Wednesday, January 17, 2018

North Korea nuclear crisis: Lessons from History


The possibility of a 21st century nuclear holocaust, pitting a pudgy dictator against the septuagenarian wanna-be-authoritarian leader with a (ahem) bigger nuclear button on the other side of the Pacific, is real enough to haunt our worst nightmares.  Last weekend's false alarm in Hawaii made the threat particularly close to home for the island's 1.4m inhabitants.

A fascinating well-written article by George Perkovich chronicles the thought processes during the 1962 Cuban Missile Crisis: what President John F Kennedy and Defense Secretary Robert McNamara understood and what they didn't at the time, and the roles of Soviet premier Nikita Khruschev and Cuban leader Fidel Castro.  The uncertainties, misjudgments and miscalculations, could have lead parties astray towards unnecessary escalation.

Most of us know the story:  during the height of the cold war, US spy planes detected Soviet ships mobilizing missiles and nuclear materials into Cuba -- less than 100 miles off the coast of Florida.  JFK responded by installing nuclear weapons to the US base in Turkey, right on the Soviet doorsteps.  Then an American U-2 spy plane was shot down by Cuban anti-aircraft guns, with several others escaping intense enemy fire. Military leaders pressed the president to authorize an attack.  JFK held still, and sent his attorney general brother Robert "RFK" Kennedy to a secret meeting with the Soviets.  Lengthy negotiations eventually lead to both parties standing down.

What nobody -- not the Kennedys, not McNamara -- knew until recently, was terrifying, to say the least:
  1. Americans knew the Soviets were mobilizing weapons into Cuba, expecting  eventually a handful intermediate-range ballistic missiles able to reach continental United States.  But nobody knew the Soviets had already deployed more than 100 battlefield-ready tactical nuclear weapons in the island, and that local Soviet officers were pre-authorized to use them in the widely-expected Marine invasion.
  2. Furthermore, McNamara told Kennedy at the time that he believed there were 8,000-10,000 Soviet military personnel in Cuba.  In 2008 it was revealed that the actual number was far higher at 42,000.  Had JFK agreed with his generals to invade Cuba, the landing and subsequent ground war would have been unexpectedly lengthier, perhaps taking in much larger casualties, which may lead both sides to turn to their advanced weaponry. 
  3. Finally, US envoy RFK pressed his Soviet counterpart to stop firing at American military planes.  What he didn't know is that Khruschev never authorized such attacks, but Castro did.  The Cuban dictator feared an imminent invasion, and would rather risk total annihilation over American troop presence in his island state.  The Soviets agreed to RFK's demands, but had Castro kept his aggressive stance, this could have lead to mutual distrust and escalation. 


It's important to note that we probably understand less about North Korea now, than we did about the Soviets back then. The possibility of miscalculations are enormous, the consequences apocalyptic. Some of these fallacies may include:
 
  1. Misjudging the effectiveness of our missile defense system.  Technology has advanced since the Cold War, but these batteries have only been tested in isolated exercises.  We don't know exactly how effective they would be in real-life war situations. Misplaced confidence on the defensive measures can lead to bad decisions. 
  2. President Trump believes that China can coax North Korea to drop its nuclear ambitions. However, despite China's large economic contribution to North Korea, Kim Jong Un has pared down China's direct influence in his country.  Pro-Chinese elements in his political circle have been purged, most notably his brother Kim Jong Nam, who was assassinated (widely believed to have been perpetrated by North Korean agents) while in Hong Kong's protective asylum. 
  3. Grassroot conditions are also a big question mark. We hear about massive drought affecting North Korean food supply, and crippling economic sanctions bringing about the prospect of a humanitarian crisis.  But North Koreans are indoctrinated since early childhood; they learn to shoot rifles the same time they learn to read and write; they spy on their peers to identify moles and traitors; they venerate the Kim dynasty like a deity; and they despise America like the devil.  Pentagon puts the number of troops under Kim at about one million, but determination may end up meaning more than sheer numbers.  Just ask Americans about the Vietnam War. 
  4. Defense Secretary Mattis proposes a limited strike on North Korean missile sites, just to give them a "bloody nose" and show them we are serious. However, this is a fallacy at best -- how can a nuclear-equipped adversary understand the attack's "limited" nature? During the cold war, the US military scrapped its low-yield strategic nuclear weapons program, because (i) with tensions running high, it's difficult for Russia to see the difference between "low yield" and "normal yield"; and (ii) even if they can, Russia may not be able to respond with a similarly-limited strike.  Similarly in North Korea, Kim may see any attack on his country as an all-out existential threat worthy of highest possible retaliatory escalation.
What's the best policy recommendation in this case? I don't know, but the best argument I've read is to nuke Kim Jong Nam's presidential toilet

