Why does history repeat itself?

Some people see that history always repeats itself and I do agree with this point to some degree. When we only focus on history from the politics aspect, it seems that the power struggles throughout our history have many similarities. I think that this is because political struggles are always about winning the majority support. During different time periods, the politicians including kings fight for majority support from different sources. In the earlier period, the politicians particularly fought to win the support from noblemen; later, the politicians are fighting for a wider range of citizens in their communities. Overall, their goal never changes.

Since they always have the same, then their actions become much likely to be predictable. It is fair to assume all these politicians want to win and they are clever (I think they have to be clever to play such significant roles in our history), then they should always play the best strategies. To achieve the same goal, the game theory tells us that there are some dominating strategies. If dominating strategies are pure strategies, then we will see exact outcomes every time. If dominating strategies are mixed strategies, then we will see several outcomes repeatedly happen.

Overall, the reason for us to see history repeating itself is because the people playing significant roles in our history do have the same goal which is to win the majority support, to achieve this goal, they have to follow similar dominating strategies.

US investment in China

Despite the ongoing trade war, the US investment in China is rising. According to the Rhodium Group (from FT), US companies invested $6.8 billion in China in the first half of the year, this is a 1.5 per cent increase from the average over the last two years’ same periods. These companies include some famous names, such as Tesla, Bain Capital. What does this mean?
First, these companies still want to enter the enormous Chinese market. Tesla may be a great example of this. Tesla sees itself as a very competitive EV company and it sees a great potential in the Chinese market. By investing in China, it hopes to expand its market share in China to significantly increase its revenue and profit. Although there is a risk in the Chinese economy, some companies see more opportunities in the Chinese market and the downside risk actually makes it a great time to enter the market. Moreover, some US investors believe the Chinese capital market is overreacting to the risk caused by the trade tension. This is very likely because not all sectors are affected by the trade tension equally; when the market is panic, overreaction is a very likely phenomenon in the market.
Overall, we can see that although the risk is obvious due to the ongoing trade war between the US and China, the Chinese market still has its potentials that no one can omit.

Content creation

Many companies are competing in the content creation market. Apple, Netflix, Disney are all offering subscription services to their clients. The price for subscription is between $5 and $10 per month. This is not cheap, if we combine all music, game and film contents. At the moment, it seems these companies are competing for creating better contents instead of prices.

Price competition is the easiest competition strategy but also it is the least profitable strategy. Once one company starts to launch a price competition, the others will follow and the price is racing to the bottom. Under such circumstance, there will be no winner until someone wins the entire price competition and get the whole market share. Such competition will not help companies to earn profits for a long period of time. So they are competing for creating better contents to attract more clients.

These companies are investing millions of dollars in creating good contents. They make their investment based on how many subscribers they expect to have given the expected quality of their contents brought by the investment they make. Of course, they are trying to make enormous investment to create very good contents, so they may suffer losses for a short period but win a significant market share.

However, when every company in the business has enormous resources, they do not want to play the game so aggressively. Then their success is based on the return from the contents they create, and it is a very risky investment since the success of contents is dependent of too many heterogeneous factors.

Who is going to buy bonds with no interest?

Germany is planning to sell 30-year bond with no interest at all. It sounds odd as it means whoever buys the bond will pay a price for holding the bond and get back his or money after 30 years. Why would anyone do so? They can simply save their money in a saving account and even get more money in 30 years as banks generally pay interests. Saving in a bank account could almost be assumed to be risk free; however, this is not absolutely risk free. In finance, the risk-free rate is considered to be the 10-year UK bond yield or the 10-year US bond yield. At the moment, they are not zero at the moment; anyone who buys the zero-interest rate bond must believe these German sovereign bonds are less risky than the 10-year US bond or the 10-year UK bond.

Why do some people believe the German bonds safer than the US bonds or the UK bonds? Germany is an economy which is different from the UK economy or the US economy and it is a strong economy. In addition, comparing with the increasing budget deficit in the US, the German budget deficit seems to be much under control. Moreover, the political environment surrounding Germany is rather stable and predictable. These elements and more make the German sovereign bonds attractive to some investors.

In addition, the German banks are setting very low interests and the zero interest rate may also be a cause of the general low interest rate environment as well.

