Brazil Trip

Each bullet pt is a day

1. I arrive at Sao Paulo, which is kinda like the NY of Brazil. There were some interesting architecture as well...
2. I had to do some unforeseen work and stayed in the hotel the whole day... I was literally so busy I had to order room service for a burger at 3pm for lunch. It was actually surprisingly good. Then I go eat Churrasco (all-you-can eat Brazilean bbq) for dinner.
3. Everyone arrives, we go shopping in Sao Paulo and Chico and I get Havainas slippers (a famous Brazilean brand of slippers?). The Havainas chafe my toes. I experience buyers regret. We take the overnight bus to Rio.
4. In the morning, Andy almost mistakenly sits on a homeless person sleeping in a tarp while smoking cigars at a beach; then we hike up a 2000m elevation mountain to look at the Jesus statue; at night we learn how to dance samba at a night club
5. We went biking and I had explosive diarrhea- that was an interesting combo, and the first of my epicly bad biking experiences. We then flew to Fortaleza that night
6. We stayed in Cumbuco (a 2000 person beach town close to Fortaleza) and learned kitesurfing for 3 days. It was very nice and peaceful, and we had very great learning conditions. We all got epicly tanned and burnt. In the afternoon, we go on a sand buggy ride, sand butt boarding and highlining and take lots of failed selfies because we lack the technical expertise... I manage to do work after all this...
7. After kite surfing, I stay and eat street food while Andy etc go to explore Fortaleza. I try to get Korean fried chicken and fail. I sleep all day and feel happy.
8. On the last day of kitesurfing, we manage to get up and surf for ~10-20 meters. We go demolish an all crabs meal and then bus to recife
9. Recife is where we learn how to mountain bike... from Andy... on urban streets because it was so bumpy... and Andy only teaches us what to do after we have spent 3 hrs dodging NYC-type traffic, cycling on highways and riding through potholes and going up and down huge pavement ledges. We are talking about a 15cm wide by 10cm deep drainage systems. A moat between the car traffic lanes and every single pedestrian pavement that we need to somehow vault across each time... We have totally worked in our Havainas- perfect fits and no more chafing. Unfortunately Chico's Havainas breaks. We also contribute to a bike imbalance between the islands of Recife. We eat Churrasco to replenish our energy.
10. We go to Porto de Galinhas (a beach 2hr bus ride away) and molest seahorses. I drive a manual sandbuggy. I see somebody wakeboarding with a jetski and I am green with envy.
11. We go to Olinda (lots of baroque/1600s-1800s buildings that then got burnt down by the dutch). We stumble into a school parent teacher open day. I realize that we are going to have to walk up and down steep hills for 3+hrs to look at churches. I become dejected and gloomy. Then I become delirious. We sit down for a beer and then lunch and have good philosophical discussions about goats. I become happy again. Then we fly to Salvador. We bring beer and also try to mix our own Caipirinha's on the flight and learn that domestic flights in Brazil don't serve/allow alcohol. When we get to Salvador, we eat the most epic hotdogs ever (according to Andy).
12. We visit a market place, learn Capoeira (dance fighting), and watch epic dance shows about Brazilian gods. We go eat Moqueca stew.
13. We go to a beach. Tuesday night is the designated party night for our region, so we mix our own Caipirinha's and go watch real life Capoeira and party in the streets. We watch a drum group and join a rave.
14. The rest... is interesting as well. My phone gets stolen. We almost get robbed. I am traumatized. I miss my flight.
    

If you enjoyed reading about my trip and my sense of humour, check out my Tanzania trip here! 

