Concentration or Diversion

General Electric announced a disappointing financial report and the company's performance has been dragged by its financial services division. Unlike other industrial companies which use their financial services to support sales, the financial services division which also provides consumer credit and mortgage lending services historically generated more than half the company's profits. Based on the historical record, this division was very successful; however, when the division does not generate as many profits as previous, people would ask whether a company should have very diverse operation or not.

Diverse portfolio is help to reduce the risk, this is the same for companies. When a company is running very diverse operation, it can help the company to reduce the risk it faces. However, running diverse operation has higher costs. Starting operation in a new field involves a fixed cost of starting the business; therefore, a company running operation in many fields requires very high costs. Then a company has to ask itself whether it is cost efficient to run very diverse operation or not. Running a concentrated operation is not a bad thing. Though the risk is higher, as the companies are heavily dependent of their businesses in single fields, they are much more likely to be better at what they are doing. Moreover, sometimes diverse operation is started from companies' original businesses. For examples, Rolls-Royce is a very famous car brand; meanwhile, a jet engine maker is also called Rolls-Royce, which used to be a division of the car maker. In the past, because car makers also made engines, some car makers tried to make jet engines as well, including BMW and other famous car makers. Therefore, diversifying operation is not necessary for pooling a company's risk, but also targets advancing its strength further.

Overall, there is not a clear line to separate the two types of business operating. Both styles of operation can be profitable and do not contradict with each other.

Tax Revenues

The UK announces 2\% levy on revenues and US lawmakers and officials have expressed concern about the tax. The president of the US Chamber of Commerce, Tom Donohue, said that the tax would "improperly target large American technology companies" and "set a dangerous precedent". Taxing revenues is not new, has been discussed widely in Europe. The European countries generally have good welfare systems, which require significant government expenditures. However, those profitable multinational companies hardly pay taxes, because of their tax efficiency schemes. There were several hearings in the UK asking those technology giants about their tax payments. During one of the hearings, I remember one MP said it was a moral issue rather than a legal issue. Therefore, taxing revenues becomes one of the potential solutions.

Taxing revenues is a profitable strategy for governments, especially when it comes to taxing the multinational companies. The multinational companies are operating all around the world, so they can transfer their profits from countries which have high tax rates to countries which have low tax rates. However, countries cannot tax all companies based on their revenues. Because for some medium and small businesses, they do not generate enough profits after paying their revenue-based taxes, it is not good for these companies to generate sustainable growth. Therefore, the revenue-based tax system only targets large multinational companies, Donohue was right about the tax would "target large American technology companies", whether the tax is improper or not is still an arguable question.

Of course, the US government does not see such tax. The US government wants these large American companies to pay taxes at home, that is why they cut taxes for the companies. Once many European countries start to tax companies based on their revenues, the US would lose significant amounts of tax incomes from its large companies. Also, other "tax heaven" countries are not happy to see such tax system either.

Can stock market be saved?

The Sorth Korean stock market is sliding in October, the benchmark index has fallen 14% . The government has set up a multimillion dollar (approximately $400m) fund to prop up local stocks. The recent sell-off in the Sorth Korean stock market is fuelled by the concerns about regional geopolitical tensions and the negative expectation of the global economy. The Sorth Korean government wants to stabilise the stock market, since the volatility in the stock market can affect firms' operation, leading to the entire economy's performance. Not only the Sorth Korean government does this sort of thing, but other governments also have done similar things.  However, how effectively can a fund save the stock market?

The stock market performance is dependent of people's expectation about the future. A government intervention cannot restore investors' confidence fully, because buying stocks does not mean the exogenous factors will improve and make firms easier succeed. In addition, some people find that it is a good time for them to escape from the endlessly sliding financial market when the government steps in. Under such circumstance, when the government steps in, it can trigger a greater sell-off, so the market performance would be worsened by the government intervention. Moreover, the government intervention can increase the demand for stocks in a relatively short amount of time, but it cannot change the fundamental of the market.

Overall, the government intervention hardly changes the market fundamental, so it is very unlikely to change the market performance either.

How does fraud work?

