By Bilal Hafeez 02-07-2019
In: post, Newsletter

Macro Hive Podcast Playlist: Populism’s Future / Huawei’s Secrets / Tech Non-Bubble

(total reading time: 6 mins) With President Trump giving the green light for Huawei to continue trading with the US, I feature an excellent BBC podcast profiling the Chinese tech company. Among other things, it describes Huawei’s gigantic R&D budget and its developing countries play. Staying on tech, I also bring you the thoughts of the founders of leading Silicon Valley VC fund, Andreessen Horowitz. Against popular opinion, they argue that tech is not in a bubble. There’s a wide-ranging interview of Harvard Professor Jeff Frieden wherein he discusses the link between the decline in manufacturing and the rise of populism. He talks about the regional consequences of this and the impact of expensive housing in reducing labour mobility. Frieden also suggests that the US Federal system is as vulnerable as the EU in terms of keeping its component states together. On a more optimistic note we’ve included a podcast with Nobel laureate Daniel Kahneman on how a new combination of insights from psychology and behavioural economics – ‘nudge theory’ – could help reduce the opioid crisis and climate change. Last week I had a few podcasts on investment strategies and today I feature another – this time with Blackrock’s head of factor investing, Andrew Ang. He’s confident that value-based strategies will make a comeback and he doesn’t think negative-yielding bonds are necessarily irrational. Finally, for a short distillation of the philosophy of Confucius as it could apply to today’s world, you can listen to my latest podcast: Confucius on Management. Podcast banner Jeffry Frieden on the Rise of Populism, Mobility, and the Eurozone (Macro Musings 53 mins) A wide ranging interview of Jeffry Frieden, Professor of Government at Harvard University, in which he discusses the intersection of politics and economics. The meat of the piece starts at 8 minutes 40 seconds in where Frieden argues that a loss of manufacturing jobs is key to the recent rise of populism. Such jobs peaked as a share of employment in the late 1960s and early 1970s and were important for allowing unskilled and semi-skilled workers to enter the middle class. New technology, however, resulted in capital replacing labour. And globalization accelerated this transition as jobs were increasingly offshored. Now, in order to move up the income ladder, workers need computer literacy and higher skills levels. Freiden then discusses the role of factories within town communities and how their decline and closure negatively impacts employment, housing prices, and the success of neighbouring businesses (around 18 minutes in). Moreover, with more prosperous regions (like the coasts) experiencing increases in house price, people from the underperforming regions can’t afford to move to the areas with better jobs. This partly explains the regional nature of populism. It also reveals a vulnerability for the cohesion of the US, much like the EU has struggled with the diverging fortunes of member states. Who Are Huawei? (The World of Business, 27 mins) An excellent profile of the Chinese tech company that includes a rare interview with its founder, Ren Zhengfei. Huawei originally started as an importer of tech but eventually turned into a research-heavy tech producer. How has it been so successful? For one, it has a controversial and intensive work culture known as the mattress ethic (for sleeping in the office!). Early on Huawei also had a big focus on customer service and was helped by government contracts. It avoided competition with Apple and Samsung by focusing on emerging markets like India, which has resulted in lasting loyalty. Huawei also spends a huge amount on R&D – last year $15-20bn – with a large portion in basic research that doesn’t have a direct commercial benefit. To make such large investments it has avoided a stock market listing. The podcast also touches on how the company matured and started to compete against Apple, with some great insights into its decision to focus on a single smartphone feature like the camera to make it the best in class. Of interest to those eager to keep up to date on the US-China tech war is the concluding sections revealing how Huawei is attempting to deal with restrictions imposed by the US – it’s working on its own chipsets and operating system. Andrew Ang Discusses Asset Management (Masters in Business, 1hr 6 mins) Andrew Ang leads US asset manager Blackrock’s factor-based strategies group. At 8 minutes in he highlights some enduring trading strategies (or smart beta/factors) such as value, small cap, and quality. He argues that they have not been arbitraged because they may be a reward for bearing risk, there could be a structural impediment (e.g. mandates may force funds to target high volatility strategies), or investors might have behavioural biases. Even though value strategies are seeing their fourth worst drawdown in a century, Ang remains confident the strategy will recover. At 15 minutes, we hear about Blackrock’s new focus on factor investing in fixed income, currency, and commodity markets. Ang also disagrees with those who suggest that holding negative-yielding bonds is necessarily irrational. He suggests that if we see deflation in the future, then the yields would be positive in real terms. He also highlights  that extreme events such as banning gold holdings (as US President Roosevelt did in the interwar period) could make holding negative-yielding bonds, a safe-haven asset, attractive. Finally, Ang discusses how he tilts portfolios towards a factor based on its own valuation (around 28 minutes in). This could be assessed relative the factor’s own history or compared to the performance of other factors. Entrepreneurs, Then and Now (A16z, 44mins) The founders of Andreessen Horowitz – a leading Silicon Valley venture capital fund – discuss the company’s history and their views for the future. Though many think tech is in a bubble, they feel that too many people are still bearish for it to be the type of bubble it was in the late 1990s. Indeed, they highlight how there have been constant fears of a bubble for the past ten years. When they formed their company in 2009, many were concerned that the aftershocks of the financial crisis would torpedo the tech sector. Then in 2012 when Facebook IPO’d many thought that was the peak. Today, the Andreessen Horowit founders expect more upside in online-to-offline (O2O) plays – think the AirBnB/Uber model moving to other sectors. They are also looking for the new user interface beyond the iPhone, at the use of augmented reality (AR) and virtual reality (VR), and at bio-tech such as genomics, CRISPR, and synthetic biology. We also learn about their investment philosophy in general. Don’t question the possibility of new tech, only how big it might get. On timing, ask, is the tech ready? Is the market currently receptive? And are there any potential regulatory issues? The founders also dole out some handy tips on treating differently first and second time entrepreneurs and reveal their own focus on ‘process’ (they substantially revise it after both good and bad outcomes). Listen to the end for a great book recommendation – “Thinking in Bets”. Nobel Perspectives: Can people be nudged into better behaviour? (Monocle 24: The Bulletin with UBS, 15 mins) First some background on the history of behavioural economics. Then Nobel Prize winning behavioural economists Richard Thaler and Daniel Kahneman talk about how framing and transparency can be used to ‘nudge’ people towards ’good’ behaviour. Take the US opioid crisis – lowering the default prescription for drugs has been found to reduce addiction. But another effective method is notifying the original prescribing doctor that their patient dies of an overdose. On climate change, carbon taxes and congestion charges should reduce carbon usage. Another approach could be to exploit the ‘endowment effect’. People are more likely to keep an object they own than acquire that same object when they don’t own it. By that logic, if we remind people that we have the earth, and that through their actions they could be losing it (think billboards of melting icebergs), then, Thaler and Kahneman argue, we can more effectively adjust their behaviour. Their ideas present policy-makers with options that could garner bipartisan support.

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