Weekend reading links

1. The rise of zero-sum politics in the West.

In the US, UK, France and Germany zero-sum beliefs on the left (eg people only get rich by making others poor) and the right (eg immigrants succeed at the expense of the native-born) are related expressions of the same underlying worldview. Namely that there is only so much to go around and we must therefore use restrictions, exactions and preferential treatment to redress the balance between winners and losers.

2. Primer on how the Labour Codes will contribute to the formalisation of the economy. 

3. Tim Wu contrasts America's all-in bet on proprietary AI-led innovation with China's diversified bet on renewables and green technologies coupled with applications of AI through open-source models. The article has this graphic which shows how Chinese exports to developing countries has taken off exponentially.

Last year, 70 per cent of the world’s EVs were manufactured in China. China also accounts for roughly 80-85 per cent of global solar photovoltaic manufacturing, and more than 75 per cent of all global battery production.

4. Data centre construction in the US is now on par with office construction!

And this on their power demand.

Across America, data centres represent a combined capacity of about 51GW. Running at their maximum, this equates to 5 per cent of the country’s peak demand. By 2028, an estimated 44GW of additional capacity will be required by new data centres, according to S&P Global Energy. Given constraints to grid infrastructure, power capacity coming online in the next three years will only be able to provide about 25GW for these data centres. That leaves a gap of 19GW — just over 40 per cent of the power needed... After more than two decades of flat or anaemic growth, US power demand is now surging. Electricity usage is projected to rise by an average of 5.7 per cent a year to 2030, based on forecasts from utility companies... more than half of the expected increase stems from the rapid build-out of AI data centres, according to consultancy Grid Strategies.

And the constraints to power capacity expansion.

Boosting the US power grid is an enormous and time-consuming task due to a complex web of regulatory, financial and supply chain challenges. Interconnection queues — backlogs of projects waiting to plug into the network — have become a major chokepoint, slowing the rollout of new power capacity and leaving data centres facing lengthy delays... The average time from filing an interconnection request to achieving commercial operation now exceeds eight years, according to energy think-tank RMI... On average, federal permitting for a new US transmission line takes about four years, according to the Department of Energy. State processes add further delays to grid build-out. Last year, almost 900 miles of new high-voltage transmission lines were completed, according to lobby group Americans for a Clean Energy Grid. This is the most since 2020, but still far short of the 5,000 miles a year the group estimates is needed to support grid reliability and growth.

5. Like in China, India's solar manufacturing capacity is entering a glut and is also due for consolidation. 

Edinburgh-based energy consultant Wood Mackenzie estimates the country’s solar module manufacturing capacity will exceed 125GW by 2025, which is more than three times its domestic demand of around 40GW. Nomura projects capacity additions of 100-110GW in the next three years, further raising the risk of oversupply and painful consolidation.

This is an interesting comparison with China, pointing to future pain.

In China, half of the six major solar IPOs of the past two decades now trade below their issue price. In the US, SunPower has filed for bankruptcy. Even today, China’s JA Solar, with nearly 85GW each of ingot-wafer and cell capacity, is valued on par with India’s Waaree Energies, which has only a fraction of that scale... Some distress from oversupply is already visible in the supply chain. While the large, cash-rich players, including Adani, Waaree and Premier Energies, are tightening their hold on the sector by backward-integrating their supply chain and protecting their future margins, the smaller players are struggling to keep their plants running.

Worsening matters further is the lack of demand for solar power among discoms. 

India’s solar energy capacity currently totals 130GW, according to the ministry of new and renewable energy... As of September, around 44GW of tendered clean energy capacity, out of 93GW since fiscal year 2024 (FY24), remains without buyers... The ministry said in early November that it may look to cancel these projects on a case-by-case basis. One of the primary reasons for unsigned agreements is that state utilities expect solar prices to fall further. 

This capacity explosion has been facilitated by industrial policy.

In 2022, India imposed 40% tariffs on solar modules and 25% tariffs on solar cells to discourage imports from China. Last year, the country dictated that Indian solar power producers must purchase from an approved list of domestic solar-module makers—there are 93 companies in the approved list so far. Similar rules for solar cells will come into effect next year. Further restrictions on imports of ingots and wafers that are building blocks of modules and cells are expected in the coming years.

But industrial policy does not appear to be able to bridge competitiveness. 

Under new domestic content requirements, an entirely ‘Made in India’ module would cost more than double Chinese-manufactured modules, making it uncompetitive without substantial government policy support.

While India's solar manufacturing capacity is now largely at the level of modules, the government is pushing hard to integrate backwards into cells, ingots, wafers, and polycrystalline. But that's challenging. 

Owing to the complexities involved, the cell is the most capex-intensive segment. According to Nomura, capital expenditure per GW of cells can total ₹6,500 crore versus ₹2,000 crore for modules. Ingots and wafers need up to ₹4,500 to build 1GW capacity. As the supply glut in modules deepens, large integrated players such as Reliance Industries, Adani Enterprises, Waaree, Premier and Tata Power, which are investing across the value chain, are better positioned to survive... All large and listed players have announced plans to backward integrate, expecting that impending import restrictions further down the value chain will keep profits coming. According to Nomura, 70-80GW of cell capacity additions will come online over the next three years. It is 18.5GW right now.

Solar energy has the lowest tariff rate.

6. As developed countries grapple with high and rising debt burdens, some pointers.

While the ratio of debt to GDP in the world’s biggest economy shrank from 106 per cent in 1946 to 21.6 per cent in 1990-91, it has since lurched back up to almost 100 per cent thanks to, among other things, the financial crisis and Covid-19... The postwar experience of the UK provides a case study of how these factors interact. The country’s debt-to-GDP ratio went from more than 250 per cent in 1946 to just 42 per cent three decades later. In a seminal piece of research, Barry Eichengreen and Rui Esteves show that for most of the 1946 to 1955 debt consolidation episode, the UK ran consistent, large primary budget surpluses despite the Labour government’s huge expansion of the welfare state. Yet the largest contribution to debt reduction came from inflation, which was responsible for more than 80 per cent of the debt consolidation over the period. That said, from 1955, fiscal discipline and economic growth did most of the work — surprisingly given Britain’s record at the time for economic incompetence — because the contribution of consumer price inflation, which peaked at 24 per cent in 1975, was neutralised by rocketing interest rates.