Some people fall into fraud traps, even some of these are highly educated and very
intelligent. Why do people fall into fraud traps? It is caused by information
asymmetry that if there is perfect information, fraud is impossible to exist. I
always believe that people always make their rationally best decisions while
constrained to their limited resources including time; therefore, people fall
into fraud traps because they are misled by the informationally asymmetric
set-up and misestimate the payoffs from entering the trap.

There are several ways to create such informationally asymmetric set-up. The first way is
to trick inexperienced or less educated people, as these people are very
unlikely to create good estimations about their payoffs. The second way is to
overstate the positive payoffs and the probability of succeeding. Such method
aims to misguide people's expectations; moreover, people tend to overestimate
the probability of having positive returns. Therefore, when the possible
positive return is overstated, it can lead to further overestimation of the
success probability. The third way is to overestimate the negative outcomes of
not entering the trap. People are loss aversion, so they are afraid of
suffering the losses they are told from not entering the trap.



Of course, there are other ways to make people easier to fall into fraud traps. However,
other ways are there merely for supporting the main three ways mentioned above.

What's next, Fed?

The US stock market rebounded on Thursday after the awful Wednesday. On Wednesday, the Dow industries tumbled more than 600 points, and the fall wiped out the gain of the US stock market in 2018. Today's US stock market surged for the most of the day.

If the Fed decides to stick to its rate hike, it can affect the US stock market significantly negatively. First, the 2007 Subprime Crisis could be thought to be started by the Fed's decision of rate hike, which made many debtors less capable of paying back their loans. At the moment, there are many companies which took the advantage of cheap interest rates and have very high leverage ratios, causing a worrying systematic risk. Secondly, the Federal Reserve has influence over the world financial market, since the US economy is the dominating economy in the world. When the Fed sends a signal of calming down the US stock market, it can cause a spillover effect that brings down the world financial market. Thirdly, the Fed has a conflicted with the US government. The US president, Donald Trump, always want to have more stimulating policies. He has cut taxes and provided subsidies to stimulate the US economy, which cause a historically high budget deficit. While the US Fed wants to raise rates and calm down the economy, this would erase the positive effect of the stimulus policies made by Trump. Therefore, the Fed will not achieve what it wants and the US government will not get the full effect of its expansionary fiscal policies, this is a loss-loss situation.

Overall, the US Fed has to re-consider its plan of rate hikes, especially given the increasing worry among the US financial market.

Why Apple loves a tougher privacy regulation

On Wednesday, Apple's CEO, Tim Cook and Erin Egan, Facebook's privacy chief addressed separately about their desire of a tougher privacy regulation in the US, like what it is in Europe. Europe has the toughest privacy regulation at the moment; the EU's General Data Protection Regulation (GDPR) came into force in May and gives EU citizens the right to demand companies disclose and delete information held about them. Companies can be fined as much as 20 million euros, or 4 percent of annual revenues for breaking the law. Why does Apple want a similar privacy regulation in the US, given more regulations often mean higher costs for firms?

First, Apple wants a good image of itself. Privacy has become primary concern of many people, especially after the 2016 US presidential campaign. During the 2016 US presidential campaign, Cambridge Analytica collected approximately 87 million Facebook users without their consent and used it for political purposes. When people are so concerned about their privacy, Apple can certainly improve its company image by acting like a fighter. Secondly, Apple is not a company built based on its users' private data. Apple is selling services, such as Apple Music; but its major income source is its hardware. Therefore, complying with a tougher privacy regulation is not going to increase Apple's costs significantly, comparing with companies built on intensive data, for example, Google. Thirdly, Apple can use a tougher privacy regulation to reduce the likely competition facing it. It will work actually. GDPR adds more complexity to data asset management, which will increase the costs of managing data assets, especially when the companies have very intensive data. However, the costs for the companies which are less dependent of data will rise much more moderately.

Overall, a tougher privacy regulation in the US can actually benefit Apple.

Austerity or Stimulus

Since the European Debt Crisis, some countries have not recovered from the Crisis, such as Italy and Greece. The European Union is pushing these countries to achieve the budget deficit targets; to achieve the goals, many of these governments which are stuck in theirs are forced to apply austerity policies for cutting their government expenditures in order to reduce their government deficits. However, such policy  often faces enormous unpopularity among these countries' populations.

