What is the role of the insurance industry in this new era?

People who have been affected by the “drone chaos” are making claims to their insurance companies, but not all of them will be able to be paid by their insurance companies since some cheaper policies do not cover such incident. This incident can bring more customers to the companies which have the policies which cover such incident because people tend to overestimate small probabilities based on the prospect theory. When people are worrying about the consequences of new and coming technologies, it actually creates more opportunities for the insurance industry.

Providing insurance for unknown threats or risks can be a very profitable business but with substantial risks. Of course, since the insurance industry has much more resources than others and they can hire more experienced and more skilled people to work for them to analyse the possible impacts of new and coming technologies. Therefore, just like other insurance businesses, insurance companies are able to create a system of information asymmetry to gain profits. However, there are risks. First, the predictions about technology innovation and invention cannot be always correct; once it is incorrect, then it will make insurance companies lose money depending on how different the reality is from the prediction. Secondly, how many people demand such insurance is another issue. Hiring very good people in the technology sector is very costly; however, if they cannot sell enough insurance and generate sufficient revenues, they will not be able to afford expensive costs for quality labour forces. Thirdly, there are merely too many technology sectors, even insurance companies do not have the resources to conduct effective research on all possible technology innovation and development.

Overall, designing insurance policies covering the risk caused by technology innovation seems like a fantastic idea; however, given its cost of conducting effective research and the risk of potential demand and prediction, this may not be a profitable business.

From the Gatwick Incident

The London airport, Gatwick, has been closed for more than a day because of the “drone chaos”. Several drones flew very close to the airport and created threats to airplane safety. A comment from the authority is that the technology is developing at a faster than the legal system is. This comment is very true indeed that the authority cannot create laws and regulations for something that does not exit yet as they do not have the ability to foresee the coming new technology, and it takes time for regulators and lawmakers to create appropriate laws while the technology is still advancing. I do not think that people would have thought drones could cause such trouble a decade ago.

In the future, other technologies will appear in our real life and some will cause problems like this one. There are several new technologies which are highly likely to cause this kind of problem. The first one is AI. When an AI does something wrong, who should take responsibility? Especially when the AI is unsurpervised, the designers should be blamed since they create the AI that misconducts; however, the users should also be blamed since they might know how the AI works and purposely train the AI to misconduct. Under such circumstance, who should take the responsibility? The second one is on the Internet. Who should take the responsibility to stop misleading information? The general public believe that social media should take the responsibility to stop misleading information from spreading; however, there are so many ways to spread misleading information, and social media is only one of many ways. Moreover, even social media is the main way to spread misleading information, it is impossible for social media to stop all misleading information. The third one is also on the Internet. Open information can benefit many of us, and since it is open, the cost of accessing to the information is extremely cheap. However, not all knowledge is good knowledge, when some knowledge falls in hands of some bad people, the knowledge itself would start to create negative impacts. For example, someone posted an open guidance about how to 3D print a pistol online; though the post was pulled off from the website, as it existed on the Internet, it is very hard to guarantee that there is absolutely no copy existing on the Internet right now.

Overall, when the technology world is developing rapidly, it is definitely a huge challenge for all regulators and lawmakers.

The Auto Industry

The competition in one of the most traditional industries is increasing over time, many new comers are joining this competition while the incumbents are also seeking ways to boost their competitiveness to prevent themselves from losing out in this tight race. The incumbents are those traditional carmakers, such as Ford, General Motors, Volkswagen and etc.; meanwhile, unlike the new comers in other sectors who are less financed, the new comers in the car industry are well financed, some even have greater market values than the incumbents, such as Alphabet (Google's parent company) and Apple (there is always some rumour saying Apple is inventing its own car). There are two fields where carmakers are competing against each other that one is electric vehicles and the other is driverless cars.

Electric vehicles are supported by many governments around the world, because they are much more environmentally friendly that they do not produce harmful air pollutants. Many governments provide electric vehicles with subsidies. Moreover, not only the sudsidies will benefit the carmakers, but the electric technology can improve people’s driving experience, as the acceleration speed can be faster and smoother. In addition, carmakers are bringing modern entertainment and control systems to new cars that some cars only have one big screen to control the entire cars, including the air conditioners, media players, car rada and etc. Many electric vehicles are already appearing in ordinary consumer markets for people to buy.

