The Balance of Life

Finally, everything comes to zero in the balance of life. What we have gained in one dimension of life, we have lost in another. The size of our achievements is balanced by the impact of our failures. Sacrifice in youth yields to bounty in old age. We should work in harmony with nature as we are as much a part of it as is the sun, the air and water. Nature seeks to achieve balance and it is more powerful than any man.

ROI on ICT Adoption in Developing Countries

As technology becomes increasingly accessible and permeates societies in developing countries, I believe that the question of whether the money spent or invested in ICT is generating an adequate return on investment (ROI) to justify the expenditure is critical.

In many cases*, the technology being used in developing countries originates in some form from developed countries, for example, patent or manufacture. Since these technologies cannot generate economic returns from patent or manufacture in the developing country then, at the very least, it becomes very important for their usage to be economically purposeful. Otherwise, the valuable, and usually scarce, foreign exchange being used to acquire these technologies might be better used in other economic investments.

When an individual purchases a smart phone, are the features being used for amusement or to generate economic activity? When a government makes large investments in technological infrastructure to support e-government, is the civil service ready to absorb and use this technology? When a corporation implements new state-of-the-art business technology, is the market sophisticated enough to make full use of the additional services offered as a result? It may be the case that in many instances society is not mature enough for smart phones, the civil service organisation may be years away from being ready to accept and effectively use e-government technology and the market in a developing country is simply not sophisticated enough for the new services from state-of-the-art business technology. In the simplest case of the smart phone, even partial use of the features for generating positive economic activity may not provide the required ROI per dollar of foreign exchange invested to warrant the investment.

It might be that investments in ICT should be strategically controlled until society is ready to accept increasingly complex technologies, either through education, maturity or practicality. Should governments then play a role in managing the use and adoption of technology in developing countries?

*I note that some larger emerging economies do manufacture some ICT, sometimes under licence, but there are a significant number of developing countries who are importers and consumers.

Straying Markets

The extent to which financial markets have evolved and the types of trading instruments available has strayed far from the fundamentals of markets in my opinion. Traditionally and fundamentally, a market should allow participants to barter, bargain and strike a deal to trade a tangible asset and the strike price should closely reflect the value of the asset as it is related to the infinite circumstances surrounding the participants. However, in modern day financial markets, I believe trading instruments have strayed significantly from the fundamentals in the name of innovation. The degree of abstraction of many of the derivatives used in modern financial markets away from the real asset has introduced participants and behaviours that undermine the trading process of real assets.

I believe therefore that the move by Germany to ban "naked short-selling" is a step in the right direction to returning financial markets to its fundamental principles. In "naked short-selling", an asset is sold without owning, borrowing or even ensuring that the asset can be borrowed to fulfil the sale. How can a market participant trading an asset that he/she does not own or intend to own be acting in the interest of the real asset? I believe that a participant acting in the interest of the abstraction of an asset can never be interested in the real asset and therefore can never be working in the interest of the market or an economy. Such abstraction of the real underlying asset means that the factors influencing the decisions are not properly correlated to the real asset since the psychology of these participants interested in trading an abstraction of the asset are likely to be different to participants who have an interest in the real underlying asset.

The abstracted derivatives in the US housing market proved to be the fundamental cause of the bust by introducing risk that was impossible to measure and manage. Financial markets must be returned to operation on the basis of the principle of trading real assets.

Financial Models Determine Trends

The attempt to rationalise the behaviour of markets has yielded many financial models which are now being criticised as being a primary source of the financial crisis of the past 2 years. Regardless of whether these models were adequate as a reflection of market behaviour, I believe that the use and adoption of these models had an important role in the impact of financial crises of the past 20 - 30 years.

I believe that the adoption of the popular models for rationalising market behaviour (such as Black-Scholes, Value-At-Risk, CAPM and various Pricing Theories) by large portions of the market players made the basis for decision-making close to uniform in influential segments of the market such as large pension funds and mutual funds. The resulting decisions and bets on stocks and derivatives were geared in one standard direction on the basis of the outputs of these models. Consequently, the average uniformity in decision-making arising from positive outputs from these models would have driven sustained increases in asset prices over months and years since the market participants would have been using very similar outputs from their models. Similarly and importantly, unique negative shocks, events and shifts in sentiment would have created a uniform set of decisions in the opposite direction causing a crisis and further, as Kahenman and Tversky have proven in their research, losses loom larger than gains and therefore probably fed downward spirals, independently of the models themselves.

Revised and new models arising out of the learning from the latest financial crisis, I suspect, will not solve these problems but rather create the similar patterns of gains and losses over the coming 30-40 years though driven by different market factors input into these models, with a large crisis yet again in this period. The ability to predict and model human and market behaviour is a very long way off.