Maybe Andrew Yang is correct

One of the Democratic president candidates, Andrew Yang, is not as popular as Joe Biden, Elizabeth Warren or Bernie Sanders is but I am very interested in one of his proposals. He proposes that if he is elected, he is going to give every American $1000 a month. It seems that he is buying votes; however, the reason he gives for this policy proposal is very reasonable. He thinks that AI is going to replace the majority of our current jobs and people need to be compensated.
Such future is very likely and even it may come sooner than we estimate, since the rate of AI replacing human jobs is likely to accelerate and we are not not finding more new paid jobs for humans. If people are out of work, they will not be able to afford their previous lifestyle, so the demands for all kinds of goods will significant decrease. When the population does not have sufficient incomes, the firms are not able to earn as many profits as previously. Under such circumstance, it may be reasonable to consider Andrew Yang’s proposal.
I think his proposal has one major issue, which is where the money comes from. He suggests that the money coming from the firms which benefit from the development of AI; however, if the firms no longer have sufficient numbers of consumers, they will not earn sufficient profits to pay for the $1000 plan.

What determines consumers’ demand?

Demand and supply are the two probably most important concepts in economics. Demand is determined by consumers’ preference and price. In the majority of cases, when a product’s price goes down, the demand for this product will increase. However, what determines if a person demands the product at a given price is this person’s preference. There are many factors determining a person’s preference and people’s preferences vary across different individuals. Often these factors can be very personal. For example, if someone wants to buy a pair of headphones, the sound quality provided by a pair of headphones is not necessarily consistent, as the performance may vary based on what song the user is listening to, therefore how much this person is willing to buy a particular pair of headphones can depend on his or her preference of music. Moreover, his or her preference may also be influenced by his or her work. If his or her work requires a lot of travelling, he or she may want a pair of noise cancelling headphones and is likely to value noise cancelling headphones mor than those who do not travel so often.
Therefore, a person’s preference is based on his or her previous experience and expectation about the future. Let’s focus on how a person forms expectation. People generally form their expectation based on what they see at the moment, what they have learned and experienced. What they have learned and experienced can also be seen their experience so far. What they see at the moment depends on their accessibility to information. A person’s accessibility to information is based on their network connections, jobs. However, these elements (even including experience) may depend on people’s family and background.
If the hypotheses are true, then we can use the population characteristics to model the population preference as a whole, due to all factors are correlated with people’s background and family, which are known objectively.

Who is paying for tariffs?

Tariff has become one of the hottest topics at the moment since the US president, Donald Trump, decided to lower the US trade deficits. Tariff is a way to lower trade deficits, but it does not work exactly like what it is like in the president’s tweets. The US president’s tweets often give us such impression about tariff that China is paying money to the US government when the Chinese companies export certain products to the US. This impression inaccurately explains how tariff works. Tariffs lower trade deficits by making foreign products more expensive, so the domestic consumers will be less willing to pay foreign products comparing with domestic products. When people consume fewer imported goods and services, the trade deficit will be lowered. Then although tariff is hurting the Chinese exporters significantly due to the weaker demand, it seems that the domestic consumers are paying for tariffs, as they determine the demands for imported goods and the companies are very likely to transfer the increased costs caused by the tariffs to their consumers.

The challenges of breaking into emerging markets

The emerging markets are generally developing at faster rates than the developed countries do, which means the population in these countries are becoming richer and richer. When people become richer, they can afford more goods and services, so companies can potentially sell more goods and services in these countries. China is a great example, when the Chinese economy has expanded to become the world second largest, companies can earn enormous profits from a share in the Chinese market. However, not all companies can enter an emerging market successfully, there are several potential challenges.
First, the cultural difference between the emerging markets and the developed world can be very wide that misunderstanding could easily lead to a huge business failure. For example, people from different countries can have different tastes and habits, popular items in one country may not be popular in other countries. We do not even need to talk about he difference between the emerging markets and the developed world that the UK and the USA, which are the sister countries, have different cultures and consumer behaviour. Best Buy failed in the UK and Tesco failed in the USA but both of the two companies are successful in their original countries. Secondly, in the emerging markets, some local incumbents can be more competitive than the multinational companies, because the local incumbents sometimes have stronger links to the local resources via social networks. For example, the multinational dairy companies fail to continue their successful stories in India where the milk production is the biggest in the world. Thirdly, although emerging markets are fast growing, it does not mean that emerging markets have all sufficient infrastructure to make everything possible in the developed world also possible in the emerging market. Fourthly, the average income for ordinary people in the emerging markets may not be high enough to have similar demands like what people demand in the developed world. This is why Apple has not gained a significant market share in the smartphone market in India.
Overall, these challenges often exist when companies are trying to break into new markets. Usually if a multinational company fails to break into a new market, it can just leave since it is already making huge profits elsewhere in the world; however, if a multinational company fails to break into the emerging markets like India and China, it will lose huge potential in its business comparing with the successful companies.

What does the term “tech company” mean?

