Subatomic opportunities

Quantum leaps

The strangeness of the quantum realm opens up exciting new technological possibilities


All this potential arises from improvements in scientists’ ability to trap, poke and prod single atoms and wispy particles of light called photons. Today’s computer chips get cheaper and faster as their features get smaller, but quantum mechanics says that at tiny enough scales, particles sail through solids, short-circuiting the chip’s innards. Quantum technologies come at the problem from the other direction. Rather than scale devices down, quantum technologies employ the unusual behaviours of single atoms and particles and scale them up. Like computerisation before it, this unlocks a world of possibilities, with applications in nearly every existing industry—and the potential to spark entirely new ones.

Strange but true
Quantum mechanics—a theory of the behaviour at the atomic level put together in the early 20th century—has a well-earned reputation for weirdness. That is because the world as humanity sees it is not, in fact, how the world works. Quantum mechanics replaced wholesale the centuries-old notion of a clockwork, deterministic universe with a reality that deals in probabilities rather than certainties—one where the very act of measurement affects what is measured. Along with that upheaval came a few truly mind-bending implications, such as the fact that particles are fundamentally neither here nor there but, until pinned down, both here and there at the same time: they are in a “superposition” of here-there-ness. The theory also suggested that particles can be spookily linked: do something to one and the change is felt instantaneously by the other, even across vast reaches of space. This “entanglement” confounded even the theory’s originators.

It is exactly these effects that show such promise now: the techniques that were refined in a bid to learn more about the quantum world are now being harnessed to put it to good use. Gizmos that exploit superposition and entanglement can vastly outperform existing ones—and accomplish things once thought to be imposible.

Improving atomic clocks by incorporating entanglement, for example, makes them more accurate than those used today in satellite positioning. That could improve navigational precision by orders of magnitude, which would make self-driving cars safer and more reliable.

And because the strength of the local gravitational field affects the flow of time (according to general relativity, another immensely successful but counter-intuitive theory), such clocks would also be able to measure tiny variations in gravity. That could be used to spot underground pipes without having to dig up the road, or track submarines far below the waves.
Other aspects of quantum theory permit messaging without worries about eavesdroppers.

Signals encoded using either superposed or entangled particles cannot be intercepted, duplicated and passed on. That has obvious appeal to companies and governments the world over. China has already launched a satellite that can receive and reroute such signals; a global, unhackable network could eventually follow.

The advantageous interplay between odd quantum effects reaches its zenith in quantum computers. Rather than the 0s and 1s of standard computing, a quantum computer’s bits are in superpositions of both, and each “qubit” is entangled with every other. Using algorithms that recast problems in quantum-amenable forms, such computers will be able to chomp their way through calculations that would take today’s best supercomputers millennia. Even as high-security quantum networks are being developed, a countervailing worry is that quantum computers will eventually render obsolete today’s cryptographic techniques, which are based on hard mathematical problems.

Long before that happens, however, smaller quantum computers will make other contributions in industries from energy and logistics to drug design and finance. Even simple quantum computers should be able to tackle classes of problems that choke conventional machines, such as optimising trading strategies or plucking promising drug candidates from scientific literature. Google said last week that such machines are only five years from commercial exploitability. This week IBM, which already runs a publicly accessible, rudimentary quantum computer, announced expansion plans. As our Technology Quarterly in this issue explains, big tech firms and startups alike are developing software to exploit these devices’ curious abilities.

A new ecosystem of middlemen is emerging to match new hardware to industries that might benefit.

The solace of quantum
This landscape has much in common with the state of the internet in the early 1990s: a largely laboratory-based affair that had occupied scientists for decades, but in which industry was starting to see broader potential. Blue-chip firms are buying into it, or developing their own research efforts. Startups are multiplying. Governments are investing “strategically”, having paid for the underlying research for many years—a reminder that there are some goods, such as blue-sky scientific work, that markets cannot be relied upon to provide.