Tuesday, January 02, 2018

What's the endgame for Ride-Sharing?

Uber's non-dominance in SEA markets

2017 was the year of reckoning for Uber due to a barrage of scandals, culminating in a massive coup/down-round investment by Japanese investment firm SoftBank. But it's worth taking a closer look at the nature of the business itself.  Ride-sharing (also known as ride-hailing, or on-demand mobility) companies like Uber and Lyft are designed to be an intermediary business: they have no assets, take on no risk, no nothing, just technology-based platform for the transport industry, connecting riders and part-time drivers wanting to make additional income.  In Southeast Asia, the market leaders are Go-Jek and Grab, with a slightly different business model of enrolling professional drivers, helping them with car ownership/rentals, and providing access to the app.  How any of that justifies billion dollar valuations, you tell me.  One may argue that an asset-heavy business should justify bigger valuation, but recent crashes in Chinese bike-sharing startups (due to either poor asset management, or poor management in general) should put that theory to rest.

So this begs the question: what's the real endgame for ride-sharing? The companies simply can't survive by doing this forever, as both drivers and riders are spoiled by subsidized economics. Is it logistics? Food delivery? Fintech (e.g. do they want to end up like Alipay)? If Uber fares rise significantly to levels that make the business sustainable without subsidies, won't the market also shrink greatly (e.g. people would just return to owning cars or, gasp, taking public transport) ? Would self-driving cars be the endgame? How do we even know that driverless Uber taxis make a good business?

Let's explore.

Rides are fundamentally unprofitable

Transportation industry analyst Huber Horan lays out the case for skepticism over Uber's hype. Amazon saved costs by getting rid of expensive retail stores and sales staff.  But Uber rides still require a car, a driver, and fuel -- just like any old taxi rides.


OK then, many taxi companies were making decent profits for some time before Uber; wouldn't ride-hailing be at least as profitable as these old companies?  No, for three reasons, eloquently laid-out by Len Sherman in Forbes:

(a) The taxi industry that Uber is seeking to disrupt was never profitable when allowed to expand in unregulated markets, reflecting the industry’s low barriers to entry, high variable costs, low economies of scale and intense price competition -- and Uber’s current business model doesn’t fundamentally change these structural industry characteristics.

This historical experience exhibits several parallels to Uber’s current business model, presaging the company’s dismal financial performance. The pre-regulated taxi industry was characterized by bounded demand, abundant supply, relatively undifferentiated service quality, extremely low barriers to entry, low customer switching costs, high variable costs and virtually no economies of scale.  [...]

(b) Conventional wisdom has held that Uber would enjoy a global winner-take-most outcome because of their outsized balance sheet and strong network effects. But to the extent that network effects exist, they are local, not global. For example, Uber's 89% market share in Tampa doesn’t help them in Portland, where Uber’s market share is below 50%. In fact, Uber has struggled to achieve market share leadership in many large foreign markets, including China, India, SE Asia and Brazil. Moreover, while network effects do exist within each metro market, the benefits are significantly weakened by extremely low switching costs, which enable drivers and riders to utilize whichever ridesharing service offers the best deal on any given trip. [...]

