NIC Undergrad Review

“ThaT makes me smarT” - Donald Trump, responding to a claim that he may not have paid federal income tax for years

“Are you prepared to die? If that’s O.K., then you’re a candidate for going”

“If you take the 50 largest banks in the world, we wouldn't even think about [investing in] probably 45 of them”

- Elon Musk, describing the criteria for those interested in being the first humans sent to Mars

“We're going to win, maybe by 70-30” - David Cameron, predicting the result of the EU Referendum

- Warren Buffett, on the risks linked to derivatives

Contents 04 Starting Over

48 Revolution vs Evolution

Investing – Where to Start

Take a Closer Look Into...

06 Ownership is Everything

52 Willful Blindness

12 Derivatives 101

56 Engineering Expectations

18 Investing in Water

60 Financial Wizardry? Don’t think so...

22 You Don’t Mind Me Making a Dollar

64 A Trumped Up World

Politics

66 A Bubble in American Student Loans

28 What Future for Europe

68 South America

30 US Political Power

2016 Overview

34 Trumponomics

72 Deutsche Bank

Technology

74 Wells Fargo

40 The Alchemy of Finance

76 Markets in a “Post-Truth” World

42 An Insight on Sharing Economy

80 Regulation Wars

44 Robinhood

Who are we?

Andrey Dmitriev

Francisco Logrado

Mariana Ruivo

Anna Averina

Gonçalo Marques

Miguel Amaral

Carlos Gonçalves

José Alberto Ferreira

Miguel Garção

Catarina Castela

Kyriacos Inios

Miguel Moita de Deus

Diogo Conceição

Leonardo de Figueiredo

Miguel Monteiro

Diogo Neto

Madalena Ruivo

Rita Marques

Filipe Berjano

Manuel de Oliveira

Simão Serrano

Francisca Anselmo

Manuel Vassalo

Tiago Alves

Francisca Vera

Maria Ana Mesquita

Tomás Ambrósio

Francisco Gonçalves

Maria Pocinho

NIC Undergrad Review | Volume 3 | Issue 1

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Starting Over The best thing about NIC-UD is, without any doubt, its people. In fact, we, as editors and as members of the Club, consider the different backgrounds, interests and abilities of the various members we are lucky enough to work with every week, the main asset that makes us want to be a part of this team.

As such, the multifarious nature of the Club made our work and decisions a lot easier than we initially thought they would be. Our idea behind the topics present in this Issue was simple: freedom. In fact, we did not try to steer the members towards given topics that suited a narrative we were trying to tell. Instead, and as had been done before, everyone had full autonomy to write on whatever subject they were interested in and would allow them to produce the best possible output. The result is what can be seen. We believe this Issue proves that, despite the increasing number of members, the proficiencies of each individual continue to not only live up to, but build on what the previous years’ members had done. We are proud to be a part of this Club, and to have taken on the challenge of being Editors of such an ambitious endeavour like the NIC Undergrad Review.

This is already the 5th Edition of this magazine. What was at first an unwonted project, has now become the norm. Our praise and admiration lies with those who came before us, the previous editors who had, naturally, to develop practices which we are simply perfecting. Thus, it would not be fair to imply that we are reinventing the wheel. We are merely starting over.

- The Editors Learn. The first word that comes up to my mind when thinking about NIC-UD. My learning experience within the club has been increasingly improving. I have been tremendously lucky to work with such dedicated and hardworking individuals. Even luckier to be able to call them friends. With NUR it has been no differently. It was a honour to be the Editor-in-Chief of this Issue, to assemble the creations of the members in one single piece, and to start over.

I got amazed every single second ever since accepting this challenge. I believe the same will happen to our readers. At least, I hope so. If not, there are no limits for the ones that accept them. Hence, the process of starting over will keep on feeding the wheel.

- Francisca Anselmo “Run from what's comfortable. Forget safety. Live where you fear to live. Destroy your reputation. Be notorious. I have tried prudent planning long enough. From now on I'll be mad.”

Jalaluddin Rumi Acknowledging the underlying, undeniable hyperbole in this quote, it is without exaggeration that I say it represents NIC-UD the best. NIC does not hold your hand. Its goal is not to keep you comfortable. It doesn’t either guide you step by step through the unavoidably complex path to professional achievements and personal improvement. It’s not supposed to. We, as a group of individuals, instead, incite each other to find our own personal forms of success. It sounds simple because it is.

Being in NIC has given me the pleasure to work with some of the most extraordinary people I’ve met, each with their own unique strengths, areas of interest and tools, which we all share amongst ourselves. Becoming the Editor-in-Chief not only gave me the opportunity to work more closely with Francisca, whose hard work and organization are nothing short of astonishing, but it also allowed me to work with each of the writers, my colleagues, in a more personal and close way, an experience that I had not had before, but I certainly intend to repeat.

- Manuel de Oliveira 4

Rule Nยบ1: Never lose money.

Rule Nยบ2: Never forget rule Nยบ1.

Warren Buffett

INVESTING – WHERE TO START Ownership is Everything Your way to the 0.1%

Leonardo de Figueiredo and Tiago Louro Alves YOU CAN GET THERE Plutocrats are getting richer, much, much richer in fact.

The 0.1% are increasingly living beyond the dreams of avarice while 95% of society is finding it increasingly difficult to make ends meet.

This raises the question not of whether this scenario is unfounded, which it is, but rather where precisely it is flawed; whether the wealth inequality being completely skewed to favour the minority is a flaw in the current economic and political legislation and/or environment or whether it is the vast majority of society that truly have the tools to compete against the wealthy few but consciously, subconsciously or perhaps out of ignorance choose not to.

Around the globe politicians are convocating increasingly larger amounts of supporters based on the premise that they intend to redistribute the wealth of the global elite.

This past year saw the spotlight on Senator Bernie Sanders in his campaign to be elected as the democratic nominee. During Sen Sanders 6

campaign, the democrat garnered a lot of support on issues surrounding wealth inequality and future wealth distribution strategies, that could be implemented to ease the wealth gap and restore some balance to this jagged landscape. During his campaign, Sanders unyieldingly declared that: “America now has more wealth and income inequality than any major developed country on earth, and the gap between the very rich and everyone else is wider than at any time since the 1920s”.

The evidence seems to bolster up the Senator's claims. According to The Economist, the 0,1% wealthiest families in the US control as much wealth as the bottom 90%.

wealth inequality being pointed out as the cause of all evil by many politicians, especially those belonging to the left wing. It is not yet clear as to the way forward on reaching an equilibrium; however, to many analysts, entrepreneurs and even politicians, ownership is evidently the cause of this ever more prominent divide.

A skim over the Forbes 400 will reveal an evident underlying similarity between all members on the renowned list. This similarity is denoted below, as well as all subsequent consequences.

All individuals on the list own, either completely or to a substantial degree, companies and/or financial assets.

Wealth inequality is a troubling issue (for 90% of society, at least) and it is no longer news. What is more pressing is what caused this inequality and the way forward on solving this matter.

Nick Hanauer, admitted plutocrat, has famously stated: “I see pitchforks, as in angry mobs with pitchforks”. The masses are unhappy, especially with

As a consequence: 1. No mentioned individuals have a wage or salary as their main source of income.

2. No listed individuals have to directly answer to employers, as the majority of them do not have any direct employers.

3. They have the means and

NIC Undergrad Review | Volume 3 | Issue 1

all resources necessary to protect and layer their wealth in complicated accounting grids in order make less contributions to the state.

Owned by the bottom 90% of families Owened by the top 0.1% of families

However, what creates wealth inequality (albeit not entirely) is not the similarity between all elite individuals, it is the fact that 90%-95% of individuals do not share that main similarity with the abundantly wealthy and thus do not share any of the consequences that are implied through ownership.

Multi-millionaire and bestselling author Robert Kiyosaki famously affirmed this notion by stating: “The rich buy assets. The poor only have expenses. The middle class buy liabilities they think are assets. The poor and the middle class work for money.

The rich have money work for them”. It is the massive disconnect between where the majority of people spend their money and time and where the minority invest their money and time that is causing the difference.

As the aforementioned politicians are desperately trying to remedy this situation and have gained popularity by doing so.

However, the majority of their remedies include underlining the importance and, eventually, imposing higher tax on wealthier individuals. This method has been put into play by the French government in 2013 though and has not yielded promising results – with boatloads, or yacht-loads in this case, of higher income individuals leaving the country in search of tax havens.

The solution may lie in a well known proverb: “If you can’t beat them, join them”. Many successful entrepreneurs have been tooting this for decades. Felix Dennis was renowned for saying: “You’ll never get rich by working for a boss”. The cornerstone to becoming rich undoubtedly derives from ownership. It can be argued that the solution may lie in educating the masses to learn how to acquire assets, as this would, in a sense, revert the economic landscape to tend closer to perfect competition between the haves and the have nots. Many believe that ownership of assets is reserved only for the elite, however it is not. The simplest and, perhaps, most risk averse way to invest

INVESTING – WHERE TO START

capital is to bet on

the

American and European markets.

Through ETF’s individuals can purchase financial instruments that mimic the movements of the markets, two examples of this would be the S&P500 and the FTSE 100.

Join Us Like our Facebook Page It is the best way to give us feedback and suggestions, keep updated on the most recent news and trends in the markets and track all of our events.

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INVESTING – WHERE TO START Not only would the investor own an extremely diversified portfolio but the above mentioned ETF’s have also returned on average around 10% return per annum.

Meaning that if an individual earning a low wage invested a certain amount every year throughout their twenties, thirties and mid forties they would be able to amass a substantial amount of capital to then further reinvest and or just live comfortably for the rest of their lives. The simulation below further exemplifies the ease at which this can be done: An individual earning a modest €1,000 per month (well below the minimum salary in the UK) at the age of 20, who saved 25% of his or her income and then invested this amount every year in the extremely diversified, and essentially risk averse, financial instrument that is the S&P500, which has historically gained an aggregate of 10% every year since its inception for the next 36 years would have amassed the following wealth on the basis that his capital was actually invested at 11% return due to moving averages increasing dramatically: (Please note that this expression does not account for inflation, the average increase in salaries or the 8

dividends payed by the ETF that could also be reinvested).

As if it was not already difficult to get there, it is getting harder and harder.

At the age of 56 the investor would be left with a return of €1,268,947.47.

As Ms. Lagarde, current IMF's MD, put it: "The gap has been widening tremendously, particularly over the last ten years and it has widened in all corners. You look at the US pay".

This wouldn’t put you into the Forbes 400, not by a long shot. However, it would give an individual earning a mediocre salary, and under the minimum wage in a few European countries, who saved 25% to achieve financial freedom and further allow that individual to have the possibility of investing that capital in more profitable ventures.

Furthermore it would rocket that individual into the 1% comfortably as data shows that one needs approximately €686,381.00 to join the one percent.

YOU WON’T GET THERE We have found a way to grow a somewhat impressive fortune. You would have, in fact, arrived at the top 1%, but you would still be millions of dollars away from a top 0.1% net worth. If we look at US Fed data, we find that the 160,000 families that make to the top 0.1% have net worth of $20M, on average. Millions more than what you could ever achieve following our previous advice.

There are two main reasons why we see this diversion.

Firstly, the wealth of those at the top has been driven up by an improvement in equities – stocks and shares – plus the continuously inflating real estate markets in places like London and Hong Kong; property investments represent about 24% of ultra-high net worth individuals' portfolios. And secondly, the wealthiest both own the largest share of these high-yield assets and retain their assets offshore where tax authorities cannot get hold of it.

That brings us to Mr. Piketty, the French economist who wrote “Capital in the TwentyFirst Century”. His acclaimed book delivered new ideas on wealth and inequality with supporting data. One of those insights was that income inequality is not an accident. Indeed, Piketty claims that it is a feature of capitalism itself — unless governments take action to rein in capitalism's excesses.

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He argues that, as a general rule, wealth grows faster than economic output. The expression r > g depicts this concept; where r is the rate of return to wealth and g is the economic growth rate. All else equal, faster economic growth will lessen the importance of wealth in society, whereas slower growth will increase it. But, no natural forces are pushing against the constant concentration of wealth. In Piketty's words: "The inequality r > g in one sense implies that the past tends to devour the future: wealth originating in the past automatically grows more rapidly, even without labor, than wealth stemming from work, which can be saved.

Almost inevitably, this tends to give lasting disproportionate importance to inequalities created in the past, and therefore to inheritance.”

This might be your inescapable sentence. You will never simply get there.

Even if you find yourself with a vast fortune after years of incredible breakthroughs and hard work, by the time that you have amounted all that money, the 0.1% entry requisite will only have gotten a tiny bit more ludicrous.

YOU WON’T NEED TO GET THERE

But hey, you most probably won't need to be part of the 0.1% club.

If you dream of a future in which you have no kind of material limitations, in which you will not have to worry to find a job: embrace yourself; you will most probably have no other choice.

Given the current advances in Artificial Intelligence, especially due to large sets of data ever more abundant and cutting edge machine learning techniques, your future job will be aggressively disputed. You will face two adversaries.

On one side, depending on your work, you will find either a tireless industrial robot way stronger than you or a replicable software that transmits information at the speed of light. On the other side, you will have a human, your boss, trying to cut costs.

Let’s use the recent news of Uber driverless cars’ arrival to San Francisco and the first delivery by Otto's self-driving trucks. One can easily see that driverless cars and trucks are an attractive product for both consumers and businessmen. But that's not the case for the new obsolete workers. The fact that more than 4.4M US workers will be facing this challenge in the short-term should start

INVESTING – WHERE TO START

concerning us all; in several US districts, the percentage of driving related jobs is up to 10%.

The macro effect of this change in the employment rate will be difficult to manage. Now try to take into consideration the remaining spectrum of jobs; Oxford University's Carl Frey and Michael Osborne did it in a 2013 study. Trying to guess the percentage of occupations becoming obsolete in the next 20 years?

Well, these researchers estimated that robots and automated technology would potentially replace 47% of US jobs in a span of 10 to 20 years.

Almost half of them.

With a considerable degree of certainty, the idea of a negative income tax or a universal basic income will then become a policy necessity. In the negative income tax case, people earning below a certain amount would receive supplemental pay from the government rather than be paying taxes.

With a universal basic income, a stipend would be unconditionally granted to all individuals regardless of their means or employment status.

Even though both ideas have 9

INVESTING – WHERE TO START been recently making the news, none of them is new.

Supporters from different quarters have been discussing them for decades, from Friedrich Hayek and Milton Friedman to Bernie Sanders and Elon Musk.

A future with automation everywhere, with a regular and acceptable pay and any occupation imaginable, is the future where there would be

few reasons to envy the top 0.1%.

At the end of the day, only one thing is for sure: You are going to have a hell of a ride.

Three realistic scenarios await you. Either you, somehow, save enough money to invest it making use of the compounding effect and become prosperous by your late fifties. Or you will do your

best but still fail to make that fortune of yours, while witnessing an ever-growing disparity between you and the wealthiest. Or, last case scenario, there is not much that you can do: you are not as smart, nor productive as your silicon counterparts but you still manage to find meaning in a brave new world.

Boston Dynamics new robot

10

NIC Undergrad Review | Volume 3 | Issue 1

HOW TO GET RICH

INVESTING – WHERE TO START Derivatives 101 A class on a class

Manuel de Oliveira The market.

Where disagreeing agents - buyers, sellers, brokers and market makers -, all with different expectations, come together and create a non-agreedupon expectation, but an expectation nonetheless.

That expectation takes the form of a price: in fact, an Apple share trading at $100 is the result of more than the actual value of the brand new iPhone around the corner; it is the culminations of hundreds of thousands of shares being traded back and forth, with the people expecting Apple to go up in

12

value stocking up on shares, inflating its value, whilst the people who think that removing the headphone jack might just be straw that breaks the camel’s back are dumping their stock, devaluating the most scrutinized company in the world. And so, through the twists and turns of thousands upon thousands of inexplicable trades, the market reaches an ever changing conclusion, an expectation.

But you disagree. You think the market is wrong. And you want to profit from it.

Even though it might be easy to bet against market expectations when believing that Apple is going up, as easy as buying the stock itself, that is not always the case.

And that is one of the many reasons why derivatives should be in your portfolio.

Whether you are sure that Apple is going to be trading at a certain interval 3 months from now, you want to hedge against credit default, to defy the market on things like forex or exchange rates, or you just want to make money

NIC Undergrad Review | Volume 3 | Issue 1

on less traditional underlying assets, like the weather, this article should give you a head start on trading with derivatives.

“Life can be lived at a remove. You trade in futures, and then you trade in derivatives of futures. Banks make more money trading derivatives than they do trading actual commodities.”

- Sebastian Faulks The basics- What is a derivative?

A derivative is, in its most simple terms, a contract between 2 parties where a set of conditions are defined, related to one or more underlying assets. The price of a derivative derives from the performance of the underlying assets.

Derivatives’ contracts are usually associated with stocks, bonds, commodities, currencies, interest rates and market indexes, although there are other, less common, underlying assets.