Population does not like any kind of austerity policy, though sometimes they may understand it is necessary at some point. Austerity policy involves tax increases and/or expenditure cuts. Tax increases mean people receive lower disposable incomes; in addition, expenditure cuts are likely to lead to cuts in benefits and subsidies which are bad for individuals as well as businesses. In addition, austerity policy is not helpful of stimulating economic growth, so governments do not like it either. For the governments like Italy and Greece, they are forced to adapt to austerity policies due to the pressure from the European Union and their creditors; however, their governments are trying to apply more moderate austerity policies. Their concerns are reasonable that with more generous budget policies, it is helpful for generating better economic performances, which can help them to be capable of paying back their loans in the long term. However, their creditors do not trust them, they believe that the governments would just give away more benefits which merely makes people lazy and does not help to generate better economies. Moreover,  these creditors are also evaluated by others, their creditors as well as their owners, so due to the evaluation pressure, the creditors are also forced to be short-sighted and push these governments to adapt to austerity policies.

Overall, austerity policy is not going to help these countries in the long term,and likely to create opposition from these countries' populations, which could lead to political conflicts and chaos within these countries as well as Europe (and even the world).

Join or Stay aside

It is the era of the fight between globalisation and separatism (or populism, or nationalism). People who believe in globalisation think that countries should join the global community in the spirit of working for the mutual benefit of the entire world, and those who believe in nationalism or populism think it is bad to stay away from other countries’ matters and only focus on what is beneficial for themselves. If we assume that all countries are working for the best interests of their own people, then it is not a matter which ideology is better, whether it is globalisation or nationalism; the only question is under which system it is good for their countries.

Joining the global system is like diversifying oneself across the world, as once a country joins the global community, its economy is linked with other economies that if one country is doing well, other countries will be also benefited. The same situation will occur when bad things happen that

bad influence will also pass on. If one country believes that it will receive greater negative spillover effects coming from all countries’ bad performances (including the multiply effect generated by its own performance) than the positive spillover effects coming from all countries’ good performances, then it is sensible for it to make itself isolated from the outside world. For example, many Americans become nationalists because they think that the US can do well by itself and the world economy is dragging the US economy down in terms of its employment rate, economic growth rate and the stock market performance.

Overall, countries are merely choosing the best strategies for themselves, they do not have to stick to one single strategy. There is no right or wrong ideology, there is only the most suitable for the time.

No Deal Negotiation

The prime minister of Japan, Shinzo Abe, expressed his concerns over the Brexit negotiation between the UK and the EU. Based on the current status of the negotiation, it is highly likely to see a no deal Brexit in the near future; and Germany and France are preparing themselves for a no deal Brexit. This is not the only negotiation deadlock appearing on the world political stage, the negotiation between China and the US is also stuck in a deadlock.

What causes a negotiation deadlock? There are several causes. First, if the two sides do not have common interests, then they are unlikely to propose any agreement that both sides can agree on, and it is literally impossible to have a mutually beneficial agreement. However, this is not very likely to see such case under a globalised system. Secondly, when the two sides are both dealing with multidimensional goals, they are very difficult to come to an agreement, as when they have multidimensional goals, it is difficult for both sides to find the Nash Equilibrium of the ”game”. Thirdly, when the two sides are playing a chicken game, and they have information asymmetry, since their strategies are depending on each other’s, then it is possible to see that it takes very long for them to come to an agreement, especially they are many available strategies. Fourthly, once more countries are involved in a negotiation, it is less likely for them to come to an agreement, as the game becomes more complicated when more players are included.

Overall, as countries have multidimensional goals and many strategies to play, it is actually very easy for the negotiations between countries to be stuck in deadlocks.

Difficulty in Knowledge

There was a piece of news recently that Harvard Medical School and Brigham and Women’s Hospital have recommended that 31 papers from a former lab director be retracted from medical journals because of falsified and/or fabricated data. In academic research, there is an issue that whether a scholar wants to repeat his or her peer’s experiment in order to see the results are reproducible or not. If a scholar repeats an experiment from a top journal article and finds an error, then his or her work will be appreciated and highly likely to be published on the top journal; however, if he or she repeats the experiment but finds no mistake, then his or her work will be less appreciated and not very likely to be published on  a top journal, especially for those who have not been widely respected in the academic world yet. Moreover, as we believe that most of the scholars are honest about what they get from their experiments, then the probability of making errors is relatively low; therefore, the expected returns from repeat peers’ experiments are low, it is not worth repeating peers’ work. However, checking reliability is actually very important.

