AYA Analytica financial health memo July 2019
As of July 2019, this regular podcast is available on our Andy Yeh Alpha fintech network platform.
All the 18 systemically important banks pass the annual Federal Reserve stress tests. Many of the largest lenders announce higher cash payouts to shareholders in the wake of the stress test results as of mid-2019. The total cash dividends and share repurchases can exceed $150 billion. In response, Deutsche Bank experiences 4%+ share price gains, and JPMorgan Chase, Bank of America, and Goldman Sachs each reap sharp share price increases about 2%. All these banks now maintain more than 4.5% common equity Tier 1 capital ratios, and their supplemental leverage ratios are well above the 3% regulatory minimum requirement. As the annual Federal Reserve stress test results indicate, all of the systemically important banks hold sufficient core capital to safeguard against extreme losses that might arise in rare times of severe financial stress. As a result, the Federal Reserve expects these banks to remain profitable with better survival likelihood to disgorge cash distributions to their shareholders in adverse macroeconomic scenarios. Specific macroeconomic scenarios include a 30% decline in real estate prices and a high unemployment rate with double digits. Overall, all of the systemically important banks can absorb severe post-crisis losses with sufficient cash capital utilization for subsequent shareholder payout.
Blackrock asset research director Andrew Ang shares his economic insights into fundamental factors for global asset management. As Ang indicates in a recent interview with Ritholtz Wealth Management, fundamental factor investors seek to manage macroeconomic risk to enhance their average returns. Ang focuses on 5 systematic factors: size, value, momentum, low volatility, and high quality of profit margins. Also, Ang oversees a broad basket of assets such as stocks, bonds, commodities, and currencies. The consistent application of both big data and technology helps scale total assets under management with lower transaction costs. At BlackRock, Ang decomposes his favorite fundamental factors across macro and style factors. The 3 major macro factors are economic growth, inflation, and the real interest rate, in accordance with the standard Taylor interest rate that depicts the highly non-linear Phillips curve. Ang empirically finds that these 3 major macro factors account for 85% of stock market returns. Stock portfolio analysis helps achieve higher average returns (after risk and fee adjustments) when the active fund manager focuses on size, value, momentum, low volatility, and corporate profitability. Moreover, value occasionally becomes more cost-effective relative to its own history, and momentum factor returns often cluster together in specific time periods. This factor investment methodology accords with our proprietary alpha investment model that focuses on 6 core fundamental factors (size, value, momentum, asset growth, operating profitability, and market risk exposure).
Capital gravitates toward profitable active mutual funds until the marginal asset return equilibrates near the stock market benchmark. As Stanford finance professor Jonathan Berk suggests, capital flows equilibrate persistent active mutual fund returns relative to the stock market benchmarks. Since investors first direct capital to the best active mutual fund managers, these fund managers receive so much money that it affects their ability to generate superior returns. Their average return declines to match the average return for the second-best fund managers. At this stage, investors become indifferent to investing with the first-best and second-best fund managers, so capital flows equilibrate until their average return declines to match the average return for the third-best fund managers. This process continues until the average return of investing in most active mutual funds declines to match the stock market benchmark. Capital flows may reflect persistent asset returns in the transition toward the dynamic equilibrium outcome. Only high-skill active mutual fund managers can consistently earn superior average returns when numerous fund managers compete for scarce capital flows. This rationale suggests that investors who choose to invest with active fund managers cannot expect to receive positive excess returns after we apply appropriate risk and fee adjustments.
Harvard economic platform researcher Dipayan Ghosh proposes alternative solutions to breaking up Facebook, Google, Apple, and Amazon. As Ghosh suggests, breaking up tech titans would only serve to punish innovative tech enterprises that have already created tremendous economic value. These tech titans have become quasi-monopolies that necessitate a stringent set of *utility regulations* for better privacy protection and personal data usage. These regulations should obstruct the capitalistic overreaches of tech titans in order to protect the public against economic exploitation. Facebook, Google, Apple, and Amazon reap substantive mercenary gains from their network services when more people use these services. Their current infrastructure makes it extraordinarily difficult for new entrants to offer competitive levels of consumer utility. The tech titans extract consumer currency on the basis of personal data and attention. Moreover, these tech pioneers extract consumer currency on one side of the platform, and then exchange such currency for monetary revenue at high margins on the other side of the same platform. This subtle but corrosive form of economic exploitation seems most objectionable to U.S. Justice Department, Federal Trade Commission, and European Commission. Ghosh thus advocates an alternative case for utility regulations in lieu of breaking up the tech titans.