There are many types of derivatives, each one with different uses. By using a combination of these there are some really interesting things investors can do. It is important to understand that derivatives, due to their complex nature, are typically used only by the most proficient investors, and

not by the average Joe who likes to own shares of a company. Whilst it is undeniable that derivatives can be very useful, if used properly, one must also realize that they can carry a lot more risk than owning stock. If you spend $100 buying a share of Apple you know that, worst case scenario, Apple goes bankrupt and you lose your $100, no more than that.

With derivatives it isn’t always that simple: not only are there other fees associated with most of them, which may fool a distracted prospective investor and disrupt their expected profits, but they also can involve things like leverage.

a contract whose value moves in the opposite direction of its underlying asset, you are actively cancelling out part of the risk (and also part of your upside).

Leverage allows you to multiply your profits by ridiculous amounts, but the same can happen to your losses, and many times less knowledgeable investors end up losing a lot more than they thought they had even risked.

3.Obtain exposure where it is otherwise not possible to trade the underlying asset, for example contracts whose value depends on the Weather or the Sea Level.

Why use derivatives?

Derivatives are extremely versatile. The possibilities are literally endless and, as such, they have the most varied uses: 1.Hedging – Without any doubt the usage most commonly associated with derivatives. Through entering

INVESTING – WHERE TO START

2.Leverage, leverage, leverage – This is the reason why people use derivatives in the movies, achieving returns in the 1000s of percentage points. Contracts based on increasing leverage are relatively simple, but very interesting. In case you want to profit lots from less volatile assets, you can engage in contracts such as these where, for example, if Apple’s stock increases/ decreases by 5% you gain/lose 100%.

4.Making your profits and losses easier to predict. If you buy an Apple share for $100, you can win or lose an infinitely different amount of values, depending on how much the share is worth by the time you sell it. If instead you buy an option, you can make it so that if the stock reaches 105 you get a predetermined value and if it doesn’t you lose a predetermined value.

13

INVESTING – WHERE TO START 5.Speculate about how the underlying asset price will move without actually buying or short-selling the asset, allowing you to profit if the asset moves in the direction you expected - stays in or out of a specified range or reaches a certain price point.

6. Lastly, for larger investors, it allows you to gain exposure to an asset without disturbing its price: if Apple is trading at $100 but you think it’s worth $102 maybe you want to profit from this, but buying hundreds of thousands of shares from Apple would inflate its value, making you lose your upside – it’s simple microeconomics.

As such, you might choose to enter a contract that would allow you to profit from the movement of the stock’s worth, without actually causing it to change yourself.

Getting started- OTC & Exchange-Traded

Due to their often complex and unique nature, it can be hard to group derivatives together like you would do with stocks or bonds.

However, one easy criteria to separate derivatives is whether they are traded over-the-counter (commonly and subsequently referred to as OTC) or in an exchange (exchange-traded derivatives or ETD).

ETD are those which are 14

traded much like stocks. The contracts traded are relatively standardized and liquid, have been established by the exchange itself and it is easy to check things such as price and volume traded.

The exchange itself acts as an intermediary to all related transactions, taking an initial margin from both sides in order to guarantee that the trade goes according to plan.

The most active derivatives exchanges (by number of transactions) are the Korea Exchange, Eurex and the CME Group. Pre-financial crisis, in the 3rd Quarter of 2007, derivatives traded on exchanges amounted to $681 trillion, according to the Bank for International Settlements.

OTC derivatives are contracts which are not regulated and don’t go through an exchange or another intermediary. Instead, they are privately negotiated directly between the two parties involved. Since the OTC market is mainly made up of banks and other highly sophisticated parties, such as hedge funds, it is difficult to pinpoint the details of these trades. However, the OTC derivative market is the largest market for derivatives.

According to the BIS, OTC derivatives traded amounted to $516 trillion in the 3rd Quarter of 2007, and it is estimated that this value has continued to increase over

the following years.

It is important to understand the difference between these two, acknowledging that you, as an individual, will have a hard time accessing OTC derivatives, but ETD are plenty and varied.

Types of Derivatives As was already alluded to before, derivatives are extremely varied and can be incredibly unique. As such, it would be virtually impossible to try to explain or even list all possible types of derivatives. That being said, with this article you will be able to learn about the most commonly traded and talked about derivatives.

Forwards – in a forward contract, the two parties agree on a specific time in the future in which payment takes place at today’s predetermined price. The buying party usually pays a premium in order to enter the contract and is unable to back out of it, once the contract is set (although he might be able to sell it , if a willing buyer is found and the other party’s conditions aren’t affected).

This can be done by investors, agreeing to buy shares, commodities or other assets, in order to speculate or hedge their positions.

However,

forwards

(and

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futures), are also commonly used by people involved in activities such as agriculture and manufacturing industries, to secure predictable prices for their necessary raw materials and the selling price of their products, in order not to see their costs and profits affected by the volatility of such market prices.

Futures – a future contract works exactly the same way as a forward contract, being used for the same reasons.

The difference between these two is that whilst a forward contract is nonstandardized, traded mostly OTC, and thus, written and executed by the two parties involved, a future contract is standardized, as it is written by a clearing house that operates an exchange and thus creates, buys and sells these derivatives. A future contract, by being standard, isn’t as personalized as a forward, but it makes up for this fault by being much more liquid.

Options – option contracts are probably the most known derivatives, as they are very versatile and yet, relatively simple.

Options work similarly to forwards and futures, and they can be traded OTC or in Exchanges.

The main difference is that these contracts give the owner the right, but not the

obligation, to buy (call option) or to sell (put option) the pre-determined asset.

This comes, obviously, at a higher premium than forwards or futures, since it carries less risks – possible profits can be infinite and, worst case scenario, losses are only the premium paid, since the owner can choose not to execute the option, if he doesn’t benefit from it. In option contracts, the two parties also pre-determine the asset to be bought or sold, the price, as well as the maturity date. In European options, the owner only has the right to execute the option at the maturity date, whereas in American options the owner can require the sale to take place at any time up to the maturity date. It is important to understand that either type of option can be traded anywhere in the world and that American options carry less risk, and thus must charge a higher premium.

Since volatility increases the value of both put and call options, these are commonly used to increase leverage.

Swaps – swaps are very versatile contracts, that are mostly used as a hedging tool. In swaps, the two parties exchange cash flows of one party’s financial instruments for those of the party’s financial instrument.

The most common types of swap are:

INVESTING – WHERE TO START

-Credit default swap (CDS), in which the seller of the CDS will compensate the buyer – usually the creditor – in the event of a loan default by the debtor. In other words, the seller of the CDS insures the buyer against some reference loan defaulting, in exchange of a series of payments that are made to the seller. In the event of default, the buyer of the CDS receives from the seller a compensation (most commonly the face value of the loan), and the seller of the CDS takes possession of the defaulted loan.

-Interest rate swap (IRS), in which one stream of future interest payments is exchanged for another based on a specified principal amount. There are various types of IRS, some very complex, but they all share the same principle and work in similar ways. In a Vanilla IRS, one of the parties agrees to pay the accrued interest on a pre-determined amount, with a fixed, pre-determined interest rate. The other party agrees to pay the interest on that same amount, but this time with a floating rate (usually associated with the LIBOR). In reality, the first party benefits if the floating rate rises, as the fixed rate that he pays doesn’t increase, whilst the second party profits if the floating rate decreases, for the same reason.

15

INVESTING – WHERE TO START -Currency swap (or cross currency swap) is mostly used by banks, large corporations or institutional investors, who use this instrument to lower borrowing costs, motivated by comparative advantage.

The easiest way to understand how these swaps work and why one would engage in them is through an example: imagine an American Company called ABC and a Brazilian Company called XYZ. Both companies want to expand to each other’s territories and, to do so, they would need money in the other’s currency. Since they don’t operate where they would be requesting the loan, they would both be subject to very high interest rates in the other market’s currency.

However, ABC and XYZ can

get a loan within their own territory and in their own currency with a much lower interest rate. ABC borrows what XYZ needs from an American Bank and XYZ does the same for ABC through a Brazilian Bank. Assuming the exchange rate is 1.60 Brazilian Real to 1 US Dollar, and both companies need to borrow the same amount, XYZ receives 100M dollars from ABC, and ABC gets 160M real from XYZ. The firms then agree to swap the notional values of the loans and to repay them in each loans currency. Despite this swap implying that both companies assume forex risk, in case one currency diminishes in value relative to the other, both have managed to reduce their debt by borrowing domestically and exchanging

the loans.

The Derivatives Time Bomb Financial derivatives, as we know them today, were only invented in the second half of the XX century (though there have existed simpler forms of derivatives dating back to Ancient Greece) and yet they already add up to values that, even though hard to calculate exactly, are nonetheless unsurmountable: the derivatives market is often estimated at more than $1.2 quadrillion, more than 10 times the size of the total World GDP.

These are truly astonishing numbers no matter what we are comparing them with.

However, as was popularized in Sam Raimi’s Spiderman,

Global Market for Derivatives (all contract types, US$’000BN)

Organised Exchanges

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Over-the-Counter

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“With great power comes great responsibility.”. And the power derivatives hold in today’s financial markets isn’t an exception. In fact, many experts blame the enormous volume of highly volatile, OTC traded, derivatives present in the market for the 2008 crisis, with Business Insider having headlines such as “Forget About Housing, The Real Cause of the Crisis Was OTC Derivatives”.

And that’s not all. Actually, many writers and financial experts argue that we are witnessing a Derivatives Time

Bomb: “Big Banks and Derivatives: Why Another Financial Crisis Is Inevitable”, in Forbes, is just one of the headlines that allude to the possibility that the same institutional investors who gave derivatives their popularity, at first for hedging and now, progressively, for increasing leverage on their positions, would suffer catastrophic losses, plunging the markets into chaos, if the derivatives positions owned by hedge funds and the large banks were to move against those parties.

Nonetheless, and without forgetting Warren Buffett's words that “Derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”, it is hard to argue against the notion that derivatives are still some of the most versatile tools that every investor, that is truly serious about the financial markets, should have in their portfolio.

“I think you should be more explicit here in step two.”

HOW TO GET RICH

INVESTING – WHERE TO START Investing in Water “To sow the seeds of all things sensible, kind and eternal.”

Anna Averina

Why? You might say “no worries, Anna, 70% of the Earth’s surface is covered in water”.

While this is generally true, freshwater – the one we care about – accounts for no more than 2.5% of that amount, according to UN-Water.

Furthermore, we are left with 1% of freshwater at real disposal, as the other 99% are hidden in glaciers, snowfields and the set for 18

the movie “The Revenant”.

Another entertaining statistic was gathered by the UN in 2016: namely, that we are currently using around 30% of the world’s total accessible renewal supply of water. By 2025, that percentage could reach 70% with two-thirds of the world’s population living in water-stressed regions.

Given shrinking water security, it is of no wonder that persistent supply shortages have already

resulted in roughly 200 water-originated conflicts since 2000.

Taking excessive alarmism aside, previous arguments may come to naught as technology advancements on converting salt water to drinkable are made. The development of this Jesus water-to-wine style tech within a 40 to 50 year timeline may very well detract from the water

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scarcity trend, rendering this article irrelevant.

However, assuming the status-quo hold, how do you turn water into an actual cash flow? #1. Water rights purchase.

Commonly, an owner has a full or partial - depending on the country’s legislation - set of property rights on respective water source: from rivers to groundwater.

Investors make money simply by selling the water right for a higher price than was originally paid. As simple as this. Likewise a friend of mine purchased lake water rights back in Siberia for recreational fishing and summer leisure (NB: not all Russians enjoy possession of large amounts of natural resources). After operating several years under rental contract, he decided to purchase full rights, enabling the reconstruction of the territory attached and the deepening.

To give you some notion about numbers, 30x40-ish square meters lake was bought for €220K, and subsequently successfully sold for €370K (consider inflation of 8%). Go figure now how many Sporting CP stocks you may buy with these proceeds.

The same way, in 2011,

investor T. Boone Pickens was successfully selling water rights during the drought periods in Texas and acquiring new water bodies during the rainier seasons.

Inevitably it brings up the greater fool theory issue, that is some item may be priced regardless of its intrinsic value, but rather based on irrational beliefs and expectations. As such, since water arguably provides value per se, buying water rights, and trembling to sell those to a greater fool after, might be a flawed strategy if there’s no greater fool behind your shoulder.

#2. Following “no value per se” idea, we might think of the tangent markets.

Particularly, agriculture water consumption reaches 70% of the total water consumption.

Thus, thoughtful investors like Michael Burry acquire stakes in water-intensive agricultural businesses, like almonds production.

According to him, it takes 1 gallon of water per 1 almond, the same way it takes over 400 bottles of water per 1 bottle of wine. Since buying a farmland is hardly feasible for a recent graduate, there are several options to extract value from Burry’s quote: “What became clear to me is that food is the way to invest in water”.

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As affordable as lunch at Hamburgueria do Bairro, Farmland Partners Inc REITs are traded at around $11 per share. And there are other agricultural-related instruments, from basic commodities to equities, ETFs and mutual funds.

Regardless of the economic cycle stage, people have to eat - agricultural investments would be a thoughtful and strategic proxy move for investing in water. #3. Water utilities and equipment companies strike investors as a buy and hold forever story. Partly because demand is never expected to dip, whereas, pipelines and water infrastructure falls short for investment. So let’s take a look at the largest U.S. caps: American Water Works (NYSE: AWK) and American States Water Co (NYSE: AWR); alongside, with the Guggenheim S&P Global Water Index ETF (NYSE: CGW), tracking 50 waterrelated companies.

While single stocks’ returns have steadily outran the S&P 500, Water ETFs underperforms the index with same persistence and perseverance.

When looking at the Credit Suisse alternative measure of overall attractiveness for investors, percentile ranking, which is based on the 19

INVESTING – WHERE TO START

operational quality, momentum, and valuation metrics, it seems that small US caps (CWCO, MSEX, etc.) taking over the race, with upsides reaching 86% (e.g., CWCO) at the time of writing of this article, while, for instance AWK and AWR are downside 16% and 10% respectively.

There may be a slight disruption, with smaller 20

enterprises thriving on fragmented market structure and Trump’s tax cuts promises.

However, historically these attempts always ended up in roll-ups and, perhaps, tears.

As such, AWK closed 13 acquisitions in 2014, rallying with another giant, Aqua America, having a solid number of around 300 deals over the past two decades.

As such, water in any of its forms is a prudent investment for a world of rapidly growing population and consumption levels.

Thus, Nikolay Nekrasov’s call to “sow the seeds of all things sensible, kind and eternal” is a perfect match for this recession-proof investment strategy.

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HOW TO GET RICH

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INVESTING – WHERE TO START You Don’t Mind Me Making a Dollar Sin stocks

Anna Averina and Carlos Gonçalves Investopedia defines a sin stock as a stock of a company either directly involved in or associated with activities widely considered to be unethical or immoral (e.g., alcohol, tobacco, sex-related industries, weapons manufacturers and the prisons). Inevitably, this raises a number of questions for said industries. In this article, our goal is to look at private or for-profit prisons in the US - prisons in which individuals are physically incarcerated by a third party that is contracted by a government agency. Typically, the government pays a per diem or monthly rate, either for each prisoner or for each place available (occupied or not) in the facility.

The root of the problem:

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misaligned incentives.

Whether we like it or not, issues of organizational accountability, corporate ethics, motivation, and symbolism cannot be neglected in the face of imprisonment. The private prison industry is responsible for providing a human service that serious and far-reaching by nature; as such, to what extent does the Friedman doctrine conflict with the common organizational goal of private prison corporations? Is there a fundamental conflict of interest by establishing an industry whose economic growth and profit margins depend on locking up as many people as possible, for as long as possible and by any means necessary? Is

providing safe and humane conditions of confinement a distant secondary goal?

However, unlike such questions, this is not a story about the purpose of justice in our society - of the struggle between punishment and restoration.

It could be a story about the ethical implications of the privatization of prisons, but it is not that as well.

Nor is it a story about the nature of criminal law in the United States and mass incarceration.

Instead, this is a story about the sustainability of the business and corporate governance model of forprofit prison corporations.

Our story is concerned with the long run. Its goal is to

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estimate the intrinsic value of this momentous, powerful industry by examining related economic, financial, and social factors; we proceed to drafting an investment strategy, in which we discuss the feasibility of short selling.

Today, for-profit companies are responsible for approximately six percent of state prisoners, sixteen percent of federal prisoners, and inmates in local jails in Texas, Louisiana, and a handful of other states. While supporters of private prisons tout the idea that governments can save money through privatization, the evidence is mixed at best—in fact, private prisons may in some instances cost more than governmental ones.

When we think about private prisons versus public ones, not only the business model undergoes the dramatic change, but the goal of the entire venture suffers severe alterations. Supposedly, the ultimate goal of a stateowned prison is to either attempt to rehab its convict population or, at least, remove them from the streets. With private prisons, run by corporations, profitmaking comes first.

