The Economic Yin, the Three Body Problem Yang and India

We write this as we prepare to head to Washington, D.C. for both our Uncle’s 80th birthday celebration (happy birthday, John!) and later to attend a conference on Directed Energy Weapons (i.e., really cool ways to blow things up). Many years ago we lived in the nation’s capital at a time when it was one of the crime capitals of the country. We were mugged twice while there, once at gun point (it was a surprisingly polite conversation with the mugger–we even both wished each other a “good evening” at the end of the forced transaction) and once we were jumped over a Kentucky Fried Chicken two-piece dinner (that engagement was not nearly as polite). Back then we even had a friend who was mugged in front of the Supreme Court. Today, although the politics are much more riotous, the city itself, like many big cities, has been gentrified into a fog of calm.The crime rate is not much to worry about, the restaurants are fancier and real estate is far more pricey. We are looking forward to seeing our old haunts, including the venerable Tune-Inn, one of America’s great bars. So we will take next week off in honor of our Uncle and learning about blowing things up with phasers and lasers. But this week neither the White House or Congress dissuade us from bringing you the Yin of China’s economy, accompanied by the Yang of its innovation, finishing with a brief comparison of emerging economies. It’s this week’s International Need to Know, a soft wind of knowledge in the heat and humidity of the East Coast.

Without further ado, here’s what you need to know.

The Yin

It’s time for another episode of the Yin and Yang of China, everyone’s favorite, large, complicated, nobody-really-knows-what’s going-on country. We start out with the yin–what the heck is going on with China’s economy? We’ve been generally more positive than others about the prospects for China’s continued prosperity. The economy seemed to stabilize this year after worrisome signs in 2016. In fact, the latest China sales index is at a 20-month high, driven mostly by the manufacturing sector. But a few weeks ago we noted in passing that the yield curve had inverted in China. Since then the inversion has become more pronounced (see graph below). Inverted yield curves often predict a recession. Not coincidentally, as Reuter’s notes, China’s central bank has been injecting lots of liquidity into the financial system. In fact, the amount of money sloshing around in the Chinese economy does appear to be leading to an increase in prices. For example, land prices are up 39% year to date (they rose 18% in the moderation of 2016). On the other hand, the South Morning China Post reports that “more than 80 per cent of Beijing owners are reducing their asking prices, while just three months ago, 80 per cent were raising prices, according to property agent Homelink.” That’s a lot of volatility and some of this may be reflecting the difference between official statistics and what is occurring on the ground. What’s happening in China? We’re not sure but we’re keeping an even closer eye than usual–and we may need to see an economic ophthalmologist to get a real clear view.

 

The Yang: Three Body Problem in Real Life

It’s a long story but a meeting with a friend trying to help send people to Mars led to our reading the science fiction novel, The Three Body Problem, by Chinese author Liu Cixin.  The sections of the book we like the best have nothing to do with science fiction but rather depict life during the Cultural Revolution. Nonetheless, the science part of the novel seems to be coming true with news that Chinese scientists beamed back “entangled” photons from space.  The breakthrough is important in its own right, of course, but is also another refutation of those who claim that China does not innovate. There is a tremendous amount of innovation taking place in China. At any rate, the Chinese scientists reported “a successful transmission of entangled photon pairs from space to ground stations separated by 1,200 km, a major technical breakthrough towards quantum communication over great distances.” Previously such transmissions weren’t possible beyond 100 km. This work is continuing to lay the foundation for quantum computing and communications, two new technologies that as we discussed last week could help the world reckon with the end of Moore’s Law.

India Compares Well

We will be brief as our flight is about to depart, but courtesy of the great Jon Bensky we show you the McKinsey Global Institute’s economic comparison of emerging markets. Jon, who is our go-to person on India (and other international issues for that matter), notes that India comes out well in these comparisons. Its GDP growth rate matches official Chinese numbers and McKinsey’s assessment of their risk is that it is much lower than other emerging markets. India, like China, is a place to always keep your eye on.

 

Mind the Gap, Canadian Cows & Climate Change and the Price of Fun

Incentives are a funny thing. They drive so much in our world and yet often have unintended consequences. A few years ago, like many in our socio-economic demographic, we bought a Fitbit to measure our exercise, sleep and other such metrics. We lost it fairly quickly but then our wife gave us another one as a gift. We have not lost that one, which speaks to a certain incentive in itself. But the Fitbit has changed our behavior. Where once we would worry about getting the best–read nearest–parking spot, now we park further away just to get more steps recorded on our Fitbit. That is a good thing. On the other hand, we are often less efficient nowadays. Where once we maximized our trips back and forth from our car to our house, carefully carrying many things at once, now we purposefully make many trips between house and car, again in order to record more steps. We do the same kind of thing on house projects, going back and forth to get different tools. Perhaps this is more physically healthy for us and there may even be a Zen-like aspect to it leading to more mindfulness, but by being less efficient we are surely getting less done in life. It occurs to us that the optimal use of a Fitbit is someone who walks in their sleep. But, we don’t recommend taking that step. We do recommend minding the employment gap, examining the case of the Canadian cow and analyzing the cost of fun. It’s this week’s International Need to Know, throwing no-look passes for data and knocking down three pointers of analysis as we try to be the Golden State Warriors of international information.