The 29th Day

About a month ago, I won the Listserve. What do you write when you have the opportunity to send an email to over 20k ppl? Being a corny dork (a cork?), I wrote about exponential growth. Here it is:

---------- Forwarded message ----------
From: Andy <no-reply@thelistserve.com>
Date: Sun, Apr 12, 2015 at 4:01 PM
Subject: [The Listserve] The 29th Day


In ancient India, the inventor of chess showed his game to the King, who was so pleased with the invention, the King announced that he would grant the inventor anything he desired.  The inventor sat in silence thoughtfully, then replied that he merely wanted some rice to feed his family. To determine how much rice he would receive, they would use the chessboard as a counter. The inventor suggested that, for the first square, he would receive one grain of rice, two for the second square, four for the third square, doubling each the amount for each successive square. The inventor would receive all the rice on all the squares of the chessboard. The King laughed at this seemingly modest request and immediately accepted, tasking his treasurer with calculating the entire amount to grant the inventor. Weeks went by without hearing from his treasurer until one day, the King summoned his treasurer and asked why there was such a delay. When the treasurer showed him the total sum exceeded the rice count of his entire kingdom, the King was bankrupted and the inventor became the new King.What was the total amount?

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18,446,744,073,709,551,615 or 18 quintillion

This heap of rice would be larger than Mt Everest.

There is a pond with invasive water lilies. The water lily population doubles each day and if left unchecked, will cover the entire pond in 30 days, smothering all other life in the pond. Each day, the caretaker of the pond checks the population, and will only take action to cut the water lily population when they have covered only half the pond.

On what day will the pond be half-covered?

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The 29th day. This leaves the pond caretaker only 1 day to save the pond.

Exponential growth, or compounded growth, is a very powerful thing. Positive things like savings, investment, networks and technological innovation can bring incredible improvements to one's life, if allowed to compound without interruption. On the flip side, if left unchecked, dangerous things like inflation, debts, diseases or even dangerous ideologies can sneak up on you so quickly that you won't notice until it's too late.

Don't wait until the 29th day.

BRICs

Here's something I wrote for my company newsletter about my travels:

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Over the past two years or so, I've been fortunate enough to travel to each of the BRICs: Brazil, Russia, India and China. This group was identified by economists in the early 2000s as the four countries with the greatest potential to become the largest and most important economies in the future. Here were my experiences (no economic charts of GDP, I promise):

The first thing you notice about a country is what you can tangibly detect with your five senses: see, smell, hear, taste and feel. I will never forget the gilded gold surfaces that seemed to cover everything in St. Petersburg like a glimmering sheen, nor the smells of a Mumbai food market blocks away from the world's densest slum. I remember the rich yet simply seasoned broth of a freshly slaughtered chicken caught in the dusty dirt roads of Anhui, China; my bones rumbled by the beating of the African-origin Olodum drums in a street festival in Salvador's historic Pelourinho district. These things stay with you long after your souvenirs and trinkets collect dust in the attic.

But I am getting ahead of myself. Before you even arrive, you must find a (preferably legal) way into the country. I was lucky enough to visit India just months after their modern electronic visa-on-arrival program was launched: I applied online and received my visa confirmation in 18 hours. On the other hand, getting a Brazilian or Russian visa is an exercise in surreal absurdity, which required what I would describe as bureaucratic near-extortion in the case of the latter (in Brazil's favor, I guess it's not unreasonable for the consulate to close without warning to watch their own World Cup matches). I think I'd rather wait for Godot.

The next thing you notice is how much you take language for granted. Some countries are luckier than others: Brazil, China and Russia have high literacy rates, relatively homogenous populations and standardized languages/dialects. Each language has its own sound and rhythm: from the dancing vowels of Portuguese to the syncopated consonants of Russian to the whining singsong of Mandarin. On the other hand, India is a miniature United Nations within itself: each region has a different religion, ethnicity, cuisine and unrelated language. Ironically, this means that English has become the most popular "bridging" language in India out of all the BRICs, which results in surprising ease for English-speakers to survive in India.

Finally, I have to say something about the people. There are endlessly creative and productive ways that the citizens of the aspiring world powers manifest their skills. Of course, you can observe the results of their labor in incredible megaprojects such as China's high-speed train, which has enabled millions of migrant workers to visit their hometowns on a regular basis; and Brazil-Paraguay's hydroelectric Itaipu Dam on the Iguaçu, which generates more power than the entire country of Paraguay consumes. Yet there is also the simple industriousness of the everyday citizen, which can be found by using Uber to hail a Lada driven by an ordinary Moscow resident as well as the sophisticated leather and plastic-recycling industries operated out of Indian slum-dwellers' homes. Take the brutally efficient subway in Moscow and you will never wait on the platform for more than 3 minutes (which is not something I can say in supposedly fast-paced NYC). Despite the vastly different social and economic development models, the BRICs all depend on its citizens for its resourcefulness, from whom I felt a sense of limitless and immense capability.