So how do for-profit prisons corporations make a dollar?

The main argument is one that stand on the shoulders of utilitarian gains. However,

according to Russ Van Vleet, a former co-director of the University of Utah Criminal Justice Center, “there is a perception that the private sector is always going to do it more efficiently and less costly, but there really is not much out there that says that is correct.”

In most cases, private counterparties offer costsaving services to the state officials, which pay a stipend in return. The stipend is based on the number of inmates that the prison houses. As such, if minimum cost per day to house a prisoner is $100 and government does it at $150 (assuming the inefficiency of the governmental leviathan), then private company, operating at $125, can reap solid profits.

Though beautiful theoretically, the practicality of the issue casts an ugly shadow. First we have the core cash flows variable: the number of prisoners. In order to stay on float, prisons need a constant stream of inmates coming in to replace those that have served their sentence. As such, for-profit prison corporations thriving factor is attributed to lobbying laws and lengthening of sentences by an average of two or three months longer, as compared to state-owned prisons.

INVESTING – WHERE TO START

How does the private prison industry encourage state governments to use of their services? Simple: it has a friend in the American Legislative Executive Council (ALEC).

ALEC a nonprofit organization of legislators and private sector representatives that drafts and shares model state-level legislation for distribution among state governments.

Its 2,000 legislative members and over 300 corporate members meet in nine task forces on specific issue areas (e.g., environment and energy) and collaborate to write model legislation. When a task force completes a model bill, it has to be approved by the ALEC membership and governing board; if such a thing happens, the bill becomes official ALEC “model policies” (i.e., model policies are disseminated and introduced “word-for-word” in state legislatures).

This is all completely legal.

However, it raises questions about whether or not this is an end-run around lobbying rules. After all, when a corporation wants a piece of legislation passed, it typically hires a lobbyist or registers itself as a lobbyist. This allows the public to know what they are lobbying for, how much money they are spending on it, and the sort 23

INVESTING – WHERE TO START of things that they are paying for in order to convince legislators to go their way on a piece of legislation.

However, what happens at ALEC stays at ALEC. It is completely private, without any form of public oversight.

The extremely secretive process by which members have a “voice and a vote” on drafting and approving model policies (i.e., ALEC does not disclose the names of their legislative members and corporate representatives sit as equals with legislative members) implies that ALEC could have a tremendous influence over lawmaking in the American states - or it could have none at all.

Not only are their meetings private, but so too are their legislative successes and failures. Ultimately, it is difficult to know where model policies inspired the introduction and passage of new legislation - many of which benefits the corporations whose agents write them, shape them, and/or vote to approve them.

Specifically, ALEC has worked to pass state laws on private for-profit prisons, a boon to two of its major corporate sponsors: Corrections Corporation of America (CCA) and Geo Group (GEO), the largest private prison firms in 24

the country. For example, ALEC helped pioneer some of today’s toughest sentencing laws (e.g., mandatory minimums for non-violent drug offenders, “three strikes” laws, and “truth in sentencing” laws); it also encouraged “states and units of local government to establish employment opportunities for prisoners under specific conditions that approximate private sector work opportunities” through its Prison Industries Act, effectively eliminating the legal barring of prison labor for the private sector. Last but not least, ALEC proposed in 2007 “innovative solutions” to the overcrowding it helped create, such as privatizing the parole process through “the proven success of the private bail bond industry.”

Coincidentally, the American Bail Coalition is an executive member of ALEC’s “Public Safety and Elections” task force.

ALEC has not gone unnoticed.

Its activities have received public scrutiny after news reports from outlets (e.g., The New York Times, National Public Radio, and Bloomberg Businessweek) described ALEC as an organization that gave corporate interests outsized influence. After all, of the 132 model bills introduced,

12 were enacted - a survival rate nearly five times that of the average bill in Congress.

In the end, it is important for the democratic process to know who is affecting which bills are introduced in the state legislatures, and which bills pass - especially since ALEC has proven capable of devising ways to help private corporations benefit from the country’s massive prison population.

The other part of this story concerns “operational efficiency.” For for-profit prison corporations, costsaving is achieved by the series of long-standing contracts with particular healthcare and food catering providers, implying lowerquality food (e.g. food with maggots) and selection of less expensive prisoners (i.e., “cherry-picking” individuals without health issues).

Moreover, more often than not it falls to families of prison inmates to pick up the rising cost of basic items like toiletries and winter clothes.

Adding to the squeeze, many private companies charge exorbitant fees to send the money.

This, in turn, fundamentally undermines the concept of efficient markets, leaving the marketplace in the ruins of distortion. After all, the primary “customer” (i.e., the inmate) lacks the exit rights

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INVESTING – WHERE TO START that are so important to making markets work.

Prisoners cannot take their business to another prison.

Moreover, while contracts can be written to try to enforce quality as well as price metrics, these metrics are cruder than the kind of discipline afforded by a regular market.

In August, the US Justice Department announcement of halting the use of private prisons caused CCA and GEO collapse with share prices double cut.

However, November news of Mr. Trump’s presidency recouped their losses as reverse in policy is highly expected: CCA surged 50%, bouncing back to pre-August

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levels. For now, hedge funds (e.g., Elliott Management and Bloom Tree Partners) are optimistically bullish on prisons’ securities as newly elected president reveals hardline attitudes towards illegal immigration, eventually leading to increasing incarceration.

Accordingly, and especially in the context of a post-Trump macroeconomic and industry scenario, we view for-profit prison corporations are prime short-sale candidates. We believe CXW and GEO stocks are overpriced, since the market distortions recklessly executed by private prison corporations (through ALEC or otherwise) every now and then will ultimately be priced by the markets. As of now, the landscape of the debate is changing as public officials

on both sides of the aisle have began to show their support to amending some components of the criminal justice system (e.g., the amendment of the federal mandatory minimum sentencing laws).

These companies are clearly affected in a significant way by changing external events in this case, the evolution of public opinion toward the criminal justice system is one of a host of other factors that will pressure leaders to embrace policies harmful to the likes of CCA and GEO. They will expose the fundamental problem of what is now one of the fastest-growing industries in the US.

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No science is immune to the infection of politics and the corruption of power.

Jacob Bronowski

POLITICS What Future for Europe If 2016 was the game changer, what game will EU leaders be playing in the future?

Miguel Garção 2016 can possibly be known, in the future, as the gamechanger year for the European project. Call it growing populism or electorate’s voice for change, the truth is Brexit and other events are jeopardizing political stability within the continent. Even though other challenges might surge from the relations with external stakeholders (Trump, Russia and Turkey are some examples), Europe will have to face its own domestic problems. People are clearly not happy with the project and the upcoming elections can be a real challenge for EU policymakers. This article is intended to walk you through what is at stake for Europe in the following months.

The current year can be seen as a victory of the voters over the media. The Financial Times formally supported the UK’s EU membership before Brexit and Hillary Clinton on the US presidential elections.

However, contrary to all predictions, Brexit did happen and Trump will take office by January 2017.

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In the case of Brexit, for the first time, the disadvantages of belonging to EU outweighed the advantages, on the electorate’s minds.

More recently, in Italy, the rejection of the constitutional changes was seen as an open door for “Italeave” (even though Italians simply rejected reforms that were seen by analysts as wrongly planned), buoying Italian anti-EU parties. But, what exactly are people worried about?

Economic growth is not being fast enough, a banking crisis is emerging, unemployment is still high (even though it has reached its lowest since 2009, the EU seasonallyadjusted rate, of 9.8% in October, compares to rates around 5% in the UK and in the USA). These are some of the problems that people have been waiting to see solved, for a long time. Even in those countries where economic prosperity was not

affected that much, people are skeptical about the European Project, wanting to regain political sovereignty (just look at the case of UK and other countries may follow suit). Some others challenge globalisation and integrated cooperation.

Populist politicians are fast when promising solutions to problems like terrorism and migrant crisis. Those are, in the majority of times, simplistic solutions, but there is no strong and consensual alternative from politicians in the European elite. After Donald Trump’s election, people have become more aware that antiestablishment and Eurosceptic parties are gathering popular support that may put the EU project at stake.

More than populism, the real problem of EU, at the moment, is the perception that it has been failing to find solutions to fulfil people’s problems.

Meanwhile politically, some important decisions are to be made next year. The FrancoGerman axis, crucial for the stability of the Union, will decide on its leadership and

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there is growing concern that both countries will walk in distinct directions. France is more focused on its own problems and decisions, leaving Germany the responsibility, and power, to lead the EU. In France, National Front leader Marine Le Pen has seen her popularity skyrocketing in recent years and is regarded as one of the main contenders to occupy the Élysée Palace. She has a strong anti-Islam posture and will, in case of victory, hold a referendum on EU membership. A poll made by Odoxa to France 2 television suggests that former Republican PM Francois Fillon will win the first round (32% vs. 22% for Le Pen). In the run-off, Fillon is expected to gather support from other parties, winning the second round with 71% of the votes.

But, one cannot ignore that polls have not been effective predictors of actual results, in the recent past.

In Germany, Chancellor Angela Merkel will run for a fourth term and her CDU party will, probably, maintain power on the Bundestag.

Nevertheless, anti-immigrant party Alternative for Germany (or AfD), which made gains on this year’s local elections, will likely win a comfortable position in the parliament, promising to be, at least, a constant defying

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force in opposition to the current policies.

In Austria, populists’ aspirations were defeated as Norbert Hofer, from the antiimmigrant Freedom Party, lost presidential elections. In the Netherlands, the far-right leader has promised to hold a referendum on EU membership and is gathering support for his radical antiimmigration vision. However, he is on court over hate and discrimination accusations and will not, likely, get enough support in the parliament to lead.

Nonetheless, he represents another alarm for Europe.

Rome. Now, it looks more like an alert than a celebration.

European leaders should listen to people and make globalisation work for them.

Otherwise, one more referendum on the EU membership could trigger its collapse. Even if anti-EU parties do not access power, popular dissatisfaction will keep pushing for changes and results, that can mean significant improvements in their lives.

IS THE EU PROJECT AT RISK OF FALLING TO THE GROUND?

The European Union is facing some other challenges (relations with Russia and Turkey, migrant crisis, political instability in Spain and the unfolding of the Brexit process) but, the biggest concern should be to recover people’s confidence in the project. The next 12 months are set to be critical for the European Union.

March 2017 marks the celebration of the 60th anniversary of the Treaty of

Under these circumstances, the Franco-German axis will, most likely, continue to be the engine of the project that aims to settle down migration and restate economic growth. And that is all we, as EU citizens (EU supporters or not), care about.

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POLITICS US Political Power Economic Policies Under Political Cycles

Francisca Anselmo and Maria Pocinho Defining what it means to be a hero has caused controversy for centuries. In the United States, it has been no differently. As far as politics is concerned, the discussion may become even further questionable and debatable. Probably, the definition of hero is just too strong to be applicable. By looking at all the 44 US presidents, since George Washington (1789-1797) to Barack Obama (2009-2016), can you identify any potential hero? This hero analysis becomes even more interesting when looking at the economic impacts of the policies followed by each head of state of the 3rd most populous country. Does the outcome depend entirely on the political practice pursued or is it influenced by the surrounding cycle?

The US were founded in

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1776, creating, from that moment on, its national identity, army and congress.

Around 50 years after Washington’s presidency, the nation was served by Andrew Jackson (1829-1837) that idealized an economy of small farmers and artisans: the ones that could assemble the country and that had voted for him, whose interests clearly diverged from the British founders.

Meanwhile, Jackson was the champion of that new generation, starting his mandate in what George Friedman describes as the 2nd cycle. The chairman of Geopolitical Futures reports: “In its history, so far, the United States has had four such complete cycles and is currently about halfway through its fifth. The cycles usually begin with a defining presidency and end in a failed

one. So, the Washington cycle ends with John Quincy Adams, Jackson ends with Ulysses S. Grant, Hayes with Herbert Hoover, and FDR with Jimmy Carter.”

Whereas Jackson’s predecessors had favored a stable currency to protect investors, he defended cheap money to protect debtors and farmers. Through his controversial financial measures, as the destruction of the Bank of the United States, the nation’s banking system was decentralized.

More anxious policies were taken by new banks, the supply of money was expanded, access to credit got easier and a short-term economic boom took place, transforming the farms in the West into businesses. Smalltown banks took the farmers’ deposits and invested the money on Wall Street. Then, the historical center of the

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Financial District invested back in railroads and industry, conducting prosperity.

Nonetheless, the policies followed by 50 years augmented to one of the worst depressions in the US, later on.

As always, one solution creates the next problem.”

The end of the 2nd cycle culminated with the failed presidency of Ulysses S. Grant, as low interest rates were not allowing to invest the profits of the farms and a strong and stable currency was needed.

“A currency worth less than it purports to be worth, will in the end defraud not only creditors, but all who are engaged in legitimate business, and none more surely than those who are dependent on their daily labor for their daily bread.”, Rutherford B. Hayes (18771881).

At the time, enormous financial debts from the Civil War still lingered under inflation and chaos, as President Lincoln (18611865) had covered expenses by issuing over $400M in greenback. Foreigners were refusing to buy American debt, merchants wanted specie instead of paper.

Accordingly, the 19th president of the United States, and first of the 3rd

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cycle, according to George Friedman, had a significant contribution to restore the American credit. Hayes built a gold reserve to pay off the greenbacks, recovering confidence in the former.

Meanwhile, inflation was limited, interest rates raised and investment became more attractive.

Such conditions sustained the expeditious industrialization of the United States, allowing its economy to increasingly expand in the following 50 years.

Furthermore, the Great Depression was about to arise, in the 30’s, and the 4th cycle about to begin with Roosevelt’s (1933-1945) presidency. For the time being, millions of immigrants moved to American soil to operate in mines and factories, substantially increasing the population living in cities and lowering wages. As the policies followed in the 3rd cycle had encouraged savings and investment but limited consumption and credit, consumers no longer had money to buy the products they needed and, as a result, the Great Depression took place.

investors to consumers, increasing aggregate demand and boosting the economy.

However, record high taxes for the wealthy and corporations were starting to become unsustainable and were no longer working.

These policies discouraged investment and the loss of competitiveness narrowed industrial prosperity. The US had entered a vicious cycle of overconsumption and underinvestment.

In the 80’s, Ronald Reagan was elected President of the United States and started a 30-year period of financial deregulation, in order to expand the amount of capital investment, while maintaining consumption. His measures, supported by economists and financial lobbyists, produced more jobs and economic expansion than any other time in US history. By allowing upper classes and corporations to modernize the economy with investment, the 80’s was a decade of turnover, not only for the US, but for the world economy as well. Developed countries also pursued economic liberalization so as to increase their

In order to tackle the Great Depression, Roosevelt’s reforms were extremely helpful in the sense that wealth was transferred from 31

POLITICS competitiveness as business environments; in developing countries, economies became more open to foreign capital and investments, resulting in rapid economic growth.

Before liberalization, investment banks were small private partnerships, unable to speculate with people’s deposit money. After, these went public, giving them huge amounts of stockholders’ money. The sector exploded and people started to get richer. In the 90’s, the financial sector consolidated in a group of massive gigantic financial firms. These institutions became marketing corporations, creating special collateral products that satisfied demand.

Conservative investors seek to increase yield and maintain risk, so these new products had hidden risk that turned out to be catastrophic as the house market came crashing down.

On the one hand, many economists blamed Reagan for the real estate crisis of 2008, considering deregulation policies implemented as the cause of the lack of control in financial markets.

On the other hand, many suggested that this crisis was not materially different from previous cyclical ones. In fact, crisis are incorporated in the 32

human nature and common parts of the business cycle in a free market environment.

Deregulation and Liberalization enables people to act according to their nature, aiming to improve themselves, and this has always led to prosperity in the long run.

Therefore, Reagan’s measures were determinant to shape America as it is today, by reorienting the economy away from the principles of the New Deal. Just like Franklin D. Roosevelt, Rutherford B. Hayes and Andrew Jackson, he was regarded as a betrayer of the heart of America’s common man. Nevertheless, he had no choice but to change the course of the country.

Nowadays, the US are in the middle of the 5th cycle, ushered by Ronald Reagan in the 80’s. According to George Friedman, no president, regardless of the ideology, can change the basic trends.

“Dwight Eisenhower was elected in 1952, twenty years after Roosevelt, but he was unable to change the basic patterns that had been established by the New Deal.

Teddy Roosevelt, the great progressive, couldn’t significantly shift the course set by Rutherford Hayes.

Lincoln affirmed the principles of Jackson.

Jefferson, far from breaking

Washington’s system, acted to affirm it. In every cycle, the opposition party wins elections, sometimes electing great presidents. But the basic principles remain in place. Bill Clinton could not change the basic realities that had been in place since 1980, nor will any president from either party change them now. The patterns are too powerful, too deeply rooted in fundamental forces.”

Notwithstanding, one question still remains unanswered: are Donald Trump’s powers strong enough to change the pattern in the middle of a cycle, when, based on historical facts, no other president could?

