The Weekend Edition

It’s a Festivus for the rest of us. Whether you observe something this time of year or not — Christmas, Chanukah, New Year’s or, on 23 December, Festivus — odds are good you’ll be taking a few days off. Odds are better you’ll want to watch a little bit of television during that break. Which leads us to a recommendation and an assertion: You must watch The Americans, which is simply the best drama on television these days, particularly if you’re a child of the 1980s (or were born thereafter and mistakenly think the decade cool). And the assertion? Die Hard is the best Christmas movie of all time. As a wise person once meme’d: “It ain’t Christmas ‘til Hans Gruber falls from the Nakatomi tower.”

Soundtrack for this morning’s edition: Apple Music’s Alternative Hits 1984. (God help us…)

** TAP OR CLICK HERE TO TAKE OUR READER SURVEY, the results of which will run in our 29 December Year-in-Review edition. We’re asking what USD rate you’re using in your budget, your expectation of the economy, whether you’ll invest more this coming year and more. The survey closes on Tuesday, 20 December at 5pm — it won’t take more than a minute to complete unless you’d like to leave us a long not

As a thank you for reading the Weekend Edition, we’re going to enter anyone who answers the survey from the Weekend Edition link into a draw for an Enterprise mug. Make sure you enter your name and email address in the final box on the survey if you want the chance to win.

What the world searched for in 2016: Google released its Year in Search series tracking what was trending in 2016. The most searched topic globally was Pokemon Go, followed by iPhone 7, and Donald Trump. The US Election was the most searched piece of news during the year, being a Presidential Election year, and the two most searched people were Trump and Hillary Clinton. Stranger Things and Westworld were the two most searched TV shows and, for some unknown reason, Celine Dion and Kesha were the top two searched musicians. We have some doubts about the Year in Search results for Egypt — it simply looks too “cleaned up” and PG. The top searches in Egypt were for the results of the Thanawiya Amma high school exams, the price of USD, and the Ramadan TV series “Al Ostoora.”

You want to talk about American exceptionalism? America was home to a medieval city bigger than London or Paris was at the time — with pyramids, writes Annalee Newitz for Ars Technica, one of our favourite online rags. “A thousand years ago, huge pyramids and earthen mounds stood where East St. Louis sprawls today in Southern Illinois. … At the city’s apex in 1050, the population exploded to as many as 30 thousand people. It was the largest pre-Columbian city in what became the United States, bigger than London or Paris at the time. … It was booming in 1050, and by 1400 its population had disappeared, leaving behind a landscape completely geoengineered by human hands. … The story of this place would take us back to the final decades of a great city whose social structure was undergoing a radical transformation. … It was bigger than Paris—then it was completely abandoned. I went there to find out why.” Read Finding North America’s lost medieval city.

A four-letter ‘code’ you’ve never heard of can help you sell anything. “His firm designed mid-century icons like the Exxon logo, the Lucky Strike pack, and the Greyhound bus. He designed International Harvester tractors that farmed the Great Plains, merchandise racks at Lucky Stores supermarkets that displayed produce, Frigidaire ovens that cooked meals, and Singer vacuum cleaners that ingested the crumbs of dinner. Loewy’s Starliner Coupé from the early 1950s—nicknamed the “Loewy Coupé”—is still one of the most influential automotive designs of the 20th century. The famous blue nose of Air Force One? That was Loewy’s touch, too. After complaining to his friend, a White House aide, that the commander in chief’s airplane looked “gaudy,” he spent several hours on the floor of the Oval Office cutting up blue-colored paper shapes with President Kennedy before settling on the design that still adorns America’s best-known plane. ‘Loewy,’ wrote Cosmopolitan magazine in 1950, ‘has probably affected the daily life of more Americans than any man of his time.’”

How did he do it? The Atlantic’s Derek Thompson explains: “Loewy had an uncanny sense of how to make things fashionable. He believed that consumers are torn between two opposing forces: neophilia, a curiosity about new things; and neophobia, a fear of anything too new. As a result, they gravitate to products that are bold, but instantly comprehensible. Loewy called his grand theory “Most Advanced Yet Acceptable”—maya. He said to sell something surprising, make it familiar; and to sell something familiar, make it surprising.” It is, at its heart, a story about what makes things cool.