What you hear in the Western news about the emerging world is sometimes sensationalist or even frightening. Yes, there's poverty, bureaucratic mismanagement and even wars. However, based off my experiences with the people, I have no doubt in my mind that the BRICs are well on their way to becoming the global powerhouses of the future.

Buy and Forget

For those people who don't want to actively manage their portfolios, I usually recommend VT and ACWV to ppl as passive buy-and-hold core holdings for the stock allocations of their portfolios. These are global stock ETFs, which means that they hold basically all the stocks that are publicly trade-able. The main difference is their weighting methodology.

VT is market-cap weighted. That means the stocks held in it are weighted by the size of the company itself. This is the return of the (dollar-weighted) average investor. It is mathematically impossible to always and consistently beat this benchmark (otherwise, you eventually become the market).

ACWV has a higher allocation to low-risk or low-volatility stocks (here we use risk and volatility interchangeably). The correct way to evaluate the worthiness of an investment is to look at return divided by risk (you should NEVER look at solely the return with no regard for the risk). If an investment B has two-thirds the return of investment A but also two-thirds the risk, then you should be ambivalent between the two investments. However, if investment C has two-thirds the return but one-half the risk of investment A, then you should strictly prefer investment C to investment A.

The theory behind ACWV is that ppl are biased towards buying high risk / high reward stocks and structurally overpay for them. When you bid up the price of an asset, you reduce its potential return. Thus, high risk / high reward stocks have their return reduced below what efficient markets would justify.

Why does this bias exist? There are several theories.

1. The paradigm described above (our analysis with investments A, B, C) is only true if you have access to risk-free leverage. This is obviously not true in the real world. Due to this leverage constraint, investors who have higher risk tolerance, rather than borrowing 50% to buy a 150% allocation of stocks will instead just buy 100% allocation of 1.5x more volatile stocks.
   
2. Another theory is that investors solely look at potential return and do not properly account for potential risk. In this scenario, investors will prefer an investment with 1.5x the return but 2x the risk.
   
3. Finally, there is theory that investors have behavioral preference-for-gambling and will pay extra for lottery-like binary outcomes. Regardless of which theory is correct, the empirical data confirms that the low-vol anomaly exists.

Thus I think ACWV should outperform VT on a risk-adjusted basis over the long run. Investors should be careful to adjust their asset allocation to take into account the lower risk of ACWV (e.g. rather than a 60-40 stock-bond allocation, a 70-30 or even 80-20 stock-bond allocation might be more appropriate when using ACWV for the stock allocation).

Negative Yield Bonds

In theory, negative yields are impossible. Why would you buy something that pays you back less than what you paid? However, this is exactly what is happening across Europe. Almost a dozen European countries now have bonds with a negative yield. What does that mean and how does that come to exist?

WHAT IT MEANS

The yield is the return received by a bond investor expressed as a percentage of the purchase price. For the sake of simplicity, assume a bond maturing in x years has no coupon and $100 principal, i.e. the bond gives the investor $100 after x years.

If you pay <$100 for this bond, then you will receive a + yield.

If you pay exactly $100, then you get a 0% yield.

If you pay >$100, then you get a - yield.

In effect, a negative yield means you lend someone MORE than $100 with the expectation of only receiving $100 back.

HOW IT COMES TO EXIST

In theory, this bond should never exist. Why would you ever lend more to someone than s/he will pay back? You can keep the cash under your mattress and get a better yield (of 0%) with zero risk! However, this bond DOES exist, and in fact, it is estimated that there is over $2 TRILLION of negative-yield bonds today. For example a 2 year German "bund" (which is Deutsch for bond) has an almost -0.30% annual yield, so you are effectively losing 30 cents annually for every $100 you invest. In fact, Germany, France, Netherlands, Belgium, Finland, Austria, Switzerland, Sweden and Denmark all have negative-yield 2y bonds.