Fortunately for quantum technologists, the remaining challenges are mostly engineering ones, rather than scientific. And today’s quantum-enhanced gizmos are just the beginning. What is most exciting about quantum technology is its as yet untapped potential. Experts at the frontier of any transformative technology have a spotty record of foreseeing many of the uses it will find; Thomas Edison thought his phonograph’s strength would lie in elocution lessons. For much of the 20th century “quantum” has, in the popular consciousness, simply signified “weird”. In the 21st, it will come to mean “better”.

China and a Philippine Foreign Secretary’s Ouster

By Jacob L. Shapiro

The South China Sea is a sideshow.

The Philippines Commission on Appointments (CA) rejected the reappointment of Philippines Foreign Secretary Perfecto Yasay Jr. on March 8. This is the same Philippine official who made waves three weeks ago when, after a meeting of ASEAN foreign ministers, he publicly criticized China’s moves in the South China Sea. At the time, China was highly critical of Yasay’s comments, with a Chinese Foreign Ministry spokesman calling them “baffling and regrettable.”

The spokesman urged Yasay to follow the path of relations that Philippine President Rodrigo Duterte and Chinese President Xi Jinping had outlined during Duterte’s October visit to Beijing. Yasay now finds himself without a job.

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This is the latest episode of an issue that is not expected to disappear over the next few years.

China is too militarily weak and economically vulnerable to engage in fighting in its near abroad with the United States and its allies Japan and South Korea. China’s best strategic option is to change the balance of power in the Pacific or in Southeast Asia, either by developing closer relationships with key countries there or destabilizing their domestic politics.

Two countries China is focusing on are Myanmar and the Philippines. Earlier this week, Chinese-backed rebels in Myanmar resumed a new round of attacks in the country, frustrating Myanmar leader Aung San Suu Kyi’s peace initiatives.

Yasay’s rejection comes only a few days after that.

Reading Chinese influence in the rebuff of Yasay must begin with a caveat: It could have more to do with domestic Philippine political issues than with China’s influence. The Commission on Appointments is responsible for approving all heads of executive departments, ambassadors, armed forces officers and a range of other positions. The confirmation process itself is often inefficient and serpentine. It is not uncommon for the CA to take years to confirm Cabinet members. In 2014, for example, three Cabinet-level officials were confirmed after already having served four years in their positions. What is unusual in Yasay’s case is that the CA quickly and decisively moved to reject his reappointment.

Former Philippine Foreign Secretary Perfecto Yasay Jr. speaks at a forum at the Center for Strategic and International Studies in Washington, D.C., on Sept. 15, 2016. ZACH GIBSON/AFP/Getty Images

Yasay also was caught red-handed in a lie. The former foreign secretary said he had never held U.S. citizenship or a U.S. passport, but he was granted U.S. citizenship in 1986, had held a U.S. passport, and only renounced his U.S. citizenship last June – two days after he was nominated for the post. The 15-person commission unanimously decided to reject Yasay, and Duterte already has nominated a new official to replace him.

There are too many coincidences to conclude the analysis here. First, on March 6, the Philippines and China revived the Joint Commission on Economic and Trade Cooperation, which had not met for five years due to territorial disputes between the two countries. On March 7, the day before Yasay’s rebuff, Chinese and Philippine trade officials announced China intended to finance at least three infrastructure projects in the Philippines worth $3.4 billion. China also reportedly agreed during the commission’s meeting to purchase $1 billion of Philippine agricultural products this year. Yasay’s comments at ASEAN last month resulted in the cancellation of a visit by China’s commerce minister to Manila to sign economic agreements. Injecting new life into those deals the day before Yasay’s downfall was fortuitous timing.

philippines-chinas-territorial-claims(click to enlarge)

The issue goes beyond the announcement of a few economic promises (the word deal should be reserved for when the checks actually clear). Duterte has been relatively quiet on the issue of China-Philippines relations in recent months. If anything, his attitude toward China has been ambiguous at best. Duterte made no prominent statements after the ASEAN incident, which is strange for a leader with a demonstrated penchant for controversial sound bites. He also hosted Japanese Prime Minister Shinzo Abe in January, the first foreign leader to visit him in Manila.