Moreover, there is a barrier between scholars and ordinary people. First, how many people have heard of LaTeX? It is a text editing software for scholars to write their papers and make their presentation slides, like Word and PowerPoint. Scholars use it because it is maths friendly; however, since it becomes a standard, it actually prevents people outside from writing ‘proper’ papers. Secondly, the terminology in the academic world is very different, and the terminology varies across different academic fields, some terms used in Finance are different from the terms used in Economics.Thirdly, knowledge has become very complicated, it takes time to learn; however, ordinary people do not have the time to study the knowledge.

Overall, there are barriers within the world of knowledge.

The world economy is at its edge

The world economy is not looking very good at the moment. Germany and France are preparing for a no-deal Brexit, the US government budget deficit reaches its 6 year high, and the development in the emerging markets has been affected by the increasing world trade tension. There is a wide divergence between the US financial market and the financial markets of the rest of the world, the US stock market is experiencing its longest bull time in its history. In addition, the world is entering an era of aging population.

The US government budget deficit reaches its 6 year high because the current Trump administration cuts the tax and increases the government expenditures for subsidizing the farmers hit by its own foreign policy, thus more government money is spent and lower tax incomes are received. Meanwhile, because of the Trump administration’s foreign policy, especially its trade policy, the cooperation across countries, especially between the US and the rest of the world, has been weakened. This will hurt the entire global trading system as a whole. The US government deficit is also alarming, as the high government deficit means the government at some point needs to increase its taxes and reduce its expenditures, which will slow down the economic growth and reduce the market incentives. Furthermore, the no-deal Brexit means the European political and economic structures for the past several decades will change eventually, as Britain has been playing a major role in Europe in terms of politics as well as economics.

Overall, the world economy is alarming according to so many warning signals.

Conspiracy theories: can a family control the world?

People love conspiracy theories and some are even studying conspiracy theories seriously and publishing relevant books about conspiracy theories. However, can any of conspiracy stories be true? There is one story that fascinates many conspiracy lovers: a secret family or a secret society controls the entire world. I do not believe in any conspiracy theories, and I want to solve why it is impossible for a secret family or a secret society to control the entire world.

If hypothetically speaking there was such a secret family or a secret society having such power of controlling the entire world, the society or the family would have incredible amounts of money and power. To control their money and power, they would have to make connection with others and create their money and power networking. Their networking would not help to make them secret. However, if they did not create such networking, they would be at the danger of losing power, as the networking would help them to secure their power. Because the modern community is built based on teamwork, the information would be eventually leaked to the outside world, then the secret family or society would no longer be secret.

Moreover, controlling the entire world is a very complicated job. When dealing with such complicated job, there must be enormous uncertainties. If any uncertain state went wrong, the secret family or society would fail to control the world or keep it secret. It is impossible to ensure any uncertain state always goes in the right direction, so it is impossible to have a secret family or society that is able to control the entire world.

Overall, it is just logically impossible to have a secret family or society that controls the world.

What is behind Data science?

Data science is one of the most popular topics in the current world, people are talking about Big Data and how companies can use data science to improve their services and productivity. If computers can predict our activities, then the companies can provide services and products for their customers at the most efficient way. However, there are several issues behind such use of Big Data.

Firstly, there is a moral issue that a wide use of big data, especially the data collected from companies’ customers. The parent company of Google, Alphabet, has been criticized for its improper use of its users’ data; and some other Internet companies have also been criticized for exploiting users’ private data. Secondly, data science is not perfect. Data science used in social science can help people understand the correlation between different factors; however, in terms of explaining causality and providing accurate description of relationship, data science is sometimes fuzzy. Thirdly, when so many factors are put into models, it is important to have very large samples. The motivation of getting more accurate models encourages companies to “steal” information from their users. If companies want to make more use of data science, they are more likely to use more of their users’ information.

Overall, data science can make our life easier; however, it is not god, it cannot explain everything in our life perfectly accurately.

Can good earning reports ease the worry of the stock market?