(c) [There's] an inherent conflict between the business objectives of Uber and its drivers. Uber’s revenues are directly proportional to the number of trips it can facilitate, and thus the company has strong incentives to continuously scale its business. Drivers of course want to maximize their revenue per hour worked. But as Uber continues to recruit drivers, the revenue potential per driver inevitably declines. As the highest revenue-generating neighborhoods become increasingly saturated, new drivers are forced to seek less attractive service territories to find customers.



Ride economics are heavily distorted

Although we pay less for Uber rides than taxis, our views are highly distorted; it just seems like rides are cheaper because the company is making a loss on every ride, with a dream of dominating each market it enters  Uber burns cash at US$2bn per year globally, mainly on subsidies and new market expansion.   Similarly in Indonesia, leaked investor presentation shows market leader Go-Jek spent US$73mm on subsidies in the six months between Oct15-Mar16, yielding 12% growth in completed orders over that period.  For that period, subsidies actually made up 72% of the company's gross booking fare value.  The distortion affects the economics for consumers as well as drivers.


Challenging economics

Not just subsidies, gamification also distorts the psychology, giving both riders and drivers real and false rewards for spending/loyalty to the platform.  Nightmare stories and complaints about exploitation and lack of transparency abound -- especially as the platforms naturally always side with riders over drivers.

Ride-sharing creates serious public policy issues

Setting aside the debate over independent contractors vs employees (which have not been settled), or the corporate culture/moral compass issues, or the whole evading the law thing, recent analysis from extensive data in New York City shows that ride-hailing apps are significantly worsening the traffic problem, while also impacting the ridership and quality of public transport.  “For years, as the city grew, more and more people took the subway and bus,” according to Bruce Schaller, a former NYC DOT official. “Now, as the city grows, more and more people are taking Uber, Lyft, and Via. This is not a sustainable way for the city to grow.”  He continues by noting the drop in quality of New York City’s mass transit. Not only has MTA bus ridership rapidly dropped in recent years, but the subways are also now losing passengers, too. Service quality deteriorates, and delays and mechanical failures have become the norm rather than the exception.  Clearly we still don't have a grasp of the real, long-term public policy impact of ride-sharing.
The picture in Singapore is no different

The endgame remains a question mark

SE Asian market leaders are taking a stance: Go-Jek and Grab wants to expand beyond ride-hailing, and into fintech through organic growth and acquisitions.  Grab CEO Anthony Tan said the company wants to “win payments in Southeast Asia,” saying that the app’s user base can be the groundwork for more services.

Robots are employees or independent contractors?
Uber's endgame is less clear.  Are they just buying time until things figure themselves out? After all, Amazon spent many years and many billion dollars in shareholders' equity, evolving from selling books to selling CDs to selling everything to producing own hardware to producing own content to selling cloud services to selling groceries (did I miss anything? something with drones?) -- all in the hunt for that elusive profitability...




Friday, December 15, 2017

Politicians' Conundrum


Yes, whatever the hell this means

Paul Krugman in NYT writes that Politicians(TM) pursue certain policies -- say, a massive tax cut for big corporations and the 1%, in an environment of record-high corporate profitability and government budget deficit -- despite wildly negative public opinions, because of three fallacies:

  1. Pundit's fallacy: that a politician will improve her standing if she achieves what pundits say she needs to do.  Republicans used to know that they win elections in spite, not because, of their economic program, but they've been living in a bubble for so long, that they imagine the gospel of supply-side economics would become reality if it's preached loud enough.
  2. Points on the board fallacy: that a politician could improve her standing if enough "wins" rack up.  This is the Donald Trump motto: "we're going to win so much, we will be tired of winning."  Worth pointing out: Obama and the democrats passed many legislative victories during his term, but was demolished and lost both houses in the midterms.
  3. Post-career endgame.  A congressperson may buck the party line to win voters, but nobody really knows their representatives anyway;  she would rather position herself for a lobbying/think-tank/Fox News pundit job when she loses re-election -- in which case the best bet is to keep donors and the party happy.