Without further ado, here’s what you need to know.

Mind the Gap

Political volatility around the world continues to be high as we saw in the recent UK elections. Some may think voters are making unwise choices but there is a reason for the angst and sturm of the voting class with further evidence coming from an Organization for Economic Cooperation and Development (OECD) study on employment this week. The good news is that in OECD countries the “employed share of the population aged 15 to 74 years rose for the third consecutive year,” finally reaching pre-financial crisis levels. The bad news is that the share of middle-income level jobs has fallen. There are more high income and low income jobs in OECD countries, but the kind of jobs that have been the foundation of liberal democracies are eroding away. This is due mainly to demand for high skill jobs. The OECD reports that “Between 1995 and 2015, the middle-skill share of employment fell by 9.5 percentage points in the OECD area, while the shares of high- and low-skill occupations rose by 7.6 and 1.9 percentage points, respectively.” In the chart below you can see how in every OECD country high skill jobs have increased while middle skill jobs decreased. Low skill jobs increased in all these countries except Hungary and the Czech Republic. We note the UK is home to one of the larger gaps of jobs though not nearly the largest. The world is in the midst of a large economic transition and political volatility is likely to remain high throughout the transition.

 
  

Climate Change & the Case of the Canadian Cow

A new book, Drawdown, lists the top ten solutions for addressing global warming. You are likely to be surprised by the list, as we were, or at least by some of them. We were not surprised by number 4, however–eat a plant rich diet. After all, we are aware that cattle flatulence is a major emitter of global warming gases. In fact, the book notes that “if cattle were their own nation (and what a boring nation it would be, animals standing around eating a lot and farting–wait, there are large swathes of America just like that), they would be the world’s third-largest emitter of greenhouse gases.” Alas, we like BBQ too much and relish our Five Guy burgers (though relish is not one of the condiments we use) to become a vegetarian. But then comes news from Canada of an effort to genetically engineer a cow so it does not pass gas. “The Genome Canada project, led by Filippo Miglior at the University of Guelph and Paul Stothard at the University of Alberta, harnesses labs in the US, UK, Denmark, Australia, and Switzerland to help identify cows that produce fewer greenhouse gases, with the ultimate goal of distributing the responsible genes—conveniently transported in the form of bull semen—to areas that don’t have the resources to develop their own greener cows.” Perhaps someday we will be able to enjoy our beef without there being a beef about what it is doing to the environment.

The Price of Fun

Fun, as that great philosopher Ferris Bueller could tell you, is an underutilized commodity, perhaps more so than ever today. Children, who by all rights should be in their prime for having fun, are instead sent on forced marches of activities organized to the last second and given mounds of homework one would expect in a chemistry PhD, but not for a ten-year-old. And, our politics today are certainly not much fun unless you are of the same bent as the Marques de Sade. So perhaps it is high time to examine the price of fun. No not the metaphorical consequences of having fun you killjoy, but the actual cost. For that we turn to the World Economics Cost of Fun Index which as you see in the first chart below has gone up considerably since 2011. The index “is based on average end-user prices for typical recreational activities and items in national currencies indexed to January 2011 = 100.” When looking at individual countries it should be no surprise that the cost of fun has spiked in Russia in recent years  Does Vladimir Putin look fun? I don’t think so.* Fun is still affordable in China though it has gone up by 13% in the last year. In the last 12 months, fun has become cheaper in Japan and in the U.S. as well. So even as you work at your job this week, take care of your chores this weekend and help out your community in whatever way you see fit, take a moment and have a little fun. You never know, it could be more expensive tomorrow. 

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*though fun in Russia is cheaper in the last year–good times hacking into other countries apparently.

