Summary findings from AEA/AFA 2024

Last weekend I attended the American Economic Association and American Finance Association 2024 annual meeting in San Antonio, TX. I love this event, as its jam packed with thought provoking research with a strict 20-minute presentation, 10-minute discussant structure (where the papers are respectfully criticized).  There were roughly 6,000 economists and practitioners in attendance, and I wanted to share the most thought-provoking papers I saw presented that relate to my day job.

• Michael Greenstone, AEA Distinguished Lecture, Air Pollution is the most serious issue facing humanity in terms of its ability to reduce the total number of lived years.  The lecture had a number of helpful slides that describe the magnitude of the problem, American Economic Association: AEA Distinguished Lecture (aeaweb.org) (suggest watching at 2x speed); unfortunately, the effects of air pollution are not going to be felt equally around the world, air pollution is will disproportionately and negatively impact countries like India and regions in Africa that have the youngest and poorest populations. 

• Jeff Meli and Zornitsa Todorova, Portfolio Trading in the Corporate Bond Market, portfolio trading is a relatively recent innovation in the bond market. As we've all seen post 2008, bond liquidity has declined substantially, leading lots of hedge funds to bemoan the dangers of bond ETFs. Portfolio trading (PT) makes the fact that there are thousands of low liquidity CUSIPS less worrisome; and you can request pricing on a broad portfolio of CUSIPs rather than piece meal.  T-costs for PT trading are about 6 bps vs 14 bps for RFQ.  Also, time to execute for PT used to be 45 min to 1 hour, and now fixed income systematic investment firms have gotten PT pricing down to a few minutes.   Prior to 2018, less than 1% of all corporate bonds were traded via portfolio trading, 99%+ were traded as request for quote (RFQ). By 2021 PT accounts for more than 7%.  By trading large portfolios of bonds, you don't need to deal with matching problem on individual CUSIPs, but the ETF inflow linkage drives the benefits of low t-costs and also highlights PT's limitations.  If ETF flows are all one sided (outflows) like in March 2020, internal data from Barclays shows that the t-costs benefit of PT vs RFQ went to zero.

• Lily Fang et al, Limits to Diversification, the rise of passive investing limits the benefits of diversification. Correlated investor demand and trading generate excess correlation in asset prices relative to assets not included in index; in particular flows in and out of the index products (ETF/MF) leading to structurally higher correlation across stocks were analyzed using difference in difference. The degree to which passive funds hold a stock strongly predicts its beta and correlation with other stocks, pattern holds even when stripping out the 10 largest stocks. They also were able to rule out that the increased correlation could come from increased correlation of fundamentals, no evidence of it. Rise of passive investing isn't a free lunch, it means more correlation/less diversification benefits.

• Michele Dathan and Caitlin Dannhauser, Passive Investors in the Primary Bond Market, I was surprised to learn that passive bond ETFs are increasingly active in the primary bond market even though primary bonds generally have not been included in those indices yet.  Moreover, researchers presented evidence that passive funds allocation to primary issued bonds tend to underperform the primary bonds allocated to actively managed funds meaningfully.  The researchers believe the reason for this is that both underwriters and fund families (GPs) are intentionally steering the better issues towards actively managed bond funds and the overpriced/higher risk issues towards their passive (low fee) products.  Meaningful and consistent gross of fee outperformance detected for active bond funds in same fund families with respect to their primary bond market purchases.

• Hao Jiang et all, The Rise of the Mega Firms and Passive Investing, probably the most controversial paper in terms of number of follow up questions by the systematic investment community over post-meeting coffees.  Monthly flows into passive have been dramatic in the US over the last 10+ years.  The standard view of index flows is that inflows to index funds are neutral with respect to underlying constituent pricing. They develop a theory which claims that passive reallocation is not neutral because idiosyncratic risk is priced differently for the largest firms in the index compared to the hundreds or thousands of smaller firms. They believe this has been a contributing factor to the rise of so called super-star firms, first called, FANG, then FANGM, then Mag 7, etc. Their theory makes four predictions, which they tested in the data; 1. passive flows raise the stock return vol of large firms while barely affecting that of smaller firms; 2. effect of passive flows are more pronounced for over-valued firms among the index's largest companies, this is because investors hold short positions in these firms stocks which get amplified when they cover, 3. flows have an asymmetric effect in the cross section driving the stock market up even when those flows are driven by investors switching from active to passive; 4. when individual firms are added to an index tracked by passive funds, the resulting stock price increase is larger for larger or overvalued firms.  Over coffee, Hao told us that to the extent we believe the reallocation too passive to be fully played out, underweighting the top caps would be sensible, but to the extent you think the reallocation to passive continues as it has, overweighting the top mega caps should be sensible.  Keeping in mind that the expected vol for the top mega caps should be much higher than the overall market.