Platforms often benefit from network effects, scale economies, and information cascades. There are at least 2 types of highly valuable platforms: innovation platforms empower third-party firms to add complementary products and services to some core technology (e.g. Google Android, Apple iPhone operating system, and Amazon Web Services), and transaction platforms facilitate the positive exchange of information, goods, or services (e.g. Amazon Marketplace, Airbnb, and Uber). In the empirical analysis of 20-year Forbes Global 2000 data, the top 43 public platform corporations generate about $4.5 billion annual sales with only half the number of employees at their non-platform counterparts. These public platform corporations also yield twice operating profits, market values, and bottom-line growth rates. There are several key generic lessons for modern platform corporations. First, founders and managers need to learn fast from failures for better lean startup optimization. Despite the huge upside platform opportunities, the simple pursuit of a platform strategy may not necessarily improve the odds of success as a long-term sustainable business.
Second, most platforms need to boost exponential user demand with network effects and scale economies, so platform firms should set prices near their relatively low marginal costs with adequate buyer-or-seller subsidies. Google, Facebook, Twitter, Amazon, Apple, Alibaba, and Tencent start their lean enterprises by aggressively subsidizing at least one side of the market before they sustain profitable platforms. In comparison, Netflix, Uber, Lyft, Slack, and Zoom etc still struggle to fine-tune their business models toward maximum sustainable platforms.
Third, it is important for platform firms to clearly explain why they strive to accomplish a great deal for better customer trust and loyalty. Many platforms should build customer rapport to inspire active users via positive information cascades. For instance, Alibaba Taobao and Tmall leverage Alipay as the sleek third-party payment mechanism to ease the transactional frictions of e-commerce in China (whereas, eBay fails to attract customer trust and rapport there due to the mere absence of a credible and verifiable third-party payment system).
Fourth, most platforms enjoy and maintain their first-mover competitive advantages with formidable barriers to entry. A good example is Microsoft: the software tech titan remains competitive with its Windows operating system, Office software suite, and Edge Internet browser; however, Microsoft gradually loses unique business niches to Apple iOS, Google Android, Chrome, Firefox, Safari, and Opera. On balance, platform corporations need to deploy these key strategies for better network effects, scale economies, and information cascades.
Facebook introduces a new cryptocurrency Libra as a fresh medium of exchange for e-commerce. Libra will be available to 2.5 billion active users on Facebook, Messenger, Instagram, and WhatsApp. This new cryptocurrency has tremendous potential to change how people save, spend, and send money. As a new medium of exchange, Libra helps facilitate e-commerce auctions and other transactions within the current Facebook social network ecosystem. As a new store of value, Libra exhibits less extreme price volatility than other cryptocurrencies such as Bitcoin and Ethereum. Facebook launches the digital wallet company Calibra as a key third-party payment gateway in collaboration with PayPal, Stripe, Visa, MasterCard, American Express, eBay, Spotify, Uber, and Lyft etc. At its inception, Calibra records Libra digital transactions on a public blockchain. This blockchain serves as a tamper-proof ledger that runs across multiple computer servers to preserve consumer privacy. When cryptocurrencies become more mainstream, aggregate money supply growth may decline to the extent that the central bank can better curb price inflation and wage growth in a cashless society. In terms of macroeconomic implications, the central bank and fiscal authority can better manage the myriad trade-offs among price stability, economic growth, employment, capital accumulation, and financial market stabilization.
We can decipher valuable lessons from the annual letters to shareholders written by Amazon CEO Jeff Bezos. Amazon is highly customer-centric because the word variants of *customer* and *customers* attain the highest word count in each annual letter to shareholders in 1997-2003, 2008-2009, and 2012-2017. In addition to this customer focus, each letter indicates a clear concern with robust financial health. As Bezos reiterates in his letter to Amazon shareholders back in 2004, he emphasizes that the *ultimate long-term financial measure [for Amazon] is free cash flow per share*. This distinct focus sheds fresh light on Amazon corporate value creation via cash capital utilization that drives steady free cash flow growth in the long run. Another major aspect of Amazon business focus from 2007 to present relates to planting seeds of firm expansion into new ventures such as Kindle e-reader devices, Amazon Web Services (AWS), and self-service e-commerce platform improvements for cost-effective sales and fast delivery services. At Amazon, the most transformative inventions empower authors, third-party sellers, and other network members to unleash their creativity. On balance, Bezos believes in an optimal level of customer centricity, and he cares for other stakeholders such as blue-collar employees, content providers, and third-party sellers etc.