7. K-shaped income gain + K-shaped wealth gain = K-shaped economy. Rana Faroohar writes about the K-shaped economy in the US.  

Consider income growth, which was higher for low-income households right before and during the pandemic — in large part because of support from the Biden administration — but has diverged since. Wage growth for low-income workers is now lower than for middle- and high-income workers. This is partly explained by the artificial intelligence boom that is showing up in higher unemployment figures for young college graduates as more entry-level white-collar work is done by technology. Asset growth is K-shaped too, with higher-income households seeing lots of paper wealth from stocks at still near-record highs and rising home prices. According to investment group Apollo, the cash flow received in fixed income, including private credit, is nearing levels not seen in decades. That wealth effect has propelled the existing K-shaped trend in consumer spending. The percentage of overall spending done by the top 10 per cent of the socio-economic spectrum has risen from 36 per cent to nearly half since 1989, according to Moody’s analytics.

8. Daron Acemoglu points to the breakdown of the liberal democratic politics.

Liberal democracy was made by its pledges. It plunged into crisis because of their undoing. A lot of this volte-face was about the eclipse of the industrial compact and the rise of a post-industrial society, dominated by digital technologies and the college-educated professionals that these empowered. Digital technologies severed the link between economic growth and shared prosperity. With the widespread automation enabled by digital tools, companies could expand without hiring more employees and paying workers more, and the skill bias of these technologies gave a boost to the earnings of highly educated and managerial workers. The result was a staggering increase in inequality in the US, with the inflation-adjusted wages of low-education men falling most years between 1980 and 2014 — even as the aggregate economy and the urban, globalised professionals were flourishing.

That the computer age was leaving behind the working class, which used to typically support left-leaning parties, was unnoticed by the college-educated, who were becoming politically and socially ascendant in the environment digital technologies created. That they had started living separately, socialising separately, marrying separately, and holding very different views from the less educated undergirded this omission. There was also a major sin of commission on the part of left liberals. As they abandoned classic working-class or social democratic issues, they started focusing on cultural politics — in part because cultural divides had become more pronounced and in some ways more intractable in an age defined by shifting mores, globalisation and increasing immigration flows from countries with dissimilar traditions.

But the cultural divide that emerged between different education groups and ideologies did not have a simple solution. Even as norms were changing on important issues such as gay marriage, new rifts were opening related to the assimilation of new immigrants, transgender rights and cosmopolitan versus local priorities. The college-educated, fatefully, turned to social engineering efforts, trying to accelerate cultural change — in universities, schools, the entertainment industry and even workplaces. These efforts, though often well meaning, were nonetheless perceived by many working-class communities as the imposition of the priorities of college-educated values on the rest of society. The scene was set for a crisis of liberalism and of liberal democracy.

9. Importance of Samarium, a rare earth mineral, and how the US gave up its leadership.

Most rare-earth magnets are made of neodymium, which is used in everyday applications such as cellphones, auto parts and electronics. But the defense industry requires samarium-cobalt magnets, which can withstand extreme heat... Unless new sources of samarium or a substitute material can be found, American manufacturers won’t be able to build fighter jets or precision-guided missiles. They may be forced to sacrifice precision if they can’t get the right magnets... 

Although samarium-cobalt magnets were invented in an Air Force research lab in Ohio in the 1960s, the industry moved to China in the 1980s, partly because of rich rare-earth deposits there. Today, China mines, processes, sells and consumes such large volumes of rare-earth metals that it can drop the price below the cost of production when foreign competitors come online. American and European companies have struggled to stay afloat. Many either declared bankruptcy or opened factories in China.

And the difficulty of reshoring, even with good policy intent, without a crisis hitting.

In recent years, American policymakers have tried to build a domestic supply. The National Defense Authorization Act of 2023 and 2024 gradually tightened restrictions on the use of rare-earth metals from China in weapons systems, and stipulated that all such materials must be China-free by Jan. 1, 2027. But such mandates have been inconsistently enforced, partly because alternatives are not available. In 2023 and 2024, when magnets were supposed to be made of metal that was created outside China, Lockheed Martin notified the Pentagon that its F-35 Joint Strike Fighter had Chinese-made magnets. The military paused production of the jet for months but eventually issued a waiver allowing the parts.

10. The Bank of Japan raises its benchmark interest rates to a 30 year high.

Alongside, yields on 10 year government bonds have touched 2% for the first time since 1999. 

11. Assessment of the Insolvency and Bankruptcy Code implementation.

The data from the Insolvency and Bankruptcy Board of India (IBBI) shows that by September, 8,659 corporate insolvency resolution processes (CIRPs) had been admitted. Of those 1,898 cases were ongoing. More tellingly, about 1,300 CIRPs that resulted in resolution plans took an average of 603 days, while 2,896 cases that ended in liquidation took 518 days, far exceeding the statutory outer limit of 330 days prescribed under the IBC... Despite procedural delays, the IBC has had a meaningful impact on India’s banking system and credit culture. Resolved cases have delivered 32.44 per cent recovery of admitted claims, translating into more than 170 per cent of liquidation value, and have helped rescue about 1,300 firms. Equally important, the threat of losing control has altered borrower behaviour, improving repayment discipline and encouraging early settlement.

12. US corporate profits are at all time highs.

13. America's K-shaped economy.

14. Financial engineering is never far away in boom times. FT reports how Big Tech firms are shifting debts assumed to finance AI spending out of their balance sheets through project financed SPVs. 

Financial institutions including Pimco, BlackRock, Apollo, Blue Owl Capital and US banks such as JPMorgan have supplied at least $120bn in debt and equity for these tech groups’ computing infrastructure, according to a Financial Times analysis. That money is channelled through special purpose holding companies known as SPVs. The rush of financings, which do not show up on the tech companies’ balance sheets, may be obscuring the risks that these groups are running — and who will be on the hook if AI demand disappoints... 

Tapping private capital funding through off-balance sheet structures protects companies’ credit ratings and flatters their financial metrics. Meta in October completed the largest private credit data centre deal, a $30bn agreement for its proposed Hyperion facility in Louisiana that created an SPV called Beignet Investor with New York financing firm Blue Owl Capital. The SPV raised $30bn, including about $27bn of loans from Pimco, BlackRock, Apollo and others, as well as $3bn in equity from Blue Owl. The deal meant Meta could in effect borrow $30bn without any of the debt appearing on its balance sheet. This made it easier to raise a further $30bn in the corporate bond market a few weeks later.