All the economic measures Trump suggested, during the past months, seemed quite similar to Reagan’s ones in terms of fiscal and monetary policy.

The overall proposal to cut taxes, eliminate some deductions and increase infrastructure construction

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would cost around $5-$6 trillion in 10 years.

However, unlike Reagan, Trump is inheriting an economy that has been expanding over the past eight years, contrarily to an economy which was just bottoming from a prolonged recession and stagnation.

According to Kenneth Rogoff, whether greater spending leads to greater growth depends on whether there is sufficient spare capacity, i.e., “whether supply responds with faster productivity increases in an economy of strong demand”. The decisive factors revolve around whether the productivity growth will recover and, most importantly, if the population can grow fast enough. Most of Obama’s employment recovery (2.5M jobs, the same as Trump had promised), came from the unemployment side and not from the expanding population nor from the increase in the share of the population that participates in the labour force. So,

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Trump’s ambitions in this sense may seem unrealistic, but that does not mean that a scenario of permanently higher US growth is not impossible.

leaving the Trans-Pacific Partnership are yet to be seen and probably more than this is necessary to compromise US relations with the rest of the world.

Additionally, in terms of trade policies, Reagan’s views were more open minded. Donald Trump argues against a global economy, but at this stage of the cycle, it might continue to thrive whether he likes it or not and it may become more competitive and accessible whether barriers are imposed or removed. In fact, the rapid integration of Asian markets in the past 25 years, often to join Americanoriented supply chains, was mainly driven by improvements in communication and digitalization, rather than bilateral trade pacts. The most important liberalization wave was due to unilateral tariff-cutting and a voluntary agreement on information technology goods by emerging economies in the 90’s and not by any formal trade deal.

In this sense, the consequences of eventually

History is essential to study the trends of human behaviour and makes us rethink our mistakes. Indeed, US cycles of the past 200 years suggest that there has been some consistency in the powers each president had in his mandate. However, each situation was different and impossible to predict. What determined the consequences of the policies was simply peoples’ reactions and the context of the cycle at the time. We may be inclined to state that Donald Trump’s policies effects are limited, based on historical tendencies, but nothing is predetermined. As well as 200 years ago one could not foresee what was to happen in the XXI century, we will never know what the future holds.

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POLITICS Trumponomics A huge dilemma for a great economy

Miguel Amaral and Miguel Moita de Deus

Dear readers, Last semester, the same writers were given the task to discuss whether a terror attack in US soil would catapult Donald Trump into Presidency. Many variables were considered, namely the fact that it was astounding that Trump got to where he was, at that time of the race, and that, provided Hillary Clinton had played her cards right, it would have been likely to witness the first woman becoming the most powerful human being in the planet.

Truth is, Trump ended up not needing a terror attack to become the 45th President of the USA and Hillary observed, for the first time, an inflection point in her 34

political career. Hopefully, this article will shed some light on how Trump’s winning was even possible, why phenomena like these exist in the first place and what might happen in the next 4 years (at least) in regards to Trump’s policies.

Regarding Trump’s victory, it’s vital to analyze what type of speech he has given along the Presidential race. In the case of Mexico, for example, he kick started his free publicity campaign by making outlandish statements on how illegal Mexicans jump the border to bring drugs and rape Americans. By mid 2016, he was tweeting how he loved Hispanics while eating a burrito in Trump Tower during Cinco de Mayo. In between, he was the

candidate with most media coverage in the country.

Throughout his campaign, he continuously attributed derogatory, yet catchy, nicknames to his opponents, be it “lying Ted” or “crooked Hillary”, while simultaneously receiving thousands of hours of coverage in TV and social media - especially Twitter -, that would fundamentally contribute to his election. By the time he got elected, he was saying how Hillary Clinton is an amazing woman, how she was a tough opponent and how she has served her country so well.

After all, there really is no such thing as bad publicity.

The pattern on Trump’s speech was shouting for attention as much as possible

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when the big day was still far away and marginally smoothen his own speech when the election day was nearing, giving more space to share opinions on foreign policy, free trade deals or the US’s stance on NATO. All the while posting every single chain of thought on Twitter.

Hillary Clinton also had her fair share of controversies, but concealed them efficiently.

For example, not a whole lot of people noticed she received massive contributions from MiddleEastern countries, who have some of the harshest standards of living for women, through the Clinton Foundation and a big bulk of her campaign was about gender equality.

Soon, after Bernie Sanders started giving Clinton a hard time, Hillary herself adopted Sanders’ opposing speech on Wall Street, which is interesting considering that some of the biggest contributions to her campaign were from investment banks.

Moreover, Hillary failed, while Trump excelled, to convince the public that she was from the outside of the Washington D.C. political juggernaut. In effect, Trump used the fact that she had

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already been a first lady, a senator and a secretary of state, to prove that she was indeed very much from the inside and that he was a successful owner of a real estate empire, therefore being from the outside. How did she claim to be from the outside? By saying she was a woman.

voting should belong in the realm of intellect than necessarily that of birthright.

All in all, we believe this election proved Socrates right in his skepticism towards democracy. The founder of western philosophy had such pessimistic views on this vital part of our current lives as it stemmed the very conundrum that brought down the Greeks and the Romans: demagoguery.

In fact, Donald J. Trump represents a complete change in the economic and political status quo we’ve known in the last years.

By not having any obligation to strive for a more educated voting class, demagogues can strive because they can appeal to what their target client wants to hear, in exchange for power, and as we’ve seen, both sides of the election tried to sell what each crowd wanted the most, be it globalism and stasis or nationalism and change.

Socrates didn’t believe that just a small class of individuals should be entitled to vote, but that only by deep reflection and consideration of all variables could a voter be allowed near a poll.

Plato’s master firmly believed

And yet, here we are in the second decade of the twentyfirst century - astounded by Brexit, Hillary and Trump wondering what Trumponomics might bring us.

People who have been aware of what’s going in the world in that last few years, have been brought to believe that globalization was unstoppable and that the world would make its way to a big global village, with a convergence of laws, cultures, languages and ways of making business.

What we didn’t predict was that in this rough and quick path, many people would be left behind, whether by losing their jobs or not being integrated in a world changing too fast.

As such, this huge Trumpmania happened - and he did actually win against all odds. Doesn’t matter how he took advantage of those dissatisfactions, he and his team will take over the office of the most powerful country 35

POLITICS on Earth. Hence, our keyword takes place - Trumponomics.

Nevertheless, what’s done is done. Now, we have to look to these new circumstances and try to understand what will come out of it. We believe it makes sense to start discussing global trade and what side effects will befall on it, since that will directly affect many people all across the globe.

Mr. Trump stated some weeks ago: “I’m going to issue a notification of intent to withdraw from the Trans-Pacific Partnership (...)”. Quoting himself - that is, in fact, huge. Truth is, this agreement would open space to a more resourceful American economy, since companies and industries would have access to broader markets to greatly increase their exports. Furthermore, tons of trade barriers would be eliminated, helping small companies and firms grow their businesses, which will,

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in theory, lead to more employment and ultimately to economic growth and development.

Although this is one way of seeing it - the next American office claims that this level of free trade would in fact prejudice the average American worker - once again, globalization would stand its ground, making a whole restructuring in the economy, pushing ones to the ground and lifting others towards the heavens. As Joseph Schumpeter would put it, it is called creative destruction. Don’t get us wrong, creative destruction is not an unkind term, it is the concept that made us have the quality of living standards that we have today. The question is whether this creative destruction is paving its way too fast, while people don’t see its positive effects so through suffrage, people are choosing an easier path, with more immediate results -, a path of which might just

be fit for the short-term, history tells us.

So, what might happen next?

Other countries adopting this kind of politics, protecting its own industries and jobs, instead of trying to take advantage of the synergies free trade may bring us all, and actually have already brought. Let’s also wait to see what happens with the Transatlantic Trade and Investment Partnership, between the US and the European Union.

Focusing on American soil, the economic path will change completely: from cutting down taxes and tackle down market regulation, to rally public expenses and investment, Trump will indeed remain faithful to his motto of making America great again - at least he expects to. But, reasonably speaking, the pros that these measures may bring must be counterbalanced with the adequate cons.

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POLITICS First, increasing expenses will provoke a huge raise in the deficit and government debt - while the first can be worrying, the second will not be a really big problem in the next few years, since the US really is too big to fail and no economic agent or investor will ever think that such a powerful market economy will go bankrupt.

Second, despite the raise in deficit, public expenses may actually help the American economy reaching a higher pace again - which will increase employment, private spending and growth, all over again.

Nonetheless, expectations on growth are becoming so high that interest rates will go up, preventing consumer spending and private investment - but this effect will most probably be overcomed by the growth

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this policy will bring. Notice, dear reader, that we are assuming investors will remain confident in America’s future. It’s actually a pretty reasonable assumption, since Trumpeffect will be diminished over the time giving place to a pure Republican governance.

Third, and final.

The American Dollar is expected to get stronger, damaging American exports. Trump’s policy, on trade, of increasing tariffs on foreign products aims to protect, once again, American products and companies.

Trump’s approach will, most likely, benefit US growth, despite all the cons of these kinds of policies for the Government budget and for the world’s commercial relations which, we insist, benefit us all. Trumponomics has, however, one huge

failure: where’s the socialeconomic side? By making markets so much more independent at a drop of a hat, lots and lots of people will have a hard time adapting to this new reality.

For example, the withdrawal of Obamacare could have a real negative effect on many workers who rely on it to fulfil their health needs. In fact, the tighter government budget gets, the bigger is the possibility of cutting immediate and necessary social supports. What’s the use of a great growth if one cannot transform it in real economic development? Real increase on quality of life?

Nonetheless, Trump won the elections alongside his economic sketch - people trusted in it.

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It has become appallingly obvious that our technology has exceeded our humanity.

Albert Einstein

TECHNOLOGY The Alchemy of Finance Is Quant Investing the future?

Filipe Berjano and Gonçalo Marques On May 11th 1997, chess Grand Master and all time legend Garry Kasparov was beaten for the first time by a computer. Deep Blue, the machine developed by IBM, made history by bringing to life a new paradigm that had only been envisioned by science fiction before: machine beating man in a field that required skills beyond mere mathematical prowess and calculation, such as visualization, evaluation, planning, adaptation and pattern recognition.

In the present day, computers are expected to perform anything, from placing space probes farther than the reach of our Solar System to driving automobiles autonomously.

Over the years, computation has extended its ability to Finance. We’ve come a long way since the times of the Japanese Rice Exchange or the Dutch Tulip Futures market. Now, all types of securities exchanges are digitized, with investors becoming evermore

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dependent on information technologies. This trend has resulted in the advent of new types of exciting investing techniques and strategies, being Quant investing one of the most intriguing and effective new approaches to arise.

In fact, Quantitative Investment evolved from back office space to become one of the most important investment tools in mutual and hedge funds, majorly due to its modus operandi. Quant comes up as a direct product of Mathematical Finance, that explores market inefficiencies. Based on the past-performance of securities, Quant uses a modeling approach to financial markets to achieve alphas, betas and expected returns. Particularly, its core lies on a statistic approach to stocks, commodities, currencies adjusted returns[1], which are subjected to multivariable regressions, where variables can range from as simple as company

specific financial ratios, to stochastic discount factors, as used in pricing theories like the Consumption-CAPM (Capital Asset Pricing Model).

In recent years, Quant investing has managed to beat the market, performing especially well in bull markets, i.e. when prices are rising or are expected to rise.

And whereas this is one of its biggest advantages, its implication is Quant’s biggest setback.

Investors tend to follow similar patterns and often show biased behaviors, influencing variations of stock prices.

Not only the overconfidence, but also the biased self-attribution of gains lead to a situation where equal stock orders and transactions occur, making the market more risk sensitive and unstable.

Hence, one of the biggest flaws of Quant is that models behind it are not capable of fully account psychological

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biases from investors, making them inefficient in major selloff scenarios or even during stock crashes.

Quant funds are becoming more popular as conventional Hedge Funds struggle to justify the hefty fees charged for their services. An exodus of capital from the latter to the former has become a trend since 2015.

Major investment banks such as Credit Suisse are also planning to add quant funds to their product range while funds such as Winton Capital, Man Group and Systematica have seen their quant funds face high demand from investors. Seen as an alternative investment before, quant funds are becoming ever more mainstream.

Some of the most famous quant funds include D.E. Shaw, AlphaSimplex Group and AQR Capital, but none of these come close to the notoriety and performance of Renaissance Technologies and its Medallion Fund.

Founded in 1982 by award winning mathematician James Simons, Renaissance was one of the pioneers of quant investing.

with losses amid the subprime crisis, Medallion boasted returns of 85,9% and 98,2% in both years respectively.

The Medallion Fund, Renaissance’s crown jewel, was established in 1988 and has been dubbed by Bloomberg as the “blackest box in finance” and as the “Manhattan Project of Finance” by rival Andrew Lo, chief scientist of AlphaSimplex. Ran exclusively for Renaissance’s employees, the fund posted a whopping 39,5% average annual returns since 1988, almost 4 times as much as the S&P 500 in the same period, with dividends reinvested. In its 28 years of existence, it originated $55BN of profit, leaving legends like Ray Dalio or George Soros behind by about $10BN. A $1000 investment in Medallion at the time of its establishment would have turned into about 11,4M US dollars in 2015.

That’s about the same as Berkshire Hathaway’s A stock with an investment starting in 1964! In 2007 and 2008, when most funds struggled

No one in the industry has ever been able to recreate the fund’s performance, even with many of its past managers being recruited by rivals and receiving mindboggling bonuses. However, with Simmons retiring in 2009 and the current managers being in their late sixties, questions are being made on whether Medallion will continue to not only beat the market consistently but also its competition in the future. Whatever the answer to that question is, one can be sure that quant investing techniques are here to stay and will surely take a lead role in asset management in the coming years.

[1] Returns are adjusted to a specific time frame, given the investment period.

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TECHNOLOGY An Insight on Sharing Economy “I don’t need a drill. I need a hole in my wall.”

Kyriacos Inios and Rita Marques We started by sharing media in social networks, then by sharing all aspects of our lives with each other. Today, this trend is spreading to other areas, people are starting to share their cars, homes, and even their money.

Sharing economies allow individuals and groups to make money from underused assets. This way, physical assets are shared as services.

For instance, a car owner may allow someone to rent out their vehicle while they are not using it, or a condo owner may rent out their condo while they are on vacation.

Mankind’s obsession with ownership appears to be at a tipping point and the sharing economy seems to be the beginning of the antidote. A study made by PwC in 2014 showed that in 2025, only in the UK, sharing economy will generate a potential revenue opportunity worth $335BN. Sharing economy business models are generically presented through digital platforms that enable a more precise, real time measurement of spare 42

capacity and the ability to dynamically connect that capacity with those who need it.

Nowadays, the value of a brand is often linked to the social connections it fosters.

Managing these connections is fundamental to successful marketing. In the case of sharing, experience design is critical to engendering emotional connections. By providing consumers with ease of use and confidence in decision-making, a company moves beyond a purely transaction-based relationship to become a platform for an experience.

Zipcar. RelayRides. Car2Go. Lyft. Uber. The sharing economy is rapidly changing the status quo in the automotive industry, creating a pool of transportation options. The number of people that participate in the automotive sector of the sharing economy, either consuming or providing the service, is also increasing and, according to studies, people believe that a sharing economy is most likely to succeed in this sector. All of this has made collaborative

systems far more attractive and caused this big culture change. And for those who figure out how to adapt to these changes it can be big business.

Uber’s objective is to provide safe and reliable rides for its users. Right now, there are hundreds of thousands of drivers, with 50,000 new drivers every month, and around 43% of the US population is using this platform. Uber’s main activity is moving people which gives the company the ability to provide solutions to other issues that the transportation sector is going through. They already have uberPOOL, a carpooling service where passengers can share their ride with another person; a service which could easily be scaled up and work with buses.

Another sector which is experiencing a drastic change is the one of hospitality, where Airbnb is shaping the future. “Airbnb is the worst idea that ever worked”, said Brian Chesky, CEO of Airbnb.

Today, Airbnb is valued at $30BN, more than most

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mature players in the field and it gets around 1M new customers every month. The total number of listing on Airbnb is more than 2M and taking into consideration that there is an average of 3 listings per host, we get that there are around 700,000 hosts so far, and this number is quickly growing . Airbnb users are not like a typical tourist, they are looking for unique and adventurous experiences.

This year, 700,000 people have stayed at an Airbnb place in New York, spending $800M. With New York’s hotels being 80% booked, we see that this industry is not a zero-sum game – Airbnb’s winning does not imply that hotels lose. Airbnb aims to be the world’s leading community-driven hospitality company, which doesn’t stop at accommodation. In the contrary, it starts there.

Through accommodation Airbnb can easily shift into home cooked meals, local guides, cleaning services for hosts – any concierge-type or value-added services.

Media, entertainment and communications industries have been the most impacted by the sharing movement.