Before the 2007/8 financial crisis, the banking sector was the sector which attracted the most attention from investors; nowadays, investors focus on the tech sector, the top three most valuable companies are all from the tech industry. This is not new actually that during the dot com bubble, many companies, which would be tech companies at today’s standard, attracted enormous investment. However, there is one key difference between today’s market and the market during the dot com bubble. Today the definition of a tech company has been quite broad while the dot com companies are merely those which have websites on the Internet. Tesla is a very good example that can help us understand how we define a tech company. Tesla can be seen as an auto company; however, if it was just a normal auto company, its market value would not be so high. Because it is seen by many as a tech company, its share price rocketed.

Tech companies nowadays are defined as those which use new technology or concept (WeWork) and have the potential to reshape the current experience. Let’s still use the Tesla example. Tesla is an auto company, but unlike traditional auto companies, Tesla produces electric vehicles by robots. Furthermore, Apple may be a better example. It is a tech company since it was founded, and it definitely reshape the world phone industry and it is fair to see that Apple invented the modern-day smartphone. Other successful tech companies, such as Netflix, Spotify, all reshape consumer behaviours to some degree. Once the behaviours are changed, for a short period, the tech companies will have monopoly power; then when the competition is increasing, they will still be able to maintain some degree of powerful market power for a long period. Such potential makes tech companies attractive to investors.

The importance of population mobility

Population mobility is very important in my opinion because I believe that population mobility determines the efficiency of resource reallocation. In the real world, we often see many people move from poorer areas to richer areas to seek better opportunities. Richer areas are more likely to have greater economic opportunities available for more people. When more people move into richer areas, more resources are also likely to be reallocated to these richer areas. However, the resource growth rate in these richer areas is likely to diminish after the resources accumulate to a certain level, because one place cannot contain all resources due to its natural constraints, such as land constraint. When the population growth rate exceeds the resource growth rate, people will gain fewer resources on average, so they will be worse off. Under such circumstance, the original locals will try to block people from other areas from entering their areas in order to maintain their current economic benefits. This will lead to increasing opposition to immigration.
Then is it possible to mitigate the opposition to immigration? It is possible. When the resource growth rate in the richer areas is diminishing, it means the resource outflow rate in the poorer areas is also diminishing. Then the people in the poorer area should enjoy more resources when many people move to the richer area. If the people in the richer area find that they enjoy fewer economic benefits than those living in the poorer area, they will move from the richer people to the poorer area, including those who originally live in the richer area. The reason that we do not often see people living in the richer area move to the poorer area is because maybe those who live in the richer area do not enjoy as many economic benefits as previously, they still enjoy more than they will enjoy if they move to the poorer area. To reduce this problem, we need to reduce the transportation cost and improve the returns in the poorer area. The latter point means that when people take resources from the richer area to the poorer area, the return of investing in the poorer area is higher than the return of investing in the richer area. This is not too difficult. Because the competition in the poorer area is relatively low and people can borrow successful business models from the richer area and apply them in the poorer area.
Overall, better population mobility and narrower wealth gaps across areas can reduce the problem of opposition to immigration and improve social stability.

Platform and Content

Huawei just released its OS, HarmonyOS on its developer conference; based on the presentation, HarmonyOS is a very powerful and cutting edge operating system. Since I am not an expert in computer science (and also I have not accessed to this new OS), I cannot judge whether it is a good or a bad operating system. There is one thing gaining my attention in the developer conference that Huawei is making its IDE much more user friendly that developers can use the IDE to develop their softwares for this OS faster and more easily. Not only Huawei is making its IDE for developers to create contents on its platform more easily, other companies are also doing the same thing. For example, Apple has also made its IDE more user friendly and even developed an application to teach children about how to use its programming language to write codes.
Not only the companies which develop operating systems value the contents in their operating systems more and more, other platforms are also valuing their contents more and more. For example, Netflix, YouTube and other companies are also trying to improve the qualities of the contents on their platforms. Why has content become so important now? First, good environment for content creators including software developers can bring in better contents including software, more and better contents will help to attract more users to the platforms. Secondly, more users will also attract developers, because developers will see there is a bigger market. So this can create a multiplier effect. Thirdly, the competition between similar platforms is increasing. To win the competition, they have to use their contents to gain more market shares. Fourthly, different types of contents can help to attract different types of users, firms can differentiate the contents on their platforms from each other’s to avoid price competitions and make everyone happy.
Overall, if there are more platforms appearing, the competition for content creation will increase significant, because only those with the best contents will survive at the end. People may still remember Windows Phone, why does it fail? It fails partially because the number of contents on this platform is nowhere near the numbers on IOS or Android.

