What does a decentralised world look like?

Arguably one of the biggest impacts of smartphones ubiqutous, always-on computing, has been decentralisation. An “on-demand” economy is being created, as smartphones combine to organically bridge supply and demand across industries.

Freed from traditional gatekeepers, huge efficiencies have been found. Consumers are pleased by increased supply, wider variety and lower prices. A massive amount of employment and alternate income has been generated. Surplus has been captured, a new kind of worker has been created.

From a fantastic post on Medium by Simon Rothman of Greylock partners:

The uncollared worker is a new class of worker — born out of the Great Recession and the ubiquity of mobile technology — that makes a living by leveraging their time, and sometimes their assets, on marketplaces like Airbnb, Uber, and Lyft. These uncollared workers work independently, but collectively offer a singular service — like hotel, transportation, or delivery.

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It’s that last bit we need to really focus on – thousands of individuals are combining to provide the utility of a hotel, only without the hotel. Without much of the massive capital outlay and organisation required to start and keep one going. In these industries, the monopolies and rents afforded by capital, location, licenses and even entrepreneurialism could vanish.

The barriers are gone.

But there’s more.

The corporation is centralized and controls everything. In distributed marketplace platforms, uncollared workers have more control over their work life. Uncollared workers work when they want to work and do the job that they want to do. They are able to control the “when” and “what” of their job.

Not only do they distribute the workforce, but also the distribution of the assets. Airbnb doesn’t own any rooms or homes; Uber doesn’t own cars. None of the share economy or on-demand service companies have large retail buildings.

Removing assets from the balance sheet, and costs from the income statement, unlocks profits. Combine this with higher profits per transaction and the fact that many of these platforms are expanding the absolute size of the market, and you start to see how powerful decentralization can be for the bottom line in a marketplace.

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On-demand platforms might not take over the world, every industry and sector. But what Uber is doing to taxis, Airbnb to hotels, and Amazon to cloud servers, is hard to ignore. It’s the world as a service, even for the entrepreneurs.

And it’s hard to imagine exactly what it will look like when the dust settles.

Employment without much of the culture and norms that have shaped the last hundred years of work – defined hours, lifetime jobs/careers, micromanaging  and steady wages etc.

Changes to physical landscapes as resource use shifts – hotels without skyscrapers, taxis without fleets, microtaskers without offices…

I really, really recommend reading Rothman’s entire article.

 

The case for making Sim City part of the political curriculum

How do you turn the country with the largest proven oil reserves into a walking time bomb? Just follow Venezuela’s three step plan: overspend, under-invest, and use the printing press to cover the difference.

From the Washington Post:

The first step was when Hugo Chávez’s socialist government started spending more money on the poor, with everything from two-cent gasoline to free housing. Now, there’s nothing wrong with that — in fact, it’s a good idea in general — but only as long as you actually, well, have the money to spend. And by 2005 or so, Venezuela didn’t.

People who knew what they were doing were replaced with people who were loyal to the regime, and profits came out but new investment didn’t go in.

Even triple-digit oil prices, as Justin Fox points out, weren’t enough to keep Venezuela out of the red when it was spending more on its people but producing less crude. So it did what all poorly run states do when the money runs out: It printed some more.

Thanks to this tri-fecta of bad ideas, Venezuela’s economy has been spiraling for years. The country had to fix its exchange rate and introduce currency and price controls. The government has tried to control shortages through a mix of subsidies and rationing.

The result?

The problem with that idea is that it’s not profitable for unsubsidized companies to stock their shelves, and not profitable enough for subsidized ones to do so either when they can just sell their dollars in the black market instead of using them to import things. That’s left Venezuela’s supermarkets without enough food, its breweries without enough hops to make beer, and its factories without enough pulp to produce toilet paper. The only thing Venezuela is well-supplied with are lines.

Chavez and Maduro have fallen into the same rookie errors familiar to anyone who has played Sim City or the like. You start with a bunch of cash and big dreams, no one likes you and the place isn’t growing. So you try some largesse. You build anything and subsidise everything, you find one industry so good you pump all your time and resources into it…

A couple of hours later, you’re in the crapper. You’re borrowed to the hilt, can’t cut any spending without riots breaking out, the price of oil has plummeted, things are falling down, and some aliens have probably attacked. In a game, this is the end. In real life, there is always the magic pill that is printing money…

If past hyperinflations are any guide, this will keep going until Venezuela can’t even afford to run its printing presses anymore — unless Maduro gets kicked out first.

If there’s one thing we’ve learned from educational technology, its the power of games. My phone plays host to games that impart language and coding, and that’s just what I’m interested in. There’s no reason it can’t be extended to governance. To learn the relationship between revenue and expenditure at least…

As usual, I really encourage you to read the entire Washington Post article about Venezuela on the precipice.

What will happen when passive investors have control?

Bill Ackman is a really entertaining hedge fund manager. For his crusade against Herbalife if nothing else. But his recent letter to investors, in which he adequately explained why Pershing Square Capital was down 20% last year, included a swipe at passive investing.

Passive investing has taken off in recent years. For those of us unable to sit on our Bloomberg Terminals all day, throw legions of ivy league grads at data collection and predictive modelling, corner or move markets through letter writing (obviously I’m not describing anyone in particular here), something like an exchange traded fund is a godsend.

But Ackman raises a really interesting point in the letter. The boom in index funds (a type of exchange traded fund), vehicles that essentially buy and hold shares in certain companies and sectors, means passive investors hold considerable voting power. Power that many of the investors are il-equipped to wield, and that many of the funds are either disinclined or too under-staffed to handle for them.

From the letter:

Scroll through the ownership registry of corporate America and the top three holders are typically Vanguard, Blackrock, and State Street. As the biggest managers of index funds, they often cumulatively own 12%, and as much as 20%, of nearly every public company.