Two decades ago, an aspiring artist needed a bundle of money to make a film. Today there are alternative ways of

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making and monetizing music. For instance, Spotify has popularized the act of listening to customized music without physically owning an asset. Just as artists are finding alternative ways to create, consumers are discovering alternative ways to consume.

requires fewer valuable possessions – and fewer worrying about them. For example, if you only need to drive you car just for a few times per month, a car may be unnecessary for you and not having to deal with car insurance and maintenance issues could be a big benefit.

Regarding the future of the collaborative economy system, theories vary and no one can tell with certainty how peer-to-peer networks will affect and alter our society and economy in the forthcoming years.

Concluding, the sharing economy has been moving forward by exciting new technologies. The ease with which strangers can now connect, exchange, share information and cooperate is transformative. That’s the promise of the sharing platforms about which virtually everyone agrees.

However, the sharing economy does promise some advantages which could definitely have a compounding positive effect as more and more people get involved in this process. One important outcome of a society built on sharing goods and services is the ability to arrange things faster, easier and on your terms. For instance, in case you need to close your business, coworking -which means working in a shared environment- allows you to leave your current space without having to deal with contracts and spending money and time on lawyers and meetings. Furthermore, sharing economy allows you to get and use the things that you need from someone else and in this way live a life that

However, technologies are only as good as the political and social contexts in which they are employed. Software, crowdsourcing, and the information commons give us powerful tools for building social solidarity, democracy, and sustainability. We now have a different task: to build a movement to harness that power.

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TECHNOLOGY Robinhood Stealing from brokers, giving to investors

Diogo Conceição and Miguel Moita de Deus

If you’ve ever invested in an asset or at least know how trades work, you’ve probably realised how commissions are a big deal to any investor.

Just think of investing $1000 in a stock, knowing you have to pay $15 for the purchase and another $15 for the sale.

That means you have to make 3% just to break even and, considering thousands of professional portfolio managers sometimes yield 5% a year and get praised for it, you’re likely thinking either how good an investor you 44

believe to be or how much brokers can rip off small time investors.

In effect, commissions are the bedrock of the typical broker’s paycheck and, due to immeasurably high demand for brokerage services especially by those who can worry less about those $30 -, prices in such services ought to remain stagnant, hindering the market for those who have small amounts to invest.

Until now.

Enter Robinhood: a Palo Alto based Fintech firm that has

been giving the big names of the brokerage industry a run for their money by providing commission-free brokerage services.

Robinhood Markets presents their company as “a stock brokerage built with the needs of a new generation in mind”. Is it an online brokerage focused on teenagers trading stocks in their lunchtime or in between catching Pokémon in the middle of the street?

The answer is no. We bet our grandmothers could generate

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insane profits with this app, betting on Apple just because their phones have Apple’s iOS. Here’s the catch: Robinhood holds no trade commission and has a userfriendly interface. It appears to be a trading game and not a serious platform but its impact on a new era of investors seems to be humongous. By allowing traders to buy and sell stocks without any additional costs, it reduces the risks of the investments and attracts everyday people to learn more about financial markets in order to generate a different source of income, in a generation of increasing youth unemployment.

In all its greatness, the app does have some problems conquering experienced traders, due to the simplicity of the analysis tools offered.

However, such a conundrum could turn out to be an asset.

According to a WSJ article by Daniel Huang, by 2015 around 80% of the Robinhood clientele were millennials - the demographic between 18 and 29 - with an average age of 26. So, essentially, the app found itself a target demographic. A niche market that was ripe for the taking but remained unclaimed as Wall Street was viewed as the place for quant jockeys, politicians without a job or Harvard professors who wanted to earn an extra

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buck.

With Robinhood, millennials can finally realise equity markets aren’t boogie monsters that want to control everyone’s lives from a small, secretive cabal of investment bankers and politicians. More importantly, millennials can finally understand the dimension of global trade and why it’s hypocritical to make “Resist Capitalism” posts on TWTR or FB. And it gets better.

According to a poll crafted by Gallup in April 2016, only 52% of Americans said they own stocks, which might be a huge number for the average European, but considering 2007 hit a record high of 65%, traditional brokers could take a big hit if the evolution stays negative. For Robinhood, however, market outlooks might not be so gloomy since, one, their target client is in expansion and, two, middle-class Americans might feel more enticed to try out a free commission broker instead of investing in real estate, for example.

So by now you might be wondering “If there is no trading fee, how do they manage to generate profits?”.

That is the beauty of their whole operation. They don’t

need to retain portions of investors’ profits to generate their own. Robinhood uses traditional approaches of online brokers such as: accruing interest from customers’ uninvested cash balances, collecting interest from customers who choose to use premium features of the app and through their most advanced version: Robinhood Gold. Regarding the latter source of income, it allows users features such as: Pre & After Trading Hours, Additional Buying Power (using the equivalent of a line of credit for the stock market) and Bigger Instant Deposits (eliminating the three day period for funds from users’ bank into Robinhood).

This business model has already paved its way into Europe and the rest of the world.

Dutch company DEGIRO has started developing a similar service, called DEZIRO, which generates profits from advertising and already has an early access mailing list.

DriveWealth lets clients invest in fractions of a single stock, enabling anyone to buy a fraction of NASDAQ:GOOGL or NYSE:BRK-B if they so wish. Big companies in the industry such as Fidelity Investments or OptionsHouse have pushed to create promotions that include having a certain amount of 45

TECHNOLOGY free trades upon entry or having a limited credit for free trades in a specific asset class.

In a conclusive tone, it’s important to understand markets change, be it stocks or clientele.

If someone had told Vasco da Gama that in 500 years mankind could buy essential consumer products from China with free shipping, even he would give a big laugh. Truth is, we can. If someone had told David Ricardo that in 200 years an investor could go behind bars for insider trading, he would have gasped in disbelief.

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Truth is, we can. If someone told you 10 years ago that you could, today, invest in stocks for free you might have reacted a tad like the former personalities. Truth is, you can. With Robinhood.

Bottom line is that this mobile app really is revolutionising the brokerage industry and it is attracting big money from investors looking to be attached to the frontline of online investments.

Robinhood raised $66M in 3 rounds from 25 investors, that ranged from VC firms such as Index Ventures and Google Ventures to celebrities as Jared Leto, Snoop Dogg, Linkin Park and Nas.

So, we are heading into an era where you can find artists and other role models trading stocks on their smartphones, potentially generating higher returns than analysts on an investment bank. An era where checking your Facebook feed and your portfolio’s performance can be done in the same swipe while in one’s commute.

At the end of the day, it all comes down to cutting the middleman. Thus, don’t call your broker, call your dad instead to open a Robinhood account.

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"What we’re after is something much more basic that can provide access to the public markets for everyone, not just for people with lots of money."

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TECHNOLOGY Revolution vs Evolution Francisca Vera and Leonardo de Figueiredo Evolution is abundant; humans are a product of it.

Bona fide innovation or revolution, however, is not a natural process. It requires disruptive thinking, creative minds, the willingness to take risks and time to develop — albeit revolution takes effect abruptly. The question that both companies and investors are facing, nowadays, is whether or not innovation is an absolute necessity or whether evolution is truly the cornerstone of progress.

Evolution is defined as: gradual change, adaptation, progression, metamorphosis.

It is present in all facets of life and is becoming increasingly common in the marketplace, as well as throughout technological environments.

A field of study where evolution is considered a hallmark is biology, the biological world is one that is ever evolving and one that has shaped who we are as people and how we interact, with the physical world

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around us. However, in this technology crazed modern age, that we live in, the word evolution has in a sense evolved to befit a different genre; technology. Futurist and technologist R.S Amblee said it best - “Technological evolution is the result of our own desire to lead a better life”. It is this refined desire to live a better life, combined with economic based incentives, that pushes technological evolution.

Human beings have witnessed evolution in various different aspects of their lives: from communication mediums, to transportation, to technological spheres, as banal as plumbing. Just as biological matter is in constant evolution — from a consumer’s point of view, so are goods and services found in the marketplace. The gradual evolution in consumer goods has led to the societally shared idea that the consumption of new goods and services is not

only beneficial but also, in a sense, necessary.

The evolution of technology, however, is different from its Darwinian counterpart in the sense that it is slowing down rapidly across various different industries. Have cars really evolved that much over the last 30 years? Perhaps they are more fuel efficient and go from 0 to 60 slightly faster, but, for the most part, revolution in this industry is clearly slowing. Many other industries are facing similar complications with evolution.

Dissimilar to evolution, revolution is not innately shared between biology and technology. Whilst evolution is slow, natural and linear; revolution is fast, harsh and disruptive.

Technological revolution can be simply conveyed as: a dramatic social change in important structures brought about relatively quickly by the introduction of some new technology. The technological landscape has borne witness to many iconic world

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changing revolutions such as: AC power, the motor car and the even more contemporary social network; these are the bold revolutions that “exclusively fuel” our advancement as the human race — that is what most believe, at least. Throughout history it has been radical change that has claimed the front pages and, to this day, radical change still casts its long imposing shadow over its incremental counterpart.

Due to this fact, large corporations, investors and consumers alike are in a frenzy to discover the “next big thing” — El Dorado.

Perhaps, this is some obscure form of and or bi-product of the craving that millennials have for instant gratification.

Having defined revolution as well as evolution, the investigation of whether or not there are grey areas between the two exists becomes important. In spite of the stark contrast between revolution and evolution it has been discovered that a synthesis between the two exists, aptly named revolutionary innovation.

Such innovation can be observed in various forms and across various different industries.

A pertinent example of this is

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Uber. Uber took two forms of technology that had been evolving over the years and combined the two to form a technological revolution which has utterly transformed the private transportation industry.

This revolution caused a major buzz around the new model which subsequently drove the Silicon Valley based company to approximately $50BN. This example perfectly exemplifies the fact that the conjunction of the two previously discussed forms of technology can truly generate profitability.

Yet, another example of revolutionary innovation is the aforementioned automobile industry. It hasn’t evolved much over the last few decades but, in spite of this, over the next few years we as consumers might see the introduction of autonomous fully electric vehicles enter and eventually dominate the automobile industry. To witness this change would be to witness a product of revolutionary innovation. Autonomous EV’s would be the combination of technologies and industries that have been steadily evolving over decades (such as: the automobile industry, machine learning and battery technologies) in order to

bring about a significant revolutionary change that could completely transform the world.

Apple is the largest company in the world, based on market cap, at the time of this publication, and furthermore posted a $9BN net profit for 2016. They launched both iTunes and the 1000 songs in your pocket iPod in 2001, as well as the iPhone in 2007. These 3 have been key value drivers for the tech giant, representing years of technological revolution.

One question remains: is Apple still creating revolutionary products, or is it just evolving existing ones?

Apple is conceived as an innovative company.

However, recently, people started claiming that Apple stopped being able to reinvent products and drive true innovation. Many are claiming based on the fact that the design of the previous 3 iPhone models have been quite similar. A priori it isn’t fair to state that Apple stopped being an innovative company just based on the design of the iPhone 6, 6s and 7. The changes under the bonnet have been quite revolutionary, especially with the introduction of the Apple A10 Fusion processor.

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TECHNOLOGY Beyond lies an underlying truth.

The American multinational, founded in 1976, can’t always be launching revolutionary models, otherwise everything new would be considered completely innovative and creative.

Beyond lies an underlying truth.

The American multinational, founded in 1976, can’t always be launching revolutionary models, otherwise everything new would be considered completely innovative and creative.

Besides, in order to revolutionize the industry the company has to simultaneously cater to the customer's needs and, to do so, it has to be launching products continuously.

Second of all, revolution

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takes time and, specially in technology, research.

It took Apple years to develop 3D touch technology, which is now present in iPhone 6. However, like any other company, Apple wants to be profitable and it can't be only launching projects when they think they are going to be revolutionary, since that would imply that product launches would only occur every few years. Apple has concluded that a single company can thrive by not religiously choosing between either evolution or revolution nor by only applying the concept of revolutionary innovation.

This tech giant chose to apply revolution as its main focus at first and then transition to

an evolution based business model in order to perfect its products and services and so far, financially, this model has proven itself to be efficient.

In a world where revolution only materializes occasionally and where product evolution is stagnating it seems clear that perhaps a combination of the two (in order to produce revolutionary innovation) is best; however not strictly necessary at least in terms of driving profitability.

There seems to be no right or wrong answer to this debate but interesting hybrid answers are emerging and shedding new light on which could be the path that will be adopted by companies around the globe.

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Change is the law of life.

And those who look only to the past or present are certain to miss the future.

John F. Kennedy

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Willful Blindness Across Business, Media, Policy and Regulation

Tomás Ambrósio

"I am doing this in the interests of the company even though I am not aware of any wrongdoing on my part". This statement belongs to Martin Winterkorn, former CEO of Volkswagen AG, at the time of his resignation, after the emissions scandal involving the company.

“I do not know”, “I do not remember” and “I was surprised” were some of the several ‘It-was-not-my-fault’ excuses given during the parliamentary inquiry commission into the collapse of Grupo Espírito Santo, in Portugal.

Unfortunately, these cases are not unique. A vast array of wrongdoing and misconduct can be found all over the world, across several industries, affecting large parts of our society, from 52

media and businesses to governments and regulators.

The grounds of those cases might be explained by the Willful Blindness, which happens when information available is simply ignored.

When an individual is willfully blind, he is in the presence of information that he could (and should) know, but he chooses not to as it makes him feel better not to know.

This is not a case of ignorance, considering that willfully ignorant people are fully aware of facts, but refuse to acknowledge them.

As famously stated by Upton Sinclair: "It is difficult to get a man to understand something, when his salary depends upon his not understanding it!".

Historically, the willful blindness term first appeared in the 19th century in

Criminal Law to describe a situation in which a man seeks to avoid liability for an illegal action by intentionally keeping himself uninformed about facts that would render him liable.

But why do people choose to go blind?

There are psychological, social and structural reasons to justify why people do not see what should have been noticed. People simply turn a blind eye in order to avoid conflict, feel safe and reduce the anxiety caused by the sense of responsibility. By using numbers and euphemisms to distance themselves from the problem, individuals choose to ignore the long-term consequences of their behaviour.

Researchers found that when

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individuals read, they focus on the information that supports their current opinions, paying less attention to information that challenges their views. This behaviour is called the confirmation bias, as individuals tendentially recall information in a way that approves their prior beliefs, disregarding the alternative points of view.

This is in line with the ‘hostile media effect’, a perceptual theory of mass communication that shows the propensity for individuals with a strong pre-existing attitude on an issue to perceive media coverage as biased against their opinion.

Yet, in a recent survey, European and American Executives acknowledge that they are afraid of the conflict that raising concerns can bring, with 85% admitting that they had issues or concerns at work that they were afraid to raise.

Besides that, by isolating different divisions within the same company, organizational structures are increasing the perceived distance between employees and its hierarchical superiors and diluting the direct responsibility that ignoring important information should bring.

In the same way, consumers avoid evidence about the

working conditions in which their purchased goods were produced in order to keep their lifestyle.

Outsourcing activities are growing in today’s gig economy and are also appointed as a justification for willful blindness. In fact, both the subcontracting and the supply-chain complexity increase the likelihood of a company becoming blind to how work gets done. Several examples have been brought to the public knowledge in the last few years, such as the children labour exploitation by Apple’s Chinese suppliers or the Rana Plaza collapse in Bangladesh, which increased the discussion around the corporate social responsibility across global supply chains.

As already mentioned, this is not an exclusively Corporate Governance problem, raising issues across all the activities of our society. The Financial Sector, for instance, is one of the most criticized, as a haven for willfully blinds. In fact, by creating a specific industry jargon, which seems to imply several technical details, the Financial Industry typifies the men’s need of transforming simple concepts in complex issues in order to have an excuse for ignoring problems. As a matter of fact, financial innovations such as securitization and derivatives

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were created to hedge risk, but they have enabled financial institutions to follow riskier behaviours instead, hiding the recklessness in the increasingly complex and muddy Financial System.

In fact, the subprime crisis showed the world the blindness of individuals, companies and regulators.

The Financial Industry deregulation that took place in the 80’s and 90’s, led to the popularity and wide use of complex and risky derivatives, which culminated with a real estate bubble and the explosion of subprime mortgage lending. However, none of these developments were unknown. At least, a few economists, government officials and investors were raising voices against the frantic speculation that would end up in disaster. The home buyers were also blind if we consider that many were simply buying houses they could not afford.

The Financial Services Industry is not the only one affected. One of the most impressive exposures of the 2010 documentary Inside Job, was the prevalent conflict of interests in universities, among academic “experts”. Without disclosure requirements professors are accepting paid and tailored academic publications, media appearances, and lobbying 53

TAKE A CLOSER LOOK INTO... activities. Apparently, universities have chosen to ignore the conflict of interest that is obviously raised with these relationships.

The question that might be on your mind, right now, is whether ignorance is a choice. Is it imposed?

Despite not being a fan of conspiracy theories, I am aware that the internet is helping propagate ignorance, as a place where everyone has a chance to be an expert, which is creating opportunities for companies to deliberately spread ignorance. Indeed, “in the land of the blind, the oneeyed man is king”.

