Mainstream media sources such as the New York Times tend to make light of policies such as QE1, 2, and 3 (the processes of printing money to buy US treasury bonds), asserting that there have been no signs of high inflation, despite three rounds of massive increases in the money supply.
While inflation hasn’t made its way to the grocery store, it has been credited to the government’s and the FDIC banks’ accounts. It’s also paid a visit to the investor-class in the form of inflated asset prices, giving investors the opportunity to borrow for leverage in stocks, real estates, and of late, in cryptocurrencies. In effect, asset prices are bid up to dangerously overvalued levels.
In 2014, St. Louis Fed (FRED) economists wrote an article claiming that the reason for low inflation in consumer prices was due to a scheme called the Keynesian liquidity trap. This is a situation in which the supply of reserves in banks are increased through each round of quantitative easing. They are increased to the extent that it intersects with demand at a federal funds rate hovering just above zero. This acts as a binding price floor, and shields banks against a negative federal funds rate. How? Banks prefer instead to lend to the Fed at the interest on reserves (IOR) rate, rather than to lend to other banks at a negative federal funds rate. Out of self-interest, banks will choose to earn interest from the Fed at a positive rate, rather than be forced to pay borrowers, following a negative rate. What the FRED economists failed to consider were savings and investment decisions based on real rates, not nominal rates.
As pointed out in an article by the Mises Institute, European and Japanese central bank have already pushed their federal funds rate below zero, which means that something else is responsible for the mass of excess reserves. Before it was used in 2006, excess reserves were practically nonexistent. The little amounts that existed were loaned to consumers and firms by banks. Coincidentally after each bout of QE, excess reserves skyrocketed with increases by $1 trillion, $0.6 trillion, and $1.2 trillion following QE 1, 2, and 3.
When used in conjunction with QE, IOR artificially sustained the federal funds rate above zero. It does this by preventing some amount of reserves from being loaned out, which is the equivalent of hoarding cash under a mattress instead of putting it in a bank where it can be loaned out. Contrastingly, if the Fed were to decide to set the IOR rate below zero, some amount of previously contained reserves would flow into the economy, and federal funds rate would decline. The Mises article also pointed out that after QE3 ended in 2014, when excess reserves began declining, the Fed increased the IOR rate from 0.25% to 1.5%. If that increase sounds familiar, it’s nearly the same increase federal funds rate underwent since then.
The Fed is raising the IOR rate to keep up with economic growth. As the economy grows, banks are incentivized to make more loans. These loans can only come from demand deposits which the excess reserves are converted into. Raising IOR slows the flow of excess reserves into the economy. If the Fed fails to do so, assuming an M1 (money supply used as the medium of exchange) of 1, banks would convert excess reserves of $2.6 trillion. That amount represents a 72% increase in M1 from its current stock of $3.6 trillion. Under the Quantity Theory of Money, consumer prices could accelerate at a startling pace of 72%. With the recent tax cuts and increased spending plans spurring economic growth, bankers will need to lend reserves to consumers and firms.
If the Fed wants to prevent the stimulus spillover into consumer prices, it will need to raise the IOR to slow the conversion of excess reserves into demand deposits. The problem is, raising rates would lead to an inverted yield curve, in which long-term bonds would yield lower than short-term bonds. This could trigger a recession.
What is the Fed’s next move? According to a chart for the TMS (total money supply), the money supply is shrinking. In response to the increased IOR and federal funds rate and the Fed’s decision to unwind its balance sheet, year over year (YOY) growth has dwindled from 11.15% in October of 2016 to 3.1% in December of 2017. This means the Fed is choosing the latter, to raise IOR rates. Unfortunately, it seems that a tool which the Fed deemed valuable in the past will soon turn into a curse, much like Pandora’s Box.
The U.S. dollar index is at its lowest since 2014, fluctuating between 88 and 89 . It began its fall in early 2017 from a high of 102. Similarly, in the past year, the 10-year Treasury bond’s yield has risen 50 basis points, from 2.4% in early 2017 to around 2.9% . Yet, some might argue that in the past, the dollar has been weaker, yields have been higher, and that comparatively these trends are not a cause for alarm.
To put things into perspective, one has to look at how long it took the U.S. federal funds rate to get to the 1.42% it is today . In 2009, in the midst of the Great Recession, it was hovering just above zero at around 0.15%, or 15 basis points. It has taken nearly ten years to get to the rate where it is today in 2018. Looking at the historical trends for the federal funds rate, there isn’t much of a difference between a 100 basis point rise, from 0% to 1%. Compare the change to that in the period between 2000-2002, when the Federal Reserve cut interest rates 500 basis points, from 6% to 1% to counter the effects of the imploding tech stock bubble, and to stabilize the U.S. economy. In that period, 1% interest rates signaled a weak economy. Under that logic, why would 1% today signal a strengthening economy? In that light, it may also seem fit to examine the ominous parallels between the fundamentals underlying the transition from 1987 into the nineties, and present economic conditions.