For Republicans, the main argument for pursuing their economic policies now, when they're wholly unpopular and the timing is horrible to do so, is largely driven by their dire political situation.   They have control of all three branches of government, and they know they may lose control of the legislative branch in the 2018 midterms.  Henceforth, their razor-sharp focus on cutting taxes NOW.  Because if not now, when?

Thursday, December 14, 2017

Bitcoin is a massive waste of power

Close-up of Bitmain mining farm in Iceland

The amount of electricity needed to run the Bitcoin economy, i.e. the electricity needed to operate "miners", has gone haywire.  Mining involves running sophisticated algorithms to verify each transaction in the blockchain, earning newly-minted Bitcoins along the way.  This process used to be done with idle processing power on desktop computers; nowadays, as more and more powerful computers are unleashed to compete for new Bitcoins, miners in China and Venezuela (where electricity is free or dirt cheap) deploy massive arrays of dedicated, purpose-built computers.

According to new research, as Bitcoin prices skyrocketed to US$17,000 from only US$1,000 in less than 12 months, the cost of Bitcoin mining has also gone up: 32 terrawatt-hours on an annualized basis, equal to the energy use of Serbia (population: 7m), or about 1% of energy use in the United States (population: 320m).  In ~10 years the energy use is expected to exceed that of the entire North America.

All this, just to solve meaningless math problems.

Needless to say, this doesn't really bode well for the cryptocurrency-based economy.

Monday, November 27, 2017

Only buy Bitcoin if you're OK with losing money

MtGox CEO Mark Karpeles faces charges of embezzlement 

Like many people, I've been tempted to look at Bitcoin. Look at those prices! $7000, $8000, $9000, every day is a new peak! But seriously, is it a good idea to put your money in Bitcoin? You can lose money just through the daily price seesaw. Some even say the only winners are the early adopters that came in (either by buying or mining) around 2010-11?

Bitcoin is not supported by a government/central authority, but the fact that there's no federal/insurance backing is considered a positive to some eco-anarchists. If that even makes sense at all? So the chances of losing most/all of your money are very real.

Recent news reports shed light to how this works in the real world. There's no widely-accepted way to maintain Bitcoins, much less purchasing them, that nicely balances convenience with safety/security.  Wired's Mark Frauenfelder is a security-freak, so he put his $30,000 Bitcoin wallet offline in an super-secure USB disk -- which he promptly lost the passcodes to. He had to jump through so many hoops: he basically hired someone to hack into his own encrypted drive.

Consider the previous guy lucky: at least he eventually got his Bitcoins back. Gizmodo's Nick Douglas just wanted simplicity, so he invested with the largest global Bitcoin exchange at the time… which was OK until MtGox collapsed amid millions of dollars of Bitcoin theft (theft or criminal misconduct? yes please!).

So yeah, you shouldn't invest in Bitcoin -- it's just not investment-grade yet.  You may consider buying Bitcoin, but only if you know and are mentally prepared if you lose all of it.

Sunday, November 19, 2017

More on Trickle-Down Economics

How the GOP sees the world

The GOP tax "reform" plan -- in quotations because yes, it's basically a tax cut (POTUS45 doesn't have the attention span to manage a major reform) -- doubles down on trickle down economics: that giving more money to rich people and corporations will drive broader benefits for everybody else.  No serious economist believes this.  Even Wall Street is skeptical of the plan; they worry about hot money inflows, appreciation of the US$, inflated asset prices, impact on consumption and housing prices, and how it eventually may trigger another recession(!!!).

New Yorker's John Cassidy summarizes the counterarguments in his article covering a Reuters panel discussion featuring several experts.  Ex-Federal Reserves board member Alan Blinder and Moody's chief economist Mark Zandi showed charts showing no correlation between GDP growth and tax rates - -  something that everybody outside the White House readily points out.  Another economist showed that tax cuts have historically gave more money to shareholders (i.e. dividends and buybacks), as opposed to making new investments or giving increased salaries to employees.  Moreover, across-the-board profitability has been high and corporate borrowing costs have been low for some time; companies that wanted to invest would likely have done so already.