In 1995, the first steps in a new field of science had been made by Robert Proctor, a Stanford Professor who studied the culturally induced ignorance or doubt. The Agnotology was born as he empirically studied how the tobacco companies denied the addictiveness of nicotine and the harm from cigarettes for decades.

Recent examples, such as the American Football League 54

denial of concussions’ harm, show that ignorance is not a thing of the past. On the contrary, in the information age, a lot of “spreading doubt news” are appearing. The recent Facebook fake news controversy shows both the willful blindness and the induced ignorance problems.

During the United States election campaign, stories announcing that the Pope endorsed Donald Trump or that Bill Clinton raped a minor appeared in the Facebook feeds as real.

Since the election’s results, there has been a fierce debate about whether the fake news could have swung the election to Donald Trump. Mark Zuckerberg described it as “a pretty crazy idea”. Was he being willfully blind? Maybe. Later on, he published on his Facebook Page: “This is an area where I believe we must proceed very carefully though. Identifying the ‘truth’ is complicated.

While some hoaxes can be completely debunked, a greater amount of content, including from mainstream sources, often gets the basic idea right but some details wrong or omitted. An even greater volume of stories express an opinion that many will disagree with and flag as incorrect even when factual. I am confident we can find ways for our community to tell us what content is most

meaningful, but I believe we must be extremely cautious about becoming arbiters of truth ourselves”. By the way, The Pope already denounced fake news as a sin.

I have started this article mentioning last year’s Volkswagen emissions scandal. However, evidences that European authorities knew that car manufacturers were cheating official emissions tests as early as 2012 raise questions about why more was not done to probe the issue beforehand.

In the same way, and just picking an example, the documentary Food, Inc. showed the corporate farming in the United States, concluding that agribusiness produces unhealthy food, harms the environment and abuses both animals and employees. However, nothing really changed since the film’s release eight years ago.

To sum up, is not willful blindness ubiquitous? From climate change, gun production or politicians’ campaign funding, we can find examples of reckless behaviour everywhere, but our society seem to consciously ignore it.

Nevertheless, as noticed by Albert Einstein, “those who have the privilege to know have the duty to act”.

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Engineering Expectations Forward Guidance

Andrey Dmitriev

In a certain sense, space travel might be more straightforward than conducting monetary policy.

Of course this is an overstatement in so many dimensions. After all, the greatest minds of the planet with access to significant resources are still struggling to orchestrate the illusive flight to our nearest planet, while monetary policy is conducted every day.

However, building rockets has a slight advantage over inflation-targeting, as it relies mostly on the laws of physics, which have been, by far, much more successful at predicting outcomes than the laws that are evoked by social science (in their respective domains). When a rocket launch malfunction occurs, engineers can trace down the problem to a flaw in their models or an unpredicted event that changed the outcome predicted by their 56

models, such as a defective part or even sabotage. When the models are altered or a certain process becomes more strictly controlled, the following launch tends to be more successful, until another problem shows up.

anything new and, the latter comment, might as well have been made by a disenchanted undergraduate student. The startling detail is that the paper was written by the Chief Economist of the World Bank, Paul Romer.

In the realm of monetary policy-making, matters are far from being this clear.

There is, of course, a general consensus among the most relevant institutions regarding the underlying macroeconomic theory for monetary decisions.

Nonetheless, dissenting voices are becoming ever more frequent.

Aside from the discussions regarding the main assumptions of modern macroeconomic theory, monetary policy-makers have found themselves facing a situation which was largely unexplored in theory – reaching the zero lower bound – that is, it became no longer possible to further reduce interest rates in order to stimulate economic activity, as these closed in on zero. In terms of our parallel with space travel, this might be the equivalent of approaching a strange cosmic phenomenon, where it is not clear whether the laws and theories we’ve used to get so far will continue to apply.

The most noticeable example came about in September, this year. A paper titled “The Trouble With Macroeconomics” sent shockwaves throughout the economics community and angered numerous fellow colleagues of the author. The paper started with: “For more than three decades, macroeconomics has gone backwards.” and featured quotes such as “Assume A, assume B, ... blah blah blah ... and so we have proven that P is true.” Such critiques aren’t

Along with this unconventional situation, came unconventional monetary policies. The Bank of International Settlements defines these as being balance sheet policies

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(otherwise known as quantitative easing), negative interest rates and forward guidance.

Unlike our spaceship, which can avoid the awkward phenomenon by moving in another direction, monetary policymakers have no choice but to apply whatever tools they have to pull the economy out from its dire state, as time only moves forward.

As these policies have been applied in recent years, the break of reality away from theory has become even more evident. The best example is given by forward guidance, the least explored of the 3 policies – a quick search shows that different institutions still give different definitions and explanations of how this policy works –, that arose from central banker’s awareness that not only the changes implemented by their policies will have an effect on the markets but also the way these changes are communicated.

Rocket scientists engineer structures; economists are now attempting to engineer expectations.

The importance of communication was not always clear among central bankers. In fact, quite the

opposite was believed – the public’s expectations were not to be steered, they were to be surprised. Otherwise, policies would be ineffective, or so did the models predict.

Also, policymakers wanted to avoid precommitment by as much as possible, as unfulfilled promises would make them run the risk of losing credibility, a highly valuable resource in this field. This framework of thought gave central banking and central bankers a rather interesting aura.

Until the 70’s, central bankers communication was an almost mystic act and it was reduced to the minimum. In 1981, the Swiss economist Karl Bruner jokingly wrote that “Central Banking (…) thrives on a pervasive impression that [it] (…) is an esoteric art. Access to this art and its proper execution is confined to the initiated elite.”

However throughout the 80’s and 90’s the attitude among academics towards central banks secrecy became increasingly critical and attention started to shift from solely the control of interest rates to the formation of market expectations as well. At the time, even the thought of this was groundbreaking.

Princeton economist Alan Blinder considered it to be a “revolution in thinking”.

In a speech in 1988, Alan Greenspan, the impersonation of esoteric mysticism in central banking, said “Since becoming a central banker, I have learned to mumble with great incoherence. If I seem unduly clear to you, you must have misunderstood what I said.”

By 1994, he had significantly increased his communicativeness, showing that the change in views amongst academia, had reached decision-making in central banking.

Still in the 90’s, several central banks, throughout the world, started adopting innovative practices when it comes to communication.

Paul Volcker, practitioner of the esoteric art of central banking

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Some out of pure necessity, for which policy alternatives already became scarce, such as for Japan, which was already in the midst of a 57

TAKE A CLOSER LOOK INTO... stagnation crisis that went back to the early 90’s. By the end of the decade, the Bank of Japan was already playing with public expectations by promising to leave interest rates at zero “until deflationary concerns subside”. Only a decade later would this practice be coined “forward guidance” and Japan would still be having the same issues…as well as in the following decade.

Other central banks started to explore the benefits of increased communications, as a means to increase policy effectiveness.

The pioneer was the Royal Bank of New Zealand (RBNZ) in 1997, which started to publish a forward projection of the 90-day interest rate, as well as comments on the policy outlook, discussion of risks and potential alternative scenarios. The newly founded European Central Bank (ECB) also operated with much more openness than the most important central banks in the developed world.

As more central banks began adhering to increased communicativeness and policy forecasts, it became clear that this was a new tool that policymakers were consistently recurring to.

Academic interest, in this practice, soared and 58

numerous studies were subsequently made in the XXI century on the effects of these policies. Empirical evidence showed that increased communication decreased financial volatility, increased policy predictability by the public, and also, most importantly, that different strategies of communication provoked different economic performances, that is, evidence showed that central banks could literally steer economic activity by adopting particular ways of formulating expectations.

Although, in this case, empirical studies were able to prove the benefits of this policy, it demonstrates a risk that central bankers take when trying to innovate or when these have no choice but to act. It is the equivalent of launching a manned rocket set to reach Mars and only starting to figure out the fundamentals of space travel after takeoff.

After the Great Recession and the European sovereign debt crisis, interest rates in the world’s most developed economies approached the zero lower bound and some went beyond into negative interest rates such as the ECB did in June 2014 and Japan in January 2016. Central banks’ maneuvering space had, therefore, shrunk to unprecedented levels and policymakers turned their

attention to unconventional monetary policies.

By this time, 2 types of forward guidance had been outlined. The first one is called Delphic forward guidance, named after the mythical Delphic oracle which is the one pioneered by the RBNZ. By Delphic forward guidance, it is meant that the central bank delivers a forecast and also its behavior in response to that forecast as well as potential alternative developments, that is, the bank presented its reaction function.

The second type is called Odyssean forward guidance.

It got its name from a renowned scene in Homer’s Odyssey, in which Ulysses asks his sailors to tie him to the mast of the boat so that he wouldn’t be able to follow the siren’s call. In the same fashion, central banks commit themselves to keeping the interest rate low for a period that is longer than necessary, therefore promising to resist the urge of following the call of macroeconomic theory.

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By adopting this type of policy, the central banks could, by influencing the public’s expectations of the future, after their current behaviour. Simply the term “forward guidance” is many times mentioned to reference a particular type of forward guidance.

The ECB more often refers to the first type while the Fed to the second, reflecting their different mandates, since the first one contributes for price stability while the second one allows (in theory) for actual changes in economic activity which would enable an increase in employment.

Just as with the ancient Greek epic, it has become questionable whether Odyssean forward guidance has any base in reality. Even though it is, in fact, one of the three main tools of monetary policy makers nowadays, its applicability, effects and ways to measure its effects are extremely vague.

According to Gauti Eggertsson and Michael Woodford, 2 pioneer academics in this field, this policy would work by altering public’s expectations regarding inflation, through the promise to keep a loose monetary policy for longer than needed.

As a result, the public’s expected inflation would temporarily rise, since

keeping nominal interest rates lower for longer implies letting inflation increase beyond the bank’s long term goal for a period of time.

With higher expected inflation and nominal interest rates close to zero, the real interest rate is also expected to decrease and therefore lead the public to save less and consume more, therefore stimulating the economy.

However, since central bankers, unlike Ulysses, aren’t physically restrained from acting in another way, this process would only work in case there would be full confidence on behalf of the public in the promises of the central bank. That is, that the central bank wouldn’t increase rates once economic activity would increase again.

This in turn, goes against another theoretical conclusion, which is that of the time inconsistency problem, according to which, it wouldn’t be rational for the central bankers, once the economy has recovered, to keep rates low and therefore run the risk of overheating.

theoretical framework. A working paper by the Federal Reserve Bank of St. Louis explained the failure simply with the public’s disbelief in economic improvement in the near future. Turns out the public does not interpret information as the Fed wants it to.

As you can see, the World Bank’s Chief Economist may have some reasons to feel frustrated. Critiques toward the economic establishment will probably not decrease in years to come and credibility in our main policy-making institutions might continue to decrease, with their political consequences, of which we are now well aware of.

However, this field is one where critical situations arise unexpectedly and have to be faced with whatever means there are available at the moment. In our complex reality, it is particularly difficult to bring positive change by means of monetary policy. This is not rocket science after all.

Even more entertaining than the complex theoretical assumptions, was the fact that when the FOMC intensively applied Odyssean forward guidance between 2012-2015 and failed to reach its objectives, the explanation had nothing to do with the

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Financial Wizardy? Don’t think so...

Deconstructing the idiosyncrasies shared by two of the most prolific con-artists in the financial history

Diogo Neto and Simão Serrano

“I landed in this country with $2.50 in cash and $1 million in hopes, and those hopes never left me.”

Charles Ponzi Ponzi. Charles Ponzi. Some might just label him as one of the most widely acknowledged con artists in the world’s financial history.

Us at NIC-UD? Assessing his worth as a salesman, although an unethical one, we cannot deny that he is one of the most skillful players in this “craft”. Wicked and certainly ungodly, but brilliant in his own way – and we are about to show you why. After all, the average Joe cannot pull off one of the greatest financial schemes that we, as a civilised society, have ever witnessed.

Best known for the financial crimes he committed when he conned investors into 60

giving him millions of dollars and afterwards paying them with other investors’ money, the impact that led to the immensely spread introduction of this fraudulent business model still marked its footprint in some of nowadays’ businesses – such as certain “network marketing” companies and HYIP’s (most of these high-yield investment programs and companies using this business model are registered in offshore bases which guarantee anonymity and thus making it harder to dismantle them). So much so that the rather famous “Ponzi scheme” is named after him.

Moreover, records show that at the time he was arrested, in 1920, he had amassed $7M. However, should the buying power be converted to the current year, 2016, one can gauge a whopping $87M fortune.

Back in 1918, after being caught forging a bad check and smuggling Italian immigrants across the border into the US, subsequently spending a total of 5 years in prison, he finally got the idea

for the scheme that dazed the world in the following years. He would send money to his associates in other countries who would buy IRCs (international reply coupons) and ship them back to the United States.

Afterwards, he would exchange them for stamps worth more than what he had paid and sell them later on – reportedly averaging a staggering 400% Return on Investment per sale.

Notwithstanding, yet unsatisfied, Ponzi started seeking investors to turn even higher profits. You see, in his point of view, one could leverage other people’s cash to astounding figures with virtually no risk of forfeiting his own assets – this being a fairly new concept to the average citizen, enabling him to beat other forms of investing. Howbeit, his evil genius took charge when noticing he could capitalise on the momentum created by the IRC investment hype, rather than actual IRC investments. Already avowed as quite the financial wizard, he started promising investors outrageous 50%

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ROIs in 45 days and even 100% ROIs in 90 days! That way, by announcing he was able to double one’s investment in 90 days, he could pay them using money from other investors, instead of paying them with actual profit. His scheme was indeed triumphant. Ponzi’s manipulation system reportedly made him watch colossal amounts of $250 000/day sprawling in his safes. Again, adjusting to inflation, the worth of these figures in 2016 is roughly $3M/day. One can assume that the success of this scheme was rooted in financially uneducated minds, incapable of deconstructing such promises – which is unquestionably harder nowadays that the world has already seen many of these financial scandals. However, there is one particular individual, whose name still resonates with millions all over the world, that tried to defy what one might consider the fundamental principles of investing and, for a lack of a better concept, common sense.

Ponzi’s Impact in the 21st Century As people become increasingly educated, it becomes more and more grueling to perpetuate this sort of schemes. Then again, the wraith of Ponzi was yet to

bewilder the world once more. It all began in early years of his career, when a man who went by the name of Bernard Lawrence Madoff, later known as “Bernie” Madoff, founded a company Bernard L. Madoff Investment Securities LLC -, which started out as a penny stock trading company. In short, and since you may be wondering, penny stocks are stocks trading below $5/share and more often than not, the companies that issue them lack trustworthy, up-to-date information that would otherwise be available to the public. However, to some, the potential profits generated by the offset of the low liquidity inherent to the extremely low price per share, counterbalance with the risk taken - hence making them highly speculative.

Meanwhile, the firm grew bigger and eventually began using disruptive computer based information technology which was ultimately the quintessence for the development of NASDAQ, the second largest stock exchange in the world in terms of market capitalisation. By the 80’s, Madoff’s company was trading approximately 15% of the total transaction volume of NYSE listed stocks in the United States. Nonetheless, the largest asset of Madoff’s Securities firm was its investment management

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division (the so-called hedge fund) and twinkling, the scheme was about to be born.

Contrary to common sense, instead of toning down his conspicuous and deceptive avows, Mr. Madoff preposterously claimed that he could deliver his clients a steady 18%-20% ROI regardless of market performance. This clearly begs the question: How could he possibly attain such farfetched unswerving return yields? Obviously, our friend Bernie across the pond had the answer and, to an extent, it was quite simple. You see, Mr. Madoff would state his strategy consisted of holding blue-chip stocks and then hedging them using options.

Briefly, blue-chip are stocks of financially stable companies with large market capitalisation and, therefore, incredibly reliable stocks with outstanding records of paying steady or rising dividends.

However, even though this type of stocks holds very low risk, they still carry some form of inherited chance of failure. Thus, Mr. Madoff would reduce the risk using options which assured that he could buy or sell a certain security, provided a previously agreed price, consequently certifying that the price of a certain financial instrument would be constant regardless of 61

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Yet, Mr. Madoff’s stratagem was far more complex.

During his time at Wall Street, he managed to associate himself with some of the most influential and powerful people in the banking system, whilst strengthening his bonds to Washington by contributing to campaigns of prolific senators and other government members.

Furthermore, he and members of his family were actively involved in regulatory agencies such as the National Association of Securities Dealers (NASD), for which he was inclusive part of the board, the Securities Industry and Financial Markets Association (SIFMA) or even

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the Securities and Exchange Commission (SEC) itself. On top of being a trustworthy banker, Mr. Madoff knew exactly how to market his own product – he made it exclusive. That way, he could leverage the psychological factors associated with “the fear of missing out”, alongside the seemingly perception of financial wizardry.