In 1987, the dollar tanked from an all-time high of 164.72 in February of 1985. Ten-year treasury yields peaked that month for the year at around 8.7%. Fiscally, the United States was transitioning from a creditor nation to a debtor nation. It was running large budget and trade deficits. The personal savings rate for the average American tanked to 3.8%, an all-time low at the time.
Fast forward to 2018. Congress’s latest bipartisan vote approved an increase in spending to $300 billion over 2 years. Simultaneously, Trump delivered tax cuts of $1.5 trillion . These policy decisions are happening at a time where as a nation, we are running record-high trade and budget deficits.
Is there a difference between 2018 and 1987? In 1987, foreigners were still buying our bonds , and the federal funds rate in 1987 was around 6%, which meant that the U.S. could afford to pay higher interest on their bonds. Remember how long it took to get to the current rate of 1.5%? It seems that the times have certainly changed thirty years later.
To add to growing worries, last month, Chinese officials announced the potential of slowing down or halting the buying of U.S. treasuries . If China does decide to stop buying treasury bonds, how will the twin deficits be financed? It’s even less feasible at this point in time, when the Federal Reserve is preparing to undergo quantitative tightening. The selling of treasuries from the Fed’s balance sheet is going to add substantially to the already growing pile of bonds for sale .
Fundamentals are much worse now than they were in 1987. Now, the savings rate is at a ten-year low, at 2.4% , which was much lower than the bottom in 1987. Consumer debt, including credit card debt and student loan debt are at all-time highs. In addition, the economy as a whole has changed drastically since 1987. Back in the eighties, manufacturing played a larger role in the U.S. economy. The United States exported more. Compare that to today, where the economy is mostly service based, the majority of new jobs are of part-time, low wage variety, and a staggering number of 95 million Americans are not participating in the workforce .
While it may seem like unnecessary gloom and doom, it does warrant another look. It is probable that a weak dollar, higher yields on the 10-year treasury, and stalling rate hikes are reflections of a weakening U.S. economy.
 U.S. Dollar Index – 43 Year Historical Chart, macrotrends.net
 US 10-YR, cnbc.com
 Effective Federal Funds Rate, fred.stlouisfed.org
 Dollar Under Siege With U.S. Deficits Back on Wall Street’s Radar, bloomberg.com
 Nine Myths About the Crash, mises.org
 China Weighs Slowing or Halting Purchases of U.S. Treasuries, bloomberg.com
 Raising Rates Reflect Bigger Debt Not Faster Growth, europac.com
 Personal Savings Rate, fred.stlouisfed.org
 Labor Force Statistics from the Current Population Survey, data.bls.gov
Perhaps one of the biggest news story last week was Tuesday’s announcement of a new health care venture between JP Morgan Chase, Berkshire Hathaway, and Amazon. The three fortune 500 companies plan to form, “an independent company that is free from profit-making incentives and constraints.” The announcement was made jointly between Amazon’s Jeff Bezos, Berkshire Hathaway’s Warren Buffett, and JP Morgan Chase’s Jamie Dimon. Markets reacted with a noticeable 6.6% drop from United Health and Express Scripts. CVS dropped 5.5% and Aetna dropped 2.5%. The Vanguard Health Care Index Fund ETF dropped a more conservative 1.81% during trading on Tuesday.
Temporary leadership will be under Todd Combs an investment officer of Berkshire Hathaway, Marvelle Sullivan Berchtold a Managing Director of JPMorgan Chase, and Beth Galetti a Senior Vice President at Amazon. The new company will have 1.1 million ready customers from their combined employees. No headquarters has been selected, and no long term management has been announced. According to the New York Times, the announcement was made at a preliminary stage so a team could be hired. Even in these early days, Jamie Dimon believes the deal could eventually benefit all Americans.
Healthcare costs have been ballooning in recent years. According to research from JP Morgan, Americans spend $714 on healthcare that is not covered by their insurance. That’s up 13.5% from 2013 and 3.6% from last year. The average American spends about $4,000 a year on total healthcare related costs. That number is expected to reach $5,000 by 2023. Between now and 2025 prescription drug spending is projected to grow 6.3% annually. Warren Buffett believes, “the ballooning costs of health care acts as a hungry tapeworm on the American economy.”
Robert S. Huckman from, the Harvard Business Review, identifies likely paths for cost reduction and quality improvement naming streamlining routine transactions, passive data capture, and data analytics as likely routes to take. Though these ideas are speculative, Amazon’s experience in data analytics will probably be one of the ventures biggest assets.