Meanwhile, driverless cars are not yet ready for ordinary consumers to buy. Tesla has some driverless systems available cars out there in the market; however, many countries and regions do not allow driverless cars to be operated without any human monitoring. There are several issues in driverless cars. First, when there is a car accident, who should take responsibility. Secondly, some driverless systems require network access; however, when cars are driving on roads, they do not always have access to the Internet. However, with the coming 5G, this issue might be able to be solved. Thirdly, the development in driverless systems is quite diverse, different companies have different thoughts about how to achieve driverlessness. There is one potential problem that when driverless systems are all different, would this increase the probability of car accidents because of the differences in the systems. Fourthly, the system that aims to work along with human drivers, when driverless cars are more, is this design still necessary?

Overall, the car industry may be like the smartphone industry that was transferred from the phone industry that it could be transferred into a smart car industry, the transformation will create much more opportunities for the carmakers like what we saw when the smartphone industry was rising.

Why is open economy inevitable?

China is celebrating the 40th anniversary of Deng Xiaoping’s “reform and opening up” policy. Deng’s reform is crucially important that it has changed the Chinese economic structure and improved a significant number of people’s living conditions and China’s world political status. Moreover, Deng’s reform should be appreciated by the world, as his policy successfully pulled a substantial proportion of the world population out of poverty.

Open economy is important that no country should close its economy and isolate itself from the outside world. Isolation is not rare to see throughout our human history that there were some governments which voluntarily decided to close their countries and isolate themselves from the rest of the world. Why were these countries able to isolate themselves from the rest of the world? Firstly, in the past, people did not have necessary level of technology to have sufficient access to the outside world. Secondly, people were living in a relatively self-sufficient environment. When people were self-sufficient, they did not have the need to get an access to the rest of the world. Thirdly, information asymmetry was another important reason of isolation. In the past, people did not know about the outside world, then it was too risk for them to access to the outside world.

However, things have changed. The inventions of new technology, especially the Internet and transportation, have corrected the factors mentioned above. People are no longer able to be self-sufficient, as people are needing much more than they were in the past. Overall, isolating oneself from the rest of the world is no longer an option.

The African proxy game

John Bolton, the US national security adviser, suggested tha the Chinese and Russian “predatory practice” in Africa have threatened the US’s strategic, military and economic interests on Africa. His claims have in some ways given up the moral ground for the American intervention and actions in Africa that the US spent on development, security and food aid was pointed out by him to advance the American interests in Africa, instead of actually providing humanitarian support. The strategy suggested by Bolton sounds quite “ancient”, it is basically what was used by the US and the USSR during the Cold War, a proxy war.

Bolton wants to make African countries choose their sides between China or Russia and the US, and they cannot choose both. All countries care about their own interests, there is nothing wrong about this. However, as Grant Harris, Mr Obama’s former adviser on African policy pointed out, “it is unnecessary to cast everything was some scramble for resources or great-power game”; Bolton’s words are also heard by African countries as well, and likely to cause some degree of opposition. Based on some studies, China is ahead of the US in terms of influence over Africa that there are more African students now studying in China than in the US or the UK and China is also leading on infrastructure programmes in Africa.

Bolton has made the US strategy and goal too bold which can cause some opposition from Africa. The game between China, Russia and the US can have different outcomes, but these outcomes have one common thing that African countries are highly likely to be the victims of the super-power game.

The battle in Westminster

Theresa May is definitely facing her end period of her political career after she successful survived the no confidence vote that she made a promise that he would not lead the Tory party into the next election in order to win the support within her Conservative Party. This implies that May is highly likely t leave the office after she makes an agreement with the European Union.

I previously said that May and her Brexit rebels are playing a game of chicken and I expected that her Brexit rebels would turn to support May before the deadline of Brexit. However, her Brexit rebels are much smarter. They forced May to enter another game before the deadline and offered something that May could not resist. May was forced to the no confidence vote that she was likely to be overthrown by her own party if her rebels got enough votes. Her rebels knew that they would not have many choices in terms of the Brexit negotiation because what May offered was almost the best that they would be able to get; therefore, in this game they were very likely to lose. However, the no confidence vote was a totally different game that this time May would not have many choices but accept what her party requested in order to win their support on her Brexit plan, because May cannot afford losing her Prime Minster position at this crucial time point.