As more of a side note, Thorstein Veblen, a Norwegian born economist who is best known for describing the concept of conspicuous consumption, showed that one oftentimes spends money to acquire luxury goods or services to public display a certain level of power, whether that is financial power or social superiority – and that was

exactly Madoff’s idea. By accepting only a handful of clients with a fully-realised status in the wealthy individuals’ community, he bestowed his services with a high-class elite standing that would make it even more appealing than just the returns themselves. So, in summary, by being a Madoff Securities’ client, people would gain power conjugated with extraordinary high yield returns. It was a win-win situation.

However, some already believed his prerogatives were false and that all of his business was based on a fraud, just like it was corroborated in December 2008. One should also state that 2008 was not a random year, as it turned out to be an appalling year for the global

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economy, to say at least.

The subprime crisis along with the collapse of several North-American banks such as the Lehman Brothers or Bear Stearns (acquired by JPMorgan Chase) and numerous others publicly traded banking-related institutions, like Fannie Mae, sunk financial markets all over the world. For instance, the S&P 500 lost around 50% of its value. Amidst financial havoc, clients began to worry about their investments and started to pull–out their money from Mr. Madoff’s firm. According to The Guardian, when clients demanded a total of $7BN, Bernie only possessed $200M to $300M. Obviously, knowing that Madoff had only made money through acquiring new clients or convincing old ones to keep him in business through endless lies, the cash received was always moving to fulfil older obligations.

Evidently, a withdrawal of this size completely and utterly dries up any type of backup money that was possibly stored to cover situations of this nature and due to that, Mr. Madoff was wrapped with commitments that he was unable to deliver and eventually turned himself to the FBI. He was later charged with 11 counts

of fraud, money laundering, theft and perjuring and convicted for 150 effective years in prison. Even though Madoff defrauded his clients in $65BN, the victims were only able to recover a fraction of that amount. In fact, according to “The Madoff Recovery Initiative” led by Irving H. Picard, the recoveries and settlement agreements amount to $11.242BN up to November 2016.

All in all, one could say there is no way of predicting when or how we will witness the next “big fraud”. As the world evolves, people adapt their strategies to their end goals – regardless of how unethical they might be. At the present times, every “no-risk investment” is easily deconstructed using elementary concepts of business models and accounting methods.

Therefore, instead of making “100% ROI in 60 seconds” ads and other types of wondrous yet unrealistic promises, the modern con artist of the 21st century is now coming up with more up-to-date deceiving methods, capable of swindling through hoax perpetration practices – one of the most common being pyramid schemes, falsely marketed as legal multilevel marketing companies. Multi-

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level marketing and pyramid schemes (business models that recruit members via a promise of payments or services for enrolling others into the scheme, rather than supplying investments or sale of products or services) are becoming growingly popular in the U.S. – so much so that according to records, if put together, they registered $36.12 BN in retail sales in 2015. In spite of the uncertainty in regards to which companies operate legitimately, there is the recent (July, 2016) Herbalife controversy in which the company agreed to pay $200M to the FTC in a settlement due to the complaint filed by the same commission. Within such assertions, you can clearly sense the blistering, walking right up to the line of outright calling it a pyramid scheme in: “Herbalife is going to have to start operating legitimately.”.

Nevertheless, the company neither admitted nor denied wrong-doing. At least, at the end of day, we can postulate in regards to the increasing ability of the average Joe to grasp the gist of unlawful and illicit business models, hence making it progressively harder for these companies to capitalise on ill-informed principles of marketing and accounting fundamentals.

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A Trumped Up World Is 2017 the year to be bullish on commodities?

Francisco Gonçalves and Madalena Ruivo with Mr. Trump at the helm of the United States?

Partisan opinions aside, Donald J. Trump has done a great deal for Glencore and the other giants of the mining and commodities industry. With investors stoked over the direction of the economy under a Trump presidency, the matter of fact is that most bets currently point to an upcoming, bullish 2017 for commodities.

The Bloomberg Commodity Index, for example, which dropped nearly 25% in 2015 its worst annual percentage loss since the financial crisis – is currently poised for its first annual gain in nearly 6 years.

As of mid-December of this year, the index was up nearly 11.5% yoy.

Assuming that we do not see significant shocks to oil prices in the near future, is there good cause for investors to be bullish on commodities

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Apart from precious metals, where price movements are in part a reflection of investors’ willingness to hedge and protect their portfolios against uncertainty and volatility, movements in commodities prices are largely determined by the more common, supply and demand model.

The distinction between the performance in precious versus industrial/base metals is an important one: for the year of 2016, it seems that not all commodities were created equal.

As of December 20th, for example, gold-exchange traded funds have seen 27 consecutive sessions of outflows – a record losing streak, as noted by Commerzbank.

Moreover, looking at the spread between the S&P GSCI Industrial Metals Total Return Index (which is up 20.76% yoy), and the S&P GSCI Precious Metals Total Return Index (up 7.07% yoy), it is abundantly clear that

industrials have led the race in 2016. The spread is similar (i.e. just over 10%) when considering movements in both indices from November 8th onwards.

As such, in the demand side, market sentiment is so upbeat that one of the dynamics of commodity markets has turned on its head, with prices for industrial metals (tracked here via the London Metals Exchange Index futures, or LMEX) rising alongside the dollar (tracked here via Bloomberg Dollar Spot Index). This is a rare trend, as prices for industrial metals, which are sold in dollars, move opposite to dollar movements - i.e. industrial metals become more expensive for non-US buyers.

As of mid-December of this year, the LMEX – which assigns weights ranging from

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1% to 45% to six different non-ferrous, base metals – had already seen its biggest gain (+12%) in 6 years, Bloomberg’s Dollar Spot Index also rising 3.9% in November and reaching its highest level in more than a decade.

The 30-day correlation at the time between the LMEX and the Bloomberg Dollar Spot Index was +0.29, in contrast to -0.6 this last July, according to data compiled by Bloomberg.

This is great news not only for construction stocks such as Vulcan Materials and Aecom, but especially for producers, which up until the beginning of November were fighting a two-front war against, on one side, a strengthening dollar, and on the other, the dwindling investor demand for commodities. Producers like Glencore are now set for a rebalancing of their bottom lines, after reacting to the slumping commodities’ market of 2015 by cutting output and reducing investment across the global scale.

As an example, note how futures on zinc have increased 74% this year.

Coupled with the recent dollar strength and the consequent weakening of emerging market currencies, it becomes clear how a mixture of lower expenses

(e.g. personnel) and higher selling prices have benefited the bottom line of mining companies. For a producer like Glencore, which has seen its stock rise +225% yoy, their recent decision to resume dividends and distribute $1BN to investors of the course of 2017 is immensely indicative of how the increasing commodity prices have helped the mining industry.

What can investors expect for commodities in 2017?

Firstly, there has been some uncertainty as to what Donald Trump will do once he takes up office in January of 2017 – a point which was recently noted by Andrew Sheets, chief-cross strategist at Morgan Stanley, who wrote that “like Schrodinger’s cat (…) [Donald Trump’s policies] exist in a state of being both pragmatic and radical, all at the same time.”

Whether you believe Mr. Trump will be able to put forth his “$1 trillion over a 10-year period” construction plan through a Republican, fiscally-conservative dominant Congress, the consensus is that inflation and US economic growth will accelerate in the upcoming year under a Trump presidency. The OECD’s own secretary-general, Ángel

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Gurria, also noted this much, pointing out in a report in late November that the promised tax cuts and boosts to spending could signal “(…) some prospect of the world exiting from this low-growth trap.”

In addition, the Federal Reserve, which decided to raise the federal funds rate at their last FOMC meeting by up to a quarter percentage point, – between 0.50% and 0.75% –, and their increasing optimism surrounding the direction of the US economy, of a strengthening labour market and a higher than expected acceleration in inflation, have all helped push investors away from bonds and defensive investments and into growth seeking ones.

Though the OECD warns that protectionist measures may partially erase global gains that would ensue from US fiscal stimulus, Trump’s promise to “rebuild our highways, bridges, tunnels, airports, schools, hospitals” has already delivered some much-needed respite to commodity markets.

There is more than enough evidence to suggest that commodity markets will to improve over the course of 2017 and away from the commodities nightmarish market of 2015.

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A Bubble in American Student Loans Maria Ana Mesquita

The overall economy benefits from higher levels of education.

Improving population’s education develops the whole economic well-being and prosperity, lowers retirement burdens and increases collective satisfaction – unemployment rate for American college graduates is 2,5%, much lower than the one for people with only an high school diploma.

The US expanded the access to student loans as an initiative to lead more people to get higher education but this initiative carried large risks, mainly default.

In 1965, Stafford Loan, a Guaranteed Student Loan, started as a private and public sector joint venture – as the private sector’s work was to provide capital, disburse loans and collect payments, the public sector’s was to define who was getting the loan, the loan’s maxima, the interest rate applicable, and protect the lenders against default, as well as pay interest on some loans prior to the students finishing their college 66

education.

Somewhere near 1990, the Federal Government adopted the Direct Loans program in which Stafford loans did not require a private intermediary.

Students started to borrow dependently on the college they attended.

The Direct Loans program is financed only by the government and its liquidity depends on the borrowing power of the Federal Government.

Since private lenders were almost removed from the Direct Loans Program, these entities created a market product named “ student loans” which differed from government loans due to the requirement of a creditworthy borrower or cosigner - they are essentially like unsecured consumer credit, but private loans cannot be discharged in bankruptcy. This type of loans do not allow access to initiatives to ease repayment.

The reality is that private loans contained 10% of

annual borrowing in the last decade.

Nowadays, the total outstanding student loan debt is $1,2 trillion (2nd highest consumer debt, right next to mortgages); the average debt per graduated person is $35,000 and one quarter of student loan borrowers are either in default or delinquency.

Higher student fees combined with more students enrolled (70% of them only paying with these loans) caused the stock of outstanding debt to triple.

The return on investment of higher education has been falling, median income has not develop the same way as the median debt. Actually, median wages only increased 1.6% since 1990 contrasting with the increase of 163.8% of median debt.

The economy is growing slowly and changing rapidly: universities are slow to adapt to what the economy needs and, for this reason, many students cannot secure employment that takes secure employment that takes advantages of their

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knowledge and it leads them to default on their loans.

income-based plans.

By now, the President Elect Donald Trump has not given many details about what he attempts to do but some guidelines had already been exposed by him. Trump stated that he wants to restructure student loans and aims to return student lending to private banks.

The forgiveness strategy will probably change too. Under the current plan, students’ loans are forgiven after a 20 years payment, the new proposal is that this mark alters to 15 years. This modification will, as the President Elect said, limit the government’s dependence on student loans’ profits.

Cap repayment will also be changed.

Nowadays, graduates pay 10% of their monthly income to loan borrowers, this percentage will increase to 12.5% for

repayment

He plans to punish schools financially if their students default on their loans - Trump says that colleges are the ones responsible if students

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can’t pay the loans. President elected also intends to cut college costs, since they increased 40% in the past 20 years and his administration would like to tax universities that fail to cut costs.

"If colleges refuse to take this responsibility seriously, they will be held accountable, including by reconsidering whether those with huge endowments deserve to keep those endowments tax exempt. We have a lot of power over the colleges. And they're not doing the job of cost cutting” - Donald Trump.

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South America A view on South America

Mariana Ruivo Nowadays, many European students choose to do their exchange semester in South America.

This poses an interesting question. What are these students looking for in this continent, so different comparing to Europe? To analyse this trend we should take a look at some countries, in order to find out what makes them so attractive. At least 2 should be considered in order to develop a conclusion. For that, let’s take a closer look at Colombia and Argentina, two countries that illustrate the Latin culture in their own way.

I was staying in a little village where tourism is the primary activity, Palomino, in Colombia. There’s nothing there, just hostels and hotels, since its main attractions are the beach and natural landscapes. Nearby, there is Sierra Nevada, a place where you can still find indigenous people that are not aware of the current development of the world and that live with the basic supplies that nature offers.

By looking at this picture, you can easily see how spontaneous these children are. In fact, I had never seen such facial expressions before. These families come from the mountain range to villages, looking either for food or supplies. They have never seen all the technology that we are used to, such as speakers, smartphones, televisions and so on. When first coming across this type of equipments it is undeniable their amazement and curiosity.

Besides, they speak a dialect barely understandable by others. Here, communication takes another form.

Cartagena is the most beautiful city in Colombia. It is full of history, being the preferred destination for any tourist for its colorful streets and gastronomy. Here, the poverty of the country is not fully visible, except in this picture.

This lonely man was walking on a random street, all by himself, representing the majority of Colombia's social class. In this country, most of the population doesn’t have access to education, with 2.7M of Colombians being analphabet. Moreover, basic resources, such as water and electricity, are not available to these people on a daily basis. There’s a huge gap between the rich and the poor and people discriminate each other constantly. After living there for 4 months, it is truly disappointing to see a country with such potential still so undeveloped. The hierarchization of social classes and corruption predominate. Nevertheless, I’ll never lose the hope that this situation changes one day.

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TAKE A CLOSER LOOK INTO...

Patagonia, in Argentina, is one of the regions that drives people to visit this country. Its landscapes and nature are breathtaking. When experiencing all of this beauty, it's impossible not to start to give importance to problems as global warming and the extinction of some species.

Glaciar Perito Moreno makes anyone feel like a tiny ant in this big world. Its beauty is something that can only be described by the ones who see it. Perito Moreno made me think about what has been happening. As years go by, individuals tend to think more about themselves and less about the consequences of their actions. Therefore, global warming is an issue that has been gaining a huge dimension. These glaciers have been melting due to the climate change.

La Boca is one of the most famous neighbourhoods in Buenos Aires. El Caminito, a place which is a heaven for any artist, is one of its main attractions. Tourists are entertained by other type of activities, such as open-air tango. Besides, it is a place known for the fact that most of those who live there belong to the working class.

This image shows that even the most touristic places are surrounded by poverty. These kids do not have a place to play except for this football camp. It is obvious that money is not abundant, neither is education. In such a big city as Buenos Aires, it is interesting to see the contrast between those who live in La Boca and the ones who live in Recoleta.

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Those that fail to learn from history, are doomed to repeat it.

Winston Churchill

2016 OVERVIEW Deutsche Bank When giants bounce

Manuel Vassalo Deutsche Bank is not the biggest nor the smallest bank in the world. Also, it is not the riskiest nor the safest. It probably is, however, the bank most deprived of purpose.

In 1999, Deutsche acquired Bankers Trust. Since then, it has sold itself as a global investment bank.

Nevertheless, the American investment banks have left it behind, even in Europe. The bank’s revenues have fallen since the crisis and last year it reported its first annual loss since 2008. Its shares are now worth barely an eighth of what they were in 2007 and a quarter of the

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supposed net value of its assets – far below its peers.

but the city’s future has been thrown into doubt by Brexit.

Some of the difficulties Deutsche is going through are not of its own making. It is facing litigation costs for past misdeeds, related with the role of the bank in selling investment products tied to US mortgages (it relates to the type of investments that triggered the 2008 financial crisis, which are formally known as “mortgage-backed securities”). In addition, negative interest rates have cut margins across the industry.

Moreover, Deutsche also has a lot of its investment banking divisions in London,

Starting with capital, before the financial crisis, banks could easily and rapidly fund expansion with very little capital cushions. Today, equity has gained more importance on that matter.

Deutsche Bank has consistently been behind the other banks, waiting too long to raise capital and then doing it in insufficient amounts.

As presented before, the bank also has legal worries.

An allegation by the American Department of

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Justice states that Deutsche misrepresented residential mortgage-backed securities before the crisis. Other leading banks have already settled similar claims, Citigroup paid a fine of $7BN in 2014 and Goldman Sachs agreed in April to pay $5.06BN. American and British authorities are also examining whether weak controls at Deutsche let money-launderers spirit cash out of Russia. The German global banking and financial services company has set aside €5.4BN to cover legal bills.

Another looming headache is a proposal by international regulators that would sharply increase capital requirements for mortgages and other loans.

Furthermore, Deutsche is struggling for profitability.

German domestic banking is fiercely competitive and it is not being able to keep up with American investment banks. Also, the negative interest rates environment in Europe is not being favorable as the bank can’t charge much for the loans it makes.

It planned to plump up its capital cushion without asking investors for money, which sounded difficult even before of the Department of Justice’s accusation. A $14BN legal bill would blow a sizeable hole in Deutsche’s capital. The bank insists it will not pay anywhere near that

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much and no one expects it to. Though the likely bill should be bearable, Deutsche can ill afford to pay a lot more than it bargained for.

Deutsche’s markets business, which accounts for a third of its revenues, is struggling to cope with a world of lower trading volumes, tougher regulation, capital requirements and increasing US dominance. Its plans for the investment bank by 2018 include reducing client numbers by half and cutting risk-weighted assets by a net €28BN. These actions are, however, far less exhaustive than those of its European rivals, such as UBS and Credit Suisse with the latter cutting almost $60BN of riskweighted assets from its investment bank and coming under pressure from investors to do more.

