the entire market, but there are some sharp increases in certain areas, which imply investors switch to sectors where they expect there are greater profitable opportunities. For example, when the US president announced the US would break the Iran Deal, the oil company stock prices increased sharply while the entire market fell, this was definitely a sign of increase in risk in the market.

To conclude, when we see certain areas have significant increases while the market is falling, it indicates that investors are facing sudden risk increase.

Government and company

The UK government is reducing its stake in the bank, RBS. By the market close on Monday, the government sold approximately 925 million shares, 7.7% of the bank. After today’s  trade, the UK government should still hold around 63 per cent of the bank, and the government plans to reduce its holding to zero over the next five years. The shares were bought by the UK government during the financial crisis. The UK did not pay much for the bank at that time since the bank was at the edge of bankruptcy. Despite the money put into saving the bank during the crisis period, the trade should still give some profits to the UK government due to the share price difference. Such investment does not only happen to the government, many private equity firms are using similar investment strategies. However, firms and governments have different goals. Governments buy firms, especially banks, to stabilise economies, as the firms they buy are usually large corporation and can have systematic influence on their economies. The firms bought by private equity firms are those which are potentially more profitable and not being managed well, so the private equity firms buy these companies merely for profit reasons, and this is understandable.

However, although governments do have different goals, they can make profits as well. The firms they buy are large companies and have systematic influence on the economies. The characteristics of these companies should be attractive to investors, especially they are more secure as they are highly likely to be rescued by their governments; therefore, the shares of these companies should have good prices. Once the governments can manage these companies well and rescue them from crisis periods, basically they are doing nothing much different from private equity firms and can potentially make profits out of it.

To conclude, the rescue programmes during crisis periods could potentially be a profitable opportunity for governments, and should not be seen as a waste of taxpayers’ money, even if we do not consider the externalities of such programmes on our economies.

A trade war between the US and the rest of world

The US is imposing tariffs on aluminium and steel from the EU, Canada as well as Mexico. The EU, Canada and Mexico are unlike China, they are longstanding traditional American allies, so they are more likely to be angrier than China in terms of their respond to the US tariffs and they are.

Cecilia Malmstrom, European trade commissioner, said the EU “had closed the door on talks to partially liberalise parts of EU-US trade after the tariff exemption ran out” and further pointed out there would not be any negotiation when such threat is not removed from the table. The prime minister of Canada also has made a public speech to express his disappointment and anger. Mexico has been attacked by the US multiple times since Trump became the US president. China and Russia are the two powerful countries that have been seen as threats by the US for some years. They are treated unfairly or hostily by the US is not something surprising. However, it is surprising to see the US president has complimented the two countries’ leaders multiple times.

The US is changing its foreign policy. The currnet US president is turning against the rest of world, even some parties in his own country (such as Democratic Party). When the US is only fighting with one country, it is undefeatable, since it is powerful enough. Its GDP is more than twice as much as the Chinese GDP, its army is undoubtedly the world’s most powerful one. There is no single country that is capable of making the US suffer significant pain. Though the US has not been so successful at the Middle East issue as well as the North Korean nuclear issue, its position of the world’s most powerful country is unchangllened. However, when the US is fighting with so many countries at the same time, its undefeable position may be changed. One country cannot have such power to shake the US, but when there are so many, the situation can change.

To conclude, when the US believe that the world is owing it, it is going to fight with more countries and its undefeatable position will be turned and its global leadership will become weakened and actually is weakened already.