Today JPMorgen and Citigroup both reported amazing quarter earnings reports after a big sell off week this week. Investors are worrying about if the longest bull market is close to its end. Can these good earnings reports ease investors’ worry? In the short term, it might be helpful to ease investors’ worry; when thinking about the long term performance of the stock market, it does not make sense that these reports can easily ease the market worry.

Investors may expect other companies will also deliver very good earnings reports in the coming weeks or months, so they could have the confidence that the stock market will stay as strong as it has been, then the market will bounce back from this week’s fall. However, a company's share price is not based on its past performance, but based on its future performance or future payouts, as we know the share price function is the sum of all possible discounted outcomes. Therefore, even if the companies in general have wonderful history performances and dividends, once the future performances do not go well or people expect the companies will not perform well in the future, then the share prices will still fall sharply, because the future determines firms’ today values.

Overall, the good companies’ reports give investors some reasons to believe the stock market will be strong, but we have to think more about the future, as the future builds firms’ share prices.

The impact of networking

Networking is unavoidable that people are also interacting with each other, especially in the modern era when no individual can survive without others’ help. Networking can help people share each other’s ideas and influence each other. Some firms’ CEOs are also board directors of other companies, this might make them be able to influence other companies, especially when other companies are complementary or subside. They can change other companies’ strategies, and they can also change their own firms’ strategies. Such environment could potentially lower competition levels as well as transition costs.

It is great to see transition costs become lower but lowering competition levels may not be a good sign for ordinary customers. To study the impact of networking on other factors, it is important to graph networking in order to see how people are connected. Networking has an important fact that once someone has an incredibly influence over others (in other words, his or her networking power is huge), more people are connected to him or her, while the people who are closer to him or her are more influential than the people who are less close to him or her. Of course, people can connect to other influential people, but the number of influential people is very limited comparing with the size of the entire population.

When picturing networking graph, it might be possible to have a few influential people within a circle while many more less significant people surround them.

If investors are rational, what does it mean to climate change?

If investors are rational, it means climate change is real and people are urgent to do about the climate issue. Why do investors invest in new energy?  Investors’ decisions are based on several factors, and the primary factor is the profit concern that investors only invest in the projects which they believe can make profits; of course, investors can make investment decisions based on their religious belief and moral judgement, for example, there are some funds that specifically target Muslim clients and some funds are only investing in clean industries.

The investment in clean energy industries can be evaluated in several ways. On one hand, the clean energy industries are morally right to invest. When there is not any significant difference in terms of profitability, investors definitely want to invest in the projects which seem more morally correct. On the other hand, the clean energy industry has to be a profitable investment project. For the clean energy industry to be profitable, there is one primary foundation which is the climate change is real and our human beings have to change the current situation. Only if the climate change is real and our human beings have to change the current situation right now, then it is sensible to develop new energy. Moreover, it is also sensible to develop new energy if the fossil fuel is about to run out, as the industries have to find an alternative.

Overall, sometimes, it is possible to use investment as a judgement of social opinion.

What drives investment?

What drives investment is a very good question which helps to understand how an economy generates its growth and expands its productive capacity. The safe answer to this question is positive expected profits. Investors are seeking for profits in financial markets, they want to use their wealth as primary generators of more wealth. Then there comes another question how investors decide what project will provide them with positive expected profits.

For some common financial instruments or assets, investors calculate their expected returns based on historical records, or institutions’ preexisting interest rates. However, there are some investable projects which are completely new. Then investors are required to have some professional knowledge to understand how these innovative projects are working. But since some projects are so innovative and cutting edge, investors with fortune may not meet the necessary requirement of knowledge to understand entirely the projects; therefore, they do not have the ability to calculate potential returns and risk. This might not make these investors abandon these projects, they can rely on external information to make their judgement. For example, if the social media is all talking about how solar energy has huge potential and why it is important to develop clean energy, then it raises huge interests for the investors to invest in the solar energy industry or other relevant clean energy field. Moreover, this could create momentum to drive more money into the hot field, thus a higher chance of making profits.

Overall, internal judgement is important for making investment decisions; however, the external environment is also key for investment decision makings, especially in some very new fields.

Why extreme political parties are winning elections?

