Ten interesting things that we read this week

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At Ambit we spend a lot of time reading articles that are not directly relevant to Indian stocks. However, since the Indian economy is now umbilically linked to its global counterparts, the articles that we come across have relevance for Indian stocks and the Indian economy. In that context, this report contains the ten most interesting pieces that we read this week.

Here are the ten most interesting pieces that we read this week, ended December 16, 2016.

1)    The Thucydides Trap: Are the U.S. and China Headed for War? [Source: the Atlantic ] 
As per this article, the defining question about global order for this generation is whether China and the United States can escape Thucydides’s Trap. The Greek historian’s metaphor reminds us of the attendant dangers when a rising power rivals a ruling power—as Athens challenged Sparta in ancient Greece, or as Germany rose to rival Britain a century ago. Most such contests have ended badly, often for both nations. In 12 of 16 cases over the past 500 years, the result was war. When the parties avoided war, it required huge, painful adjustments in attitudes and actions on the part not just of the challenger but also the challenged. Based on the current trajectory, war between the United States and China in the decades ahead is not just possible, but likely. A risk associated with Thucydides’s Trap is that business as usual—not just an unexpected, extraordinary event—can trigger large-scale conflict. Thucydides identified two key drivers of the stress: the rising power’s growing entitlement, sense of its importance, and demand for greater say and sway, on the one hand, and the fear, insecurity, and determination to defend the status quo this engenders in the established power, on the other.

2)    China’s liquidity flood stirs memories of the Mongols and Mao [Source: Financial Times ]
At intervals in their history, Chinese rulers have succumbed to the temptation to pay off spiralling debts simply by printing money. Inflationary scourges ravaged dynasty after dynasty, with both the Mongols and Mao Zedong’s Communists seizing power in a country eviscerated by depreciated paper. Such episodes still echo in Beijing as the PBOC seeks to control its latest bout of monetary exuberance. The danger going forward is that if the renminbi loses value internally or gushes out of China, a wave of unpaid debts could precipitate a crisis. Between 2007 and 2015 China created 63%, or $16.1trn, of the growth in the world’s supply of money. The nation now has more money coursing through the arteries of its economy than the eurozone and Japan combined — and almost as much as the USA and the eurozone combined. This effusion of liquidity presents as many problems as it promises to resolve. The main issue is that debts are piling up almost as fast as China generates money to service them, creating a “debt funding bubble”. The risk is seen mainly in the form of a “madcap proliferation” of flaky financial institutions that lend out money which they raised by issuing debt. Other fear is that Chinese corporations and citizens will decide en masse that they would be better off taking their money abroad to buy companies or invest in gold, stocks or real estate. Such capital flight could sap the liquidity that is required to keep China’s bubble from popping.

3)    Game changers: The importance of puzzles [Source: Financial Times ]
English economist Tim Harford shares his views on why puzzles make for not only great family entertainment but are also potential grounds for breakthrough discoveries. Consider the puzzle of the bridges of Königsberg — 18th-century Königsberg had seven bridges connecting two sides of a river and two large islands. The puzzle was: is there a walking route through the city that crosses each bridge only once? The great mathematician Leonhard Euler was intrigued by the fact that, despite its apparent simplicity, “neither geometry nor algebra nor even the art of counting” could solve it. And so Euler invented an entirely new branch of mathematics, graph theory. Euler’s graph theory has been enormously fruitful in chemistry, physics, sociology and, of course, computer science. The internet relies on Euler’s analysis. And it all started with a brain-teaser. He also exemplifies how gambling formed the foundation of probability and “game theory”, one of the building blocks of modern economics and an important tool in evolutionary biology. Even fun games can be crucial in devising ways to alter our future materially – as is planned by researchers at DeepMind, Google’s artificial intelligence outfit, who are turning to computer games to train artificial intelligences.

