Three Longs & Three Shorts

Published on: 6 Jan, 2019

At the end of each week, we will share with you our favourite reads. We would be grateful if you could reciprocate. This week’s reads focus on the failure of democratic politics, the need for ‘purposeful capitalism’, how to develop intellectual humility, effect of climate change on the fishing industry, private sector participation (or the lack of) in Indian infrastructure.

If you want to read our other published material, please visit http://marcellus.in/resources/

1. Long read: Too rich to jail
Author: Maureen Dowd
Source: New York Times (https://www.nytimes.com/2018/11/17/opinion/sunday/trump-bankers-fraud.html)

Maureen Dowd says that the rise of populist politicians like Trump is due to the failure of the American political system and Barack Obama to punish the Wall Street bankers who wrecked the economy and the lives of millions of people in 2008. She says, “We let the corrupt bankers who ravaged our economy roam free with bigger bonuses, more lavish Hamptons houses and fresh risky schemes. The big banks are bigger than ever and prosecution of white-collar crimes is at a 20-year low. And, cherry on the gilded cake, we put white-collar criminals in charge of the country — elevating epic grifters to the presidency and powerful cabinet posts. Reading all the recent stories about the 10th anniversary of the financial crisis, it’s easy to see the neon line leading from Barack Obama’s failure to punish Wall Street scammers to the fact that Republican scammers are now infecting the entire infrastructure of government.”

This political failure gave political space to people like Trump and the Tea Party. [We could say that in India in 2013-14, Narendra Modi spotted a similar opportunity.]

“In his 2016 book, “Listen, Liberal,” Thomas Frank wrote that “the hope drained out of the Obama movement” at the meeting between the fledgling president and Wall Street C.E.O.s in March 2009: “After warning them about ‘the pitchforks’ of an angry public, Obama reassured the frightened bankers that they could count on him to protect them; that he had no intention of restructuring their industry or changing the economic direction of the nation.”

The political opportunity created for Trump by the cowardliness of the Democrats has been used by Trump in a very interesting way.

“Donald Trump scooped up “the forgotten,” promising to punish Wall Street for “getting away with murder,” and pledging to break up the big banks and force bankers to pay higher taxes.

But it was just another Trump con. His administration, The Times reported, “has presided over a sharp decline in financial penalties against banks and big companies accused of malfeasance,” sparing corporate wrongdoers billions in fines….Trump’s White House started off like a branch office of Goldman Sachs, as Elizabeth Warren noted. Gary Cohn, Trump’s former economic adviser from Goldman, showed that Wall Street’s arrogance shines bright when he recently told Reuters that borrowers were just as responsible for the 2008 crisis as lenders.

“Who broke the law?” Cohn asked, adding: “Was the waitress in Las Vegas who had six houses leveraged at 100 percent with no income, was she reckless and stupid? Or was the banker reckless and stupid?””

We don’t think it is an exaggeration to say that the continuing failure of democratic politics in countries like USA and India to deliver even what looks like a semblance of justice opens the door for right wing fascists to enter mainstream politics.

2. Long read: Beyond the bottom line: should business put purpose before profit?
Author: Andrew Edgecliffe-Johnson
Source: Financial Times (https://www.ft.com/content/a84647f8-0d0b-11e9-a3aa-118c761d2745)

A fairly balanced and constructive debate around the need for ‘purposeful capitalism’, that can even carry the most ardent of Friedman’s followers. “Milton Friedman’s argument that for a company to pursue anything other than (legal) profit would be “pure and unadulterated socialism”” effectively underpinned the unbridled rise of capitalism over the last 50yrs. Of late though, criticisms have emerged from all quarters:

“The pursuit of returns to companies’ owners at the expense of other stakeholders has undoubtedly led to greater profits, generating enormous wealth for investors and the executives whose rewards have been increasingly tied to shareholder returns. But it has come at a cost to employees, customers and the environment; incentivised boards to pay less tax; diverted cash to earnings-flattering share buybacks rather than investment; and — among those outside the privileged club of equity owners — eroded the trust on which companies ultimately depend.

A decade after the financial crisis shook voters’ confidence in capitalism, the challenges to Friedman’s model have been gathering momentum. Now — even as US President Donald Trump pursues stereotypically “pro-business” policies such as cutting corporate taxes and regulations — they are starting to converge into something that looks like a new worldview, shared by leading executives and
investors and shaped by an unlikely alliance of consumers, employees, campaigners, academics and regulators. Together, they could break a consensus that has governed business for two generations and offer a new model for capitalism based on the watchwords of purpose, inclusion and sustainability.”

The arguments for change go beyond altruism – as Colin Mayer, the economist and author of the new book ‘Prosperity’ puts it – “Elevating shareholders’ interests above those of employees, the environment or communities may have made sense when financial capital was scarce,….but now finance is abundant while human, natural and social capital are in short supply.”

“For this capitalist reformation to succeed, however, it will have to prove it has more substance than spin, survive the market’s down cycles and persuade a public whose faith in corporate and institutional elites remains fragile.”