Gold prices surge above $1400 per ounce amid global trade tension and economic policy uncertainty. Both the European Central Bank and Bank of Japan may consider expanding additional monetary stimulus if the global economy continues to weaken in the next few months. Greenback depreciates quite a bit as the Federal Reserve switches to a dovish tone. The current stock market investor sentiments manifest in the negative correlation between U.S. dollar strength and gold appreciation. The precious metal accrues zero interest as a steady store of value over time, and so gold prices often serve as a negative-beta countercyclical indicator of international economic stability. Meanwhile, the Sino-U.S. trade impasse calls for both Trump and Xi to show courage with some reconciliatory gestures at the G20 summit. Also, the British Labour Party may back a second referendum on Brexit despite substantial economic policy uncertainty. British Conservatives now need a new prime minister to lead the next round of E.U. withdrawal conditions, trade negotiations, and other regional economic affairs. Moreover, the recent accidental drone collision between Iran and the U.S. adds to the current global trade escalation. As a result, both gold and oil prices surge as stock market investors seek capital safety.
President of US-China Business Council Craig Allen suggests that a trade deal should be within reach if Trump and Xi show courage at the G20 summit. A landmark trade agreement between China and the U.S. should be attainable insofar as Trump and Xi have the courage to compromise on specific aspects of the trade deal. This compromise can be difficult for both leaders, whereas, both sides signal the positive intent that Sino-U.S. trade negotiations should get back on track. Allen indicates that setbacks are quite normal in most bilateral trade negotiations. Perhaps the China-U.S. trade envoys, Liu He and Robert Lighthizer, seem to agree to a major trade deal *in principle*. However, the legal details may not fully reflect mutual agreement for both presidential leaders. The U.S. Trump administration calls for significant bilateral trade deficit eradication and better intellectual property protection and enforcement in China. The Chinese Xi administration expects all future fair trade practices to be realistic with appropriate goods and services procurement, market access, and technology transfer etc. Respecting these fundamental interests can help both sides reach a tractable solution. In essence, Allen emphasizes that addressing these concerns helps China achieve sustainable economic growth in the long run.
Japanese prime minister Shinzo Abe outlines the key economic priorities for the G20 summit in Osaka. First, Asian countries need to forge the Regional Comprehensive Economic Partnership (RCEP) for free and fair trade in China, India, Japan, South Korea, Australia, New Zealand, and the 10 members of the Association of South East Asian Nations (ASEAN). This Asian bloc promotes sound and efficient trade relations as China, India, and Japan lead the mainstream consensus views on economic integration, financial stabilization, and intellectual property protection. Second, Asian countries should help ensure the safe and free flows of data via digital networks. With respect to this recent digitization, the socioeconomic ramifications of data flows can rival, or may even surpass, the broad impact of petroleum and the internal combustion engine in the previous century. Third, Japan leads many Asian countries in terms of disruptive innovation that helps tackle global environmental degradation. In the new era of beautiful harmony, the Japanese Abe administration seeks to reduce carbon emissions with better artificial photosynthesis. This innovative technology contributes to maximum sustainable employment, economic growth, and capital investment accumulation. Overall, the Japanese Abe administration hosts the next G20 summit for better international trade, data, and environmental protection.
France and Germany are the biggest beneficiaries of Sino-U.S. trade escalation, whereas, Japan, South Korea, and Taiwan suffer from the current trade standoff. U.S. Commerce Secretary Wilbur Ross reiterates that President Trump can impose tariffs on all of the other $325 billion Chinese imports if the Chinese Xi administration fails to agree with the U.S. to deliver a bilateral trade deal. Barclays economic research head Christian Keller emphasizes in his recent report that the additional U.S. tariffs may lead to trade substitution with fresh opportunities for France and Germany to garner greater export market shares worldwide. Eurozone exposure concentrates in Chinese computer and electronic exports and U.S. transport equipment exports. As France and Germany choose to accommodate Chinese export diversions, this transition may result in important economic repercussions in light of U.S.-E.U. trade negotiations. On the other hand, Japan, South Korea, and Taiwan rely heavily on trade linkages with the Chinese economy. As Asia Pacific chief economist Steve Cochrane suggests, these industrial economies face substantive exposure to Chinese consumers and electronic supply chains. In recent times, these East Asian economies experience hefty stock market losses due to the current trade standoff between China and the U.S. amid trade deal uncertainty.
The Chinese new star board launches for tech companies to list at home. The Nasdaq-equivalent new star board serves as a key avenue for Chinese tech companies to raise funds as the stock exchange criteria are less stringent than other domestic boards. In recent years, the Chinese government encourages local tech firms to become more self-reliant in producing microchips and other core components. This new star board arises amid the current Sino-American trade escalation and recent U.S. embargo on the HuaWei supply chain of electronic imports. As of mid-2019, the new star board has received applications from 122 tech firms. Tech companies with at least RMB$300 million ($43 million) net income can list on the new star board insofar as these companies maintain the minimum stock market capitalization of RMB$2 billion with RMB$100 million cash flows in the prior 3 years. The board is the first registration-driven IPO system that streamlines the price flotation restrictions. Like Facebook, Google, Alibaba, and JD etc, Chinese tech companies with a dual-class shareholding structure are eligible to apply for registration. Alibaba continues to mull over its next proposal to list on the Hong Kong Stock Exchange several years after its blockbuster IPO on NYSE.