A major point of debate is over the capacity for this venture to make deals on drug prices. Speculators say the coalition may have bargaining power on drug prices. Sam Glick who works for the management consulting firm Oliver Wyman believes, “the idea that they could have any sort of negotiation leverage with unit cost is a pretty far stretch.” Bezos is weary of this risk and others but, “hard as it might be, reducing health care’s burden on the economy while improving outcomes for employees and their families would be worth the effort.”
The healthcare industry makes up 18% of U.S. GDP and could see many changes in the upcoming years. Aetna and CVS’s $69 billion merger deal plans to cut costs and simplify healthcare through vertical integration. A similar deal was formed in 2016 when other large companies, notably Coca Cola, American Express, and IBM, came together to try and tackle the same issues. The Health Transformation Alliance has not had tremendous success, but it’s still in relatively early days.
Over 160 million Americans are given some form of coverage through their job. The collective 1.1 million employees in the new venture are a relative drop in the bucket, but this type of partnership may prove to be a model for other companies trying to curtail the steep price for healthcare.
As of February 5th 2018, Jerome Powell was sworn in as Chairman of the Federal Reserve Board, marking the end of Janet Yellen’s term. Yellen, who headed the Fed during the Obama administration, was praised highly by President Trump for her integral part in stimulating economic recovery following the 2008 financial crisis. Even with such glowing remarks, Trump chose to nominate someone else and now Powell is stepping into the driver seat, tasked with preserving the precarious equilibrium that exists between an economic downturn and an overheating.
Historically, the Federal Reserve has been a separate entity from the executive and legislative branches, utilizing tools of monetary policy to promote economic growth. It is no surprise that worries of Trump over-extending his political power to influence the Fed’s actions hang heavy in the air. Powell was met with concerns over his economic experience and comprehension of monetary policy throughout his nomination. However, his time with the Fed under both Bernanke and Yellen, as well as his experience on Wall Street, has given him a unique perspective that challenges the typical economist Chair appointment.
Anxieties of deregulation leading to another financial crisis were brought forth by many, including Senator Warren. In the past, Powell has pushed back against proposals to allow large banks to borrow more of their funding, stating that “requiring them to raise capital from investors had strengthened the financial system.” His comments on revisiting current regulations does not necessarily support Trump’s deregulation, but more so indicates his desire to find a sensible balance. To further quell any anxieties, Powell has repeatedly stressed his devotion to the Fed’s integrity. In a video he released, Powell stated that he and his colleagues “will put everything they have into serving you and our country with objectivity, independence, and integrity.”
Throughout his time at the Fed, Powell has voiced a very centrist perspective, siding with the majority that Yellen spearheaded. At a Fed debate in 2012, Powell expressed concerns that stimulus policies may generate a “much larger balance sheet with likely benefits that are not commensurate to the risks that we're bearing.” If this is any indication, Powell will most likely continue the Fed’s gradual retreat from its campaign of financial stimulus. Years of quantitative easing has burdened the Fed with quite an accumulation of assets and Powell must guide the Fed as it plans to unload these assets into a market that has recently demonstrated its unpredictability.
On the issue of interest rates, Powell has made it clear that he plans to continue raising them. Economists, as well as Wall Street, have expressed concerns over the speed at which the increases occur, putting Powell under immediate pressure to ensure that the economy does not overheat. As the market has shown, what goes up can come down just as quickly. Moreover, Powell must recognize that raising interest rates too quickly may cause a downturn, as it has in the past. As of now, plans for a December hike in interest rates are being discussed, but nothing has been defined.
Though it is only his first week on the job, Powell faces a monumental task of ensuring the economy stays strong under the Trump administration. The public must remember that the Fed is not a one-person show. All decisions on interest rates, regulations, and asset sales are made by committees that draw on its members from all of the Fed’s branches across the United States. Alan Greenspan’s inability to stop the economy from tumbling in the first two months of his term may serve as a valuable lesson to Powell as he takes the reigns.
“AI is probably the most important thing humanity has ever worked on. I think of it as something more profound than electricity or fire.” -Sundar Pichai, Google CEO
The space race was one of the greatest periods of innovation the world has seen. It was driven by fear and desire for dominance on a global stage but ended up being positive for all of mankind. The battle for artificial intelligence (AI) is the ‘modern space race’ and the U.S., like the Russians, is the ‘first in orbit’. However, a lack of government confidence in science research could be ceding the race to China, with consequences we have yet to understand.
May 27, 2017. Google’s Alpha Go defeats Go(围棋) world champion Ke Jie 2-1. Winning in this complex Chinese war strategy game exhibited the computational power of AI; as it has 10170 possible board positions, the game is considered far too intricate for machines to comprehend. This victory cemented the status of the U.S. as the leading power on AI technology. In fact, U.S. investments in AI technology are 1.5 times higher than China’s, and the U.S. talent pool is two times larger. Chinese companies currently buy semiconductor chips, an integral piece in furthering AI capabilities, from U.S. companies like Nvidia and Intel rather than developing their own. As the chip manufacturing industry is expected to go from $6 billion in 2016 to $35 billion by 2021, it will continue to a great advantage for the U.S. This, along with the work of companies such as Google, Facebook, Apple, Microsoft, and Deepmind give the US quite the edge.