Like Friedman championed the cause of capitalism, support for change is emerging from the very beneficiaries of capitalism – the bosses of the likes of Blackrock, Unilever, etc

“If Friedman’s article provided the intellectual underpinning for the idea that a public company’s only social responsibility was to increase its profits, the catalytic text for the new era of purposeful capitalism was a letter sent to chief executives a year ago by BlackRock’s Larry Fink, who with $6.3tn of assets under management counts as the biggest investor of them all.”
Fink wrote “With governments failing to prepare for the future, people were looking to companies to deliver not only financial performance, but a positive contribution to society, benefiting customers and communities as well as shareholders. Without a social purpose, companies fail to make the investments in employees, innovation and capital expenditures needed for long-term growth — and above-par returns to the likes of BlackRock.”

“Mayer’s manifesto recasts the company’s place in society, arguing alliteratively that its purpose is “producing profitable solutions to problems of people and planet.” Profit, in other words, flows from the pursuit of a broader social purpose.”

“As companies’ self-interest converges with the interests of other stakeholders, those who would improve the world have a chance to get some of the world’s most powerful instruments for change onside. They should grasp the opportunity business’s moral money moment has given them.”

3. Long read: Intellectual humility – the importance of knowing you might be wrong
Author: Brian Resnick
Source: Vox (https://www.vox.com/science-and-health/2019/1/4/17989224/intellectual-humility-explained-psychology-replication)

A paradoxical attempt by Brian Resnick to bat for intellectual humility especially among social scientists backed by research from….social scientists/psychologists. “…We need more intellectual humility for two reasons. One is that our culture promotes and rewards overconfidence and arrogance (think Trump and Theranos, or the advice your career counselor gave you when going into job interviews). At the same time, when we are wrong — out of ignorance or error — and realize it, our culture doesn’t make it easy to admit it. Humbling moments too easily can turn into moments of humiliation.”

The first step towards building intellectual humility is the appreciation of our cognitive blind spots – much has been written about this in recent years, yet there isn’t a simple practical guide for it. “..it’s a method of thinking. It’s about entertaining the possibility that you may be wrong and being open to learning from the experience of others….it is about being actively curious about your blind spots. One illustration is in the ideal of the scientific method, where a scientist actively works against her own hypothesis, attempting to rule out any other alternative explanations for a phenomenon before settling on a conclusion. It’s about asking: What am I missing here?”

The second step is to give up the notion that owning up to our mistakes undermines our credibility among peers, in society, etc when the reality is exactly the opposite.
“Many of us fear we’ll be seen as less competent, less trustworthy, if we admit wrongness. Even when we can see our own errors — which, as outlined above, is not easy to do — we’re hesitant to admit it.

But turns out this assumption is false. As Adam Fetterman, a social psychologist at the University of Texas El Paso, has found in a few studies, wrongness admission isn’t usually judged harshly. “When we do see someone admit that they are wrong, the wrongness admitter is seen as more communal, more friendly,” he says. It’s almost never the case, in his studies, “that when you admit you’re wrong, people think you are less competent.”

Even among scientists — people who ought to question everything — intellectual humility is hard. In some cases, researchers have refused to concede their original conclusions despite the unveiling of new evidence. (One famous psychologist under fire recently told me angrily, “I will stand by that conclusion for the rest of my life, no matter what anyone says.”)

Psychologists are human. When they reach a conclusion, it becomes hard to see things another way. Plus, the incentives for a successful career in science push researchers to publish as many positive findings as possible.

There are two solutions — among many — to make psychological science more humble, and I think we can learn from them.

One is that humility needs to be built into the standard practices of the science. And that happens through transparency. It’s becoming more commonplace for scientists to preregister — i.e., commit to — a study design before even embarking on an experiment. That way, it’s harder for them to deviate from the plan and cherry-pick results. It also makes sure all data is open and accessible to anyone who wants to conduct a reanalysis.
That “sort of builds humility into the structure of the scientific enterprise,” Chabris says. “We’re not all-knowing and all-seeing and perfect at our jobs, so we put [the data] out there for other people to check out, to improve upon it, come up with new ideas from and so on.” To be more intellectually humble, we need to be more transparent about our knowledge. We need to show others what we know and what we don’t.
And two, there needs to be more celebration of failure, and a culture that accepts it. That includes building safe places for people to admit they were wrong, like the Loss of Confidence Project.”

4. Short read: Climate Change Drives Fish Into New Waters, Remaking an Industry
Author: Robert Lee Hotz
Source: Wall Street Journal (https://www.wsj.com/articles/climate-change-drives-fish-into-new-waters-remaking-an-industry-11545454860)

The fishing grounds are shifting northward as water temperatures rise, forcing crews to retool their boats and rework their businesses. This WSJ article says:

“Aboard the Stanley K and the Oracle, two 58-foot vessels, Buck Laukitis and his crews chase halibut across the Bering Sea worth $5 a pound at the docks. As sea temperatures rise, and Arctic ice retreats the fish appear to be avoiding warming waters, migrating northward where they cost more to reach, federal fisheries biologists say. Twice this past fall, the Oracle sailed 800 miles north from the seaport of Dutch Harbor in the Aleutian Islands, before finding the halibut that a decade ago lived several hundred miles closer to home. Each voyage took twice as long and yielded half as many fish. “It keeps me up at night,” he says. “I woke up at three in the morning. I couldn’t sleep thinking about where the fish are going.”