The Chinese central bank has to circumvent offshore imports-driven inflation due to Renminbi currency misalignment. Even though China maintains substantial foreign reserves in U.S. government bonds, traders may speculate about whether the People Bank of China (PBOC) can manage to fix the Dollar-Renminbi exchange rate below 7.0x. This current exchange rate has substantially declined about 9.3% since April 2018 and now hovers in the stable range of 6.89x to 6.92x. PBOC Governor Yi Gang indicates that there is no asymmetric red line for the Sino-U.S. exchange rate. However, Chinese economic policymakers may be hesitant to let their currency depreciate past RMB$7-to-USD$1. Any expectations of short-term currency misalignment can spur capital flight out of the Chinese economy. Chinese public companies that list abroad have to make cash dividend payments in June every year; so foreign exchange order flows reveal substantive short-term pressure for these Chinese public companies to sell the offshore Renminbi. As China maintains a near-zero current account surplus in mid-2019, the Renminbi faces downward pressure. Renminbi depreciation has long been a major source of tremendous competitive advantage for China. It is important for the Sino-U.S. trade negotiations to level the playing field with respect to potential Renminbi currency misalignment.
Warwick economic researcher Roger Farmer proposes paying for social welfare programs with no tax hikes. The current U.S. government pension and Medicare liabilities are almost $47 trillion in total. As Farmer suggests, national treasuries should establish social care funds, and these public funds borrow money at low interest rates and invest the proceeds in many international stock markets. A recent study analyzes data from OECD economies over a century and empirically shows that the average stock return is about 7% above the return on government bonds. The average equity premium ranges from 3.8% in Denmark to 9.9% in Japan. Stock market idiosyncratic volatility may not fully accord with economic fundamental factors such as size, value, momentum, asset growth, operating profitability, and market risk etc. Instead, this volatility reflects the animal spirits and sentiments of investors who often buy and sell shares on the basis of self-fulfilling prophecies of greed and fear. When the government institutes social care funds, these public funds can smooth out short-term stock price gyrations to invest in the long-term fundamental health of the global economy. The Farmer proposal may work well in practice as most public funds can earn an average 4%-7% equity premium per annum.
U.S. regulatory agencies may consider broader socioeconomic issues in their antitrust probe into tech titans such as Amazon, Apple, Facebook, and Google. The House Judiciary Committee expects to hold the inaugural session on anti-competitive practices among these tech companies. The investigation represents the first congressional probe into allegations that these tech companies may abuse their quasi-monopoly power with suspicious anti-competitive behaviors. House Democrats back this landmark investigation, and Republicans also have huge concerns around the potential abuse of tech monopoly power (although most conservatives intend to avoid excessive government intervention). Federal Trade Commission and Justice Department focus on how Facebook and Google affect consumer privacy and competitor survival across the news media landscape. The regulatory agencies also probe into whether Apple abuses its market power in collaboration with Spotify to dominate digital music and the iOS app ecosystem. Moreover, the regulatory agencies examine whether Amazon not only drives down retail prices but also conducts collusive schemes in e-commerce. Antitrust scrutiny remains one of the biggest bipartisan tech issues. The regulatory agencies may impose punitive fines to diminish the market power of these tech companies, or may break up some of these tech titans for better consumer welfare and competitor survival.
Apple releases the new iOS 13 smartphone features. These features include Dark Mode, Audio Share, Memoji, better privacy protection, smart photo collection, and a fresh app dashboard. Switching the iPhone to Dark Mode can turn the typically bright screen design elements black and grey. This switch draws less electric power and helps ease eye strain. The iOS 13 software update facilitates sharing music between Apple mobile devices. Audio Share allows 2 AirPod users to listen to the same song with stereo sound at once. Apple refreshes the first-party apps in terms of both usability and functionality.
These apps help track health trends, gallery views, notes, maps, reminders, and text messages with natural language entry. Apple gives iPhone lovers more control over their location data, social login service for iOS 13 *Sign In With Apple*, and random email address generation for better privacy protection. The new iOS 13 photo collection app uses machine-learning algorithms to ditch duplicate images and blurry screenshots. All iOS 13 users can edit photos and video clips with new tools to beautify both vertical and horizontal masterpieces. Memoji allows iOS 13 users to customize their FaceTime, Camera, and Messages with eyeshadow, jewelry, hats, glasses, and additional hairstyles.