In July of 2017, the Chinese government announced a plan to make AI, “the main driving force for China’s industrial upgrading and economic transformation,” and make China the world leader in AI by 2030. In an indication of its aspirations for AI technology, China has put $20 billion into a new chip industry project already and could spend up to $150 billion according to a U.S. government estimate. Semiconductor chips are but a small part of China’s plan for AI dominance, and while the Chinese government and private firms are pumping funding into AI, the U.S. government is conversely taking funding away from AI.
Though the U.S. has had the upper hand for decades, such excellence could not have been obtained without governmental support. While the Chinese government plans to invest upwards of $150 billion on AI technology, it has been revealed that after a 10% budget cut, the U.S. National Science Foundation’s spending on so called “intelligent systems” will be a mere $175 million. This places the onus for the development of AI technology on private U.S. companies and is a significant handicap for the U.S. in the continued development of this technology.
Its aggressive investment in AI by means that China plans to be the first in this modern space race to ‘reach the moon’, and the U.S. will be increasingly looking to the East for AI excellence. AI: one small step for robot, one giant leap for all mankind.
 Deepmind was acquired by Google in 2014
 Chinese State Council (国务院), translated by Graham Webster et al. "New Generation Artificial Intelligence Development Plan (新一代人工智能发展规划)" last modified July 20, 2017.
In February, President Trump signed a repeal of section 1504 of the Dodd-Frank passed in 2010. The section that was repealed required oil, gas, and mining companies to publicly disclose to the SEC any payments they make to governments that are not the US federal government. The initial logic behind the law was that it would promote transparency among the companies and reduce bribery and corruption in foreign nations bearing large resource reserves. The reason the Trump Administration gave for repealing it was that the disclosure process was unnecessary and did not help American companies compete on the foreign landscape.
The possible monetary implications of the regulation were costly. According to the conservative Americans for Tax Reform, companies would have spent from $173 million to $385 million to comply with the regulation. The US was not alone in its requirement for transparency. Many countries in the EU, other European countries, and Canada have similar legislation. Opponents of the repeal point to this fact and also that the loss in transparency could make it harder for citizens to spot corruption and fraud, as Jay Branegan of the Lugar Center think tank argues. At the same time, this could make it easier for companies to hide their shady activities.
The oil, gas, and mine industries all have lots of money and international influence embedded in them. The economic effects of this repeal will not just have ramifications domestically, but all over the world. The House Republican who was the main person behind the bill, Bill Huizenga from Michigan, argued that with the repeal, there would be less costs inflicted on businesses, particularly small businesses, and make them more competitive on the world stage. President Trump also commented on how the repeal could lead to more jobs in the sector, a sector he campaigned hard on and received many votes from - particularly mining.
This legislation was only signed 8 months ago, so the effects of it have yet to be fully felt. It will be interesting to see if American companies really do get more business and compete better against other international companies.
Charles Lynn - Real-Estate Analyst
Amazon recently announced plans to open a second North American headquarters. The technology giant is asking state and local governments to submit proposals for the potential development. According to Bloomberg estimates, such a development could cost $15 billion over 15-20 years and bring along up to 50,000 employees.
While Amazon released an 8-page invitation for bids, the firm’s exact criteria remains ambiguous. A few desired traits are clear:
- A population greater than 1 million
- A business-friendly environment
- An ability to “attract and retain strong technical talent,” most likely including top universities in the area
- A robust local transportation system, including an established international airport
- High quality of life and cultural fit with Amazon
- Tax and financial incentives, perhaps similar to recent Boeing and Foxconn deals
If past history can serve as a precedent, it is likely Amazon will look to create a bidding war among cities for the most favorable package. Here are 5 major contenders for HQ2:
Boston, MA: A logical pick. Boston recently landed a similar deal with General Electric and there is waterfront property ripe for development. Harvard and MIT would provide Amazon easy access to top talent and the area is emerging as the Silicon Valley of the East. However, Mayor Walsh has recently suggested that the city does not intend to enter another corporate bidding war and a tight housing market could be a concern.
Charlotte, NC: Home to one of the busiest airports in the country, Charlotte is an interesting option. With a lower cost of living than many other competitors listed and a pro-business government, Charlotte could offer a lucrative package. Bank of America has a significant stronghold on the city and Amazon would represent a major threat to retaining talent. As one real estate executive I spoke to put it: if Bank of America does not want Amazon in Charlotte, Amazon will not be there.
Denver, CO: The only option west of the Mississippi listed. Denver checks many boxes, with its strong transportation network, outdoorsy culture, low cost of living, and effective governance. If Amazon chooses to stay west, this may be the spot. However, many feel Amazon would be best served on the east coast.