• Anthony Cookson et al, The Social Signal, using data from Twitter, StockTwits and Seeking Alpha, they find that after controlling for firm disclosures and news, attention is highly correlated across platforms but sentiment is not.  Social media consumption has been growing over the years, with Americans spending 3.6 hours per day on SM. For investors social media has become a primary source to obtain information.  The researchers wanted to know how similar both attention and sentiment were across platforms (as did many of the stat arb hedge funds in the audience). Attention was defined as volume of post, and sentiment was defined using several different NLP algos. Particularly interesting that sentiment had low commonality across platforms, but attention had high commonality.  Sentiment predicts positive future returns (short term), and attention predicts negative future returns (short term).  The data tables in this paper are fascinating.

• Sophie Calder-Wang et al, Pricing Neighborhood Amenities, this paper developed a new econometric method to price amenities relevant in the real estate market, like air pollution.  The problem with traditional econometric methods is that if you regress air pollution on home prices, you will find a positive coefficient on air pollution because more desirable places (large cities) tend to be more polluted, this is known as the wrong sign problem, even if you add per capita income to the regression as a control, you still get the wrong sign.  The researchers develop a new method that compares cities using the PageRank algorithm but applied to the migration flow data, such that places where people are moving to get a higher rank, and places where people are moving to from already high ranked places get an even higher score.  The researchers use this new variable as a control, and then are able to recover negative coefficients on air pollution.  The top 20 Geographic Page ranked counties are as follows. 

Bell, Calder-Wang, Zhong (2023); FWIW, I have been on real estate tours in Maricopa, Harris, Tarrant, and Dallas Counties and I can attest that for median-income people, the quality of life is very high.  A 3 bed, 2br in a good school district can be purchased for less than $400k in all these locations, and rents are generally $1800-$2500.

• Rongjie Zhang et al, Anti-Corruption Campaign and the Resurgence of SOEs in China, a lot of ink has been spilt on the performance of SOEs vs privately owned enterprises (POEs) in China over the last three years. A team of brave researchers at Tsinghua published a compelling paper that the anti-corruption campaign is casually related to SOEs dominance over the POEs over the last few years.  The anti-corruption campaign that began in earnest in 2013, but really got going in 2015-2018 is historically unprecedented. The researchers believe that it is commonly understood that POEs give larger kickbacks than SOEs real estate developers do. In order to avoid being perceived as corrupt, the response among government officials has been to disproportionately favor selling land to SOEs and not POEs even if the project, terms, or proposal were worse in all respects relative to a similar offer from a POE. After the Anti-corruption campaign SOE's saw a 61% increase in land parcels purchased (roughly 406,000 sample size of land parcel data). Keeping in mind that the RE is China's largest sector, the implications of this paper are pretty far reaching and worrying.  After anti-corruption campaign and big well publicized high level arrests, they see the share of SOE developers in residential land significantly increase. They see no effect in the control group, industrial land.  Industrial land is far cheaper than residential.  BC opinion, given the anticorruption campaign is core to President Xi's governance policy, we should not expect POE recovery, at scale, any time soon.

• Darren Aiello et al, Who Invests in Crypto?, the authors obtain bank and credit card data on 63 million US consumers from January 2010 to June 2023, this data contains labeled transaction level data (i.e. $400 sent to Coinbase, $16 sent to Five Guys, $10 sent to McDonalds, etc.), on average they are observing about 9 million unique consumers per month. About 20% of adults in the sample own crypto and 50% own stocks. Crypto currency owners span all income levels, with the largest investments coming from wealthier individuals, similar to stocks. High past crypto returns and personal income positive shocks tend to lead to more crypto investment. Because they have transaction level data they can calculate individual level inflation measures, individuals with higher household-level inflation, do tend to investment more in crypto, suggesting that people are using crypto as an inflation hedge.  For most US households, crypto investment behavior is similar to traditional investment behavior.

Observations and Learnings from India: What’s changed from 2019 to 2023?