AYA finbuzz podcast July 2019
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All the 18 systemically important banks pass the annual Federal Reserve stress tests. Many of the largest lenders announce higher cash payouts to shareholders in the wake of the stress test results as of mid-2019. The total cash dividends and share repurchases can exceed $150 billion. In response, Deutsche Bank experiences 4%+ share price gains, and JPMorgan Chase, Bank of America, and Goldman Sachs each reap sharp share price increases about 2%. All these banks now maintain more than 4.5% common equity Tier 1 capital ratios, and their supplemental leverage ratios are well above the 3% regulatory minimum requirement. As the annual Federal Reserve stress test results indicate, all of the systemically important banks hold sufficient core capital to safeguard against extreme losses that might arise in rare times of severe financial stress. As a result, the Federal Reserve expects these banks to remain profitable with better survival likelihood to disgorge cash distributions to their shareholders in adverse macroeconomic scenarios. Specific macroeconomic scenarios include a 30% decline in real estate prices and a high unemployment rate with double digits. Overall, all of the systemically important banks can absorb severe post-crisis losses with sufficient cash capital utilization for subsequent shareholder payout.
Blackrock asset research director Andrew Ang shares his economic insights into fundamental factors for global asset management. As Ang indicates in a recent interview with Ritholtz Wealth Management, fundamental factor investors seek to manage macroeconomic risk to enhance their average returns. Ang focuses on 5 systematic factors: size, value, momentum, low volatility, and high quality of profit margins. Also, Ang oversees a broad basket of assets such as stocks, bonds, commodities, and currencies. The consistent application of both big data and technology helps scale total assets under management with lower transaction costs. At BlackRock, Ang decomposes his favorite fundamental factors across macro and style factors. The 3 major macro factors are economic growth, inflation, and the real interest rate, in accordance with the standard Taylor interest rate that depicts the highly non-linear Phillips curve. Ang empirically finds that these 3 major macro factors account for 85% of stock market returns. Stock portfolio analysis helps achieve higher average returns (after risk and fee adjustments) when the active fund manager focuses on size, value, momentum, low volatility, and corporate profitability. Moreover, value occasionally becomes more cost-effective relative to its own history, and momentum factor returns often cluster together in specific time periods. This factor investment methodology accords with our proprietary alpha investment model that focuses on 6 core fundamental factors (size, value, momentum, asset growth, operating profitability, and market risk exposure).
Capital gravitates toward profitable active mutual funds until the marginal asset return equilibrates near the stock market benchmark. As Stanford finance professor Jonathan Berk suggests, capital flows equilibrate persistent active mutual fund returns relative to the stock market benchmarks. Since investors first direct capital to the best active mutual fund managers, these fund managers receive so much money that it affects their ability to generate superior returns. Their average return declines to match the average return for the second-best fund managers. At this stage, investors become indifferent to investing with the first-best and second-best fund managers, so capital flows equilibrate until their average return declines to match the average return for the third-best fund managers. This process continues until the average return of investing in most active mutual funds declines to match the stock market benchmark. Capital flows may reflect persistent asset returns in the transition toward the dynamic equilibrium outcome. Only high-skill active mutual fund managers can consistently earn superior average returns when numerous fund managers compete for scarce capital flows. This rationale suggests that investors who choose to invest with active fund managers cannot expect to receive positive excess returns after we apply appropriate risk and fee adjustments.
Harvard economic platform researcher Dipayan Ghosh proposes alternative solutions to breaking up Facebook, Google, Apple, and Amazon. As Ghosh suggests, breaking up tech titans would only serve to punish innovative tech enterprises that have already created tremendous economic value. These tech titans have become quasi-monopolies that necessitate a stringent set of *utility regulations* for better privacy protection and personal data usage. These regulations should obstruct the capitalistic overreaches of tech titans in order to protect the public against economic exploitation. Facebook, Google, Apple, and Amazon reap substantive mercenary gains from their network services when more people use these services. Their current infrastructure makes it extraordinarily difficult for new entrants to offer competitive levels of consumer utility. The tech titans extract consumer currency on the basis of personal data and attention. Moreover, these tech pioneers extract consumer currency on one side of the platform, and then exchange such currency for monetary revenue at high margins on the other side of the same platform. This subtle but corrosive form of economic exploitation seems most objectionable to U.S. Justice Department, Federal Trade Commission, and European Commission. Ghosh thus advocates an alternative case for utility regulations in lieu of breaking up the tech titans.