New York, NY: The city that never sleeps. Amazon has invested in over 1 million SF in the five boroughs this summer. With proximity to headquarters of other high-powered firms and ample availability across a variety of office types, New York is almost too obvious of a choice. The potential desire to be a big fish in a smaller pond, and high costs of living and doing business, however, could sink a potentially great match.
Washington D.C: A dark horse candidate. D.C fits many of Amazon’s needs with potential locations available in suburban parks or urban centers. A D.C base would provide easy movement throughout the east coast. With Amazon falling under increased pressure from President Trump and the potential for antitrust issues as the firm expands, a D.C headquarters would be quite the statement and could be part of an effort to improve the firm’s regulatory environment.
For most firms, an annual report is an opportunity for a company to present its financial position as well as explain past performance and discuss future growth prospects. But for Berkshire Hathaway, the annual report is a widely anticipated document lauded by investing enthusiasts well beyond the United States' public equity markets. Chairman Warren Buffett's 27-page opening letter is more than simply a review of Berkshire's routine outperformance over the market. In this year's letter, the Oracle of Omaha outlines his projections for macroeconomic growth, Berkshire's opportunities to expand, and broad investing advice to his readers. His wisdom is simple, powerful, and most importantly, puts all investors on an equal playing field. Buffett dissuades even the wealthiest from investing in actively managed funds with considerable management fees:
"The wealthy are accustomed to feeling that it is their lot in life to get the best food, schooling, entertainment, housing, plastic surgery, sports ticket, you name it. Their money, they feel, should buy them something superior compared to what the masses receive... My calculation, admittedly very rough, is that the search by the elite for superior investment advice has caused it, in aggregate, to waste more than $100 billion over the past decade." (Berkshire’s report)
A decade ago, Buffett agreed to a $500,000 bet with several hedge fund managers. If Buffett's selection of a S&P 500 Index fund (passively managed) outperformed actively managed hedge funds, the third-richest man in America would walk away richer. If actively managed funds won, Buffett would lose some pocket change. Guess who won (hint: not the hedge fund managers).
Buffett’s successful bet demonstrates the advantages to investing in passive funds rather than trying to outperform the market and picking individual equities. Considering the average member of the Forbes 400 has a net worth of $6 Billion, $100 Billion is no drop in the bucket. Buffett employs the Keep-It-Simple-Stupid method to investing tremendous sums of wealth, and history suggests his advice is correct over extended periods. Furthermore, Buffett's confirmed hypothesis is impactful because this investing strategy is accessible to the masses. A hedge fund typically offers an entry level beginning at six figures, and a standard 2/20 fee structure (2% of total asset value + 20% of profits). To invest in a style that tracks the S&P, any investor can simply purchase a low-cost ETF that mirrors the 500 companies in the S&P, and watch it grow over time. Buffett perhaps alludes to this Vanguard S&P 500 ETF charging a whopping 0.05% expense fee (and Vanguard aims to decrease this cost even further).
Given the inherent positive bias of an annual report, investors consider it as one of many sources when arriving at an investing decision, and know they must consult other third-party analyses to formulate a well-rounded opinion. Berkshire's annual report is undoubtedly filled with self-promotion and endorsement, but is unique as it does not overlook poor performance. Buffett feels an obligation to inform his reader of such (albeit infrequent) acquisition disasters, and his subsequent efforts to learn from these mistakes. Buffett's performance at Berkshire and broader market advice will continue to shape the investing world, and influence investors regardless of economic status.
This article has been modified by the author and secondarily published by First Report Economics. See original work here:
Daniel Lombardo and Gelsson Ortiz
Elon Musk, co-founder of companies Tesla, SpaceX, and PayPal, is launching yet a new startup, this time for neuro-tech. However, this company is unlike anything Musk has ever been involved in before. What is NeuraLink, and more important, how does he plan to run this company while running Tesla and SpaceX?
The startup, NeuraLink, is a company focused on linking the brain and computer without having to go through an operation. According to the MIT Technology Review, NeuraLink was founded in 2015 by two professors, Pedram Mohseni of Case Western Reserve University and Randolph Nudo of Kansas University Medical Center. The researchers were working on a neural lace technology that would help people with brain injuries by communicating with machines without having to go “through a physical interface” (Muoio, 2017). Without knowing billionaire Musk was behind it, the two had sold the name NeuraLink to him for tens of thousands of dollars.
Musk has stated there are multiple applications to brain-computer interface technology. The practical use would be allowing humans to stay healthy and reaping the benefits of computer software updates. According to The Journal, the first devices could be used to treat diseases such as depression and epilepsy. Modern day treatment for neurological disorders such as Parkinson’s Disease and Alzheimer’s does exist, but NeuraLink’s technology would provide much more than just treatment of certain conditions. Additionally, the chips could improve memory and drastically increase cognitive processing abilities.