I spent a week in India after having yet to visit since 2019.  Naturally, curious to see how business culture and consumer behavior evolved, Indian contacts and friends were happy to share their perspectives. On the one hand, there have been some palpable changes over the last four years, including payments, tech wages, and remote work.  On the other hand, much has stayed the same, including frugality, caste, and chrysophilia.  

Business Culture

• The Indian government's decision to adopt and implement UPI, an instantaneous cash transfer system similar to WeChat Pay, at this point, largely obviates the need to carry cash.  I feel safer walking around India without taking a lot of cash.

• Like the US, white-collar workers work remotely about 1/3 of the time, and firms are having trouble getting software engineers to return to the office at all.  This has resulted in significant demand for more extensive flats for additional home office space requirements. 

• Before COVID, some firms felt that production could only take place from the office and were generally skeptical of remote work. Post-COVID, firms are far more open to the idea of partial or fully remote work than they were previously.  Once you get comfortable with fully remote work, the willingness to consider cost-reduction-oriented BPM increases dramatically. Global companies are even more willing to outsource aspects of their business to Indian business process management firms than ever in the past.  Interestingly, BPM firms are some of the most well-equipped to benefit from recent developments in AI and may be able to handle more business with fewer employees going forward. 

• Indian tech companies struggle with retention. Top product engineering and research talents effectively command wages like those in leading US firms.  This has made hiring and retaining the best engineers much more costly; however, firms still believe keeping these people is worth it because a top engineer can be more productive than 100 average-quality engineers.  Also, note that graduate degrees are not required for Indians to get paid at the highest wage bands. 

• Ten years ago, top graduates from IIT would have wanted to move to the US vs. stay in India at a rate of 95% to 5%.  However, now that wage rates for top engineers have normalized with US levels, I learned that the situation has flipped.  Today, about 90% of top IIT engineers want to stay in India, and only those wishing to pursue PhDs in CS or engineering would like to move to the US for further study. It seems that choosing $225k in Bangalore over $350k in Mountain View is an easy decision for most Indians. 

• We’ve heard that young Indians are more willing to take entrepreneurial risks than their parents or grandparents generations.  Becoming a lifer at Infosys or The Ministry of Railways may have been viewed as the dream job in the past, but that may be changing.  Combined with the relative wage rates, a desire to stay local, and an increased willingness for younger people to take entrepreneurial risks, the prospective environment for venture capital may be better in India than in the previous few decades.

• The female labor force participation rate has always been one of the biggest challenges for India.  However, in the last five years, the rate has been increasing modestly for the first time since 1994. If India can better enfranchise women into the economy, it could be a tremendous tailwind; however, many sociological and religious barriers remain; from the women I talked to, traditional gender roles and the expectations to conform to them remain very strong in most parts of India.

Consumer behavior

• Indian consumers remain incredibly conscious of value-for-money tradeoffs. Indians will hunt to save 100 INR and try to take advantage of all possible VC CAC. I heard stories of people taking free trips around India paid for by Uber shareholders; one customer bought 300 cheap mobiles from Jio and received 300 free rides in sign-up bonuses from Uber.  Upstart coffee chains like Third Wave Coffee have grown in popularity specifically because they offer bean quality near Starbucks, a slightly trendier atmosphere, but offer a price point of 10% to 20% cheaper. 

• While people enjoyed ordering takeout during COVID, with takeout/delivery firms enjoying triple-digit growth for a time, broadly consistent with most other countries, food delivery-related businesses have generally struggled over the last year as people returned to pre-COVID takeout trends.

• Notwithstanding demonetization and other policies related to limiting gold hoarding.  Indians remain gold-hungry, particularly around marriage ceremonies. Due to gold’s strong outperformance during COVID, many Indians feel vindicated that it can hedge inflation and remain a resilient investment during challenging times. 

• The Caste system remains alive and well. Marrying outside of one’s Caste remains extremely rare. When I asked friends how often they have seen this happen, the most common response was when an Indian marries a foreigner. Marriage continues to be primarily intermediated by matchmakers within the family, not dating apps as is expected in the US.  Four years ago, dating apps were reputed to be taking share, but it seems it was mostly for casual sex and shorter-term relationships.

• Coming from Philadelphia, the level of poverty present throughout Mumbai and Bangalore remains overwhelming.  Seeing badly malnourished children sitting in the streets picking trash breaks your heart.  

• Economic development has certainly improved people's lives in significant ways.  At this point, about 50% of Indians have access to the Internet, and almost everyone at least has a feature phone.  For 3,000 INR per year ($37.00), users can enjoy 2.5 GB/per day of data and 4G service, which is affordable for most Indians.