The Nobel Lecture: Nobel Laureates Oliver Hart and Bengt Holmström, co-recipients of this year’s Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, delivered the Prize lecture last week at the Aula Magna, Stockholm University. The pair were awarded the prize for their work on contract theory. Hart’s lecture, titled Incomplete Contracts and Control, explained the basis of his work and the limits of contracts (runtime 29:24). Following Hart’s, Holmström gave his lecture, titled Pay for Performance and Beyond, in which he attempted to convey how he viewed theory and how some of views might seem “obvious” but actually “require some further thought” (runtime 36:29).

What it is like to bomb so beautifully at the Nobel Prize awards ceremony: Patti Smith accepted Bob Dylan’s Nobel Prize last week and honored him by singing his 1963 classic "A Hard Rain’s A-Gonna Fall." The performance was marked by Smith’s case of “the nerves” (runtime 08:30), as she forgot the words in a verse before apologizing for her slip-up. Smith followed up by writing a beautiful, heartfelt piece in The New Yorker explaining “How does it feel.” Smith writes, “In September, I was approached to sing at the Nobel Prize ceremony, honoring the laureate for literature … I chose to sing ‘A Hard Rain’s A-Gonna Fall,’ a song I have loved since I was a teen-ager, and a favorite of my late husband.” After meticulous preparation for the event, Smith says she woke up “with some anxiety” on the day of the performance: “I was aware that people were looking forward to the performance. Everything was before me.”

It was time. “As I sat there,” Smith writes, “I imagined laureates of the past walking toward the King to accept their medals. Hermann Hesse, Thomas Mann, Albert Camus. Then Bob Dylan was announced as the Nobel Laureate in Literature, and I felt my heart pounding … The opening chords of the song were introduced, and I heard myself singing. The first verse was passable, a bit shaky, but I was certain I would settle. But instead I was struck with a plethora of emotions, avalanching with such intensity that I was unable to negotiate them. From the corner of my eye, I could see the huge boom stand of the television camera, and all the dignitaries upon the stage and the people beyond. Unaccustomed to such an overwhelming case of nerves, I was unable to continue. I hadn’t forgotten the words that were now a part of me. I was simply unable to draw them out… It was not lost on me that the narrative of the song begins with the words “I stumbled alongside of twelve misty mountains,” and ends with the line “And I’ll know my song well before I start singing.” As I took my seat, I felt the humiliating sting of failure, but also the strange realization that I had somehow entered and truly lived the world of the lyrics.” Smith was struck with the kindness of the Nobel laureates she saw the next day, “They told me I did a good job. I wish I would have done better, I said. No, no, they replied, none of us wish that. For us, your performance seemed a metaphor for our own struggles.”

Put down your earphones and step away from Spotify: “Bad news for anyone … who believes background music is some sort of special hay that makes the writing horse trot. It turns out the best thing to listen to, for most office workers, is nothing,” The Atlantic tells us. Although some studies have found that music can be an aid to productivity, this seems to only be the case when performing tasks that don’t require much cognitive function and/or may be boring, such as driving for long distances or cleaning your house. For cognitively complex tasks, however, it’s better to perform in silence than while listening to music, as the “noise” — no matter how much you love it — is likely to interfere with, well, thinking. This is especially the case when listening to music with lyrics and attempting to perform verbal and written tasks.

Applying math to investment: The optimum amount of money you should bet on a particular outcome is dictated by mathematics. People ignoring the laws of numbers and probabilities for gut feeling or going on a whim risk losing everything, Joe Weisenthal and Tracy Alloway discuss in an episode of Bloomberg’s Odd Lots podcast. They speak to Victor Haghani, CEO of Elm Partners Management and the co-founder of the collapsed hedge fund Long-Term Capital Management, about the most important mathematical concepts for investing, and also discuss the pros and cons of quantitatively led finance (runtime 25:14).