Is risk really risky?

The traditional view of risk and return is that an investor's or entrepreneur's returns is related to the type of risks he or she takes. If he or she takes a large number of high risk bets, the overall returns should be large. As their stories go, well-known and successful investors and entrepreneurs such as Bill Gates, Richard Branson, Muhammed Yunnus and George Soros have tread unconventional paths and made bold decisions which have determined their success. But while general society views their stories as a set of bold and risky decisions, in their eyes were their decisions risky? I believe not - that is to say, to these investors and entrepreneurs, these decisions were very simple to make because, to them, the outcomes were certain.

If these entrepreneurs and investors have a unique way of understanding information which enable them to get a strong "feeling" about the future - a "feeling" which tends towards certainty - then their decisions would be almost based on certainty. Many of these types of people talk about their "gut instinct" and just "going with the flow" and these inclinations are what led them to their success. The decisions made would be viewed as risky and foolish by the average person at the point in time when the decision was made but perhaps the abilities of these investors and entrepreneurs enabled and enables them to process and assimilate information that led and leads to degrees of certainty about future events that the general society or the average person cannot see. Is it that the abilities of these investors and entrepreneurs allow them to see into the future in a way that enables decisions to be made based on a unique view of trends, events and outcomes that tends towards near certainty? I believe so, and further, if someone else had taken any of same decisions as any of one of these unique investors or entrepreneurs, the outcome would not have been the same as the understanding that converts the uncertainty into certainty would have been absent in the average person.

In that case, to try to emulate the strategies, decisions and paths of very successful investors and entrepreneurs is like chasing wind.

Adapting to Clean Technology

People will always tend to resist change, whether it is in their interest or not - it is just human nature. This resistance can be conscious or subconscious in that the resistance will not always be explicitly manifested in a negative manner but may be simply in the process required to adapt. Clean technology is in the interest of mankind's future but the resistance embedded in the process of adaptation means that innovative and radical new technologies may take much longer to become useful as a clean technology whereas smaller and incremental technologies will be the success stories in the short, medium and even long term.


What are the implications?
1) Cleantech companies whose products require radical changes in process, require large investments or require highly special skill-sets, regardless of how unique and valuable they are, will not yield the results or returns that might be expected.

2) There will not be a unique, innovative technological solution to the problems caused by global warming that is financially feasible in the short to medium-term, and maybe even the long term.

3) This may also mean that environmental problems will get worse before they get better as the process of adaptation may not be quick enough to reduce the impact of global warming and the factors that cause it.


What does this mean for investors?
I believe that, for example, technologies that change one component of systems such as cleaner batteries or highly efficient electrical components will quickly gain momentum while technologies that change many elements of systems or require system overhauls such as smart grid technology, while very feasible with clear benefits, will take much longer and may never provide a viable return on investment. Investors who want to make a good return on investment in clean technology should therefore focus on companies pursuing incremental technologies while governments and large corporations should focus on supporting technologies which change fundamentals.

Comments invited.

Emphasising Reputational Risk

The impact of technology on global information dynamics over the past 5-10 years has drastically changed the the reactions and consequences of events on people, business, industries and markets. The pace at which the change has occurred has not allowed business and people to adjust at the same rate. News houses must now make fundamental changes to their business models to remain viable, politicians have to devise more complex means of manipulation and businesses have to monitor the internet for user content on their products and services. But above all, as far as trust is the foundation of this clash of social influence and technology, reputation risk management needs to be greatly improved.

While individuals have quickly reacted to the need to manage reputation in this world of social media, organisations, by their very nature, have not reacted as quickly to develop risk models as complex as those used to manage financial risk or operational risk. By and large, it has been a reactionary situation in instances where bad information affects any one organisation. And in other instances, nothing is done or can be done, given existing models for managing this risk. For example, how does Toyota manage the damage to its reputation from safety defects (which is probably over-inflated)? How does Cadbury recover after fears of melamine poisoned chocolate? When these issues are born, the information multiplies globally, even to the smallest states, almost instantaneously in a manner that was impossible even 7 years ago.

This may mean that significantly more resources must be expended to manage reputation than currently. As intangible an asset that reputation is, so is the effect of the damage on future revenues at the moment in time. Might the intangible reputation and future revenue impact of Cadbury's melamine mishap allowed Kraft to acquire it a couple years later?

Comments welcomed.

Toyota - Why now?

Indeed, Toyota has had some critical quality defects in its cars but why is it now that the US is extending significant resources to bring Toyota to its knees? According to reports, these safety issues and other defects have been under investigation for nearly 7 years, since the George Bush era. But now, with the excessive pressure on the US car industry to increase market share and profits, and the fact that Toyota is one of the leading foreign sellers in the US market, might it be an opportunist reaction for a planned effort to destabilise Toyota to give the US car industry room to recover

Comments welcomed.