四个月的新型冠状病毒 - Reflection on COVID 19

去年十二月份我去了中国出差。我去了北京， 上海，苏州和深圳。以前对于病毒的情况中国人的感觉很放松，因为经济发展的很快，所以每个生意人都觉得贸易战很快会结束。我回到美国，感到乐观。但是两个星期以后，早上我在我的厨房喝了咖啡，看了南华早报。在南华早报，我读了一个令人不安的故事；在湖北省，武汉市很多的人感染了病毒，跟萨斯病毒很像。

八年前，我住在深圳。我记得我的同事们告诉过我萨斯病毒的故事。在萨斯病毒的期间所有的广东人都很担心，他们很长的时间不能出去，并且每个人需要带口罩。   虽然很多人带口罩，但是还是有一千个人死亡了。死亡了的人不但有老人还有小孩儿。从那时起，我知道病毒会坏社会。

在一月九号，我的 同事问我：“大宝宝，你觉得新型冠状病毒严重吗？” 我告诉他：“我觉得会有一万多的人死亡。“ 他说：“不可能！如果有一万多的人死亡了，那么我们的世界张会有经济危机。” 不幸的是，他说的很对。

在过去两个月中，世界出现了很多健康危机。无数的企业破产了，成百上千的人感染了病毒，数十亿人被隔离。每个人都至少有一个生病的朋友。每个人的内心都感到担忧。

最后一个月，我每天在家，不能出去。我不仅在家工作，而且在家做饭，还要在家锻炼。这是我第一次在家工作。与在办公室工作相比，在家工作有一些好处。比如在家我会开始做工作比较早，能做更长时间的工作。因为不用浪费时间去办公室。我也会在家里做健康的菜。希望病毒结束以后，我也能一周几天在家工作。

在投资方面，我拥有大量现金流和少量债务。我希望我的投资能够保持偿付能力。因为我的投资组合公司有超过两千亿美元的现金。我希望我的投资组合公司能够找到投资机会。

Industrial Internet and Cultural Resources

In May I spent two weeks traveling, one week in China and one week in Greece.  I want to share some of my learnings from both countries. 

China

In early May, I traveled to Shanghai and Suzhou.  On this trip, I met with investors, bankers, companies in the textiles, heavy equipment and shipping industries as well as cab drivers, Didi drivers, friends, and family.  Despite the widespread concern in the (mainly Western) press about the risks stemming from the US-China Trade War and putative economic slowdown, the Chinese business-people I met did not seem phased.  Many businesses have already diversified their supply chains across Southeast Asia and away from China. Companies have expanded production outside of China primarily due to rising labor costs, and to hedge against the sorts of political risks appearing today. 

Business-people across industries continue to explain their current and ongoing innovation programs excitedly. Under China's industrial policy, businesses across industries are adopting "industrial internet," or "manufacturing 4.0." The industrial internet is a collection of techniques that allow companies to take an empirical approach to production, quality control, innovation, and cost management. 

One instructive use of industrial internet applications comes from a heavy construction equipment company, called Company A.  Company A has 350,000 bulldozers and cranes in use across more than 10,000 customers.  Each bulldozer has more than 1,000 sensors spread throughout the vehicle.  Each vehicle is connected to the internet 24/7 and broadcasts all usage data (audio, visual, click-stream, etc.) back to Company A in real time.  Company A can observe how each of their 10,000 customers is using their products.  For example, they can see which parts of their bulldozers are undergoing the most stress or tend to break down fastest.  Company A can then work with its suppliers and encourage quality improvement in the areas encountering the most problems. With information on each component quality, Company A can better evaluate its suppliers and quickly replace them if necessary. Company A can recommend purchasing other machines that it thinks would be complementary to its customers' lineup.  Industrial internet applications like those I listed here are just the tip of the iceberg and potential for cost reduction and volume expansion are both sizable.

Moreover, many of the companies I met in China are happy to explain how they are reducing headcount by replacing low and middle-skill tasks with industrial robots.  Many of the manufacturers I met have already reduced headcount by 50% or more over the last decade and increased use of industrial automation (robots).  As companies further implement industrial internet to improve manufacturing, headcount will decline industry-wide.  Also, it may be the case that many of the production comparative advantages resulting in trade secrets developed by incremental innovation techniques in countries like Germany and Japan may reverse engineered through industrial internet.  Should these techniques prove successful, China may be able to move up various value chains even faster. 