Overall, my previous expectation about May’s rebels would eventually accept May’s Brexit plan becomes true but I underestimated her rebels’ intelligence.

How are people's incomes determined?

When people leave school and enter the labour markets, they can choose various jobs, some have higher incomes than others. What makes different jobs have different income levels on average? There are many factors determining a job's income level.

Firstly, the jobs which require long period of training and practice (including education) usually have higher incomes than those which do not require much experience. This is very obvious and intuitive as the supply of such labours is relatively limited. Doctor is a classical example of such that being doctors requires years of learning and practice. Secondly, the jobs which potentially experience moral hazards are likely to be paid higher incomes in order to make them moral in practice. For example, bankers are paid higher because they have access to enormous amount of money and high incomes can reduce the risk of moral hazard (as the expected returns from financial frauds are reduced). Thirdly, the jobs which have influence also tend to be paid higher. For example, pop stars have influence over their fans, which create values for other parties, such as advertise firms. However, technically speaking civil servants and politicians also have enormous influence over others, but they receive relatively lower incomes, given their experience of training and practice (civil servants and politicians are usually social elites in the society). This is because of social value. In most societies, civil servants and politicians are treated as jobs where people voluntarily contribute themselves into national services. Moreover, respect and future higher incomes are given to these jobs as some form of compensation to their current relatively low incomes that many civil servants and politicians gain positions in the private sector after their political career, for example, the former Chancellor George Osborne was given a position in BlackRock which is the world's largest asset management firm.

A job's wage level is determined by the supply and demand of a job.  A movie star earns a lot of money; however, the supply of actors and actress does not seem low, but actors and actresses are often required to have specific skills and looking, which strictly limit the supply.

Is Trump playing a chicken game with the Democratic Party?

Yesterday I discussed an article about May's playing a game of chicken with her Brexit rebels and I want to talk about another possible chicken game played by the US president Trump. Trump had a meeting with the Democratic leaders, Nancy Pelosi and Chuck Schumer, in the Oval Office; Trump threatened to shut down the government if the Democratic party does not allow him to build his border wall, while the Democratic party definitely does not want the wall at all.

If both Trump and the Democratic party do not like a government shutdown, then the game which is being played between Trump and the Democratic party is a game of chicken. However, if one side does not care about if the government is shut down, then the game is not a game of chicken. I do not think that Trump does not firm stand with his idea of building the border wall, I think that Trump wants to fight against the people who disagree with him; if my belief is true, then this is not a game of chicken that Trump will continue to fight the Democratic party until the Democratic party offers the wall and the probability for the Democratic party to offer the wall in order to avoid a government shutdown is relatively higher than what we expect if having a game of chicken.

Overall, I think that the US government is quite likely to be shut down due the disagreement between Trump and the Democratic party which will control the House next year.

May's strategy in her Brexit act

There is an article on Financial Times written by George Parker and Laura Hughes pointing out that the Prime Minister "May plays a game of chicken with her Brexit critics" (https://www.ft.com/content/c14c8f1c-fd63-11e8-ac00-57a2a826423e). May is facing opposition from both wings of her own party. It seems that no one likes May's proposed Brexit Act; however, no one likes chaos either and the current UK politics is chaos. Either May or her opponents has to stop battling for their own ideology at one point before the deadline set by the European Union, which is a classical case of chicken game.

May delayed the vote on her deal on Monday and the leader of Labour Party, Jeremy Corbyn, accused May of "demeaning her office" by her delaying the vote. May is definitely trying to buy her more time to win more support within and outside her Tory party; it is not entirely impossible for her to win more support within the Parliament, that some MPs may be scared of a "no-deal Brexit" and choose to support May and her Brexit Act. Of course, some MPs are likely to stand firmly on their own bases and try to force May to compromise (which is highly unlikely because even if May wants to compromise, the European Union will not accept to give more to Britain on the matter of Brexit as the EU needs to show other member countries that there is a cost to exit the Union).