15. Demystifying Adam Smith's invisible hand

The popular understanding of the “invisible hand” is even further off the mark. Smith borrows the phrase from Macbeth, who talks about a “bloody and invisible hand” shortly before murdering Banquo. In all his works, the economist mentions the phrase just three times, in three different contexts—and never in reference to the price mechanism... In fact, he often favoured the visible hand of government. He urged the state to provide education. He favoured legal caps on interest rates. Today, almost all free-market economists despise America’s Jones Act, which requires that shipping between American ports be conducted on vessels that are built, owned and largely crewed domestically. Smith, by contrast, favoured the Navigation Acts, a similar British law. 

Smith acknowledged the benefits of markets, but also their costs. Consider his famous pin factory. The division of labour within it allowed workers to produce thousands more pins than if they were working alone. Countries that perfected the art of dividing labour, Smith argued, would grow rich. Yet he also worried that a life spent on a few simple operations would make a labourer “as stupid and ignorant as it is possible for a human...to become”. Did Smith think the costs outweighed the benefits? It is hard to be sure.

16. VC failure rates

Sequoia’s best-ever US fund had half its investments fail.

17. Cross-border payments company Aspora is disrupting US-India remittance transfers. 

Fintechs Wise and Remitly do that by partnering with a local bank, with which they park funds worth two to three days of remittance volume as a lien. This fund lies as a security, untouched. Now, when a person in the US sends money to somebody in India, the fintech pings its Indian banking partner, which uses its own funds to make a local transfer to the recipient’s account. This reduces the speed of transfer from days to minutes. The fintech then reimburses the banking partner for all the transfers via a bulk cross-border transfer.

... 30–40% of the $135 billion remittances to India are locked in as liens to banks. Aspora does about $300 million worth of remittances a month. So, to maintain two days’ worth of remittance volumes with its local banking partners, like Yes Bank, the startup needs to park away at least $20 million of capital... In 2024, Aspora chose to route nearly a third of its cross-border remittances through stablecoins. These digital currencies operate with little legal oversight and take away the need to have so much capital as a lien... In using stablecoins, all that a fintech like Aspora had to do was partner with a cryptoexchange in the originating and receiving countries. And in the process, it can simply swap the US dollar for a stablecoin like Tether. That gets swapped out for the rupee by another exchange in India. This swapping involves a fee of 20 basis points in all, said the crypto-exchange executive, as the exchanges also take care of compliance, conversion, and the payout. That’s much less than maintaining liquidity, which can add up to 1% of the total cost...

When a fintech uses stablecoins to process remittances, the recipients are in a fix. For one, Indians have to pay a 1% tax on the money they receive. Two, the instruction that comes along with the remittance would only show that the money came from an exchange, not the sender... In fact, in some cases, when users sent money to their own accounts in India, local banks, unable to see the sender, saw it as suspicious activity and blocked their accounts.

The big risk Aspora faces is regulatory. Though not banned in India, RBI does not recognise Stablecoins or cryptocurrencies generally. Only about 1% of the $135 bn annual remittances use Stablecoins for now. 

The article also has an interesting graphic about the changes in sources of remittances into India. Declining share of Gulf remittances (except Qatar) and increasing shares from the US, UK, Australia, and Singapore. 

 18. For all talk of China's AI surge, it has few listed companies in the sector.

And the US and Europe dominate the higher end of the supply-chain. 

19. The world economy's China problem in one graphic.

20. Huawei triples local sourcing ratio in smartphones from 19% in 2020 to 57% in 2024!

Huawei increased the proportion of Chinese-made components in the Mate 70 Pro to 57%. The estimated total component cost of the Pura 80 Pro is $380, with the Chinese-made component ratio steady at 57%... For the Pura 80 Pro's system-on-a-chip, which integrates multiple semiconductors, the company used the Kirin 9020 chipset designed by subsidiary HiSilicon... For DRAM, which handles short-term memory, Huawei switched from imported products to those made by ChangXin Memory Technologies. For long-term NAND flash memory, it switched to products made by Yangtze Memory Technologies. Huawei switched to products from BOE Technology Group for the organic light-emitting diode display, which is estimated to cost over $64 per unit.

21. China is not leaving even caviar!

But in recent years Chinese companies have also entered the sphere with state support, led by Kaluga Queen, a farm on Lake Qingdao. And they have dived in with such stunning efficiency and focus — echoing what has happened with, say, solar panels — that Kaluga is now the biggest caviar producer in the world. Indeed, China accounts for between half and two-thirds of global production... And Chinese officials now want their entrepreneurs to expand into other gourmet foods like smoked salmon, Wagyu beef and truffles. That is creating waves: at a recent meeting of the North Atlantic Seafood Forum, a Nordic luminary flourished a 7kg Chinese-farmed salmon on stage — and declared it to be tasty, and cheap because of Beijing’s subsidies. Meanwhile, the Japanese government has restricted exports of Wagyu genetics to China to protect its beef farmers, and some Italian and French caviar houses are complaining about the pricing threat from Chinese rivals. American caviar makers are reportedly lobbying the White House for protection, too.

22. Finally, in celebration of racial integration, the Springbok rugby team.

The one thing that unites South Africans of all colours is the Springboks rugby team... South African rugby has been so “transformed” — a word the African National Congress uses to mean overcoming the grim legacy of apartheid — that affirmative action is no longer necessary. A squad, picked purely on merit, is automatically multiracial. The Springboks’ most celebrated players include Siya Kolisi, the inspirational captain, who is Black and from an impoverished township in the Eastern Cape. Sacha Feinberg-Mngomezulu, the brilliant fly-half, has a Zulu mother and a father of Jewish heritage. The 50-plus member squad named this year by Johan “Rassie” Erasmus, the Afrikaner head coach who has led the team to successive World Cup victories, contains players from South Africa’s Black, white and so-called Coloured communities. The Springboks are a case study of what successful Black empowerment looks like. Where once players were selected from among 4.5mn white people, today they are drawn from the entirety of South Africa’s 65mn population.

Some thoughts on VC and PE funds

Private equity is a type of investment strategy, consisting, among other things, of venture capital and leveraged buyouts, which are considered among the most impactful innovations of financial intermediation. Much of this owes to the spectacular success of firms in the information technology sector. 