While industrial internet may seem like an obvious next step across the manufacturing sector, implementation can be challenging.  To meet this challenge, leading city governments like the Shenzhen government, have developed an industrial policy to support the application of industrial internet techniques.  Shenzhen recognized that it is difficult for small and medium-sized companies to implement industrial internet techniques due to high fixed costs.  If small players in the value chain are unable to make necessary fixed costs investment quickly, it could slow the implantation or retard the efficacy of the industrial internet – both sub-optimal economic outcomes. Shenzhen is experimenting by providing small and medium-sized enterprises with resources (including capital and consulting) to make the necessary expenditures to contribute to the industrial internet in their supply chains.  Should these policies succeed, we should expect to see similar programs in other cities emerge.

Greece

In first grade, I enjoyed learning about Ancient Greece.  My parents bought me a book about the Trojan War. I was fascinated by many elements of the story, including the concept of a Trojan Horse strategy and that the most beautiful woman in the world at the time, Helen of Troy, was from Greece.

Bradley Calder, Grade 1

Later, in 11th grade, I began studying philosophy with Kristin Smith, and she encouraged my love for the subject by giving me many of her college textbooks. Two years later, in college, I decided to pursue a second major in philosophy.  Rochester had a small but excellent philosophy department where I had the chance to study ethics and ancient philosophy with Robert Holmes and Deborah Modrak, respectively, both brilliant scholars who further encouraged my interest in visiting Greece.  While reading the trial of Socrates, I could not help but wonder how unique Athens must be for Socrates to sacrifice his life to remain an Athenian?

Death of Socrates

Greece is a country with an abundance of cultural resources.  Since the time of Socrates, people have traveled to Athens to study, pursue business ventures, and admire the Acropolis.  Today, Greece receives nearly 30 million tourists per year (and growing). Tourists collectively contribute 20% of Greece's GDP.  Few activities are more beneficial to a country than tourism. Tourists are happy to pay for a place to sleep, the chance to eat local food, and the opportunity to take photos of cultural resources and themselves.  Providing tourist experiences tend to be high margin/high volume and in my opinion, tend to have a high reward to effort ratio.  The reward to effort ratio is exceptionally high in Greece, given that their distant ancestors paid the costs to create Greek cultural resources.  These ancient investments provide them Greeks with cornered resources that are non-rivalrous, excludable, and have benefited the Greek economy for thousands of years.  

Acropolis Amphitheater

However, over the last decade, life has been challenging for many Greeks.  Fiscal imprudence, a culture of tax avoidance and graft have taken their toll and resulted in a lost decade:

• The local stock market declined more than -90%

• Median incomes declined -30%

• Residential real estate prices fell -40%

• The employment to population ratio declined from an already low 47% to 43% as of last year (15 percentage points below the US)

Greece is attempting to stage an economic recovery in part by trying to attract more foreign tourists and property investors.  While on tour across Athens, Naxos and Santorini, I saw numerous WeChat QR codes and scanned many of them.  Products available include Santorini wedding services starting at €2,000 and apartments in Athens starting at €250,000.  Buying an apartment secures you a residency permit and travel rights throughout the Schengen Zone.  The Greek 10 year treasury bond has declined from 40% yield to less than 4% today. As interest rates fall, capital market participants are apparently more confident in Greece’s improving ability to pay its debts.

I expect the road to recovery might be slow for Greece. However, if you are looking for an outstanding vacation filled with world-class hiking, biking, food and wine, all at an affordable price, Greece is an excellent option. 

Residential Real Estate in Ho Chi Minh City, Vietnam

I first traveled to Ho Chi Minh City, Vietnam in February of 2011. At the time, virtually all vehicles on the road were motorbikes, side walk space was limited, and most real estate was two to four story residential buildings with the first floor used as commercial space. Vietnam's nominal GDP was $116 billion ($1,300 per capita).  Though poor, to a foreigner with experience living in China, Vietnam's Confucian work ethic was readily apparent. Everyone seemed to be constantly busy and moving fast.

Just last week, almost eight years later, I returned to HCMC and saw an enormous degree of change, cars, skyscrapers, branded clothing stores and Starbucks abound. According to the IMF's 2018 data, Vietnam's GDP grew to $241 billion (about $2,500 per capita) more than doubling since I last visited.  Vietnam's skyline is very different from when I last visited with many tall buildings completed and many more under construction. The percent of the population classified as urbanized has increased from about 30% to 35%, meaning an additional 4.5 million people have moved from rural areas to cities.