Germans Wore Grey, the End of Moore and the Spread of Intelligence

Perhaps there is no greater mystery in the universe than intelligence and consciousness. The latter is, in fact, impossible to define and test scientifically. We were reminded of this not just from our current political world but also from the work of an evolutionary biologist who asserts that spiders store information in their webs. He claims “that a spider’s web is at least an adjustable part of its sensory apparatus, and at most an extension of the spider’s cognitive system.” We did not entirely understand the biologist’s argument though we are now even more wary of stepping through spider webs in our yard. He also notes that octopi have 500 million neurons in their arms (which we did know). So where does the consciousness of an octopi reside? In its arms or its central brain? Even as we learned about cognitive spider webs, we read an article about scientists studying macaque monkeys  and their ability to distinguish faces. The researchers “watched as monkeys looked at a series of 2,000 different faces and recorded which neurons were active in the so-called ‘face space’ of their brains.” The scientists then worked backwards and reassembled depictions of the faces from information contained in the firing neurons. And, they were amazingly successful as you see in the images below. We are pretty good at remembering faces but names not so much. So our intelligence is at least as good as a monkey’s. All this leads us to a special technology week at INTN, where we examine why technology is making us forget about Paris, worry about the end of Moore’s Law and examine the status of artificial intelligence around the world.  It’s this week’s International Need to Know, your digital source of information in an analog, digital and spider web world of information.

Without further ado, here’s what you need to know.

The Germans Wore Gray

For many reasons, we think the U.S. Administration pulling out of the Paris Climate Agreement was unwise and short sighted. As Major Strasse might have said in Casablanca, “we know why you left Paris, Mr. President,” But like Humphrey Bogart, our sporting interest gives us hope that the U.S. leaving the agreement will not have a big impact on the fight against climate change. That’s because, as we have noted before, the world is already reaching a tipping point on renewables. In India, for example, as you see in the first graph below, solar energy is competitive price wise with coal. As a recent Bloomberg article reports, “the cost of solar generation in India has fallen by more than half. The country’s competitive auctions for solar power have pushed prices below 2.5 rupees ($0.04) per kilowatt-hour. In fact, the levelized cost of solar—“ a measure of an energy project’s lifetime costs divided by its lifetime energy production—is now lower than coal-fired power. At the same time, China, already the largest producer of renewable energy, “will install 7 to 8 gigawatts of rooftop solar in 2017 — an amount equal to the cumulative installed rooftop solar base up to 2016,” according to Bloomberg New Energy Finance. The challenge is NOT renewable energy generation, it’s storage, and there too we see much progress. According to a McKinsey report, “battery-pack costs are down to less than $230 per kilowatt-hour in 2016, compared with almost $1,000 per kilowatt-hour in 2010.” These technological breakthroughs are why we are hopeful that Paris won’t amount to a hill of beans in this crazy world.

 

Is this the End of Moore?

Last year, we noted the possibility of the end of Moore’s Law—the idea that transistor density doubles every two years or less–and now the head of a semiconductor company confirms it. Jensen Huang, the CEO of Nvidia recently gave a presentation where he stated, “Microprocessors no longer scale at the level of performance they used to — the end of what you would call Moore’s Law.” Intel, however, disputes Huang’s contention even though they themselves are not meeting the requirements of Moore’s Law: “To get from 45 nm to 32 nm took about 27 months, 28 months to go down from there to 22 nm and 30 months to shrink to the current 14 nm process. And that’s where Intel has been stuck since September 2014.” In fact, Huang says only a handful of companies can now afford the multi-billion dollar investment to create these kinds of new chips. The expensive nature of today’s chip work has led to a consolidation of the industry (or maybe it’s the other way around?) so now there are only five companies making the most advanced chips, down from 13 a decade ago. As we look around the world, the companies are fewer and larger and the innovation smaller. 

The Spread of Intelligence

In recent years there has been much excitement over progress in artificial intelligence (AI). A computer beat one of the leading GO players in the world earlier this year, progress is being made on autonomous vehicles and AI is increasingly diagnosing cancer better than humans. Now comes a survey of AI engineers and researchers asking them when they think various AI milestones will be met. The more than 350 AI researchers surveyed believe machines will be able to translate foreign languages better than humans within 10 years, perform better as retail sales people within 15 years (better than Nordstrom?!!), generate a top 40 pop song within 12 years (Taylor Swift obsolete?) and fold laundry in 6 years (we give up that chore willingly but wonder if our cats will still jump onto the clean towels when a robot is folding them). In fact, these researchers believe all human jobs will be automated within the next 120 years. Interestingly, Asian researchers are more optimistic than American and European researchers as you see in the second chart below. How their optimism squares with the death of Moore’s Law is an interesting question though it may have to do with the emergence of quantum computers and 3-D chips. Although we are not necessarily more pessimistic than these researchers we look at AI advances somewhat differently. First, as jobs are automated, new type of jobs, more suitable for human intelligence, will emerge. Second, we expect, like spiders and octopi using external intelligence, that humans and machines will merge, so the world will not necessarily develop a human vs. machine battle (the true fight will be against flying cockroaches). We await this new world, as we await many things, with a mixture of wonder and worry (and a strong cocktail in hand). 