As index fund ownership grows as a percentage of shares outstanding, the voting power of index fund managers increases. While on the one hand, one might believe this is good for America as these “permanent” owners should think very long term compared with the many investors whose average holding period is less than one year. On the other hand, there are significant drawbacks. Index funds managers are not compensated for investment performance, but rather for growing assets under management. They are principally judged on the basis of how closely they track index performance and how low their fees are.

… the job of overseeing the governance of the tens of thousands of companies for which they are major shareholders is an incredibly burdensome and almost impossible job. Imagine having to read 20,000 proxy statements which arrive in February and March and having to vote them by May when you have not likely read the annual report, spent little time, if any, with the management or board members, and haven’t been schooled in the industries which comprise the index. Consider how difficult this job would be when even the largest index funds have a hierarchy of only 20 or so people (one per ~1,000 companies) in their governance departments which determine how proxies for these companies should be voted.

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Now obviously, as an activist investor, Ackman is incentivised to outrage at a large voting block that can’t easily be swayed by his calls for dividends, share buybacks and board appointments. He doesn’t disappoint:

In 2015, the three largest index fund managers, who owned 18% of Dupont’s stock, voted against Nelson Peltz and his firm’s (Trian’s) candidates for the board of directors, in what was described at the time as a major defeat for shareholder activism.

…Within 90 days of the vote, the company missed earnings and exhibited continued business deterioration. As a result, the CEO “retired voluntarily” and the company shortly thereafter announced a merger with Dow Chemical to address problems that Trian had identified.

But despite the self-serving nature of the argument, there is something in it. Index funds are not staffed to be activists and are incentivised for long-term accumulation. This can go a few ways – index funds won’t be pushing for short term gains, but they also won’t be paying that close attention.

Although, preliminary research does suggest companies with higher passive ownership exhibit better corporate governance. They tend to have more independent directors, for example.

Shall be interesting to see how this plays out.

If you want to go deeper, I suggest a recent piece on passive investment in the Financial Times (subscription).

Disclaimer: I own shares in several exchange traded funds.

How long can Putin’s populism last?

I’ve been a bear about Putin for a fair while. While he has played the role of eccentric strongman better than any Bond villain, it’s never been backed by an economic vision. His belligerence on the world stage is a brilliant facade, very successfully drawing the world’s attention from the cracks in the Russian economy.

The fact is, despite a wealth of talent and natural resources, a fortuitous geographic position, and an opportunity for a clean slate after the fall of the Soviet Union, Russia was never able to diversify away from base commodities. As recently as last year oil and gas accounted for half of the federal budget and two-thirds of Russian exports.

But commodities have tanked.

Oil’s role in the Russian budget is the thing to focus on here, as it highlights some of Putin’s biggest missteps – central planning, bullying and too-obvious cronyism. The Russian government is a significant player in the oil industry, often strong-arming companies and assets away from legitimate businessmen (read Bill Browder’s book for more). The government has been systematically scaring away and disincentivising investment, leaving the country without a big industry to fill the void left by commodities. And just think of what Russia has missed out on – Silicon Valley is littered with former residents of the Soviet Union, including founders of Google, Paypal and WhatsApp. And it seems like every other week Russians are caught doing something smart with computers hacking something.

The cracks in the Russian economy can no longer be papered over by staggering oil revenues. The last Russian budget, delivered less than six months ago, was based on oil at $50 a barrel. Overnight, oil once again dipped below $30. Russia, already in a recession, looks like having to make significant cuts in government spending.

And as a report in The Guardian notes, the recession is already biting:

The economic recession has hit consumers the hardest, and 2.3 million Russians fell into poverty in the first nine months of 2015. Inflation reached 12.9% last year, driving a 9.5% decline in real wages. As a result, retail sales shrank by about the same amount, and sectors including automobile sales and construction suffered large contractions. Many are foregoing luxuries like a new car or winter getaway. According to the state statistics service, the number of trips abroad by Russians decreased by 31.4% in the first nine months of 2015.

Other economic indicators published by the state statistics service on Monday showed continuing heavy falls and a deterioration compared with previous months. Retail sales were down more than 15% year-on-year in December, while capital investment fell 8.7% year-on-year.

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Putin is a populist. How long can he remain one in an economy like this?

As usual you should read the entire Guardian article. For the delicious schadenfreude at least.

Data isn’t enough

We live in the age of data fetishisation. Startups are revolutionising entire industries, like instant loans, by applying it smartly. Cars are learning to drive themselves through brute force data crunching. And “data journalism” has become a category within itself, offering new takes on old stories.

As an example, data played an integral role in the joint Buzzfeed/BBC investigation of match fixing in tennis. The story crunched the numbers on thousands of players and matches, coming up with fifteen names that kept popping up in matches with “suspicious betting patterns”.

However, as the brilliant data-journalism site FiveThirtyEight points out, there are a couple of problems with drawing conclusions purely from this dataset. There are plenty of reasons players could lose matches with odd betting patterns without fixing said games.

A player could tank a match for other reasons, such as being injured or lazy. Punters could have inside information, such as on a players health, and act on it before the betting markets can price it in. Or bookies could simply have gotten the odds wrong and revised them, something that happens surprisingly often.

It’s possible to use data analysis, as BuzzFeed did, to raise questions about certain matches and players; it’s much harder, and may be impossible, to use that data to accuse specific players of throwing matches without the additional investigative powers tennis authorities wield — and according to the BuzzFeed-BBC report, often aren’t using.

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As great as this Buzzfeed story appears, and it really does look impressive, there’s a reason the sport’s investigators use more than data.

As usual, I have only touched on a few points raised in the article. You are very much encouraged to read the entire thing.

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