Slower growth in Europe is also little use to Deutsche’s investment bank, which suffered with the rest of the industry in the market turmoil at the start of the year. The second quarter may have been better - and the uncertainty of Brexit boosted trading volumes. But the second half may be weaker again. And in recent years, the focus of the bank on fixed income – selling, trading and underwriting bonds –, in which the bank is amongst the world’s leaders, has held

it up. The industry revenues from bonds, currencies and commodities fell by 9% a year in 2012-2015, while equities businesses grew by 6% annually, according to Morgan Stanley. Amongst big banks, none relies on fixed income more than Deutsche does.

Deutsche is not alone, bearish sentiment has afflicted its rivals too. Like Commerzbank and other big German banks that are also struggling with this negative interest rate environment.

Germany’s banking sector is far more fragmented than in the most developed countries. One idea that has been discussed lately is the merger between Commerzbank and Deutsche Bank, so they could cut overlapping costs and consequently generate higher profits.

As the biggest bank in Europe’s most robust economy, if Deutsche Bank needs to be rescued by the German government, the consequences can be severe.

Especially under Europe’s stricter state-aid rules.

Meanwhile, Portuguese, Italian, Greek and others who are fed up of German lectures on financial integrity may feel “Schadenfreude” the pleasure derived from others misfortune.

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2016 OVERVIEW Wells Fargo Corporate malfeasance

Catarina Castela “I want to apologize for violating the trust our customers have invested in Wells Fargo. And I want to apologize for not doing more sooner to address the causes of this unacceptable activity”.

These are the words of John Stumpf, former CEO and Chairman of Wells Fargo on September 29th.

As you may have seen on the news, Wells Fargo announced, on September 8th, the payment of $185M in penalties to regulators, to settle allegations over the creation of bogus bank accounts for its customers.

Over the past 5 years, more than 1.5 million unauthorized deposit accounts were opened and more than 500 thousand unauthorized credit card applications were issued.

In total, this generated around $2.6M in fees for Wells Fargo.

The company fired 5,300 employees over the past few

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years for the creation of phony accounts.

Nevertheless, the responsibility for these wrongful acts hardly falls entirely on the junior employees. In fact, the number of employees dismissed is too significant to represent just a few bad actors in the company. Thus, we must follow the premise that Wells Fargo´s bogus accounts scandal is rooted in its corporate culture.

The scandal demonstrates a systemic failure of the primary values Wells Fargo affirms to have, which are presented on the website – in case you didn’t check, “ethics” and “what’s right for customers” are explicitly written as two of them. The goal of this article is, therefore, to explore the factors that led to the creation of these illegal accounts despite the company's apparently ethical

values.

To start with, the company set extremely high targets – directed, of course, by the upper management. The CEO at the time, John Stumpf, who resigned over the scandal, had a mantra of “eight is great”, meaning that employees should aim to sell 8 of Wells Fargo’s products to each customer. This idea of selling multiple products of the company to clients is called cross-selling and it is perfectly legal, as well as a reasonable business strategy.

It can even benefit the customers by increasing their awareness of the products and services the company has available and that might fit their needs. However, this should be conducted on a customized basis. In the case of Wells Fargo, 8 products represented an extremely demanding, if not unrealistic, task and incentivized staff to sell new products to meet

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their sales targets, no matter the impact on the customers.

What started as an ambitious goal, developed into an aggressive and persistent cross-selling culture.

The expectations put onto the employees for the achievement of the established daily, monthly and yearly sales objectives were severe. After the incident, workers have publicly said they were expected to work extra hours or to show up on the next day with a plan if they had failed to meet the previous daily target. In addition, they assert that they were humiliated at the office and threatened with dismissal if they didn’t meet their goals.

Consequently, the employees started engaging in unethical tactics such as opening unnecessary accounts for customers, begging their own family members to sign up and creating fake email addresses to register people in the online-banking services. The truth is that employees were doing this in an attempt to meet the sales targets specified by the company, earn salary bonuses or to simply hold on to their jobs.

In short, this phony account scandal is an example of how a high-pressure culture and

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aggressive incentive scheme can create a distortion of employees’ behaviour.

What makes this worrisome is that the conditions setting the tone for the scandal to occur can easily be found in other organizations – and it isn’t difficult to imagine a similar scenario arising in a competitor firm. Morgan Stanley was also accused of pressuring its employees to engage in unethical conduct by running cross-selling contests with monetary prizes of four digits.

Hence, companies need to pay very close attention to their financial incentives structure and how they might influence employees’ behaviour, as well as make sure that they have a corporate environment that promotes ethical conduct and an effective monitoring strategy safeguarding clients’ protection.

As a result of the scandal, Wells Fargo already applied new measures. It detached the role of Chairman and CEO from the same position in order to ensure accountability and stronger oversight; it announced the abolishment of all product sales goals for retail bankers and altered the rewarding system for a new one based on customer satisfaction.

Although these measures seem like a good start, it is

not easy to change what are institutionalized practices and values within a company.

Certainly, there will be higher supervision of employees and lower incentives for the creation of bogus accounts.

Nevertheless, the fear of being humiliated or becoming unemployed for not meeting the company’s high objectives, or even the need to work long extra hours to accomplish far too ambitious goals, will be harder to overcome.

Even though this might not affect customers, it certainly has a strong effect on employees’ physical and psychological well-being and that also cannot be underestimated.

Despite the scandal and its unethical nature, we can only hope that some lessons will be learnt within the industry and that it has awoken both the regulator´s and public´s awareness on this issue.

Meanwhile, it will surely impact other banks as they will be more attentive to unethical practices. The point is: this situation triggered change, making it harder to get away with unethical attitudes. In my opinion, situations such as these are regrettable and one can only hope that public apologies such as the one issued by Mr. Stumpf are a thing of the past.

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2016 OVERVIEW Markets in a “Post-Truth” World Do “fake” news matter?

José Alberto Ferreira and Miguel Monteiro Capturing the essence, the ethos, of one year in a single word or phrase will most likely fall short. Nevertheless, Oxford Dictionaries’ choice for International Word of 2016 draws attention to a concept that will possibly define our time: the posttruth phenomenon.

Spreading fake or vaguely fact-based news has become less rare in our days, not only as a way of getting an audience by generating

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controversial discussions, but also as a means of getting political advantage, providing people what they want to hear instead of reality - a temptation which hurts media credibility.

The US election and the Brexit vote certainly played a key role in this choice, as both sides of the fence often recurred to “a reliance on assertions that “feel true” but have no basis in fact” (The Economist), leading to

“circumstances in which objective facts are less influential in shaping public opinion than appeals to emotion and personal belief” (Oxford Dictionaries).

There are two main factors driving this paradigm. On the one hand, an increasing distrust in facts, perceived as oversupplied, offered up by “the establishment”, i.e. experts and institutions which have grown in number

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in the past decades, making it possible to find the right person to tell the right fact.

On the other hand, the rise of social media allows individuals to “shape their media consumption around their own opinions and prejudices”, as the NYT puts it.

The roots of the “post-truth” concept are primarily political: it is not about falsifying the truth, but rather making sure that it takes a secondary place, by conveying a view of the world such that one’s stances are reinforced. For instance, in the Brexit referendum, the Leave campaign managed to keep in the spotlight the estimated £350M weekly costs of the UK membership of the EU; although not untruthful, this figure simply does not take into account the money received in return (whether as transfers or as economic benefits). But, this practice is not new: the “missile gap” used as a propaganda tool during the Cold War, the misleading body counts on Vietnam (60’s) or Saddam Hussein’s mass destruction arsenal are

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other good examples of politicians shaping the truth.

There is few doubt that press coverage on a given company strongly affects its stock value. For instance, during the 2010 oil spill in the Gulf of Mexico, intensive media coverage of the effects on local communities and wildlife lead to a sharper decrease in BP’s stock value, as rumours of a major compensation bill and significant clean-up expenses drove confidence in the company down. But that was the case of fact-based news.

Something quite different occurred after an unknown Zimbabwean investor tweeted, on August 2014, that Intercept Pharmaceuticals (NASDAQ:ICPT) was to be bought by Gilead Sciences (NASDAQ:GUILD). In spite of its modest number of followers (146 at the time) or of not being known as a financial pundit, this man’s tweet drove ICPT’s stock up by $8 that day (a $160M gain in the pharmaceutical’s market value, still rather insubstantial when compared to its $6B market cap).

But how can such a meaningless tweet actually affect the market? News reading bots and algorithmic trading are the ones to blame. Due to the real-time nature of markets and the need to anticipate official company releases, many computer programs designed to look for relevant stock news also search social media, collecting “news” before any human may intervene and filter. Indeed, in spite of the values and tone of the tweet clearly denounced its deceptiveness, mentioning a credible entity (Bloomberg, in this case) seems to have confused these programs.

Nevertheless, the second this “news” hit some preprogrammed trading software somewhere in the world, it started bidding the stock up; this then lead to a

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2016 OVERVIEW snowball effect, which becomes more notorious as purchases volume increases.

The power of high-frequency trading - i.e., using powerful computer software to execute thousands of trades within a second and thus make miniscule profits which add up in a big way - was also on the spot when the Associated Press’ (AP) official Twitter account was hacked on April 2013 (days after Boston’s marathon bombings).

It reported that explosions at the White House had injured the President. The magnitude of this fake news was amplified by its over 4,000 retweets (including trusted journalists), which made it sound more trustworthy to the news bots. This wiped out $136.5BN of the S&P500 value (0.9%) in a matter of seconds.

High-frequency trading has supporters and opposers.

Regulators are in the process of developing new rules to deal with this sort of volatility, and even Chancellor Angela Merkel addressed the German Parliament on this issue last November, exhorting lawmakers to respond to this “new media environment”.

Something similar occurred 78

more recently, on 22nd November, as the French construction company Vinci SA’s stocks dove approximately 19% after a fake press release stating there were accounting malpractices in the value of several billion Euros and the company’s CFO was to be fired. The urge to share this apparently shocking news in order to maximize media revenues was so high that these sites didn´t even took the time and effort to fact check their news. When Vinci formally denied these news it was already too late, and even though its shares eventually rebounded, the damaged had been done and the stock ended up losing 3,8% of its value that day.

But is “post-truth” always negative for everyone?

According to Leonid Bershidsky, from Bloomberg, no. Just look at OPEC: mostly in the recent past, a high number of fake news about cutting the oil output surged, which obviously drove the oil prices up almost instantly for benefit of the oil exporting countries.

Nowadays, one can consider the oil market highly related to fake news and, as a result, Russia has been using this for its own benefit. It has recently been reported by Bloomberg News that Russia made has much as $6BN by

engaging in conversations with the cartel about cutting down worldwide oil production. However, even though Russia agreed to cut its daily barrel output by 300,000, the country has constantly increased its oil output between the end of August and the end of October by approximately 520,000 a day. This way, Russia benefits not only from the higher prices, but also from the significant quantity increase - a behaviour which the OPEC countries cannot punish without harming themselves (by increasing the output and, consequently, driving the prices down once again).

However, all these shocks have something in common: one week after the “news” release, Vinci’s stock had fully recovered, back to its beforeshock price (61,10€). The same could be said regarding ICPT’s stock performance after the fake tweet - it quickly recovered. More broadly, April 23rd “minicrash” harmed no long run investor, as the market instantaneously recovered (see chart). This leads us to the main difference between the “post-truth” phenomenon in politics and in markets: usually, truth manages “to reassert itself pretty quickly in the world of money”, as Reuters puts it.

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Indeed, fact-checking will come as soon as the company in question realises what is wrong, which often occurs quite rapidly.

Moreover, investors, unlike voters, are more facts-driven: given regulatory obligations, the correct information will end up revealed, and those who stick to that unreliable tweet will certainly lose money in the long run. Voters, on the other hand, may stick to the candidate who tells them what they want to hear.

Nevertheless, how “posttruth” content might affect

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markets should concern all stakeholders. Actually fake news may move the market in the short-run, as the case of Intercept or Vinci. This shows that markets, as well as politics, do not always factcheck, making them vulnerable to rely on “assertions that «feel» true”.

It should also be acknowledged that social media, like Twitter or Facebook, allows the diffusion of both fake news and post-truth content, but it is no less true that its democratisation might also help in fighting

misperceptions, perhaps faster than ever before.

However, there is pressure on Facebook or Google to fight such sources of information.

But this does not come without further interrogations: can we factcheck everything? How is there room for freedom of speech? Should Facebook decide what we cannot see?

Who is to play the role of arbitrator of truth? All this leads to a broader and challenging ethical debate which we may not be able to postpone for longer.

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2016 OVERVIEW Regulation Wars Francisco Logrado and Leonardo de Figueiredo

Just as the theory of gravity, this one also began with an Apple. Having investigated Apple’s complex tax dealing for 3 years, Margrethe Vestager iconically stated that: “Member states cannot give tax benefits to selected companies – this is illegal under EU state aid rules”. The statement by the EU’s Commissioner of Competition not only sparked a political row between the US and the EU as well as a legislative one. Moreover, it began an all out tax and legislation war between two of the main economic world powers.

EU antitrust authorities, being scrutinised due to a deal in 2003 that may have granted a lower taxation rate to Amazon’s European headquarters. Amazon’s fine can amount to €400M. Yet, on the other side of the Atlantic, American tax officials claim that Amazon’s intellectual property is extremely undervalued, which consequently negatively affects the rights to charge royalties for the use of the brand and web technology.

In August 2016, Apple was ordered to pay €13BN. A perturbed Apple retaliated by warning that future investment by multinationals in Europe could be degraded due to such strict and, in their opinion, unjust policies.

The US Treasury later affirmed this notion by Apple, stating that the ruling threatened to damage “the important spirit of economic partnership between the US and the EU”.

Google is another US tech giant being levied by EU authorities, set to face a fine between €3BN and €6BN, the highest antitrust fine ever seen within the European Union. Accusations from the EU state that Google is manipulating search results to favour itself and harm rivals. Accordingly, the fine has been imposed due to the fact that Google took advantage of its monopoly on web search through shopping comparison algorithms , making it harder for competitors to thrive.

Amazon, the online retailer, is also under investigation by

In mid September 2016, Deutsche Bank’s shares fell

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dramatically after the announcement that the bank was facing a $14BN penalty imposed by the US Department of Justice, over the mis-selling of mortgage securities. The proposed fine has spurred much controversy, especially in the EU, where regulators are claiming that the European bank is being deliberately targeted. Such commentaries have been based on the exorbitantly priced penalty, while others have rumored that this could be revenge for the fine imposed on Apple by the EU. More recently, this rumored dispute, between the EU and the US, has been further concretised and evident through banking and financial regulations.

The EU Commission has proposed that large foreign banks with subsidiaries in the EU hold additional capital and liquidity. This measure would drastically increase the cost of business in the EU for American investment banks, such as JPMorgan and Goldman Sachs.

Some believe that these measures have been put into place to counter the controversial US

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2016 OVERVIEW

2016 OVERVIEW intermediate holding company rules, set in 2014, that force foreign lenders to. retain capital in the US, in order to protect US taxpayers from any future bailouts.

What all of aforementioned measures and regulations clearly illustrate is an almost behind the scenes tit-for-tat regulatory conflict between the US and the EU. A clear pattern is emerging, demonstrating a pillar to post a set of measures being implemented. Many analysts are worried that the measures adopted are not needed for their respective reasons but rather acts of vengeance and unnecessarily harsh retaliation that could spark more distasteful conflict in the future.

The unprecedented rising conflicts between the two blocs, have a new possible threat, with the election of Donald Trump, who during the campaign severely criticised NATO - a western Europe military cornerstone.

After the election, JeanClaude Juncker stated “The election of Trump poses the

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risk of upsetting intercontinental relations in their foundation and in their structures”.

Furthermore Trump is viewed by many as a wild card. Thus, the new president elect may further complicate regulatory tensions between the US and the EU with his radical and spirited foreign trade policies.

Meanwhile, trade between the US and the EU is currently at healthy record high levels.

European exports, as well as US exports, have been rising between one another every year suggesting a positive trend in trade for years to come between the two blocs.

The Transatlantic Trade and Investment Partnership (TTIP) is a proposed trade agreement between the European Union and the United States, with the aim of promoting trade and multilateral economic growth.

The European Commission says that the TTIP would boost the EU's economy by €120BN, the US economy by €90BN and the rest of the world by €100BN. TTIP has met opposition on many

fronts but as the details of the trade agreement are still unknown, many of these concerns can be considered unfounded. The new tensions between the US and the EU could cause, according to analysts, a potential collapse of this proposed partnership.

What is at stake is whether, or not, for the first time after the Second World War, the US and European trade relations will stop being a complement of each other and if, as a consequence of the rise in protectionism in the current era, the two blocs will diverge, following their own agenda. It is not clear in which direction these future events and negotiations between the two will unfold.

Current trends suggest healthy trade in the future and potential forthcoming partnerships to reinforce this proposition. However, with a radical change in the political landscape as well as a rampant case of protectionism, the future does not seem, at all, too certain.

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