Venture capital (VC) works on the principle that there are promising ideas and dynamic entrepreneurs out there who are short of capital. If they can be identified, funded and provided light-touch portfolio support (mainly in the form of forging connections), a few among them will hit the bulls-eye and generate windfall returns that more than make up for the failure of the majority.

The central assumption is that of identification. This, in turn, has two parts. One is the belief that venture capitalists have acquired some form of prescience to spot great ideas in their nascent stages, well before their commercial potential becomes evident. Second, they are also able to identify the great entrepreneurs who are behind those promising ideas.

I’m not sure about the former at all in any credible enough manner that can justify investing tens, even hundreds, of millions of dollars in them. The strategy of making ten such bets in the hope that one or two will hit big appears closer to gambling than a strategy grounded on some sophisticated skills. If confined to a promising technology sector in its emerging phase, then the context itself dictates that some firms must succeed, and if you have large pots of money, you are more likely than not to hit some bulls-eye. This raises questions about the value proposition of the venture capitalist, certainly enough to question their outsized rewards.

The second part about the identification of entrepreneurs raises even more troubling questions. It’s hard to believe even the shrewdest brains can spot great entrepreneurs with a few interactions, with enough confidence to be able to make the kind of large financial bets made by venture capitalists. Except, if they are friends or friends of friends, or part of a connected closed network.

This raises concerns of cronyism and exclusion bias. Wouldn’t there be perverse incentives, especially given that venture capitalists are investing others’ money, and also the moral hazard afoot from the fact that most or many of these bets will fail? What about the inefficiency arising from the exclusion of those several others outside the network?

Given the aforesaid, there are some fundamental questions that one could be asking. How can we say that burning several hundred million dollars to generate one or two unicorns or decacorns is an efficient use of capital? What if, instead, investors should be more discriminating and do rigorous due diligence before investing? What if there is a model whereby the high-risk assuming angel and seed stage investors, including governments, are compensated by the later-stage investors who have a less risky pool to choose from?

It’s not that such questions are not asked elsewhere. In fact, industrial policy is subjected to this scrutiny continuously and has been declared an inefficient and wasteful pursuit by the same set of experts. For example, in the context of the Chinese government’s massive Made in China 2025 campaign to boost strategic industries and achieve technological self-sufficiency, which involved Big Funds picking sectors and firms and pouring hundreds of billions of dollars, experts have been quick to castigate it for its colossal waste. 

But they conveniently overlook the same portfolio aspect of these investments. Who can deny that these investments have resulted in a portfolio which is the Chinese economy that utterly dominates the world across several sectors and technologies? Just in terms of the incremental output, jobs created, surpluses from exports, not to mention the geopolitical power conferred, these investments appear to have generated returns in multiples. In narrower terms of sectors – electric vehicles, EV batteries, critical minerals refining and processing, solar panels, wind turbines, electronics components and products, etc. – the success of those sectoral funds is spectacular. 

Admittedly, in all these cases, the successes have come at a very high cost in terms of the amounts spent. But the logical conclusion from this line of reasoning is that wastage and losses are fine as long as the portfolio generates a high net return. 

If experts can question the collateral wastage associated with the emergence of this portfolio, why are they shying away from scrutinising the VC industry’s capital deployment efficiency on similar lines?

Leveraged buyout (LBO) is different in an important way. LBO funds identify industries and firms that have promise but are now operating far below their potential, either due to poor management or deficient enterprise or some other factor that can be worked upon. If these firms can be bought out and their operational efficiencies improved or business models modified through very active portfolio management, most likely by replacing the entire senior management, then there might be large efficiencies to be realised. LBO funds use significant leverage to supplement investor equity in purchasing firms, and place the debt on the balance sheets of the firms being bought. 

The critical assumption here is that of very active portfolio management. This would include the PE LBO fund changing the management, and in general, necessarily getting into the nuts and bolts of the firm’s business, from the high-level business model to the granular unit economics and small operational details.

There’s no quibbling about the value of this model. In simple terms, it’s about identifying firms that are not managed well (and there are several out there), buying them, and addressing their inefficiencies to unlock the hidden value. Who could dispute this proposition?

Two things follow from this model. One, the PE LBO firm must have the internal domain expertise to be able to do this effectively. There are hard limits to the use of outsourced expertise. But acquiring in-house domain expertise of the quality required to do such portfolio management effectively across several sectors is very difficult. Two, since it demands proficiency and intense engagement, there are binding bandwidth constraints on how many firms, even a large PE fund with several teams can manage.

Taken together, there ought to be a self-limiting (in terms of size) nature inherent to the PE business model. This also means there’s only so much that the fund can generate as returns and pay the General Partners (GPs).

In this backdrop, it’s natural that problems start when PE LBO funds try to scale beyond a certain level in the quest to amplify and expedite returns and payouts. The incentive distortions and inefficiencies surface at multiple levels. Each team is now stretched over far more projects than they can effectively manage, leading them to follow a light-touch portfolio management. Further, as the fund size increases, it becomes increasingly difficult to identify good investment opportunities.

Leverage is attractive, especially when rates are low, to make investors’ equity go further, besides also amplifies the GPs’ returns. The period of the PE industry’s growth coincided with that of ultra-low interest rates in advanced economies. Now that rates are normalising, the PE/VC industry faces serious vulnerabilities. 

The use of leverage also expands the envelope of sectors that become attractive for LBO firms. In fact, LBO firms come to believe that they have a model that can achieve high returns even with low-risk assets. So, they buy out low and stable return assets like those in infrastructure or affordable/public housing, load them up with debt, strip assets, and pay out large dividends and pass the parcel along. 

This creates problems and externalities that are borne by society and taxpayers. The British water and sewage sector, specifically Thames Water, is a classic example. The same logic makes similarly boring, low-return and mass-market assets like kindergartens, salons, gyms, laundromats, vape shops, and so on attractive to LBOs, but with large negative externality risks. Is this practice of amplifying risks by using leverage to increase returns on low and stable return mass market assets desirable?

Finally, the incentive to indulge in financial engineering – excess leveraging, skimping on investments, sale and lease back, raiding pension chests, etc. – and strip assets has become pervasive. The squeeze in exit options has led to PE LBO funds indulge in practices like selling to another fund managed by it at a higher valuation to reset the clock, continuation funds, strip sales of part of a fund’s assets, net asset value borrowing, defer interest payments and add them to debt, transfer the best companies across funds, and so on to raise money to pay LPs and kick the can down the road.