Overall, I do not expect May's proposed Brexit act will change a lot in terms of its content because any content that can further favour Britain will be beyond the European Union's acceptance. The best strategy for the UK at the moment seems to use May's proposed act which is probably the best deal Britain can get from the European Union; however, if no one compromises, a no-deal Brexit will inevitably occur.

To what extent will companies move production out of China?

GoPro is reported to start shifting its manufacturing of its action cameras out of China in order to mitigate the impacts of the US-China trade war. GoPro is the first brand-name device maker to pull production out of China after Trump began to impose tariffs on US import from China. China has been the world’s largest electronics manufacturer, and China is also a critical market for electronics as well.

The US and China are both so important markets for all multinational corporations that no large companies afford losing either country’s market. They have to find a way to operate in both countries with a minimum impact from the tension between these two countries. GoPro is moving most of its US bound camera production out of China. This strategy is very likely to be copied by other companies. Since China has comparative advantages of production costs and technology, most export production when exports are not exported to the US will remain in China. China has more skilled and experienced labours and better equipments because China has been the world manaufactory for a significant period of time. Moreover, only when the global economy, including the Chinese economy,  is performing very well, companies will consider to move their production to other places, because opening new plants will cost a lot of money and when the economy is not performing well, the labour cost will not be a big concern since the wage level can be set lower when the economic performance is poor.

Overall, companies are likely to move US bound production out of China, but other production is highly likely to remain in China, unless there are other trade policy changes.

To what extent is a surprise good?

When two parties are fighting against each other, there are some underlying rules between the two parties and both parties are following the rules to fight against each other. Sometimes these rules are unspoken rules which are not made public or written down. For example, during the Cold War, the usage of nuclear weapons was an unspoken rule and the two superpowers (the USSR and the US) not fighting directly on combats was an unspoken rule. However, sometimes one party might want to win some advantages by playing some surprising strategies, and often the first that comes to one's mind is to break the unspoken rules. Because the rules are unspoken, the parties do not take as much blame as they do if they break a rule that is known to the public. 

However, breaking an unspoken rule can have very serious impacts on both parties, as it fundamentally changes the system of the game since the rule is changed. Once one party breaks an unspoken rule, then either party becomes unconstrained to all the unspoken rules, as the party which breaks a rule is likely to break more, and the other which suffers the consequence of breaking the unspoken rule then is also likely to take a revengenous action and break unspoken rules. Under such circumstance, the unspoken rules become invalid and the two parties continue the game without any constrain to the unspoken rules. 

Moreover, breaking an unspoken rule can be seen as a 'cheat' in a dynamic game, and the best response to a cheat play is to cheat as well. Therefore, the players in such design theoretically will always break unspoken rules and continue this manner. So it is fair to conclude that playing a surprise (to break an unspoken rule) is not really a wise strategy when cheat creates an outcome that only one party benefits and cooperation makes both parties mutually benefit but just a bit less and fight makes both parties gain much less (or suffer losses).

What stock is recession-proof?

The global stock market is not performing very well and investors may start to think about picking recession-proof stocks to reduce their risk and generate some returns from their investment even during bad time. What characteristics might a stock have to make it recession-proof.

A stock should be able to generate constant returns despite the environment or have a negative correlation between its performance and the environmental performance.If we think carefully, we can find some companies which can actually perform better when the economy is generally not performing very well. One example is fast food chains. When an economy is performing well, people are generally earning higher incomes, so they can afford more expensive choices, such as fancy restaurants; however, when the economy is not performing well, people do not earn as much as they do during good time, sometimes they may still need to have meals outside because of various reasons, when fancy restaurants are too expensive, they may go to fast food chains. In addition, mobile network providers may not be affected by the economic performance, since people are now much more dependent of smartphones and they will not give up their smartphones even when the economy is not doing well. Moreover, they may even use smartphones more often. First, they may start to pay more attention to news. Secondly, they may choose their smartphones as their primary entertainment choices, since other choices may become less afordable. Thirdly, many users are on contracts, even if they want to lower their spending on mobile network, they are not able to do so.

Overall, there are recession-proof stocks definitely out there.