The two sides agreed to a number of aid and investment deals. Duterte broke his silence on March 8 during a speech at the 10th Philippine Councilors League National Congress, where he profusely thanked China “for loving us [the Philippines] and giving us enough leeway to survive the rigors of economic life on this planet.”

On the same day, China made a point of announcing that the first draft of a Sino-ASEAN code of conduct had been completed after seven years of abortive negotiations. The importance of this is not the draft itself, details of which have not yet been released. The draft likely contains little that will change the region’s balance of power. Many more drafts will be completed and years of wrangling will ensue before anything is actually signed, let alone put into practice in the South China Sea. What is important is that China is touting the diplomatic role it has played in writing this draft. It is doing so while the Philippines holds the presidency of ASEAN.

And China is trumpeting this diplomatic success in the arena where Yasay publicly held China to the fire just a few weeks ago. For good measure, China’s foreign minister also took the opportunity to fire a diplomatic salvo at the United States over U.S. freedom of navigation operations in “contested waters.”

It is possible that all of this is just a coincidence, but coincidences are rare in geopolitics. Yasay was considered close to Duterte, and the two were roommates in law school. That Duterte was unable or unwilling to save Yasay might be evidence of an internal power struggle in the Philippines. For example, the Philippine defense minister has been consistently skeptical of Duterte’s desire to move closer to China and made comments to that effect on March 9. But the same day that Yasay’s reappointment was rejected, Duterte made public remarks about China that effectively repudiated Yasay’s position at the ASEAN meeting. It is reasonable to conclude that Duterte either lost trust in his confidant, did not sign off on Yasay’s comments at ASEAN, or had his hand forced by the revelation of Yasay’s lie. The public coordination on announcing new economic deals between the Philippines and China and China’s opportunistic announcement of its diplomatic success at ASEAN also suggest that China was ready to capitalize on Yasay’s fall from grace.

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Yasay’s ouster does not change the region’s balance of power. There are still limits to the Philippines’ ability to drift from the U.S., and to China’s capability of pulling the Philippines into its orbit. Thinking about such a large shift in the balance of power may be premature, anyway. China would love to flip the Philippines into a potential ally. But short of that, provoking domestic instability to disrupt the U.S.-Philippine relationship is a decent consolation prize from Beijing’s point of view. The reality check is this: Potential war in the South China Sea and the blowing winds of a trade war are sideshows. The main arena where China can make moves is in the domestic affairs of places like the Philippines. That makes a foreign secretary candidate’s rejection in the Philippines a matter of geopolitical importance.

North Korea Is Practicing for Nuclear War

North Korea isn’t testing its missiles. It’s preparing for a nuclear first strike.

By Jeffrey Lewis

North Korea Is Practicing for Nuclear War

On Monday morning, North Korea launched four missiles from the northwest corner of the country that traveled 620 miles before landing in the Sea of Japan.

While none of the launches were the long-awaited test of an intercontinental-range ballistic missile — the sort of weapon that could reach the United States — the salvo was a big deal in its own way.

Pyongyang very vividly demonstrated the warnings from Thae Yong-ho, a high-ranking North Korean diplomat who defected last year and described how the country was taking the final steps to arm its missile units with nuclear weapons. North Korea is developing an offensive doctrine for the large-scale use of nuclear weapons in the early stages of a conflict. When combined with what we know about U.S. and South Korean war plans, this fact raises troubling questions about whether a crisis on the Korean peninsula might erupt into nuclear war before President Donald Trump has time to tweet about it.