Platforms often benefit from network effects, scale economies, and information cascades. There are at least 2 types of highly valuable platforms: innovation platforms empower third-party firms to add complementary products and services to some core technology (e.g. Google Android, Apple iPhone operating system, and Amazon Web Services), and transaction platforms facilitate the positive exchange of information, goods, or services (e.g. Amazon Marketplace, Airbnb, and Uber). In the empirical analysis of 20-year Forbes Global 2000 data, the top 43 public platform corporations generate about $4.5 billion annual sales with only half the number of employees at their non-platform counterparts. These public platform corporations also yield twice operating profits, market values, and bottom-line growth rates. There are several key generic lessons for modern platform corporations. First, founders and managers need to learn fast from failures for better lean startup optimization. Despite the huge upside platform opportunities, the simple pursuit of a platform strategy may not necessarily improve the odds of success as a long-term sustainable business.
Second, most platforms need to boost exponential user demand with network effects and scale economies, so platform firms should set prices near their relatively low marginal costs with adequate buyer-or-seller subsidies. Google, Facebook, Twitter, Amazon, Apple, Alibaba, and Tencent start their lean enterprises by aggressively subsidizing at least one side of the market before they sustain profitable platforms. In comparison, Netflix, Uber, Lyft, Slack, and Zoom etc still struggle to fine-tune their business models toward maximum sustainable platforms.
Third, it is important for platform firms to clearly explain why they strive to accomplish a great deal for better customer trust and loyalty. Many platforms should build customer rapport to inspire active users via positive information cascades. For instance, Alibaba Taobao and Tmall leverage Alipay as the sleek third-party payment mechanism to ease the transactional frictions of e-commerce in China (whereas, eBay fails to attract customer trust and rapport there due to the mere absence of a credible and verifiable third-party payment system).
Fourth, most platforms enjoy and maintain their first-mover competitive advantages with formidable barriers to entry. A good example is Microsoft: the software tech titan remains competitive with its Windows operating system, Office software suite, and Edge Internet browser; however, Microsoft gradually loses unique business niches to Apple iOS, Google Android, Chrome, Firefox, Safari, and Opera. On balance, platform corporations need to deploy these key strategies for better network effects, scale economies, and information cascades.
Facebook introduces a new cryptocurrency Libra as a fresh medium of exchange for e-commerce. Libra will be available to 2.5 billion active users on Facebook, Messenger, Instagram, and WhatsApp. This new cryptocurrency has tremendous potential to change how people save, spend, and send money. As a new medium of exchange, Libra helps facilitate e-commerce auctions and other transactions within the current Facebook social network ecosystem. As a new store of value, Libra exhibits less extreme price volatility than other cryptocurrencies such as Bitcoin and Ethereum. Facebook launches the digital wallet company Calibra as a key third-party payment gateway in collaboration with PayPal, Stripe, Visa, MasterCard, American Express, eBay, Spotify, Uber, and Lyft etc. At its inception, Calibra records Libra digital transactions on a public blockchain. This blockchain serves as a tamper-proof ledger that runs across multiple computer servers to preserve consumer privacy. When cryptocurrencies become more mainstream, aggregate money supply growth may decline to the extent that the central bank can better curb price inflation and wage growth in a cashless society. In terms of macroeconomic implications, the central bank and fiscal authority can better manage the myriad trade-offs among price stability, economic growth, employment, capital accumulation, and financial market stabilization.
We can decipher valuable lessons from the annual letters to shareholders written by Amazon CEO Jeff Bezos. Amazon is highly customer-centric because the word variants of *customer* and *customers* attain the highest word count in each annual letter to shareholders in 1997-2003, 2008-2009, and 2012-2017. In addition to this customer focus, each letter indicates a clear concern with robust financial health. As Bezos reiterates in his letter to Amazon shareholders back in 2004, he emphasizes that the *ultimate long-term financial measure [for Amazon] is free cash flow per share*. This distinct focus sheds fresh light on Amazon corporate value creation via cash capital utilization that drives steady free cash flow growth in the long run. Another major aspect of Amazon business focus from 2007 to present relates to planting seeds of firm expansion into new ventures such as Kindle e-reader devices, Amazon Web Services (AWS), and self-service e-commerce platform improvements for cost-effective sales and fast delivery services. At Amazon, the most transformative inventions empower authors, third-party sellers, and other network members to unleash their creativity. On balance, Bezos believes in an optimal level of customer centricity, and he cares for other stakeholders such as blue-collar employees, content providers, and third-party sellers etc.