NPR’s Planet Money discusses how Facebook’s aggressive manner in “protecting its turf” will shape the future of the internet. They looked into the story of Steve Vachani, who wanted to make a site that brings all of your social networks together making it easier to use all websites that require logging in. His plan in 2006 was to create a way for to access all their social networks from one place, and Facebook didn’t like it. “A battle ensued between two young internet companies, and something unusual happened: Neither side backed down. One side had the best lawyers money could buy. The other had a newbie lawyer who had never argued a case in court before. The result could set a legal precedent that will affect every person on the Internet” (runtime 18:09).

Plenty of us sleep less as the price of making time for other things we feel matter more: Family time, work, a Thursday night outing, one more episode of Black Mirror. Plenty of us are aware that this choice probably isn’t the best for our long-term well-being, but some people tend to cope better with reduced sleep than others, which makes it easier to pretend you’ll be fine if you just drink Red Bull instead. The consensus? “When we get fewer than seven hours [of sleep], we’re impaired (to degrees that vary from person to person). When sleep persistently falls below six hours per 24, we are at an increased risk of health problems,” according to The Atlantic. But the number of hours you spend catching z’s isn’t the only factor that should be considered if you’re concerned about your sleeping habits: staring at your phone or other light-emitting devices actually does interfere with your physiological readiness to sleep, and all that coffee you’re drinking might make you more productive now, but you might want to think about cutting back a little for your New Year’s resolution. “Caffeine works primarily by blocking the action of a chemical called adenosine, which slows down our neural activity, allowing us to relax, rest, and sleep. By interfering with it, caffeine cuts the brake lines of the brain’s alertness system. Eventually, if we don’t allow our body to relax, the buzz turns to anxiety.”

When one of the richest men in Egypt warns of a real estate bubble, you really should take stock and have a think about it. This is especially true if we are talking about Samih Sawiris, a man who built much of his wealth from real estate in Egypt and is an insider to the industry with skin in the game. And he is not the only one who believes the writing is on the wall.

At a recent AmCham real estate conference, Samih warned, “The market is oversupplied and sustaining sales will be difficult in no small part due to the float of the EGP. Egyptians are now 30-40% poorer and their purchasing power dropped during the devaluation.”

A bubble is an economic cycle created by a surge in asset prices unwarranted by the fundamentals of the asset and driven by exuberant market behavior. What really worries me about this off-the-shelf definition of a bubble are the words “exuberant market behavior,” which echoes the warning of Alan Greenspan, in typical Fedspeak, of “irrational exuberance” in the run up to the global financial crisis of 2008.

In Mohamed El Erian’s excellent book The Only Game in Town, he summarizes the lead-up to the global financial crisis as a perfect storm in which the rise and fall of the housing market was debt-fueled by excessively complex and lax lending practices at a time when central banks mistakenly believed in self-regulation and failed to spot the dangers ahead.

In simple terms, during the heyday of the housing bubble in the US and most of Western Europe, real estate agents would often repeat the mantra of “safe as houses” to prospective buyers who were confident that the price of houses could only go up and up and up. These buyers were aggressively encouraged (if not induced) by predatory mortgage lenders who offered cheap credit with no questions asked. The frenzy and madness of this “irrational exuberance” is best captured in one of my favorite finance movies, The Big Short.

Let’s try and dissect whether the concerns about an Egyptian real estate bubble are warranted. CAPMAS’ 2012-13 household income and expenditure survey (the most up-to-date available) shows the richest 10% in Egypt are those who can afford to spend EGP around EGP 42,000 a year or more. Yet the price of a decent two-bedroom property in any of the new urban areas, such as Six of October City or New Cairo, will cost a minimum of EGP 1.5 mn.

What this tells us is that clearly the majority of the supply of new housing is catered to the top 1% of Egyptians. The same story goes for any holiday homes in the North Coast or the Red Sea. There is no meaningful or cohesive government led policy that focuses on housing for the middle class or those with lower incomes. Despite recent improvements in regulation, access to mortgage lending for the less affluent is still very poor.