This article is about how PE funds have come to see insurance premiums as an attractive source of credit to finance their activities and have therefore created a financial model where they encourage the securitisation of insurance premiums and then buy those securities. The model gets strained once the insurance companies face a liquidity crunch or when the LBO fund is unable to exit its investments.

All this raises concerns about the negative externalities inflicted by LBO funds when the cost of capital becomes normalised. See this, this, this, this, and this. It is especially important since LBO funds now attract investments from pension funds, insurers, sovereign wealth funds, and public endowment funds, thereby raising questions on how private (and therefore lightly regulated) these funds actually are. 

Weekend reading links

1. Ruchir Sharma makes an important point about the norm in the financial markets and central banking today.

If you remember a couple of weeks ago, there was a big stock market correction around the world, and it was incredible to see what the reaction was. Everybody was going on television saying ‘the Fed needs to cut interest rates’. Now the market has been going up for such a long period, it falls for just one day, and all of a sudden it’s like ‘monetary policy is too tight! We need to cut interest rates! Let’s rush out the cavalry!’. That just tells you about what the thought process has become. And I think one of the unfortunate things which has developed is this asymmetry which has crept up in markets, which is that on the upside we have capitalism, but on the downside it’s socialism. The moment there’s too much of a downside, there’s rising clamour for a rescue... easy money is a suite of government habits, and it’s not just about central banks. The habits include the tendency to bail out private sector companies at the slightest hint of trouble, the zealousness to micromanage business cycles, etc... the analogy I use in the book is of pain management in America, which is that for the slightest hint of trouble, you give people opiates, and so the whole system becomes addicted to opiates...

One of the fundamental concepts of capitalism in the market is mean reversion, which is that eventually excess profits should get competed away and you should keep getting churn, which is that new winners emerge and the old players keep dying. But this whole concept has been undermined now because of this extensive government involvement, whether it’s too easy money, bailouts or regulations which benefit the big businesses enormously. I think that’s what’s become a real problem today, that the concept of mean reversion has been distorted.

2. Vivek Kaul points to how a generation of young Indian stock market investors have piled on to create the ongoing stock market boom in the country.

The number of individuals carrying out intraday trading has jumped from 1.5 million in 2018-19 to 6.9 million in 2022-23, with these figures being limited to the top ten stock brokers...On average, 71 out of 100 intraday traders in stocks lose money. It stood at 65 out of 100 in 2018-19... Also, a bulk of those carrying out intraday trading are youngsters. In fact, in 2018-19, only 18% of those carrying out intraday trading were under 30 years of age. In 2022-23, this had jumped to 48%. Which means that a bulk of the newer intraday traders are under 30 years of age... In fact, data released by the National Stock Exchange in early August tells us that in March 2018, the unique registered investors under the age of 30 formed around 22.9% of the total unique registered investors. In July 2024, it stood at 39.9%, implying that nearly two in every five investors in the stock market are under thirty years of age. In fact, the share of those in the 30-39 age group has remained stable, whereas the share of those over 40 has come down.

3. US public debt fact of the day

The US debt to gross domestic product ratio is heading far above 100 per cent, debt servicing costs are already 12 per cent of total government outlays and a third ($9tn) of government bonds must be refinanced in the next year alone.

4. The Government of President Patrice Talon in Benin is following in the footsteps of Paul Kagame in Rwanda and is trying to transform the country's economy by establishing manufacturing facilities.

Benin, a nation of 13mn people, is trying to achieve what few African countries have managed: systematically transform raw materials — not just cotton, but also raw cashew nuts, soya, shea and even human hair for wigs — into finished goods. Until now, like many poor countries, Benin has been trapped in a trading pattern in which it sells cheap raw commodities and imports expensive finished goods... Virtually its entire cotton crop, of about 300,000 tonnes of lint cotton, is exported raw, mostly to Bangladesh, where it is transformed into clothing for the world’s $1.5tn fast-fashion industry. In selling raw cotton, Benin, Africa’s biggest producer, is missing out on more than 90 per cent of the value, according to industry experts... In the Glo-Djigbé industrial park north of Cotonou, Benin’s commercial capital, where 12,000 workers are already employed, the vast air-conditioned integrated textile factory — at 160,000 sq metres equivalent to about 22 football pitches — is filled with rows of whirring machines from Switzerland, Germany and Japan. More than a thousand new recruits are cutting and sewing fabric that is being produced at the rate of 50,000 kilos a day...

According to the World Bank, the percentage of manufacturing value added in GDP for sub-Saharan African states, excluding high-income countries, has fallen from 18 per cent in 1981 to 11 per cent in 2023. Benin, with a GDP per capita of about $1,400 at market prices, is only at 10 per cent... The textile and apparel factory north of Cotonou, which will also produce bed linen, towels and garments such as polo shirts and leggings, is part of a national industrialisation strategy intended to quintuple the country’s manufacturing capacity by 2030. The finance ministry estimates that manufacturing contributes 9.8 per cent to GDP, but says that more than two-thirds of this is artisanal manufacturing. The formal industrial sector, restricted to a few activities such as cotton ginning, contributes only 3 per cent to GDP. If the entire cotton crop were processed into apparel, it would at a stroke add $12bn to Benin’s $17bn economy, say industry experts... To meet Benin’s goal of manufacturing its entire cotton crop at home would mean attracting investments in around 25 new factories... In just 18 months, five factories have been built to transform the country’s entire crop of cashew nuts into packaged goods. Previously they were all sent to Vietnam for processing and packaging, but this change increases their value to Benin’s economy 10-fold, he says.

5. This is such an important but hardly discussed fact amidst the debates on climate change - the main perpetrators of the stock and flow of carbon emissions are those economically well-off, both among nations and people, and unless they dramatically mend their ways there's no meaningful path to address the problem.

Amidst the controversy over Starbucks, a self-declared ESG leader, recruiting a CEO who'll travel to work daily over a 1600 km flight, this report raises some important points.

The richest 1 per cent of humanity is responsible for more carbon emissions than the poorest 66 per cent, according to a 2023 joint investigation by The Guardian, Oxfam, the Stockholm Environment Institute and other experts. “[T]his elite group, made up of 77 million people including billionaires, millionaires and those paid more than $140,000 (£112,500) a year, accounted for 16 per cent of all CO2 emissions in 2019 — enough to cause more than a million excess deaths due to heat,” the investigation revealed.