Gold prices surge above $1400 per ounce amid global trade tension and economic policy uncertainty. Both the European Central Bank and Bank of Japan may consider expanding additional monetary stimulus if the global economy continues to weaken in the next few months. Greenback depreciates quite a bit as the Federal Reserve switches to a dovish tone. The current stock market investor sentiments manifest in the negative correlation between U.S. dollar strength and gold appreciation. The precious metal accrues zero interest as a steady store of value over time, and so gold prices often serve as a negative-beta countercyclical indicator of international economic stability. Meanwhile, the Sino-U.S. trade impasse calls for both Trump and Xi to show courage with some reconciliatory gestures at the G20 summit. Also, the British Labour Party may back a second referendum on Brexit despite substantial economic policy uncertainty. British Conservatives now need a new prime minister to lead the next round of E.U. withdrawal conditions, trade negotiations, and other regional economic affairs. Moreover, the recent accidental drone collision between Iran and the U.S. adds to the current global trade escalation. As a result, both gold and oil prices surge as stock market investors seek capital safety.
President of US-China Business Council Craig Allen suggests that a trade deal should be within reach if Trump and Xi show courage at the G20 summit. A landmark trade agreement between China and the U.S. should be attainable insofar as Trump and Xi have the courage to compromise on specific aspects of the trade deal. This compromise can be difficult for both leaders, whereas, both sides signal the positive intent that Sino-U.S. trade negotiations should get back on track. Allen indicates that setbacks are quite normal in most bilateral trade negotiations. Perhaps the China-U.S. trade envoys, Liu He and Robert Lighthizer, seem to agree to a major trade deal *in principle*. However, the legal details may not fully reflect mutual agreement for both presidential leaders. The U.S. Trump administration calls for significant bilateral trade deficit eradication and better intellectual property protection and enforcement in China. The Chinese Xi administration expects all future fair trade practices to be realistic with appropriate goods and services procurement, market access, and technology transfer etc. Respecting these fundamental interests can help both sides reach a tractable solution. In essence, Allen emphasizes that addressing these concerns helps China achieve sustainable economic growth in the long run.
Japanese prime minister Shinzo Abe outlines the key economic priorities for the G20 summit in Osaka. First, Asian countries need to forge the Regional Comprehensive Economic Partnership (RCEP) for free and fair trade in China, India, Japan, South Korea, Australia, New Zealand, and the 10 members of the Association of South East Asian Nations (ASEAN). This Asian bloc promotes sound and efficient trade relations as China, India, and Japan lead the mainstream consensus views on economic integration, financial stabilization, and intellectual property protection. Second, Asian countries should help ensure the safe and free flows of data via digital networks. With respect to this recent digitization, the socioeconomic ramifications of data flows can rival, or may even surpass, the broad impact of petroleum and the internal combustion engine in the previous century. Third, Japan leads many Asian countries in terms of disruptive innovation that helps tackle global environmental degradation. In the new era of beautiful harmony, the Japanese Abe administration seeks to reduce carbon emissions with better artificial photosynthesis. This innovative technology contributes to maximum sustainable employment, economic growth, and capital investment accumulation. Overall, the Japanese Abe administration hosts the next G20 summit for better international trade, data, and environmental protection.
France and Germany are the biggest beneficiaries of Sino-U.S. trade escalation, whereas, Japan, South Korea, and Taiwan suffer from the current trade standoff. U.S. Commerce Secretary Wilbur Ross reiterates that President Trump can impose tariffs on all of the other $325 billion Chinese imports if the Chinese Xi administration fails to agree with the U.S. to deliver a bilateral trade deal. Barclays economic research head Christian Keller emphasizes in his recent report that the additional U.S. tariffs may lead to trade substitution with fresh opportunities for France and Germany to garner greater export market shares worldwide. Eurozone exposure concentrates in Chinese computer and electronic exports and U.S. transport equipment exports. As France and Germany choose to accommodate Chinese export diversions, this transition may result in important economic repercussions in light of U.S.-E.U. trade negotiations. On the other hand, Japan, South Korea, and Taiwan rely heavily on trade linkages with the Chinese economy. As Asia Pacific chief economist Steve Cochrane suggests, these industrial economies face substantive exposure to Chinese consumers and electronic supply chains. In recent times, these East Asian economies experience hefty stock market losses due to the current trade standoff between China and the U.S. amid trade deal uncertainty.
The Chinese new star board launches for tech companies to list at home. The Nasdaq-equivalent new star board serves as a key avenue for Chinese tech companies to raise funds as the stock exchange criteria are less stringent than other domestic boards. In recent years, the Chinese government encourages local tech firms to become more self-reliant in producing microchips and other core components. This new star board arises amid the current Sino-American trade escalation and recent U.S. embargo on the HuaWei supply chain of electronic imports. As of mid-2019, the new star board has received applications from 122 tech firms. Tech companies with at least RMB$300 million ($43 million) net income can list on the new star board insofar as these companies maintain the minimum stock market capitalization of RMB$2 billion with RMB$100 million cash flows in the prior 3 years. The board is the first registration-driven IPO system that streamlines the price flotation restrictions. Like Facebook, Google, Alibaba, and JD etc, Chinese tech companies with a dual-class shareholding structure are eligible to apply for registration. Alibaba continues to mull over its next proposal to list on the Hong Kong Stock Exchange several years after its blockbuster IPO on NYSE.