This isn’t the first time Musk has brought up the idea of merging the human brain with neural lace; he mentioned that neural lace would be able to give humans an artificially-powered connection without the need for surgery Musk believes it is imperative for the future of mankind that humans develop alongside AI technology. This doesn’t necessarily mean that he believes in a man vs. robot doomsday event, but he does feel that in order to become what he describes as a “multi-planetary species,” we must merge brain and computer.
Musk will approach this goal through the more realistic aim of symptom control before pursuing total man-machine convergence. This takes on a similar narrative to Musk’s other companies in that he begins with a small operation focused on profitability, and accumulates business until it is a massive R&D machine aimed at accomplishing the impossible.
This means that he won’t be making the revolutionary merger of man and machine that many sources have claimed he would make right away. This “neural lace” brain implant would ultimately connect a person’s brain to various control devices and could hypothetically be used to improve a person’s memory since it would be able to increase a brain’s storage capacity.
One wonders, however, how Musk will accomplish his brilliant goal while also having to balance the workload of Tesla and SpaceX. Will Musk focus more on NeuraLink than the latter two? I would imagine, if Musk were to direct all of his effort and resources to Neuralink, he will delegate the key decisions of his other companies to his closest and most trusted executives. If he decides to maintain control over Tesla/SpaceX and balance time between the three, it seems most plausible to hire experts in the brain-chip technology field to lead the future success of Neuralink. Regardless of Musk’s management strategy, it’s safe to say all three companies are, at least, in competent hands.
Matt Cesare and Andrew Stiles
The Nxt Foundation is a non-profit founded in 2014 and focuses on promoting the use of the Nxt and Ardor platforms. The foundation’s goal, as stated by Nxt’s head of marketing Travin Keith, is to become “the primary point-of-contact for businesses and organizations that use or are interested in using Nxt Technology.” As demand for blockchain increases, the Nxt blockchain has potential to improve efficiencies in financial transactions by order of magnitude.
Blockchain technology is a network that does not have a centralized database. Instead of transferring information linearly from base A to base B to base C, information is updated through all parts of the chain. An example may clarify this: when sending a legal document via email, the receiver must sign that document, save the changes, and then send back the new version of the document. In contrast, blockchain technology is more similar to editing a document on Google’s live document editing tool; editors can change the document simultaneously, and all changes are updated and saved real-time, all while the record of the changes are kept. Blockchain technology streamlines digital transactions, which is particularly useful in business. Banking transactions will become faster with smaller room for error, and legal processes will have a shorter paper trail.
So far, blockchain technology has found great use because of its structure. It is precise, highly transparent, and virtually un-hackable, which provides high upside for people and institutions. Blockchain allows everybody involved in a transaction to see what is happening with the transaction when it is happening. There are no delays and no uncertainties.
Right now, Nxt technology is used by several 3rd-party projects like SuperNET, Janus, and Digital Billions. These projects are able to use the technology for different purposes which speaks to the versatility of the product offered by Jelurida, the corporation of developers behind Nxt. The Nxt community sees a bright future for the technology and Keith says that Nxt has witnessed “increasing levels of interest by numerous businesses in blockchain over the past year” and that “we can expect more businesses and organizations incorporating blockchain technology into their operations.” Per its website, Nxt is working on updating the code to broaden its technology and further influence the market.
The future for blockchain is bright because of its versatility and security. A multitude of industries ranging from finance to law can find use for the technology. If a majority of businesses use blockchain, the effect would be increased efficiency in transactions and less money invested in security for processing those transactions because of blockchain’s simultaneous updating and impeccable anti hacking features. Nxt technology sure isn’t going away, and blockchain will become a crucial facilitator of digital transactions in the not-so-far-off future.
Learn more about the Nxt Foundation here: https://www.nxtfoundation.io
In 2016 Tesla reported a loss of $774 million in its $7 billion reported revenue. This represents an improvement from 2015, during which it lost $887 million on its revenue of $4.04 billion. Tesla’s final quarter of the year saw losses of $.69 a share, which was less than the predicted loss of $1.04. Overall, Tesla increased profits this past year, mainly due to the Model S and Model X electric cars.
In the final three months of the year, Tesla delivered approximately 22,000 vehicles. This brings the grand total to 76,230 vehicles for the year, just shy of its 80,000 car goal. Although the automaker came up short, this was still a strong showing since it increased vehicle deliveries by 51% from the previous year.