Yet, real estate developers announce a launch of a new project and within days, if not hours, all units are sold. They’re going like hotcakes ladies and gentlemen, so up until now there is clear demand for these properties. The typical story is for a family to buy a new home and move to one of the new urban development gated communities in order to upgrade their lifestyle. If they become more prosperous, they then start to buy more property as a form of saving and to secure the future housing needs of their children. If they become even more affluent and need to “diversify,” they start to invest in holiday homes in the North Coast and the Red Sea and, if things are going really well, they make the same investment for their kids and grandchildren.

But how long can this realistically last? Ten homes? Twenty? Can the rich still afford to maintain this demand after the devaluation?

Another question is whether these are actually sound investments or just speculation. The rental yields of the properties in the new urban developments are often much lower than their counterparts for the same price in the traditional affluent neighborhoods, such as Zamalek or Maadi. The yield on holiday homes are negligible compared to the cost and most people don’t rent their holiday homes anyway. Hence the ghost towns in the North Coast that are vacant for 10 months of the year.

As for capital appreciation, the secondary market has not been fully tested as most investments have unactualized as opposed to actualized returns, but what we can tell for now is that if someone would wish to sell their home in the secondary market they would have to compete with the ever increasing supply from the primary market offered by the real estate development companies. This goes to the heart of what Sameh Sawiris and others are warning about.

Another problem Egyptians have to contend with is a lack of optionality when it comes to their saving and investment decisions. Unless you are a sophisticated investor who can invest in other markets or higher risk investments, you really only have three options: either you put your money in certificates of deposit, real estate or the Egyptian stock market. This exaggerates the problem, because a lot of people who actively invest in the housing market as a form of saving may not have done so if more financial products where available to them (for example, investment grade corporate bonds).

Many people in the real estate sector believe the concerns of a real estate bubble are, to put it diplomatically, unfounded. Magued Sherif, the managing director of SODIC, recently argued that half of the population of Egypt are under the age of 25 and are victims of the housing gap. He added that despite the economic difficulties of the last few years, demand for real estate has been strong.

Hesham Shoukri, chairperson and CFO of Rooya Group, agreed with Magued and added that real estate companies are catering for current and future demand. Some data supports this position; a report by Colliers International concludes that the residential supply in Egypt grows by 1% each year, while the population grows by more than 2%, demonstrating that demand outstrips supply. Finally, there is a valid argument that, unlike the US and Europe, very few people in Egypt buy property using debt, which means they are a lot less sensitive to changes in interest rates and the overall macroeconomic picture.

So is it a bubble or isn’t it? That’s one of the main problems with asset bubbles — you never really know until it pops. If there was consensus, the market would readjust and the danger would be averted. But, unfortunately, that’s not the way the world works.

What I would say is that there are clearly structural problems with the Egyptian housing market that will come to the fore sooner rather than later. These structural challenges and possible solutions are already known to us; a government led change in mindset in order to have a more inclusive housing policy, finding the missing middle and to focus on integrated communities, rationalizing pricing by introducing incentives to the private sector to cater for different segments of the market and deep reform in regulation to provide better access to mortgage financing, especially for those with lower incomes.

I would invite you to re-visit the excellent five-part series on the real estate sector published on Enterprise a few months ago.

Anybody who invests in anything with the confidence that prices can only go up and up and up will, inevitably, end up with a nasty surprise. Caveat Emptor.

Aly Shalakany is senior partner at Shalakany Law Office, which he joined from Linklaters in London. Aly is a noted specialist in finance, projects and mergers and acquisitions; his column appears exclusively in our Weekend Edition, offering an “inside baseball” look the intersection of business, economy and finance from the point of view of a practitioner at the top of his game. Share

The most-clicked stories in Enterprise in the past week were:

• CCTV footage of a suspected suicide bomber walking into the Coptic Cathedral compound and the explosion that followed. (on Amr Adib or Youm 7)
• RiseUp: The Enterprise conference report. (Enterprise)
• The pessimist’s guide to 2017. (Bloomberg)
• Photo essay on the funeral of victims of Sunday’s Cathedral bombing (Georges & Samuel)
• A video of a man ordering McDonalds in the voice of the narrator of National Geographic’s Arabic-dubbed documentaries. (Facebook video)
• Copts bear the brunt of a shift in terror strategy in Egypt (Mokhtar Awad for the Atlantic Council)