The Chinese central bank has to circumvent offshore imports-driven inflation due to Renminbi currency misalignment. Even though China maintains substantial foreign reserves in U.S. government bonds, traders may speculate about whether the People Bank of China (PBOC) can manage to fix the Dollar-Renminbi exchange rate below 7.0x. This current exchange rate has substantially declined about 9.3% since April 2018 and now hovers in the stable range of 6.89x to 6.92x. PBOC Governor Yi Gang indicates that there is no asymmetric red line for the Sino-U.S. exchange rate. However, Chinese economic policymakers may be hesitant to let their currency depreciate past RMB$7-to-USD$1. Any expectations of short-term currency misalignment can spur capital flight out of the Chinese economy. Chinese public companies that list abroad have to make cash dividend payments in June every year; so foreign exchange order flows reveal substantive short-term pressure for these Chinese public companies to sell the offshore Renminbi. As China maintains a near-zero current account surplus in mid-2019, the Renminbi faces downward pressure. Renminbi depreciation has long been a major source of tremendous competitive advantage for China. It is important for the Sino-U.S. trade negotiations to level the playing field with respect to potential Renminbi currency misalignment.
Warwick economic researcher Roger Farmer proposes paying for social welfare programs with no tax hikes. The current U.S. government pension and Medicare liabilities are almost $47 trillion in total. As Farmer suggests, national treasuries should establish social care funds, and these public funds borrow money at low interest rates and invest the proceeds in many international stock markets. A recent study analyzes data from OECD economies over a century and empirically shows that the average stock return is about 7% above the return on government bonds. The average equity premium ranges from 3.8% in Denmark to 9.9% in Japan. Stock market idiosyncratic volatility may not fully accord with economic fundamental factors such as size, value, momentum, asset growth, operating profitability, and market risk etc. Instead, this volatility reflects the animal spirits and sentiments of investors who often buy and sell shares on the basis of self-fulfilling prophecies of greed and fear. When the government institutes social care funds, these public funds can smooth out short-term stock price gyrations to invest in the long-term fundamental health of the global economy. The Farmer proposal may work well in practice as most public funds can earn an average 4%-7% equity premium per annum.
U.S. regulatory agencies may consider broader socioeconomic issues in their antitrust probe into tech titans such as Amazon, Apple, Facebook, and Google. The House Judiciary Committee expects to hold the inaugural session on anti-competitive practices among these tech companies. The investigation represents the first congressional probe into allegations that these tech companies may abuse their quasi-monopoly power with suspicious anti-competitive behaviors. House Democrats back this landmark investigation, and Republicans also have huge concerns around the potential abuse of tech monopoly power (although most conservatives intend to avoid excessive government intervention). Federal Trade Commission and Justice Department focus on how Facebook and Google affect consumer privacy and competitor survival across the news media landscape. The regulatory agencies also probe into whether Apple abuses its market power in collaboration with Spotify to dominate digital music and the iOS app ecosystem. Moreover, the regulatory agencies examine whether Amazon not only drives down retail prices but also conducts collusive schemes in e-commerce. Antitrust scrutiny remains one of the biggest bipartisan tech issues. The regulatory agencies may impose punitive fines to diminish the market power of these tech companies, or may break up some of these tech titans for better consumer welfare and competitor survival.
Apple releases the new iOS 13 smartphone features. These features include Dark Mode, Audio Share, Memoji, better privacy protection, smart photo collection, and a fresh app dashboard. Switching the iPhone to Dark Mode can turn the typically bright screen design elements black and grey. This switch draws less electric power and helps ease eye strain. The iOS 13 software update facilitates sharing music between Apple mobile devices. Audio Share allows 2 AirPod users to listen to the same song with stereo sound at once. Apple refreshes the first-party apps in terms of both usability and functionality.
These apps help track health trends, gallery views, notes, maps, reminders, and text messages with natural language entry. Apple gives iPhone lovers more control over their location data, social login service for iOS 13 *Sign In With Apple*, and random email address generation for better privacy protection. The new iOS 13 photo collection app uses machine-learning algorithms to ditch duplicate images and blurry screenshots. All iOS 13 users can edit photos and video clips with new tools to beautify both vertical and horizontal masterpieces. Memoji allows iOS 13 users to customize their FaceTime, Camera, and Messages with eyeshadow, jewelry, hats, glasses, and additional hairstyles.
AYA finbuzz podcast July 2019
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