The far right presidential candidate Jair Bolsonaro is winning the Brazilian presidential election at the moment. This is not the only story of an extreme party winning major elections that in Italy the election was won by a populist party and in the US, the Republican Party led by Trump could be seen as a political odd. Here comes a question why extreme political parties are winning election all over the world.

Some people may argue that while the population is not well educated, they tend to vote for extreme parties who are more likely to have exciting propaganda and rallies. However, we can see that extreme parties are not only winning in the developing countries which might have less educated populations, but are also winning in the developed world, like Italy and the US. Therefore, the education level should not be the determinant of why extreme parties are winning elections. I think that the main cause is because of the different groups of candidates’ different preferences and urgents of expressing their political views.

In an election, when we feel we are more likely to belong to the majority group, then we do not care about if we go to vote, because our votes are much less significant and any single vote will not affect the overall election result. However, when we belong to a minor group, we will feel more desperate to vote in order to express their political views. Moreover, the minor groups are more likely to be affected by the changes of the change in the environment (under the current complicated global environment) more significantly. Then they have more incentives to express their views, while the majority groups are less significantly affected, so have fewer incentives to express their views. The different preferences determine the different turnout ratios of different social groups, which leads to surprising election results.

Productivity and wage

There is a way to increase wages for labours, which is to improve their productivity. This is very logical, while labours are more productive, they produce more products, they create more values for their companies, so automatically they should earn more incomes from their companies. However, if the total productivity is improved dramatically, it is possible to see an excess of supply. Though individuals’ desire is infinite, there is a limitation about how people want to consume and how much they can afford. People have preferences of diminishing marginal utility, they will not consume one product too many.

If there is a cap for people to consume, then this also means a cap for companies to produce. Then when the population productivity improves, it means companies require fewer labours to achieve the optimal output levels than before, it can mean a higher unemployment rate. When the population has higher unemployment rate, this can lead to a decrease in the average and median incomes among the populations, though the employed population receives higher incomes. In addition, people are more productive may not be caused by people’s individual improvement, it can be caused by the development of technology, for example, people use computers to deal with large datasets, they are not able to deal with large datasets because they improve their own skills, they can deal with large datasets because of the development of computers. In this case, people do not necessarily receive higher incomes, because their skills are not upgraded. Therefore, people’s jobs are taken away from them, the employed will not receive higher incomes, though the productivity is improved.

Therefore, there is not necessarily a link between productivity and wage.

Which method can generate more development, sharing or making profits?

People are more and more enthusiastic about computing, Artificial Intelligence (AI), Big Data, and many relevant topics; there are many people investing themselves into these fields and hoping they can make a difference in this field or earn lots of money from it, and even some children are starting learning how to programme as they and more importantly their parents believe the next generation belongs to the computer. There are many influential people working on, discussing and thinking about the development in the field of AI (as well as other relevant fields). There are two paths for people to develop their codes, open source or making profits.

Both paths have their pros and cons. If developers make their codes open source, they can receive more help from their community, so they can finish their courses faster. Moreover, if a program receives more help from more people, it can be more reliable. However, such work is largely depend of people’s enthusiasm. Of course, some people help the projects in an open source community just for having more experience in order to make them jobs in the industry. Because their projects are open sourced, developers do not earn any money from making them, then there is an issue of continuity. On the other hand, if people can make profits from their projects, then the motivation will no longer be an issue, and the continuity can be guaranteed. In addition, people also need to improve the reliability and many other aspects of their projects in order to make profits. However, because the project is for profits, it cannot be open source, so it limited the involvement of the entire community into this project, then the development may be lack of some intelligent minds.

Overall, it cannot judge which path will push the development faster than the other. The existence of the two paths in the real world probably indicates both paths are meaningful and reasonable for the development in these fields.

Breaking the link between labour and output

Yesterday I wrote about when the link between labour market and inflation would become weaker, today I want to talk about more about how to break the link between labour and output. Technology will play a critical role in breaking the link between labour and output. For example, although Elon Musk backed down his idea of complete automatic factory, Tesla’s factory has given us a picture that how human labours will be replaced by robots completely. In addition, on the same day of Amazon announcing its plan to raise minimum wages for its US and UK workers, Amazon opened its store without no humans staff, which was an irony. When AI technology becomes more developed and mature, it will be more common to see that robots replace human labours in a much wider scale. However, technology may not be the only way to break the link between labour and output.