Education and Labor

Vietnam's education system has proved to be highly effective resulting in near universal literacy.  Additionally, Vietnamese students tend to perform well on standardized tests in math and science, exceeding the OECD average.

I heard throughout my trip that one of the few benefits of Vietnam's experience with socialism was that it resulted in a high level of female enfranchisement into the workforce.  This results in a situation where Vietnam is effectively utilizing all of its top human capital, rather than only utilizing human capital that happens to be male. 

Family Formation and Home Ownership

Vietnamese, like other East Asian cultures have a strong preference for home ownership.  Currently, home ownership rates in Vietnam are above 90%.  Given that incomes have been growing rapidly and both men and women work. Upon getting married, Vietnamese couples will have both the resources and desire to move out of their parents' home and buy their first apartment.

Vietnamese Real Estate Industry

Entrepreneurs anticipating Vietnam's demographic and cultural preferences for new homes have formed real estate development companies. Both foreign and local real estate companies compete for land, development licenses, tenants and capital in Vietnam.  One helpful heuristic that I’ve found to quickly understand the nature of a local economy is to look at the industry sector weights by market capitalization. The chart below indicates that 38% of Vietnam’s market capitalization came from the real estate industry.

MSCI Vietnam IMI, January 2019

Furthermore, two of the three largest public companies by market capitalization in Vietnam are in the residential real estate industry, Vinhomes and Vingroup.  Both are controlled by the same entrepreneur, Pham Nhat Vuong, the richest person in Vietnam.  Clearly residential housing demand is a big business opportunity for sophisticated real estate developers and institutional investors; but I wondered if it was possible for foreigners to buy property in Vietnam?

Buying a home in Vietnam on WeChat

I used WeChat to locate a real estate broker named Sarah Gui (WeChat: sarah7_722) who caters to Chinese people that are interested in buying property in Vietnam.  During my conversation with Sarah we discussed regulation, taxation, where to buy in HCMC and what opportunities are currently available on the primary market.

Firstly, it is possible for foreigners to buy property. In 2015, the Vietnamese government clarified the law and set up a system to allow foreigners to legally purchase property.  There are some important distinctions between the property rights of local Vietnamese and the property rights of foreigners.

Incidentally, I was told that the primary reason for preventing foreigners from levering their purchases is to reduce the risk of a housing bubble and to maintain home price affordability for local buyers who are much less capitalized.

HCMC Location Guide

HCMC is separated into many districts as indicated on the map below. I also included a satellite view of HCMC taken by astronaut Scott Kelly.

District 1, D1 is best thought of as the intersection of main-street and main-street. As HCMC’s central business district and the most densely populated area, life here reminds me of Puxi, Shanghai. Recently, a Hong Kong based company called Alpha King bought up 30% of the land in D1, resulting in a doubling of property values in the last three years.

D2 and D7 are both popular with foreigners because of their strong international schools as well as a less dense environment.  A significant component of D2 known as the Thu Thiem peninsula remains undeveloped. Nonetheless, Chinese buyers and developers are excited for the day when Thu Thiem get’s the green light from the government and they can try to create another Pudong. The chart below describes the long term plan for Thu Thiem.  

Proposed developments in D2 Thu Thiem.

D7 has much unoccupied land and is being developed by a Taiwanese company.  One project on the market in D7 is called Eco-Green Saigon, it has 4,000 apartments and 6 total buildings. I attached the marketing materials for Eco-Green Saigon here.

D4 is an older district popular with many local people but with aging real estate and limited land supply for further development, however the location is considered excellent due to close proximity to D1’s CBD.

D9 is HCMC's high tech zone and is the direct recipient of much of the technology and manufacturing FDI going into Vietnam. Today, companies like Intel, Samsung, Schneider all have large manufacturing, design and engineering offices there. Vinhomes/Vingroup is building the largest residential real estate development in all of Vietnam in this area.  The massive project called “VinCity” will have 44,000 units and 71 total buildings.  I attached the VinCity marketing materials here and the master plan is below.

Red dots represent apartment buildings

During my conversation with Sarah, I asked her to sketch out the current prices and yields in each district. She described the following prices below. Property prices in Vietnam are significantly cheaper than China’s first and second tier cities, and likely explains the strong Chinese demand. Very high yields relative to what is available in their home countries likely explains demand from Japanese and Korean buyers.

3/1/2019

Deal or no Deal?