In the past, North Korea tested all its No-dong missiles out of a single military test site near a village of the same name. (Why, yes, the U.S. analysts did name the missiles after the town. The emasculating quality was a pure coincidence, I am sure.) These tests were designed to demonstrate that the Scud and No-dong missiles worked. They were tests in the literal sense of the word.

In recent years, however, North Korea has started launching Scuds and No-dongs from different locations all over the damn country. These aren’t missile tests, they are military exercises. North Korea knows the missiles work. What the military units are doing now is practicing — practicing for a nuclear war.

The North Koreans haven’t exactly been coy about this. Last year, North Korea tested a No-dong missile. Afterward, North Korea published a map showing that the missile was fired to a point at sea that was the exact range as South Korea’s port city of Busan, with an arc running from the target into the ocean, down to Busan. In case you missed the map, the North Koreans spelled it out: “The drill was conducted by limiting the firing range under the simulated conditions of making preemptive strikes at ports and airfields in the operational theater in South Korea where the U.S. imperialists’ nuclear war hardware is to be hurled.”

This time, North Korea launched four “extended-range” Scud missiles that are capable of flying up to 620 miles. The map showed all four missiles landing on an arc that stretched down to the Marine Corps Air Station near Iwakuni, Japan. Once again, the North Korean statement doesn’t leave much to the imagination: “Involved in the drill were Hwasong artillery units of the KPA (Korean People’s Army) Strategic Force tasked to strike the bases of the U.S. imperialist aggressor forces in Japan in contingency.”

So why is North Korea practicing nuking U.S. forces in Japan?

The United States and South Korea are conducting their largest annual joint military exercise, known as Foal Eagle. The exercise, which is really a series of exercises, lasts two months and involves tens of thousands of U.S. and South Korean military personnel, as well as an aircraft carrier, bombers, and — guess what? — F-35 aircraft based out of Iwakuni. Foal Eagle is a rehearsal for the U.S.-Republic of Korea war plan, known as OPLAN 5015, which has been described as a pre-emptive strike against North Korea, including its leadership, as a retaliation for some provocation. Whether that’s a fair description or not, the North Koreans certainly think the annual exercise is a dress rehearsal for an invasion. This year’s menu of fun and games reportedly includes a U.S.-ROK special operations unit practicing an airborne assault on North Korea’s nuclear and missile facilities.

What North Korea is doing is simply counterprogramming the Foal Eagle with its own exercise.

If we are practicing an invasion, they are practicing nuking us to repel that invasion.

What is disturbing about the situation, though, is how the war plans of North Korea, South Korea, and the United States might interact. North Korea’s military exercises leave little doubt that Pyongyang plans to use large numbers of nuclear weapons against U.S. forces throughout Japan and South Korea to blunt an invasion. In fact, the word that official North Korean statements use is “repel.” North Korean defectors have claimed that the country’s leaders hope that by inflicting mass casualties and destruction in the early days of a conflict, they can force the United States and South Korea to recoil from their invasion. While U.S. officials usually bluster that Kim would be suicidal to order the large-scale use of nuclear weapons, it’s obvious that a conventional defense didn’t work for Saddam Hussein or Muammar al-Qaddafi when they faced an onslaught of U.S. military power. That was suicide. Of course, that’s where those North Korean ICBMs come in: to keep Trump from doing anything regrettable after Kim Jong Un obliterates Seoul and Tokyo.

Kim’s strategy depends on using nuclear weapons early — before the United States can kill him or those special forces on display in Foal Eagle can find his missile units. He has to go first, if he is to go at all.
But going first is also the U.S. strategy. That means, in a crisis, the pressure will be to escalate.

Whatever restraint Kim or Trump might show — and let’s be honest, our expectations here are not high — each will face enormous pressure to start the attack lest his opponent beat him to the punch.

Then there is South Korea, which has its own pre-emption plan, separate from OPLAN 5015 and using South Korean ballistic and cruise missiles. Pyongyang, Washington, and Seoul all have plans to go first. Two of them are going to be wrong about that.