The structure of an economy would also determine the significance of the link between labour and output. Some industries have relatively weaker link between labour and output and in some industries, it is hard to identity the productivity. For example, it is very hard to identify for a government officer’s productivity, a judge does not produce economic outputs, but his or her role is very important to maintain the market order for supporting a healthy economy. Therefore, if an economy has lots of government officers, the link between labour and output is more likely to be weak. In addition, the structure of the labour market will also influence the link between labour and output. If an economy has a group of labours who are highly skilled and produce the majority of the total outputs, and a larger group labours who are not skilled and produce an insignificant amount of outputs, then the unskilled labours will be the ones who are at the risk of losing their jobs and the skilled labours have their jobs completely secured; under such condition, when fewer labours are employed, as long as the highly skilled labours remain employed, the total outputs will not be affected.

The link between labour market and inflation

The chairman of the US Federal Reserve, Jay Powell, said the link between tight labour market and inflation has been ‘greatly reduced’ in his defence of a careful approach to erase the post-crisis stimulus. In general, when there is a low unemployment rate, it usually means the inflation rate tends to be high, as when more people have jobs, they can afford more goods and services, so the demand for goods and services increases, leading to price increasing, thus inflation occurs. However, this point of view only considers the demand side. When more people enter the labour market, it also means production increases, thus supply increasing, Therefore, whether an increase in employment will cause an inflation or not depends on labour’s productivity. When productivity is better, it is more likely to see a low inflation rate, as there is less excess of demand; if the productivity is worse, it is highly likely to see a high inflation rate ,as there is more excess of demand. From this point of view, the link between labour market and inflation still exists and is strong (significant), only the size of the change will be changed due to different levels of productivity

The weakened link between the labour market and the inflation in the US may be caused by the change in production. If production is no longer dependent of how many workers a supplier employs, then there will be a weaker link between labour market and inflation, as the supply will be independent of the employment rate, then the inflation will solely depend on the demand change created by the change in the employment rate. Furthermore, if people’s incomes do not depend on their jobs but other things, such as their investment (the stock market performance), then the inflation will be independent of the employment rate completely. Both conditions are possible. When companies are adapting to AI and robots, no man is needed in factories, then companies do not need workers to supply goods and services to the market. Moreover, if a country has a welfare system that taxes the rich heavily and provide good benefits for the poor, then people do not need to work to have sufficient incomes to afford their consumption, then the demand for goods and services does not depend on the employment rate any longer.

Overall, the weakened link between the labour market and the inflation in the US I think is caused by the change in production that production nowadays relies much less on human labours.

Elon Musk’s settlement

Tesla’s share price closed at a price higher than the close price last Thursday just before it was reported that the Securities and Exchange Commission (SEC) sued Elon Musk for misleading investors over his ‘funding secured’ post on Twitter last month. It means that the lawsuit filed against Elon Musk by the SEC did not hurt Tesla’s shareholders but made them several dollars richer per share. Elon Musk has agreed to step down as the chairman for three years and pay $20 million fine, and there will be no charge against the company. The settlement was reached over the weekend, which surprised many people, given Elon Musk’s history in the company's earnings call and his unpredictable temper; and the surprisingly speed of reaching the settlement can explain today’s over 17% hike in Tesla’s share price. However, what will happen next is more important.

Elon Musk will not be the chairman of Tesla for three years but will remain as the CEO. This is a lesson for Elon Musk that he cannot do whatever he wants. Given Elon Musk’s temper, it was likely he agreed the settlement under enormous pressure from Tesla’s investors as well as his lawyers. He had paid prices for his misbehave, but the prices were paid by share price drops, which do not hurt Elon Musk, especially Elon Musk himself believe his company is a sensational company which will value much higher in the future. This time, Elon Musk definitely paid a price that hurt him that he had to give up the chairman position of the company that is important to him. In the future, he will not have the complete control of the company and are likely to be more careful about his actions and words, which is good news for Tesla and Tesla’s shareholders. However, Tesla’s value is still based on its production and profitability.

Overall, next quarter’s earnings report is still the key to Tesla’s market value; but if Elon Musk can learn his lesson from this lawsuit, it will benefit the company as well as the shareholders.