4)    Et tu, evolution? [Source: DNA news ] 
Life may not have a purpose but science does, to make our lives more comfortable. In doing so, scientific intervention has the capacity to change the course of human evolution. Tools altering human anatomy is but one instance. One such intervention set the evolutionary barn on fire. Philipp Mitteroecker and colleagues, writing in the Proceedings of the National Academy of Sciences, USA, proposed that the Caesarean section is altering the course of human evolution by helping babies that would otherwise succumb to the process of childbirth, survive. The scientists claim this evolutionary selection has resulted in an astonishing 10-20% increase in fetopelvic disproportion. To be sure, Mitteroecker and his friends aren’t the first to suggest this. Writing in the American Journal of Obstetrics and Gynaecology in 2011, Dr Joe Walsh had proposed an evolutionary fallout of the C-section. “Maternal pelvis can get smaller over time, and fetal birthweight can get greater over time, because there is now nothing to limit these changes,” he wrote. To understand this hypothesis, one needs to first comprehend the evolution of two of our most prominent anatomical features – brain and pelvis. In a matter of 2.5 million years it has tripled in size. With large brains comes the awkward problem of them having to pass through the constricted birth canal and a pelvis that appears hopelessly ill-designed for delivering a baby. C-section however has allowed for a work around that problem resulting in a scenario wherein there will come a time when natural birth would become impossible and C-section the only viable option.

5)    Supply-side guru Arthur Laffer hails Trump’s tax policy [Source: Financial Times ] 
Arthur Laffer, the man who claims credit for Ronald Reagan’s tax cuts, says similar policies following Donald Trump’s election will lead to economic “nirvana” in the USA. The 76-year-old — who gave his name to the “Laffer curve” that links tax rates to revenues — says he is close to many of the president-elect’s economic advisers and picks for cabinet positions. Two of Mr Trump’s most senior economic appointments subscribe to the “Laffer curve” effect, which predicts that lower tax rates will boost revenues. Mr Laffer says the best part of his strategy is that there is no limit to the dynamic gains from lowering taxes. “Make sure you understand this is the beginning and the process never ends. Just when you think you’ve hit nirvana, something else goes on and you start the process all over again,” he adds. Trade is the one area in which Mr Laffer is concerned about the president-elect’s grip on economics, saying: “I don’t know if I’ve ever seen a politician who’s ever understood trade”. He adds “I don’t believe Donald Trump is nearly as protectionist as his quotes,” and urges the president-elect not to worry about the US trade deficit. “Which would you rather have? Capital lined up on our borders trying to get into our country or trying to get out of our country?” He also supports Trump’s criticism of Ms Yellen’s chairmanship of the Federal Reserve, saying central bankers have got their strategies of ultra-loose monetary policy wrong. He thinks low interest rates fail to give people incentives to supply capital for housing and businesses, thereby constraining growth.

6)    George Lucas: The Edison of the movie industry [Source: WSJ ]
Although movie critics have never considered George Lucas an auteur, for untold millions of “Star Wars” fans he remains an unrivaled fount of entertainment. Peter Jackson, director of the “Lord of the Rings” trilogy, has said that Mr. Lucas is “the Thomas Edison of the modern film industry.” The triumph of “American Graffiti,” his second feature, in 1973, made Mr. Lucas a millionaire at the age of 28. Brian Jay Jones shows in his new biography, “George Lucas: A Life”  that before “American Graffiti,” Mr. Lucas had demonstrated his talent with a film that even today stands comparison with the best sci-fi movies. “THX 1138” made imaginative use of locations like San Francisco’s subway tunnels to explore a dystopian world in which Robert Duvall was on the run from sinister robotic pursuers. Although sometimes mocked by his contemporaries for his laborious approach to screenwriting (the script for “Star Wars” would evolve painfully over two years), Mr. Lucas developed for “Star Wars” a prodigious range of characters and settings. He had always loved make-believe, he recalled, “but it was the kind of make-believe that used all the technological toys I could come by, like model airplanes and cars.” Mr. Lucas earned respect as a shrewd and unsentimental negotiator. “I don’t borrow money,” he would say flatly, and his work ethic was second to none. From the outset, he foresaw the potential of merchandising, and by the late 1970s virtually every child in America and around the world would cherish his or her “Star Wars” figurines. Mr. Lucas’s single-minded personality meant that work almost always took precedence. Fiercely independent, he was quite simply “the boss,” refusing to compromise with studio demands. He has had “an inherent ability to hire the right people, and a preternatural knack for asking the right questions.”