The final panelist, billionaire investor Mark Cuban, makes the point from a job creator's perspective: taxes are not the primary driver of hiring, salary or capex decisions; the most important business considerations are always supply-demand dynamics and competition.  Technology is another major factor: in the past 25 years we experienced two rounds of digital revolutions: internet boom of the '90s and smartphone boom of the 2000's, which birthed new industry giants such as Google, Alibaba, and Tencent.  These days a neighborhood store owner isn't losing sleep over tax rates, she is worried Amazon is eating her lunch!  Another round of technological dislocation is at our doorstep, as autonomous vehicles, artificial intelligence/machine learning, and advanced manufacturing robotics become the norm.  These are guaranteed to create backlash and discomfort as many industries will be upended, putting many inappropriately-skilled workers out of comfy jobs.

Cuban also hits another common-sense point: if the intent is to give more money to the working class, why not cut payroll taxes, which costs the average family 15% of their hard-earned dollars (as opposed to income taxes, which not everybody pays)?

Cassidy summarizes as follows:


"... The Republican tax plan is based on false premises; it won’t give the economy much of a boost; it will raise the deficit; it will primarily benefit corporate shareholders and C.E.O.s.  And, as Cuban said, it is a distraction from the great policy question of the day, which is how to insure at least a modicum of shared prosperity in an economy being roiled by technological change, global competition, and demographic transformation. [...] If Trump wanted to help out the working stiff, why didn’t he take Cuban’s advice and call for a cut in the payroll tax? To pay for the reduction, he could also have proposed abolishing, or substantially raising, the payroll tax’s upper-income threshold, which enables someone who earns a million dollars a year to escape the tax on about seven-eighths of his income. Such a policy package could have boosted take-home pay, financed itself, and also helped to reduce income inequality."

Tuesday, November 14, 2017

Lesser of Two Evils

Vote!

In light of the Roy Moore scandal, the important lesson is to NOT choose the Lesser of Two Evils(TM).  NEVER abandon your principles in the face of bad choices.

From Michael B Dougherty (National Review):

"...Telling yourself that 'this is war, and in war you have to make less than ideal choices' is a great way to excuse the destruction of your charity and the lifting of restraint, with collateral damage to your integrity.  Choosing the lesser of two evils is a fantastic way to prepare yourself to do worse and worse evils.  And following it to the end is a bitter fate indeed.

The worst tragedies of recent history were driven by masses of people giving in to existential fear and hatred.  There are many alive today in Central and Eastern Europe who made themselves into Fascists or Communists in order to resist or avenge the Communists and the Fascists. But the names we remember and revere are those who carefully and bravely stood apart. It’s time to think about where the line in the sand will be. What behavior won’t you excuse? Where won’t you follow your party? Because the way things are going, these questions won’t be hypotheticals."



From David French (also at the National Review):

"... I keep hearing these words from Evangelicals: 'We’ve got no choice, the Democrats are after our liberties. They’re seeking to destroy our way of life.'  Some even say that even if the allegations against Moore are true, they’ll still hold their nose and put him in office to keep [Doug] Jones from serving in the Senate.  Sorry Evangelicals, but your lack of faith is far more dangerous to the Church than any senator, any president, or any justice of the Supreme Court. Do you really have so little trust in God that you believe it’s justifiable — no, necessary — to ally with, defend, and even embrace corrupt men if it you think it will save the Church?

Yes, I know there are many instances in which godless kings did good things for God’s people. God can turn the heart of any man. But there is a vast difference between seeking favor from an unrighteous ruler and choosing, defending, and embracing the unrighteous ruler from the start. Evangelicals, you’re putting people like Donald Trump and Roy Moore in office. You’re declaring to the world, “He’s our man.” In graver times, God’s people have demonstrated much greater faith.  We stumble when the stakes are comparatively low.  Our failures will come back to haunt us. There will be woe to those who’ve compromised with evil through lack of faith. A reckoning is coming. May God have mercy on us all."


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