6. Important point about aid transfers

In the two and a half years since the Russian invasion, Ukraine has received more aid and debt relief than any African country in the past few decades. Unlike most other aid flows, this money has made history. It has allowed Ukraine to fight Russia to a standstill while stabilising its war-battered economy. In the “global south” it rankles that bloodier conflicts in Ethiopia and Sudan barely register in western commentary. European and US support for Ukraine shows in stark relief what is missing with regard to the “global south”: the sense of shared destiny and common purpose, necessary to unlock aid on a world-changing scale.

7. The paddy production costs and externalities

Paddy requires a minimum of 20-25 irrigations compared to less than four irrigations for pulses, oilseeds and millets. A 2023 study by the Central Ground Water Board on water tables reveals that 87 per cent of Punjab’s 153 blocks are categorised as over-exploited, critical, or semi-critical. With GHG emissions of 5 tonnes CO2 eq per hectare, paddy cultivation here is also driving climate change. Rice stubble burning is a major contributor to pollution. The successful implementation of this scheme will have a positive impact on the agriculture sustainability of the states, and the country at large.

8. Fascinating long read about Prospera Inc., a charter city incorporated in Delaware and located in  Roatan Island of Honduras in 2017. 

In 2021, Xiomara Castro, the wife of the ousted President Zelaya, made repealing the ZEDEs a central promise of her election campaign. The zones became associated with the corruption of Juan Orlando Hernández, the president at the time, whom many Hondurans now revile. Castro won with a clear majority. In 2022, Honduras’s Congress unanimously repealed the law and passed a constitutional reform that would abolish the three existing ZEDEs... There was one problem, however: Congress, mired in competing legislative priorities, failed to ratify the reform. Furthermore, the original ZEDE law guaranteed the companies 50 years of legal stability — no matter what changes were made after a zone was founded. The net result is that Próspera is in a state of legal limbo... 

But in seeking to sidestep politics, Próspera instead ran straight into them. The endemic corruption in Honduras, the sort of thing Próspera was supposed to combat, was also what enabled its creation and has plagued its pursuit of legitimacy. For Hondurans, the prospect of American capitalists promising prosperity may instead resurrect fears of exploitation and dispossession. Despite Próspera’s fantasy of exit, it uses roads, hospitals and ports built by the municipal government, and it shares an economy and ecosystem with its neighbors in Crawfish Rock. The national government that granted its right to exist, meanwhile, may still take it away. 

In 2022, the government began stripping Próspera of some of the special privileges it was granted under its predecessors. It halted the company’s tax-exempt customs service, allowing the zone to continue to import goods only if it paid the same duties as the rest of Honduras. Colindres said that the National Banking and Insurance Commission also pressured Honduran banks to shut down accounts of Próspera businesses and bar lenders from financing its projects... At the end of 2022, Honduras Próspera Inc. and its affiliates filed an astronomical $10.775 billion lawsuit against the state in a World Bank tribunal called the International Center for Settlement of Investment Disputes (ICSID). Próspera is thought to have a good chance of prevailing in part, critics say, because the court is biased toward corporations, which can bring suit against nation-states but cannot be sued by them.

9. Another rare earth mineral where China dominates, antimony.

Antimony’s flame and heat resistant properties make it crucial in the production of batteries, especially lead-acid storage batteries and those used in cars. It is also used to make other car parts including brake pads. In recent years, the global shift to green energy has created new demand for antimony. The material is able to improve transparency for the cover glass on solar cells. This super-clear glass helps the performance of solar cells and is also used in the screens of smartphones. More crucially, a long-term shortage of antimony could pose a security risk. It is a critical material in the defence supply chain, and is used in everything from nuclear weapons production to making night vision goggles, ammunition and infrared sensors. The export restrictions have yet to go into effect. But antimony prices have already hit a record high. Spot prices in Europe and China have surpassed $25,000 per tonne, more than double prices at the end of last year.

10. Malaysia is a success story in diversification away from commodities to manufacturing.

Rana Faroohar links to commodities price speculation being a contributor to price increases. 

As a recent Unctad report laid out, it is “unregulated activity within the commodities sector” that was responsible for the bulk of “speculative price increases and market instability” since the pandemic.

11. Peak-tourism in Europe?

Île-de-Bréhat, a French island off the coast of Brittany with just 400 residents, recently imposed a limit of 4,700 visitors per day... Last year, the ancient site of Acropolis introduced a ticketing system to manage visitor numbers, with a cap of 20,000 per day... Santorini, famous for its whitewashed buildings and sunsets, was one of the most overtouristed destinations in Europe last year, drawing nearly 3.5 million visitors to an island of 15,500. Cruise ships — 800 vessels brought in 1.3 million visitors — were a major source of foot traffic... the mayor, Nikolaos Zorzos, said the island would reinstate a cap of 8,000 passengers per day, down from what would have been 17,000 starting in 2025... The Barcelona city government said it would eliminate short-term rentals by the end of 2028 and announced a tourism tax increase that will go into effect in October... In April, Venice, a city of 50,000 that received 20 million travelers last year, introduced a 5 euro entrance fee (about $5.60) aimed at dissuading daytrippers from visiting at peak times... Last month, the Lisbon City Council announced that it would limit the number of licenses and parking spaces issued to tuk-tuk drivers to help ease congestion... After the pandemic, Amsterdam introduced a series of stringent measures, including a 20 million cap on annual visitors. Over the past year, tourism taxes have been raised; the number of cruise ships, which are now barred from docking in the city center, has been limited; new hotel construction has been outlawed; and vacation rentals have been restricted.

12. Russian crude exports to India surges post the Ukraine-war.

13. Important facts about government wages in India.

In India, the ratio of the average wage of a general government employee to per capita gross domestic product (GDP) is around 4—among the highest in the world. In most of Asia, that ratio lies between 1 (Vietnam, China) and 2.5 (Indonesia, Sri Lanka, the Philippines). Even South Korea, Thailand and Malaysia have a ratio of general government wage to per capita GDP of around 3-4. In the Arab world and Türkiye, that ratio is around 2-3. India’s government, contrary to popular belief, is small relative to its needs but extremely expensive relative to its income. It is also highly interventionist without the personnel or the capability to deliver effectively... The 7th Pay Commission identified the compression ratio as 3.12 for entry-level employees at Grade A compared to Grade C, and 3.74 for the highest paid at Grade A compared to Grade C. The upper end of the civil service has seen its real wages fall well below that of the private sector, whereas at the lower end, salaries (including benefits) can be more secure and are even higher than in the private sector. This has meant that the pay, and as a result the quality, of the inductees at the higher end, with discretionary decision-making authority, has declined, whereas those at the lower end, who make up more than 90 per cent of the government labour force, end up earning a much higher wage than in the private sector. No wonder many people want a government job.