What is the World Economy?

Economists frequently talk about the World Economy and it's growth but in a world of fixed resources, what growth is being measured?

In a world of fixed resources, output should be balanced, that is, if the GDP of one country is increasing, the GDP of another country should be decreasing and in that sense we can talk of economic growth since one country will be using resources more efficiently than another and attracting the scarce resources available away from that other country. But to what is the world economy compared when it is said to grow by 2%? What is the change in resources that has happened to cause that 2% growth? Is it that we have removed natural resources from the ground faster than the year before and therefore increased output? If so, then at some point in the future, the resources should be removed less quickly and growth should be negative to achieve balance in a world of fixed resources.

Perhaps it might be better to talk of "wealth" when measuring global increases in productivity and outputs since the essence of progress is to ensure that everyone is better off than at some previous point in time. Global output growth of 2% does not tell us much about our progress as a race.

Flawed Economics

The subject of economics as we know it now is fundamentally flawed in my opinion. The entire premise of the discipline rests on the principle of rationality, which does not exist. Some may argue that it is a good reference point for understanding the truly irrational nature of markets but how does it equip economists to really understand markets and make optimal decisions? As the recent crisis in housing and debt markets showed, even the premise that the free market will tend to rational behaviour fails. What, then, is economics?

I believe that the entire foundation of the study of economics must be changed to be of any use in this new world where the dynamics of information has drastically changed. Economics based on rational foundations was sufficient to explain world affairs in a simpler world of even 10 years ago where people were not as connected and information was not as available. Technology and the internet has changed the dynamics of decision-making at individual and market levels. The irrational nature of humans has always existed but the new and quicker information availability globally has exaggerated this irrationality and made existing economics models virtually irrelevant.

The models put forth by Daniel Kahneman and Amos Tversky are good starting points for re-shaping university syllabi. Given the pace of technological change and the way in which technology is changing information and decision-making in the world of economics, can universities' economics courses keep up with the pace of change?

Where is the value in online social networks?

Online social networks have become very popular worldwide but are the numbers misleading? Investors have valued social networks at billions of dollars largely due to the potential for revenues generated from advertising and the potential for analysing the data being generated in these networks. Is the behaviour of the users of these online social networks really supporting these presumptions?

Can advertising really generate the required revenues to match investors' valuations of these networks? I think that hopes and expectations are hugely inflated. I believe that the premise that advertising revenue can yield large future profits is based on the models from search engines where the purpose is different - users of search engines are "looking". My belief is that users of these networks do not easily get distracted by advertisements but rather focus on their task at hand when they visit the network, whether it be looking at friends' updates, making a new business contact or updating their profile information.

Secondly, is the data being generated really so valuable as to warrant the valuations? Indeed, the data can generated a lot of useful information about behaviour and other consumer patterns as well as valuable news and insight from various stakeholders. But this happens across many similar networks around the world and therefore any one instance should not be so unique as to put such a high price on it. Even if the data may be unique, what is the cost of extracting the garbage and useless data from these enormous warehouses and databases?

I also suspect that over 80% of the users of any given network are not active enough to be of any real value to the network. As with any real life club, the membership may be very large but active participation comes from a few. Many of these sites have yet to generate a profit. Moreover, it is unlikely that any social network will begin to charge the masses for using the site since it is not difficult to switch to the next most popular free network available. Is there really value in online social networks?

Is the US dollar severely overvalued?

I think that any country faced with similar fiscal and monetary circumstances as the United States would have experienced a significant depreciation in the value of their currency many months ago. With a steadily increasing current account and trade deficit, the US Dollar should have depreciated significantly through market forces. The difference perhaps is that the US Dollar is the primary reserve currency of most countries worldwide and it is in the interest of the world that the US currency be stable, especially for China. The question is how long can this situation be maintained before the currency starts to buckle under market pressures. Already countries such as the UAE, Russia and some European countries are diversifying away from the US Dollar while the US is printing more currency to settle it's own markets. By my observation, the global supply of the US Dollar should be greater than the demand for it.

Specifically, with respect to China, the US is borrowing its own currency from China and China is replenishing its stock of USD through trade. My concern is what happens when the US borrows its own currency from China and therefore is faced with two future currency outflows:

1) Future loan interest payments of USD to China over the long-term

2) Future sustained outflows of USD to China through the trade deficit

It's a cycle of erosion in my view and perhaps it is destined for a failure that could be the catalyst for a necessary recomposition of the global financial system.