Partnership between large firms

The share price of the chipmaker, AMD, was up by more than 15% after it listed Alphabet and Twitter as its clients (especially Alphabet). In addition, Microsoft’s share price also jumped significantly after it announced its partnership with AT&T. Yesterday, Samsung also announced its partnership with Microsoft, despite we have not seen any significant change in either company’s share price. While having competitions, firms are also forming partnerships in the market. Firms do not tend to form partnerships within their own sectors, they generally seek partnerships outside their own sectors. This is because of several reasons.

First, forming partnerships within their own sectors could have some legal problems that it can violate anti-trust laws. Secondly, firms from same sectors are often competing for more market shares, it is difficult for them to form any kind of partnership when they are fighting for the same goal. Thirdly, the partnership between firms from different sectors is a little bit like a merge between firms from different sectors that they can take advantage of each other’s unique advantages and strength. Fourthly, sometimes it is just better for them to cooperate. They may produce complimentary products, so they can sell their products together and promote both firms’ products at the same time. Fifthly, partnership is very flexible, unlike merge, firms can choose when and how they want to end a partnership. Sixthly, forming a partnership with another firm is a way of saying having this firm as my client now.

Overall, I think that we are going to see more partnership among firms, especially when the development of cloud and IOT makes the barriers between different sectors thinner.

Cause and Effect

When we are studying a problem, we always want to know the cause and the effect. It seems really easy to find causality that people just need to follow the logic; however, in reality, it is much more difficult because there are so many ways to explain what is happening in the real world, and most of the explanations can be reasonably accepted, people can find different causalities based on the explanations they choose. People have proposed various ways to identify a causality.

Some people look at the timeline that the cause comes before the effect. Is this a valid solution? Yes, it is. The problem is that we have to identify the cause and the effect are actually the cause and the effect that the two objects do have a correlation between them. For example, recently some US politicians suggest that the video games are the cause of increasing number of mass shootings in the US. Is this claim reasonable? It follows the pattern that the cause comes before the effect that the video games appeared much earlier than the significant increase in mass shootings in the US (of course, the politicians also provide the explanations of how video games contribute to increasing mass shootings) . However, there are a lot more things which happened before the significant increase in mass shootings, can we say all these things are the causes of increasing mass shootings? Obviously we cannot, we have to find the significance of the correlation between these two objects first, then look at the causality.

Of course, there are other ways to help identify causality which I will talk about later.

Why is theory important?

Nowadays more information become available and more accessible, big data analysis becomes very popular. Sometimes people can spot a phenomenon first through data analysis, then try to create a theory to explain this phenomenon. However, sometimes people use empirical study and/or experiments to test whether a newly developed theory works in the real world or not. Therefore, we can say that there is an undirected link between theory work and empirical work (and experiment work).

Theory is very important for us to understand the world. It helps us to understand the world. Theory and model often simplify the real world problem. More importantly, theory can help us to open the black box. When we observe a relationship between two objects, it is hard for us to draw a conclusion about the causality behind the relationship; then here comes the help from theory. From the mathematics and logic inside theory, people can understand the phenomenon better.

However, it does not mean theory is always correct. Especially in social science, for one thing, there are multiple theories to explain; all the theories seem legit. Sometimes theories are different because they are looking at the problem from different angles; sometimes they are different because they include various factors. When we face such differences, we do not need to worry too much, we just need to apply different theories based on the circumstances we face. However, when the logics behind them are different, then we should be very careful, because the two theories are possible to contradict each other.

Machine learning and other methods may be able to help us to solve problems, but theory will help us to look into the black box and gain better understanding.

Bear oil market

The oil market has been into the bear zone since early June and the price has fallen below $60 per barrel. The oil market has been closely correlated with the expectation of the world future economic performance. The falling oil price implies that the market is losing confidence in the world economy to some degree. It is not surprising to see people losing confidence, since it seems the trade tension between the US and China is not going to be resolved in any near future even after the two presidents met in the G20 summit. In addition, the UK is near its Brexit deadline and has a new Prime Minister, people are also wondering how the UK is going to leave the European Union and what consequences might be brought by Brexit. People do have good reasons to worry about the world future economic performance.

The oil market is dragged back by other factors in the world economy; however, some industries are dragged back by the falling oil price. Of course, the oil companies are suffering from the lower oil price that the share prices of oil companies fall sharply in general. In addition, other energy industries are also suffering from the lower oil price, including the solar industry. Furthermore, since the lower oil price is also driven by the weak demand, it means those who produce oil related products do not perform very well, although the costs for their raw materials decrease.

Overall, I do not see the oil market can climb out of the bear zone any soon, given the increasing uncertainty in the world economy. Moreover, I think that the market will keep pressuring the oil companies, despite their internal conditions, as the environment matters more in this case.