7)    Robot proofing your child’s career is a waste of time [Source: Financial Times ]
In preparing a child for his/her professional future, most parents start from their own experiences — professions and trades run in families. A study by Facebook this year found “people within a family are proportionally more likely to choose the same occupation”. Yet the research also found that while “a son who has a father in the military is five times more likely to enter the military, just one in four sons of a military professional does so”. In other words, most children strike their own path. Besides encouraging them into their own lines of work, how else should parents prepare children for employment? Teachers and businesses urge young people to future-proof themselves by studying science, technology, engineering or maths (STEM). Toy manufacturers and entrepreneurs have picked up on the “stem” trend. However, the author is not convinced everyone can or should be a coder. As Martin Ford, author of The Rise of the Robots, pointed out, routine software development is being automated everywhere. The author opines that perhaps parents should be directed instead. Like Chris Puckett and his parents. Mr Puckett has made a fantastic career and vast amounts of money as an esports commentator, hosting competitive video gaming at live events and on screen. His father is a paper salesman, his mother, a receptionist at the local church. They worried about his decision to pack in his degree to pursue what seemed to them a flaky career. To allay their fears, Mr Puckett invited his parents to tournaments. Now they are his biggest cheerleaders. Some take it further than the Pucketts. Marc Freedman, founder of a social enterprise that advocates second careers in later working life, reports growing numbers of parents following their children into their chosen careers.

8)    Amos Tversky - An amazing man! [Source: Cover Street Capital ]
According to the new book by Michael Lewis, “The Undoing Project,” renowned mathematical psychologist and a collaborator of Daniel Kahneman, Amos Tversky kept these thoughts on a piece of paper by his desk:

• People predict by making up stories.
• People predict very little and explain everything.
• People live under uncertainty whether they like it or not.
• People believe they can tell the future if they work hard enough.
• People accept any explanation as long as it fits the facts.
• The handwriting was on the wall. It was just the ink that was invisible.
• People often work hard to obtain information they already have and avoid new knowledge.
• Man is a deterministic device thrown into a probabilistic Universe. In this match, surprises are expected.
• Everything that has already happened must have been inevitable.
• A part of good science is to see what everyone else can see but think what no one else has ever said.
• The difference between being very smart and very foolish is often very small.
• So many problems occur when people fail to be obedient when they are supposed to be obedient, and fail to be creative when they are supposed to be creative.
• The secret to doing good research is always to be a little underemployed. You waste years by not being able to waste hours.
• It is sometimes easier to make the world a better place than to prove you have made the world a better place.

9)    India lags peers in its bid towards a cashless economy [Source: Livemint ]
The last couple of years have seen a number of initiatives to facilitate cashless transactions in India. However, the latest available internationally comparable data shows why moving towards a cashless economy remains a Herculean challenge for India. Data recently released by the Bank for International Settlements (BIS) shows that Non-cash payment transactions in India amounted to only 11 per inhabitant in 2015, much lower than other BRICS economies, with China reporting 17 such transactions per inhabitant in 2014. The report also showed that at 11%, the only economies with a higher or equal ratio of cash to GDP were Eurozone, Japan, Hong Kong and Switzerland, all of which have interest rates near zero. Withdrawals per card in India are the highest among emerging market economies for which data are available. More importantly, the economies which show higher withdrawals per card than India are mostly those countries where interest rates are near zero or sometimes even sub-zero. Further, there are around 165 ATMs per million people in India, the lowest in the BIS sample of major economies and much behind other BRICS economies. India also lags major economies in terms of the availability of Point of Sale (PoS) terminals which process cashless payments. According to the BIS, India clocked the fastest growth, both in terms of number and the value of e-money transactions in 2015, among the twenty-three major economies studied by BIS. However, India’s growth is from a low base and the value of e-money transactions as yet amounts to only a minuscule 0.05% of all non-cash retail transactions, while accounting for 5.5% of the volume.

10)    Google vs. the EU explains the digital economy [Source: HBR ] 
Google’s antitrust battle with the European Union seems to be heating up. In recent weeks, the company has rebutted the European Commission’s charges that: (a) it uses its internet search engine to give its shopping services an unfair advantage over rivals; (b) it improperly uses its AdSense ad-placement service to restrict third-party websites from displaying search advertisements from Google’s competitors; and (c) it unfairly exploits the dominant position of its Android operating system with smartphone manufacturers and mobile network operators. Google’s claim is that EU authorities should adopt a US perspective given that competition in the mobile space is radically different from that in traditional markets. Companies like Google operate simultaneously in multiple ecosystems, as do their competitors. As such, any analysis of competitive dynamics must be done across ecosystems — something the European Union hasn’t done. Instead, it has just focused on the mobile-operating-system market. Google, Apple, Amazon, and Facebook are simultaneously competing and co-operating in multiple fronts, a phenomenon we call interlocking ecosystems. Since mobile devices play an important role in making it possible for these interlocking ecosystems to work smoothly, it is critical to understand the mobile industry stack – which comprises of layers of functionality, each of which delivers a unique value proposition for customers.