I understand why the public is fixated on the possibility of a North Korean ICBM. A nuclear-armed ICBM is North Korea’s ultimate goal and would be its final deterrent. It would be the last card that Kim would play. But it is equally, if not more, important to think through how such a war might start.
It is important to understand whether the military forces and plans both sides are pursuing make war less likely or more. The launch on Monday might not have been an ICBM, but — in light of Foal Eagle — it was a warning all the same. Not of how a war on the Korean peninsula might end, but of how one might begin.
Jeffrey Lewis is director of the East Asia Nonproliferation Program for the James Martin Center for Nonproliferation Studies at the Middlebury Institute of International Studies at Monterey.

The Greatest Fool Is Here

by: Eric Parnell, CFA

- Investors think stocks are expensive.

- Yet investors are as optimistic about future returns as they have ever been.

- This is a combination that does not end well at all.

- The Greatest Fool is here.

A notable divergence is taking place in the U.S. stock market. A growing percentage of investors believe that stock valuations are too high. Yet a record number of investors also think that stock prices will be higher one year from now. Such is a toxic brew of sentiment that potentially does not end well.


The Investor Behavior Project at Yale University under the direction of Professor Robert Shiller publishes four different stock market confidence indices for the United States. Two of these four confidence indices are known as the U.S. Valuation Confidence Index and the U.S. One-Year Index.

And the themes implied by the latest data from these indices suggest a stock market filled with investors that are becoming increasingly disconnected from rationale and reality.

That's Rich

Let's first consider the U.S. Valuation Confidence Index, which is shown the chart below. This index is based on a question asked to both institutional and wealthy individual investors regarding stock prices (NYSEARCA:SPY) and how they are priced when compared to "true fundamental value" or "sensible investment value." The Index measures the percentage of the survey population that thinks the stock market is not too high from a valuation perspective.

Thus, the lower the reading, the more respondents think the stock market is overvalued.

Historically, roughly 68% of institutional investors and 62% of wealthy individuals on average have viewed stock market (NASDAQ:QQQ) values as not too high at any given point in time.

As recently as one year ago in March 2016, a reasonable 64% of institutional investors believed stock valuations were at least reasonable. Wealthy individual investors were notably more skeptical a year ago, but were still evenly split at 50% about stock valuations.

Following the strong run higher in stocks since November, the percentage of institutional and individual investors that think today's stock market (NYSEARCA:DIA) is either attractively valued or simply just reasonably valued has plunged over the past year. Today, only 47% of institutional investors believe stock prices are not too high. And just over 40% of individual investors view stocks as not being too expensive today.

For individual investors, this 40% reading is the lowest the U.S. Valuation Confidence Index has been since April 2000, which was effectively at the peak of the technology bubble. As for marginally more optimistic institutional investors, the 47% reading also is the lowest it has been since the midst of the bursting of the tech bubble in the early 2000s.

Put simply, both institutional and wealthy individual investors view stocks (NYSEARCA:IVV) as about as expensive as they have been in a long time. The last time either group thought they were this expensive, the stock market proceeded to fall into a painful bear market.


Now given that a notable majority of both institutional and wealthy individual investors believe that stock prices are currently too high based on valuation, one would reasonably think that these same investors might have a pessimistic or at least a more measured view about the prospects for stock market (NYSEARCA:VOO) returns over the coming year. After all, if stocks are currently expensive in the view of many, a subsequent correction in the year ahead might be a logical conclusion in order to correct for this implied overvaluation. But this is not at all the case. Instead, investors are almost certain that the exact opposite is going to happen.

Consider the U.S. One-Year Confidence Index, which is shown in the chart below. This index is based on a question asked to both institutional and wealthy individual investors that effectively determines the percentage of survey respondents that believe that stocks will be trading higher one year from now. Thus, the higher the reading, the more confidence among respondents that the stock market will be higher a year from now.

Stock investors are a famously optimistic lot, which is shown in the historical average data.