Across the continent from Mr. Laukitis in Rhode Island, black sea bass have moved in with the warming waters. The bulk once lived roughly 700 miles south off North Carolina. Now they are a staple catch in Point Judith, R.I., along with the summer flounder that also have begun appearing. […] The impact of climate change has a price, and for fishing-boat owners in sea ports, that means following the catch. The northward movement of fish around the world is disrupting some fishing grounds and revitalizing others — and fishing businesses are trying to adapt their operations…Higher temperatures mean less dissolved oxygen in the water while increasing a fish’s demand for oxygen by speeding up its metabolism. Warming water may also favor predators or drive off species on which commercial fish feed. All told, warming ocean temperatures are pushing hundreds of marine species outside of their traditional ranges, ocean scientists say.”

5. Short read: ARTIFICIAL INTELLIGENCE / MACHINE LEARNING – Powerful Predictors: Diagnosing Cancer in India Using AI
Author: Megan Diamond
Source: HBS (https://digital.hbs.edu/artificial-intelligence-machine-learning/powerful-predictors-diagnosing-cancer-in-india-using-ai/)

“In India, approximately 74,000 women die from cervical cancer every year, accounting for 1/3rd of the burden of cervical cancer deaths globally. Less than 10,000 pathologists must service a population of 1.3 billion people…Aindra Systems, a tech start-up from India, has developed an innovative workaround. Leveraging artificial intelligence (AI) to provide point-of-care cervical cancer detection, Aindra is demonstrating how strategic use of automated technologies has the potential to democratize access to quality care in low and middle-income countries (LMICs)…

Aindra’s end-to-end diagnostic platform was developed using human-centered design, an iterative approach to design to ensure a final product that meets the needs and circumstances of end-users. Biological samples are stained by an autostainer, converted into a digital image, then analyzed by AI algorithms to differentiate between cancerous cells and healthy cells. This three-part process is done onsite at a clinic, eliminating the need for the tedious process of manual staining and the transport of large batches of samples to distant laboratories. As a result, a patient is told if they have cancerous lesions within 1-2 hours instead of 5-6 weeks.”

6. Short read: Retreat from private infrastructure projects
Author: Ajay Shah
Source: The Leap Blog (https://blog.theleapjournal.org/2017/04/retreat-from-private-infrastructure.html?m=1)

20 years ago there was lots of discussion in India about how to attract more private sector investment in infrastructure. Then between 2004-11 India saw a boom in private sector investment in infrastructure. For a variety of reasons that did not go down well with the public and with the banking system. So now again, we have reverted to predominantly Government driven investment in infrastructure.

“…we got a huge increase from 2003 to 2011: a gain of roughly 10x in nominal rupees. By 2011, there was a stock of roughly Rs.25 trillion rupees of private infrastructure investment projects that were under implementation. After that, private infrastructure projects have receded substantially. We have a decline of Rs.5 trillion in nominal terms. If inflation were taken into account, that is a decline of another 25%.

How has government infrastructure investment activity fared? This shows a picture of steady growth. In 2011, both private and government projects were at roughly Rs.25 trillion. From there, the private projects have dropped to Rs.20 trillion while the government has gone on to Rs.38 trillion. There is growth in the stock of government infrastructure investment projects under implementation, even after you take out the 25% increase in prices from 2011 till today….What’s the overall picture of infrastructure investment? Putting the two together…the private sector is losing ground and government infrastructure projects are gaining ground.”

Against this backdrop, Ajay Shah reiterates the need to attract private sector money to infrastructure. “The private sector will use capital more effectively, deliver a better incremental capital-output ratio, and take care of assets better. Conversely, public sector domination of infrastructure investment is going to deliver reduced bang for the buck.….In the first wave of pushing private sector participation, we did not adequately understand that private participation in infrastructure requires complex institutional machinery. The government’s role in infrastructure is in three parts: Planning, Contracting and Regulating. Clear structures needed to be established for each of these three pillars. Mechanisms were required for resolving disputes and protecting cashflows from user charges. We needed to keep our eye on the prize: the projects that come out of all the complexities of the early stage and make it into the listed space, as boring utilities who just collect user charges and do O&M. With the benefit of hindsight, we went about private sector investment in infrastructure in a slipshod manner.

In the recent period, instead of fixing these institutional complexities, there has been an excessive willingness to give up on private sector participation and make do with muscular State-led investment. It feels like an entire generation of institutional memory, about the problems of public sector infrastructure investment, has been lost. We are now running a Chinese-style risk of large investments going in with low returns in terms of incremental GDP per unit investment.”

Note: the above material is neither investment research, nor financial advice. Marcellus is not authorized to provide either. Marcellus does not seek payment for or business from this email in any shape or form. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India as a provider of Portfolio Management Services and as an Investment Advisor.

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