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).