Suppose one wanted to buy a 75 SQM apartment in VinCity and act as a land lord for the next 35 years, under what conditions might this proposition result in an attractive investment? I constructed a basic financial model to help frame the problem. I estimated a probability weighted, unlevered, IRR of 7.8% and MOIC of 6.4x. Note that there are no capital gains taxes in Vietnam.

Supply and Demand Elasticity

D1’s housing supply will likely remain inelastic. Because Vietnamese own their property and land freehold, large scale redevelopment in D1 is susceptible to hold out problems. In contrast, supply elasticity should be much higher in D2, D7 and D9 given the large quantity of undeveloped land. As such, I reckon one should be relatively more cautious about owning property in these areas.

In summary, Vietnam has improved dramatically in the last eight years. People are getting richer, moving to the cities and buying homes. I am optimistic that Vietnam will be able to learn from China, Korea, Taiwan, Singapore and Japan’s development experience, resulting in continued growth.

My friend translated this article into Chinese, click here for the Chinese translation. 

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Observations from the American Economic Association Annual Meeting

Last weekend, Sophie and I attended the 2019 American Economic Association Annual Meeting in Atlanta, Georgia.  AEA brings together thousands of economists from across the world for a weekend of lectures, networking, hiring, reunions, and fun with friends old and new.  The atmosphere is enthusiastic, respectful and curious. Each day at AEA, I have a small sense of wonder because it is possible that I might unexpectedly hear an argument that changes my mind.  Remarkably, the cost of admission for this three-day world-class event is a mere $75.00. What a bargain.  I attended many talks, and I'm delighted to share some of my observations with you.

Labor Economics

Work of the Past, Work of the Future; David Autor

David Autor gave the annual Richard Ely Lecture which focused on topics including the economic returns to education by location, urban/rural divide and speculates (with data) on the future of the labor market. David began by noting that the decline in inter-state mobility, which has been widely discussed in the press has been something of an economic puzzle.  It is puzzling because standard theory suggests that people will move from low opportunity areas (low population density areas) to higher opportunity areas (high population density areas).   Before attending this talk, the leading explanation for this puzzle was that rents are too high in cities for low skill people to move there.  Why are rents high? Because cities often have significant supply restrictions on new housing starts, which leads to supply constraints and high rents.  Thus pricing out low skilled people from moving to opportunity, so the story goes.

David’s talk presents a much more nuanced view of this story and even a novel partial solution to this puzzle. Using data on wage premiums for people with different levels of education in both low and high population density areas.  He found that while people with a high school degree and below (non-college people) used to earn a wage premium in cities relative to rural areas in the 1980s and 1990s, however by the 2010s, they no longer do.  Further, he shows that people with college degrees and above tend to move to high-density areas and stay there (in contrast to the out-migration we used to see).  In effect, he concludes that the reason there is less inter-state mobility is because non-college people do not have superior economic opportunities in cities relative to rural areas.  

I found these results somewhat disheartening because it implies that people with lower levels of education do not have opportunities to move to cities and receive a wage premium for their skills and there is already limited opportunity in low-density areas for low skilled people. 

Macroeconomics and Finance

Joint Interview with Ben Bernanke, Timothy Geithner, Henry Paulson

Ten years after the financial crisis, three of the most influential fiscal and monetary policymakers of the time held a public conversation about their memories of the crisis.  Early in the talk, the interviewer posed the question, why did you choose to save Bear, but not Lehman?  They explained that while JP Morgan was willing to acquire Bear (with substantial Fed support) early on in 2008.  The US Government was not able to find a buyer for Lehman toward the end of 2008.  While Barclays did come close, they were not able to consummate the transaction.  They were resolute in that the same process was used in both cases.  Paulson also, rather candidly, noted that he intentionally misrepresented the seriousness of the crisis to the public in late 2008 early 2009 (with full support of the President), saying that the government decided "not to throw gasoline on the fire" and further erode the public's confidence in the government's ability to manage the crisis.  We should continue to be skeptical of our public servants' public statements.  Also, B-G-P wanted to emphasize that the government's ability to come together in a crisis was at first begrudging, TARP measures were unpopular in Congress when introduced and failed. However, America came together in the end with an aid package, TARP was passed, QE was approved, and we socialized our losses. 