Tesla recently made two major acquisitions, buying out the companies SolarCity and Grohmann in November and January. Using SolarCity, Elon Musk is working to incorporate aesthetically appealing solar panels home roof power generation. He remarked, “I’ve never seen a solar roof that I would actually want...every one of them that I’ve seen is worse than a normal roof, without exception. So unless you beat a roof on aesthetics, why bother?” The tiles, created using hydrographic coloring, come in a variety of designs, including French slate, smooth glass, and Tuscan tile. Grohmann is a manufacturing company based in Germany which Tesla hopes will help ramp up production, and help it reach its goal of manufacturing 500,000 cars annually by 2018. This figure represents a 6-fold increase from their numbers this past year.
According to Tesla’s most recent shareholder letter, Tesla is “on track to start limited vehicle production in July” of the Model 3. Projections show that Tesla should “exceed 5,000 vehicles per week at some point in the fourth quarter and 10,000 vehicles per week at some point in 2018.” Some analysts question these expectations, remarking that Tesla has traditionally had issues meeting its goals. Bloomberg reported in January 2017 that “musk has a history of setting ambitious targets and timelines for Tesla and coming up short.” Speculation regarding a delay of the Model 3 negatively affected share prices just this past week.
The Model 3, which Tesla is now working to manufacture is being promoted as its “most affordable car yet,” at $35,000, getting 215 miles per charge. In order to make this a reality, Musk admits to pushing Tesla “very close to the edge.” However, he maintains that the expenditure is in the best interests of the company, and that Tesla will make up it's somewhat disappointing fourth quarter.
On February 20, Kraft Heinz Co. decided to withdraw its $143-billion-dollar buyout bid for Unilever PLC. The decision to drop the bid came only 2 days after the deal was made public, and Kraft attributed the decision to the hostile reaction that the deal unexpectedly generated.
During the weeks preceding the deal, investors largely expected Kraft Heinz to start targeting other food distribution firms for acquisition. The company’s current name and conglomeration was initiated when Berkshire Hathaway (Warren Buffet’s company) and 3G Capital, a Brazilian private equity firm, supported the company’s merger in 2015. This came only after the pair purchased control of Heinz Ketchup Co. in 2013.
In recent years, food processors have struggled to maintain sales against the trend of greater demand for healthier options among younger generations of Americans, so mergers and acquisitions have been commonplace in the market because companies are seeking alternative measures to boost revenues. Furthermore, 3G is particularly notorious for purchasing large companies, slashing the costs of production to maximize their profit, and then looking to further increase revenue by acquiring other companies. The firm previously made headlines when it purchased both Burger King and Tim Hortons to form Restaurant Brands International in December of 2014.
Despite the expectation of a major purchase, investors were surprised by Kraft Heinz’s choice of Unilever. Unlike Kraft, Unilever provides many of its services to developing markets and derives most of its revenues from personal care products, and therefore overlaps little with Kraft’s operations in well-established markets like the US. Because its operations had little overlap, it is unlikely Kraft Heinz could have saved much money by integrating their operations.
The deal was particularly interesting because Unilever is a Dutch company that maintains headquarters in London. According to Reuters, Buffet and 3G felt confident they could build off of their previous success in purchasing British-based Anheuser Busch last year, but were thrown off by the nation’s hostile reaction to the takeover, which was largely due to the lingering economic uncertainty caused by Brexit. Recently, Prime Minister Theresa May announced plans for the nation to become more proactive against foreign takeovers, and this sentiment eventually led Kraft to withdraw their bid.
While news of the pending deal had sent both stocks surging upward, the news of the deal’s failure reversed many of the gains. According to the Wall Street Journal, analysts believe the attempted takeover will serve as an alarm for Unilever, which lags well behind its competitors in terms of profit margins. Also, investors with 3G are reportedly hungry for another deal, as revenues are beginning to flat line after cost cutting measures from the 2015 merger are wearing off. Analysts appear to agree that these investors’ preferred choice is Mondolez International group, which was formerly a part of Kraft prior to being sold during the merger with Heinz. Mondolez, however, has not issued any statement on the speculation of such a deal, and at this point any interest on Kraft’s behalf remains a rumor.
Kraft’s attempted deal is the third largest takeover bid to ever fail, and it marks a recent trend of ambitious acquisitions failing to be executed. However, analysts note that the market has not treated these failures too harshly, and they expect companies to continue attempts at controversial mergers until the market begins punishing them more severely for their failures.
Kofi Ofori-Darko — Wesleyan University Student
On January 23, the White House signed an executive order to withdraw U.S. relations in the Trans-Pacific Partnership, a 12-nation deal that was negotiated under the previous administration. Though the deal was never formally approved by congress, the withdrawal from the TPP underscores America’s growing isolationism and decreasing commitment as a global trade partner.
This decision could be great news for one of America’s fiercest trade competitors: China. China is arguably the largest economic power in the region and has potential to take the lead on Asian development.