Matching

Matching is a very important concept in the real world as well as economics. When a product is assigned to a consumer, we can call this as a matching. In most markets, matching is done via a pricing mechanism that suppliers and consumers come to an agreement which in the form of prices. However, there are some markets where there is no price or traditional product. For example, in the marriage market, there is no clear price; in addition, in the education market, people cannot just pay the prices and go to universities (though in some cases this does exist to some extent).

There is a matching method which was proposed by Economics Nobel Prize winners, Sharpley and Gale. First, one party (proposers) proposes first and the other party (receivers) accept the candidates which they favour first if they are approached by multiple candidates; the left people then proposes again and the receivers then select their most preferred candidates; this process will be repeated till the last receiver chooses the candidate. The receivers and proposers can be switched but this will deliver a different outcome and the proposers generally benefit from this process comparing with the receivers; this is why students are given the choices to pick up their universities, students can benefit from this process. This process encourages proposers to reveal their true preferences; however, in the real world, people often tend to hide their true preferences and make their second or third preferred options their first options since they are afraid that they can easily lose out competitions if they all go for their first choices. Such deviation from true preference could be explained by people having limited proposing opportunities.

Overall, matching is very important in terms of resource allocation and efficiency, and there is great challenge in matching mechanism design as well.

What a mess

Yesterday I talked about the US-China agreement on relieving the trade tension between these two countries; however, today it is found that the trade deal between the US and China is a misleading message sent by the US President Trump. The American politics has been a mess since Trump took the office. The potential impeachment now just seems much more likely after Trump’s former lawyer Micheal Cohen’s plea and review of Trump’s business plan in Russia during Trump was running for the office. The misleading message sent by Trump just shows the mess in his administration. When G. W Bush passed away and people compare him with Trump, many American people realise what a great president they used to have. The Democratic Party will control the House starting from the next year and many Democratic politicians are ready to impeach Trump; however, is it really a wise idea to impeach Trump merely two years before the next presidential election.

To impeach a president is never an easy thing to do; and even with the evidence the Democratic Party has from the Muller’s investigation, it is entirely certain for the Democratic Party to successfully impeach the president, because the Republican party still controls the Senate. In addition, the question that if a president can pardon himself or herself will cause a constitutional crisis, especially I do not think that Trump is afraid of pardoning himself. In addition, the effort that people have to put is enormous. People do not have unconstrained capacity, so if all politicians focus their attention on impeaching the president or protecting the president, and the president and his administration are focusing on saving himself, then I do not think that any other thing could be done under such chaotic and hostile political environment. This could potentially go either way. It could be good for the economy since the government leaves the market alone, or this could make the market panic and cause the bubble bursts at a much earlier stage.

Overall, the political chao in Washington leads to more and more uncertainty in the future to the American economy as well as the world economy. 

What a Relief

The global financial market rallies on the US-China agreement at the G20 meeting in Argentina. The tension between the US and China, these two powerful countries, dragged down the global financial market as well as the entire global economy. China and the US have been many countries' major trade partners , and some countries were forced to choose their positions between these two global power which would be harmful despite their choices. Though the two countries' agreement does not mean that there will be no more tension between these countries, it is definitely a relief for the global economy.

Since the US launched the trade war on China, the financial markets became much more volatile, especially the Chinese stock markets including the HK stock market, dropped sharply. The US stock had been performing relatively well but in November the entire gains throughout 2018 were wiped out, and we could not say that the tension between the US and China had no impact on this wipe-out. In addition, though the market did perform relatively well, the American companies have changed many of their strategies to adapt the changes in the US foreign policy; therefore, it is completely fair to say that this agreement provides some degree of future insurance (lowers the corporate risk for the near future). The US stock market might not have dropped as much as other financial markets did, but it rallies just like any other financial market on this agreement between China and the US, implying that investors in the US also think that this is a piece of great news for the US companies as well as the US economy.

Overall, almost everyone should be willing to see the US and China has come to this agreement.  Even the agreement will not affect the US jobs, actually the tension between China and the US can hurt jobs; because the multiple effects caused by more trades and more businesses and greater revenues can bring more jobs to the labour market and vice versa.