Investing

Trading and Arbitrage in Cryptocurrency Markets, Igor Makarov, Antoinette Schoar

Using a proprietary data set from 34 exchanges in 19 countries accounting for 85% of trading volume, Igor and Antoinette identified tradable arbitrage.  These observations seemingly violate the strong form of the efficient market hypothesis.  They noticed that these spreads were wider across exchanges in different countries relative to spreads on exchanges within a particular country. This may imply that barriers to inter-country capital mobility may explain the mispricing.

Furthermore, they noted that the width of the spreads is correlated with Bitcoin bull markets; the more excitement about cryptoassets, the more demand for leverage via derivatives (wider spreads).  Interestingly, they estimate relatively low transaction costs at 50 to 75 basis points.  Igor and Antoinette also mentioned that there are significant barriers for institutional investors (managing external capital) from investing in cryptoassets, but that proprietary investment firms are active in these markets. 

Real Estate

What Drove the 2003-2006 House Price Boom and Subsequent Collapse? Disentangling Competing Explanations; John Griffin, Samuel Kruger, Gonzalo Maturana

There are two primary explanations for what caused the housing boom during the early 2000s: 1. credit supply and 2. speculation.  The authors attempt to explain housing prices with two sets of variables that are more indicative of one explanation or the other.  To illustrate a credit supply story, they use the share of sub-prime lenders as a percent of total lenders in a given area.  To explain a speculation story, they considered the fraction of mortgages that were non-owner occupied, as a percent of total mortgages in a given area as well as considering percent of homes purchased by an out of town buyer.  These are just the flavor of the explanations considered (seven total).  Their results indicated that a credit supply story better explains the variation in home prices.  One surprise that came out of this research was that there was no observed year on year momentum in house prices.  The authors' main concern about their results is that perhaps credit supply is picking up because lenders are anticipating price increases.  It may be impossible to disentangle speculation from credit suppliers' decision making process.     

Fun Fact on Urban Economics from Edward Glaeser
The best single predictor of gentrification in the US is the number of Yelp reviews of laundromats in an area. 

Best food in Atlanta: Gus's

It was so good that we went two days in a row!

AEA is in San Diego next year, hope to see you there!

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One Man's Trash is Another Man's Treasure

Adam Smith reminds us in The Wealth of Nations that “a jack of all trades will never be rich.” Specialization allows us to develop comparative advantage in the production of goods and services. Once we have a comparative advantage in production, we can exchange our goods and benefit from trading with other people who have developed their own comparative advantages. David Ricardo expanded on Smith's ideas and explained that there is mutual benefits from trade even if one country is more competitive in every area than its trading counterpart and that a nation should concentrate resources only in industries where it has a comparative advantage.*

Aside from comparative advantage in production, there is another reason why nations trade. Suppose neither the US nor China had an absolute or relative advantage at chicken production, would it make sense for them to trade?  Counter-intuitively, the answer is yes. 

The reason both China and the US stand to benefit from trade, even though they have no advantage (absolute or comparative) in chicken production, is because both countries have comparatively different preferences.  Suppose that Americans prefer to eat white meat chicken breasts and Chinese prefer to eat chicken feet.  From the American perspective, chicken feet are a byproduct of the chicken production process, without access to the international chicken market American farmers would need to sell chicken feet to local buyers who value chicken feet at a lower value than the Chinese.  Barriers to trade would make the American chicken farmers poorer than they otherwise would be if they were allowed to sell their chicken feet to the Chinese. Conversely, Chinese people prefer not to eat chicken breasts because they view them as less delicious than dark meat and less fun to eat because they lack bones.  Without access to international chicken markets, Chinese farmers would need to sell their chicken breasts to local buyers who would pay less than the Americans.  Therefore, if the Americans trade chicken breasts and the Chinese trade chicken feet, even if production costs were identical, gains from trade would occur.

Ricardian trade theory assumes homogeneous preferences.  However, traders often have heterogeneous preferences.  Heterogeneous preferences encourage trade because it may be possible to satisfy both traders varying preferences even if they have the same production costs. 

One way for Americans to explore trade driven by heterogeneous preferences is to go to a grocery store in Shanghai.  While walking through the store, you will likely see items that surprise you including but not limited to piles of fish heads, rows of pigs feet, and boxes of chicken hearts.  American grocers don't stock these items because there is no demand for them, but in China, they are all considered delicacies. I have limited experience outside of China and America, but I suspect that preferences across the world vary widely, resulting in trade. 

To the extent that there may be information frictions between countries, arbitrage opportunities based on heterogenous preferences may exist.  As the saying goes, one man's trash is another man's treasure.

Notes:

* David Ricardo's Wikipedia