Here is a list of four reasons that I can think of (which is certainly not exhaustive) to justify this situation:

1. RESERVE REQUIREMENTS (RR) and INTEREST ON RESERVES (IOR)

Banks are required by financial regulation to hold a percentage of their assets as reserves with the central bank (you can think of a CB as a bank for banks). Banks can keep their reserves with the CB either in 1) cash deposits or in 2) gov't bonds. So why not keep it all in cash? In normal times, banks receive some interest on their reserves (IOR), just as you would receive interest in your checking/savings account with your bank. However, here's the catch: now some central banks such as the ECB (European Central Bank), SNB (Swiss National Bank), Sweden's Riksbank and Danish National Bank have negative IOR, which is effectively a fee on cash deposits. To a bank that's being charged to hold cash in their reserve accounts, holding negative-yield bonds instead doesn't look so bad.

2. FX REDENOMINATION and CURRENCY BETS

If the Eurozone monetary union breaks up, there will be 19 new currencies. Countries with stronger economic and fiscal positions will almost certainly have their new currencies appreciate. For example, in this breakup scenario, German bunds, instead of paying you Euros (EUR) which would no longer exist, would probably pay out in newly created Deutsche Marks (DEM). Since DEM would significantly appreciate against EUR, the negative yield would be more than compensated. This is a popular idea for journalists to write about in the media, but since the chances of this are insignificant and the mechanics of this FX redenomination is uncertain (the contracts on which these bonds are written have no clause on the possibility of redenomination), this has the least explanatory power out of the four theories here. Still, it is worth mentioning and it's a cheap bet to take (you pay 0.30% annually for a 2y bund but you have a chance, albeit low, of making double-digit returns if the Eurozone falls apart).

A similar thing is playing out in Switzerland and Denmark, which are not part of the Eurozone, but have historically maintained currency pegs with EUR. When the SNB removed the Swiss Franc (CHF) peg, it immediately appreciated by 20% against EUR in one day. Investors who believe that Denmark will do the same thing with its Danish Krone (DKK) peg can purchase Danish negative-yield bonds for a similar bet.

3. "PONZI BORROWERS" or GREATER FOOL THEORY

If you hold a bond to maturity and there is no default, your total return will be exactly the yield at which you purchased the bond. For a negative yielding bond, this means that you are guaranteed a negative total return by holding to maturity. However, if you sell the bond before maturity, your total return will also be determined by your sale price. If your sale price is higher than your purchase price, you will have a positive total return.

An investor who borrows money to purchase an asset with the expectation to sell at a higher price before maturity was termed by economist Hyman Minsky as a "Ponzi borrower". Due to the inverse price-yield relationship of bonds, this means that Ponzi borrowers who purchase bonds must have the expectation that yields will go down. For negative yielding bonds, that means that Ponzi borrowers are expecting them to become even more negative! This might not be so ridiculous, especially if central banks cut their deposit rates even further into negative territory.

Although buying negative-yield bonds may be foolish, there may be even greater fools who are willing to buy them from you later. Hence, the Greater Fool Theory.

4. (LACK of) SUPPLY and (TOO MUCH) DEMAND

Finally, the central banks themselves are buying these bonds in large size. The ECB has committed to buying over $1.2 trillion of assets over the next 1.5y, most of which will be Eurozone gov't bonds. It is willing to buy bonds with yields as negative as -0.20%. Furthermore, there is little sign that gov'ts will pick up bond issuance in any size, keeping supply very tight, as gov'ts aim for deficit targets mandated by Eurozone treaties. Denmark has actually completely stopped issuing new gov't bonds.

IMPLICATIONS

Ponzi schemes end when there are no more new investors willing to pay ever-increasing prices to existing investors. This inevitably happens with all Ponzi schemes. However, when the perpetrator of the scheme controls both supply (through official fiscal constraints on gov't borrowing) and demand (through bank regulatory requirements as well as direct outright purchases by the central bank), the scheme can be perpetuated for much longer than you'd think.