14. Two graphics on India's poor sporting record. One, on Olympic medals.

The second is on the country's non-sporting culture.

15. The Economist has a good summary of why Thailand is the poster child for healthcare.

The average Thai can expect to live to 80, much longer than their regional counterpart... Last year a whopping 99.5% of the population of 72m was covered by health insurance. Remarkably, Thailand has achieved this as a developing country: its income per person was roughly $7,000 in 2023... in the 1970s, Thai policymakers focused on rural development. Public health became a priority, so a wave of spending was unleashed on infrastructure. By 1990 all 928 districts had a hospital. Investment in people also helped. In 1972 the government launched a programme that required medical graduates to spend the first three years of their careers in villages. This led to a “golden generation” of doctors, says Eduardo Banzon of the Asian Development Bank.

Subsequent Thai governments made health care more affordable. The first big initiative was an insurance scheme targeting the poor. This was followed by state-sponsored schemes for those working in the informal and private sectors. But the big boost came in 2002 when the government rolled out a universal health-coverage programme, which offered free health care to the poor and a nominal 30-baht ($1) fee for others... its coverage has expanded. Today it covers treatments for conditions ranging from hiv to kidney diseases. But an equally important feature of the programme is the focus on preventive health care, says Piya Hanvoravongchai of the National Health Foundation, a non-profit. A network of grassroots workers helps provide health advice.

Particularly striking is the fact that universal health coverage is not only affordable for beneficiaries, but also for the government. The programme is funded through tax revenues, but spending is controlled. Every year district hospitals are provided with a fixed amount of money per patient in their catchment area, regardless of the treatment they get. This “capitation” model ensures efficiency and predictability in funding. Thailand’s spending on health had remained largely steady at around 3-4% of gdp until the pandemic, even as its programmes expanded.

16. Finally, on the beneficial effects of sleep.

One study found that in America an extra hour of sleep a week raised average earnings by 5 per cent, which the authors said was about as much as half an extra year of education. Another found that in Germany half an hour more sleep each week was associated with around 2 per cent higher earnings among full-time workers, with the largest effects for mothers.

Weekend reading links

1. The RBI has recently come out with regulations requiring higher risk weights for infrastructure project loans. 

In the eye of the storm is the proposal to raise the provision requirement by more than 12 times – from 0.4 per cent to 5 per cent of the outstanding as well as fresh exposure during the construction phase of a project. Once a project reaches the operational phase, the provision can be halved to 2.5 per cent. It will be reduced further to 1 per cent when the project’s cash flow can meet the repayment obligation to all lenders, and the long-term debt of the project declines by at least 20 per cent when it starts commercial operations. The rationale behind such a measure could be that lenders have been evergreening their exposures to under-construction and delayed infrastructure projects. The 5 per cent provisioning during the construction will be achieved in a phased manner: 2 per cent by March 31, 2025 (spread over the four quarters of 2024-25); 3.5 per cent by March 31, 2026 (spread over the four quarters of 2025-26); and 5 per cent by March 31, 2027 (spread over the four quarters of 2026-27)... Typically, the return from such projects for the lenders is around 9 per cent and, for the investors, it’s around 15 per cent. The debt-to-equity ratio for infra projects varies, depending on its nature, but roughly 70:30 is the norm... With the rise in the cost of money, the cost of loans for project finance will rise as no lender would like to compromise on profitability. Analysts predict the impact could be between 0.5 and 0.7 per cent, depending on the balance sheets of the lenders.

2. Interesting observation by Janan Ganesh

Dissent is core to financial success. Why buy an asset unless you think the market has underpriced it? Why set up a business unless you think the world is wrong not to have offered that product or service already? Opening the humblest corner bistro is, in essence, a statement that everyone who hasn’t opened one there has missed a trick. Imagine how much stronger that contrarian impulse must be in a hedge fund seeking above-market returns. 

All power to this attitude. The world would be less prosperous without it. But it doesn’t transfer well to public life. In politics, if you support a radical proposition and turn out to have misjudged it, the consequence might be, oh I don’t know, societal ruin. (Or deaths in the Capitol.) There is no equivalent of limited liability. There is no equivalent of the circuit breakers that the state puts in place to contain bad business bets. The state itself is on the line.

3. Akash Prakash has this view on foreign portfolio investments in India.

The fact is that for the last 2.5 years, the net flow of foreign portfolio investors’ money into India has been zero. India is now at best a neutral weight for most emerging markets investors, having always been an overweight historically. For those allocators who were smart enough to have been in India early, they are rebalancing from the country and taking profits. For new flows, we will have to look at the global funds, which have not been in India historically or took profits much earlier. India’s continuously rising weights make it harder to totally ignore. Until markets catch a breath and consolidate for some time, I don’t think we can expect large foreign flows. The longer-term intention remains to raise weights in India, but there seems to be no urgency. Foreign capital continues to wait for the correction, which surging domestic flows do not allow to happen.

4. Good article on the gravitation of Indian automakers towards hybrid cars and the slowing down of their EV ambitions.  

5. Changing trends in the insurance industry as insurers try to shift from "repair and replace" to "predict and prevent" model of insurance management.

Auto insurers opened the door a decade ago, by offering lower premiums to customers who installed data recorders, known as telematics, in their cars to monitor their driving. Since then, cheaper digital sensors and improved analytics have allowed insurers to step up from tracking to advice and even outright intervention. State Farm offers homeowners free smart plugs that constantly check for electrical faults. Chubb bought a company that makes leak detection systems and offers discounts to homeowners who install them. Manulife first used fitness trackers to monitor customers of its John Hancock Vitality life insurance and reward them for physical activity with prizes as well as lower premiums. But its efforts to nudge customers towards longevity now run the gamut from discounts on fruits and vegetables, to cancer screening and whole-body MRI scans... Corporate insurers are also now helping clients identify and reduce risk. They hope this will take the sting out of rising premiums and generate consulting fees. Chubb sends inspectors armed with infrared cameras to commercial buildings to look for electrical system weaknesses. Zurich advises property owners on how to install rooftop solar panels to minimise future wind and fire damage. It also helps manufacturers guard against product liability claims by advising on quality control programmes.