 
 

Japan is Different, Will China Become Japan, the Air Up Here

As you may have noticed, music is important to us and we make a point of getting to live shows when we can. You may also have picked up that we are big fans of New Orleans. So when the Hot 8 Brass Band out of the Crescent City comes to town, you know we’ll be there. They are the Rolling Stones of brass bands to the Rebirth Brass Band’s Beatles, combining funk, hip-hop, bounce and the call backs of the sanctified church with the long tradition of brass bands. One of our favorite shows we’ve ever been to was a Hot 8 second set in NOLA around 1 am in a venue not much larger than our living room. The slide of the trombone nearly hit us. Tuesday night’s show was fantastic too with the guys jamming in top form. With all that divides our world, music often brings us together–whether here in Seattle, down in New Orleans, over in Manchester, or even in Tehran. On the latter, we came across the video below of two Iranian buskers, a woman bassist and a man playing the guitar, covering Radiohead’s Creep. Check out the short video below and then tap your feet as we examine yet again how different Japan is, delve into whether we should worry about China following Japan’s economic path and then breathe in, but not too deeply, the latest data on air pollution. It’s this week’s International Need to Know busking for knowledge and information on the streets of our hustling, bustling world.

Iranian Buskers play a funky rendition of Rad…
46 likes 6678 views

Without further ado, here’s what you need to know.

Japan is Different Part 6,753.5

We love Japan. It has one of the most unique cultures in the world and we are a sucker for those who march to the beat of their own drum, even when it’s an entire nation. Of course, there are trade-offs in everything in life and Japan’s uniqueness can lead to challenges. For example, in Japan, CEOs are far older on average than in other countries. As you can see in the chart below, the average age of a Japanese CEO is 61 while globally it is 53. Further, only 33% of Japanese CEOs worked in another company at one point in their career while globally the figure is 74%. An article in the Nikkei Asian Review notes that “because many Japanese CEOs build their careers in a fairly culturally homogeneous environment, Japanese companies are at a big disadvantage when it comes to competing globally.” That cultural homogeneity makes our world much more heterogeneous, but like Japan’s lack of immigration and its other insular ways, homogeneity also has challenging effects for the country and economy. 

Will China Become Japan?

No we don’t think China’s CEOs will suddenly become old but people are making comparisons between the two countries’ economies. The Financial Times notes a number of eerie similarities between China’s economy and the pre-bubble, late-1980s Japanese economy, just before Japan’s long economic slog. But, the FT, which we esteem as much as the next person, misses two factors that typically, for the ever complicated China, point in various directions. First, is a demographic comparison. China, like Japan, like most of the world, has an aging population and most important has a shrinking working age population. The chart below by Charles Schwab, shows that under current projections China’s aging demographics are closely mirroring Japan’s. As we’ve noted before, economic growth goes up due to a larger working age population and due to productivity increases.* Unless trends change, China will face a future demographic headwind. However, China does not have the same closed society culture that Japan has so it’s possible it’s working age population could increase due to immigration (like America) or perhaps its birth rate will start going up again. Nonetheless, the graph below is worrisome. The other thing the FT article neglects to mention is that although Japan’s economy has been problematic, if one looks at GDP per capita, Japan does not look so bad. Of course, GDP overall is not growing and we shouldn’t expect it to expand with a shrinking population. But, the economy, when discussed in per capita terms, is not so bad. Whether China follows Japan’s path we do not know, but there are plenty of short-term worrying signs.

*China productivity, like the rest of the world’s, is way down in recent years.

The Air Up Here

Depending on where you live, the air you’re breathing is full of particulates and other pollution. In recent years, Berkeley Earth began a major project to start tracking such pollution. In the map below you’ll see the worst areas in reds and purples (those colors sure seem to get a bad rep in graphics and metaphors while green just keeps skating on by–like much in life, our perceptions of colors are unfair). Berkeley Earth measures PM2.5 — particulate matter measuring 2.5 microns across or smaller–to determine where air pollution is problematical. Large parts of China, of course, look like Jake Lamotta’s face during a Raging Bull boxing match. But they are by no means alone. India is full of purple and red too. You’ll even see some yellow in parts of Europe and the United States. Berkeley Earth has not mapped Africa yet. Berkeley Earth has calculated “daily exposure to PM2.5 in terms of cigarette equivalents. Red is like smoking five cigarettes a day, purple brings you up to 10 and the brownish purple is the equivalent of Humphrey Bogart in a saloon in north Africa–15 or more Pall Malls a day. During a really bad day in Beijing one might as well inhale a pack of 25. But, as Berkeley notes, China is trying to address air pollution–and the incentive is not so much climate change but because of these localized air pollution health issues. There may be a lesson in here for addressing a variety of transnational issues resistant to solutions.