Overall, 78% of institutional investors and 79% of wealthy individual investors on average believe that the stock market will be trading higher one year later at any given point in time.

But where we are today is absolutely remarkable.

Among wealthy individual investors, nearly 84% of respondents believe stocks will be trading higher one year from now. This is the highest reading on the individual side since March 2007 just before the outbreak of the financial crisis.

What about the institutional side? Hold onto your hats. As of February 2017, an incredible 99% of survey respondents declared that the stock market would be trading higher one year from now. This is a reading that implies near unanimity among the institutional investor community. Needless to say, this is the highest reading in the history of the index by a healthy margin.

No More Fools

First, let's debunk a notion that I repeatedly hear expressed in the financial media. It is a common perception that investors remain shell shocked from the financial crisis, with many still hiding out in their bunkers surrounded by a stockpile of cash. Maybe this is true on an anecdotal basis, but based on the U.S. One-Year Confidence Index numbers, both institutional and wealth individual investors got over the financial crisis a while ago. Heck, I'm guessing many don't even remember it anymore if they were even participating in the markets back then nearly a decade ago.

Now, let's consider what the data is currently saying. Put simply, if ever I needed a single data point to express my bearish view on the U.S. stock market, the U.S. One-Year Confidence Index for institutional investors would be a very good candidate. Why? Because this reading alone is showing in data form that the institutional market has effectively run out of buyers. After all, if an institutional investor thinks that stocks are going to be trading higher a year from now, they will be invested accordingly. And if 99% of already investors feel that way, who is the institutional investor that is not already in the market that is going to come in and buy more to keep stock prices moving higher?

In short, the greatest fool has effectively arrived for the institutional stock investor marketplace.

Perhaps the remaining wealthy individual investors can fill the remaining gap in the very near term, but the fact that this group is already historically optimistic in their own right suggests that they may also be all in at this point as well.

What makes this greatest fool risk all the more disconcerting is that it is playing out at a time not when stock valuations are perceived to be reasonable if not attractive. Instead, it is occurring at time when a historically high majority of both institutional and wealthy individual investors believe that stocks are too expensive.

All of this implies a toxic combination. Nearly everyone is bullish, thus leaving nobody new to join the game to take on the hot potato of already expensive stock prices. And given that a majority of participants in the game know that the stocks they are holding are already too expensive, they at some point may decide to seize the first mover advantage in dumping their shares ahead of the rest.

Such is the danger of the momentum trade that has carried the stock market to such great heights in recent years. Unlike rising stock prices based on fundamentals, once the momentum trade fizzles out, the subsequent downside is painful and relentless. Those who remember the technology bubble, you know exactly what I am talking about. For just as momentum can cause stocks to overshoot wildly to the upside, so too can it cause stocks to overshoot crushingly to the downside.

The key question for stock investors is when. But with the greatest fool potentially having arrived at a time when the Fed has suddenly found its long lost swagger to storm in and steal away the punch bowl, such an inflection point for the momentum trade may finally be coming sooner rather than later.

Strategy Implications

Does this mean sell stocks today? No. But what it does mean is to not get complacent. Stocks may continue to run to the upside in the near term. And there is still a healthy percentage of stock investors who are dying to buy the first solid dip in stock prices after so many months of relentless gains. This buyer is likely to come from the institutional side - the U.S. Buy-On-Dips Confidence Index is running at the high end of the historical range for institutional investors at 64% but at the low end of the historical range for wealthy individual investors at just 52% - but they will give those who are long and currently riding high on the momentum trade a window of opportunity to scale back equity allocations if needed.

With this in mind, the key to emerging largely unscathed from any future market downturn is to avoid becoming complacent. For those who are standing ready and aware with a risk control action plan in place should fare just fine if not capitalize. Those who are complacent and not paying attention to the downside risks, on the other hand, are those who likely will find themselves trapped in the clutches of the next bear market wondering in retrospect how they possibly could have ever seen it coming.