6. Noice interactive graphic that informs the trajectory of inflation in the US since the pandemic.  

7. Good example of PPPs

The Taj Mahal Hotel of Delhi is a good example of public-private partnership (when the phrase had not yet come into usage) where the New Delhi Municipal Council and Delhi Development Authority provided land and the building structure with the Tatas investing in finishing and furnishing and entering into a long-term revenue sharing contract. These were highly profitable investments for both sides.

8. The volatility in Nvidia's prices is striking

However, it has had far more positive spikes than negative ones, reflecting in its 156% year to date rise. Such volatility is not unique to Nvidia.

More than 200 companies, or roughly 40 percent of the stocks in the index, are at least 10 percent below their highest level of this year. Almost 300 companies, or roughly 60 percent of the index, are more than 10 percent above their low for the year. And each group includes 65 companies that have actually swung both ways. Traders say this lack of correlated movement — known as dispersion — among individual stocks is at historic extremes, undermining the idea that markets have been blanketed by tranquillity... So even on a day like Monday, when Nvidia slumped 6.7 percent, the S&P 500 dropped only 0.3 percent. The broad index was buttressed by other stocks, especially other mammoth technology companies like Microsoft and Alphabet... The options market has ballooned — the number of contracts traded is set to exceed 12 billion this year, according to Cboe, up from 7.5 billion in 2020 — and while there have always been specialists with wonky derivatives strategies, now more mainstream fund managers are said to be piling in. Assets in mutual funds and exchange-traded funds that trade options, including trading dispersion, swelled to more than $80 billion this year, from around $20 billion at the end of 2019, according to Morningstar Direct.

This presents both opportunities and dangers.

This is presenting an opportunity for Wall Street, as investment funds and trading desks pile into dispersion trading, a strategy that typically uses derivatives to bet that index volatility will remain low while turbulence in individual stocks will stay high... The risk to investors is that stocks will again begin to move in the same direction, all at once — most likely because of a spark that ignites widespread selling. When that happens, some fear, the role of complex volatility trades could reverse and, rather than dampen the appearance of turbulence, exacerbate it.

9.  More on Nvidia. FT points to the fact that all the gains in S&P 500 since late March has come from AI or AI-adjacent stocks. 

In the same period, the non-AI stocks are down 2%, with 9 out of 11 sectors are down.

It's hard for anyone to make informed choices. Consider both the bullish and bearish of views on Nvidia. 

Consensus estimates for revenue growth for next year and for 2026 do not, in fact, seem wildly demanding. Analysts are expecting a 23 per cent annual growth rate for Nvidia over that period. This would represent something of a moderation in rate; over the past five years Nvidia revenue has grown at 50 per cent a year. Similarly, the two-year revenue growth rates pencilled in for the Fab Five are at or below the growth rates of recent history. It is only a handful of the chip stocks — Micron, Texas Instruments, Analog, and Lam — where a major acceleration in revenue is expected. Is the recent rally in the AI group driven by upgrades of earnings estimates? Looking at 2025 estimates, not really. Since the end of March, earnings estimates for the group as a whole have crept up in the low single digits, percentage wise. Apple, Amazon, and Micron are the only ones that have received meatier upgrades... In the past three months, the price/earnings ratios of Nvidia, Apple, Broadcom, and Qualcomm have all risen by over 20 per cent. Looking back to last October, when the rally began, the average (harmonic mean) P/E ratio in the AI group is up almost 50 per cent.

Unhedged also points to the internal tension within the AI rally

One internal tension within the AI rally is that the revenues of its leading company, Nvidia, are expenses for some of its biggest beneficiaries, the Fab Five. In the short term, Nvidia’s success is a drag on the cash flows of Big Tech companies, which are buying the bulk of Nvidia’s chips. Charles Cara of Absolute Strategy Research has recently made a provocative point about this. He notes that 40 per cent of Nvidia’s revenues come from Microsoft, Meta, Amazon, and Google, and that even the very large expected increase in capital expenditure at those companies is not very large relative to the expected increase in Nvidia’s revenues. The increase in the four companies’ capital spending between the last fiscal year and 2025, at $54bn, is more than 40 per cent of the $100bn expected increase in Nvidia’s revenues, but presumably only a fraction of Big Tech’s capital spending goes to Nvidia’s GPUs. So either the Big Tech will spend more, or Nvidia will make less.

Here's Robert Armstrong's conclusion in interpretation of the spectacular rally.

Perhaps it just reflects momentum and animal spirits. More charitably, it could reflect the expectation that the AI business will provide an increase in profits that lasts for many years into the future. That is to say, it is a bet about the competitive dynamics within the AI industry: that it will not be hypercompetitive, and the winners in the long term will be the same as the winners now — the Fab Five and today’s leaders in the semiconductor industry. To me, the second half of the bet, that the incumbents will keep on winning, seems like a reasonable one. Incumbency in tech is very powerful, to the extent that companies can use their strong market position in one technology to create a strong position in another (think of Microsoft moving from PC operating systems to cloud computing). The first half of the bet, that AI will not turn into a capital-intensive knife fight where no one makes high profits, I don’t know how to assess.

10. Simon Kuper makes an interesting point about why there's so much disillusionment about France about its economy despite the economic health of the country being at its best in decades. 

France has western Europe’s largest territory. Millennia of small farming ended here in a few confusing decades. Today LVMH exports more than all of French agriculture. The consequence: most French towns and villages outside tourist hotspots have lost their reason to exist. If they weren’t already there, nobody would now build them. They are shedding shops, schools and doctors. Places without post offices and train stations are statistically more likely to vote far right, because residents feel abandoned by the Republic. Workers have moved to cities, especially Paris. The EU’s biggest international metropolis is another French asset, but inside France it stands for arrogance and wealth, embodied by Macron. There’s an obvious solution: encourage hybrid working, which would let people leave cities for France’s plethora of cheap charming places near TGV stations.

The article also has a case for nuclear energy

Thanks to its nuclear power stations, France produces electricity with the lowest carbon intensity of any large economy, calculates energy think-tank Ember.