In the short term, the U.S. withdrawal from the TPP creates a vacuum in Asia’s economy, leaving the door open for other trade superpowers, such as China, to facilitate economic development of the rest of the region. Also, U.S. agriculture could suffer because of the high export tariffs. According to Congressional Research Service, Japan applies a 38.5 percent tariff on beef. TPP would’ve implemented an immediate 11 percent reduction on that tariff down to 27.5 percent, which would make U.S. beef more competitive with Australian beef that currently benefits from a free trade agreement with Japan. Overall, the U.S. would have seen an $815 million increase in beef exports, and a $7.2 billion increase in agriculture exports over 15 years, according to the International Trade Commission.
Despite the speculation around future U.S. involvement in Asia, it’s difficult to see a complete withdrawal from Asian markets in the near term. The U.S. already has deep military involvement in Asia, and this has been complimented by economic activity from U.S. companies. Former Secretary of State James Baker denounced opposition to increasing relations in Asia and described it as, “[drawing] a line down the middle of the Pacific.” To balance out the military presence, “arrangements such as KORUS-FTA and TPP provide a crucial economic equivalent,” Matthew Goodman of Center for Strategic and International Studies said. Deals such as the KORUS-FTA are not going away - at least for now - which will provide some stability.
In the future, the ability for the U.S. to maintain its status as the number one global economic powerhouse is uncertain. With Asia’s rapidly expanding economy, the lack of participation from the U.S. leaves the U.S. economy out of future economic growth activities. The Asian economy is going to continue to grow, and the U.S. economy will be missing out on a valuable opportunity to influence this expansion. TPP is probably not going to survive with the U.S. withdrawal but if any other economic superpower decides to spearhead Asian economic development, a new trade deal could arise.
The world’s largest social media site, Facebook, saw profits skyrocket this past quarter as it continues its expansion into new markets. It`s been twelve years since Facebook was founded by Mark Zuckerberg, and four years since its IPO. Unlike so many social media sites, Facebook is continuing to achieve rapid growth with 51% growth in the final quarter of 2016.
Exceeding all expectation, Facebook achieved profits of $3.568 billion in the quarter, bringing the profits for the year to $27.6 billion. Alongside profits, the share price has also gained, rising 2.52% as a result of some after-hours trading.
¾ of internet using adults have Facebook in the US as of January 2015, and the most recent statistics show that the website hosts 1.86 billion active users each month. Each user brings in $18.25 in ad revenue.
A recent change in Facebook’s ad tactics has pushed their profits so high. Revenue from mobile ads now make up 84% of ad revenue. With the smartphone revolution, more people than ever are browsing on their mobiles. Shifting the targeting of ads from the website to the app, Facebook is able to maximize the profit for each ad slot.
The research firm eMarketer has predicted that Facebook will continue to profit from mobile advertising in 2017, and take in an estimated $29.71 billion. This would represent a 35.2% increase in profits, and although this is slightly less growth than the past quarter, it is still a huge boost in profits. Facebook says that its slowdown is going to be caused by their plan to reduce the number of ads each user views.
This decrease in ads per person will hinder the company, but it will most likely not cause serious concern for Facebook. In addition to having a stable and thriving market in the US, it is expanding rapidly in Asia and other parts of the world that were previously untapped.
We often wonder if unskilled labor is most susceptible to displacement by automation; however, large Wall Street firms are becoming increasingly automated beyond just complex trading algorithms, showing us that skilled labor is also at risk.
According to an article published by the MIT Technology Review, Goldman Sachs employed 600 equity traders at the start of the new millennium. Just 17 years later, that number has dropped to two. Some say this is just a harbinger of the transformation to come.
Marty Chavez, Goldman Sachs’s incoming CFO, thinks automation will not be relegated to just equity trading. Trading in currency and futures markets will become more automated, along with areas of finance that rely more heavily on human interaction and relationship building, like investment banking. Chavez has found that with currency trading, four traders can be replaced by a single computer engineer. Consequently, a third of Goldman’s staff are now computer engineers.
Chavez thinks that investment banking is in dire need of disruption. Since the job requires salesmanship and people skills, many investment bankers won’t lose their jobs entirely. Rather, Goldman Sachs has identified 146 steps taken during the process leading to an initial public offering that “are begging to be automated,” Chavez said.
Increasing automation in investment banking could significantly reduce costs for large banks.
According to Coalition, a UK firm that tracks and researches the finance industry, large banks, like Goldman, employ investment bankers working on corporate mergers and acquisitions for an average wage of $700,000 per year. As investment banking becomes more automated, banks will need less low-level employees. Babson College professor Tom Davenport believes that for those workers that do remain, there will be a major growth in the distribution of income similar to the broader economy. According to Davenport, “The pay of the average managing director at Goldman will probably get even bigger, as there are fewer lower-level people to share the profits with.”
With automation spilling into areas of finance beyond trading, we could see a paradigmatic shift in the way large banks operate. Along with the proliferation of fintech startups in Silicon Valley threatening to capture market share, Wall Street firms must innovate to stay competitive.