Weekend reading links

1. Some facts about how increasing intermittent renewable power is upending the electricity market in India. 

Real time market (RTM) volumes exceeded Day Ahead Market (DAM) volumes for the first time ever in Q1FY26 – a reversal, since DAM volumes have been much higher than RTM volume in the past. In June of Q1FY26, DAM prices fell from record peaks of around ₹6.95/unit in Q2FY24 to below ₹4/unit. Nine of the last 10 months have seen month-on-month declines in DAM prices. In the RTM market, prices dropped to nearly ₹0/unit between 7 am and 1 pm, and spiked to as high as ₹5/unit between 8 pm and midnight. This seems to be the norm during April-October. The diurnal variations are huge. On the same days, RTM units were sold at a few paisa/unit and also at above ₹5/unit... During sunlight hours, there are big surpluses. At night, shortfalls occur as solar no longer contributes and price surges. Peak RTM demand in summer typically occurs between 2000 and 2400 hours (8pm and midnight). Solar is off at that time. On most days in Q1FY26, night-time supply was 10 per cent below demand, with shortfalls reaching 90 per cent sometimes. Conversely, during peak solar hours (0700–1700 or 7 am–5 pm), supply was nearly three times the demand. RE capacity is scaling up at 25-30 Gw per year. There’s a case for a big push on the storage front, to ensure surplus solar units can be used at night.

2. Distribution of teachers between different school management.

3. India's cost advantage in medical procedures is clear.

4. FT long read about how a wave of middle-class Chinese migrants to Tokyo, described as Run-ri, seeking permanent residency in Japan, is slowly transforming the city. 

Chinese buyers propel Tokyo property prices beyond the reach of many Japanese. The government has been pushed to tighten the requirements for the “business manager” visas on which so many Chinese secure their residencies. Some predict a full nationalist backlash, pointing to the klaxons of xenophobia audible in July’s upper-house election campaigns… The number of foreign residents rose by an average of roughly 1,000 per day over the course of 2024, of which about 10 per cent were Chinese. By next year, according to some projections, the total Chinese population of Japan is likely to hit a million… 

There has also been a surge of Chinese enquiries for places in Tokyo’s international schools, to as much as 60 per cent of the total in some cases… the Branz tower, a huge block of high-end flats overlooking Tokyo Bay, of which about 20 per cent are believed to have been sold to people with Chinese names, according to local estate agents. A listing for a three-bedroom flat in a nearby tower displayed in the window of a Chinese-owned estate agent in Roppongi, has an asking price of ¥350mn ($2.4mn). Other newly built developments nearby, including a vast complex built as the athletes’ village for the Tokyo 2020 Olympics, have similar ratios of Chinese buyers…

As the Chinese community in Bunkyo has expanded, the children have begun to group together and do not speak Japanese outside school. Within school, it is already becoming a distraction… The most tangible impact has been on property prices in Tokyo — one issue over which populist Japanese politicians have been able to stoke public anger. The prices of higher-end apartments in the capital, and the land in central wards on which low-rise houses can be built, has risen significantly since 2022.

5. More from the brilliant John Burn-Murdoch, this time on how the progressives may be ceding ground to the conservatives by having less children.

Recent studies find that the left’s lack of concern over falling birth rates is likely to be pushing societies in a more conservative direction. Extending previous analysis of the interplay between political ideology and family formation, I find that the assumption that birth rates are falling across society in general is not really true. From the US to Europe and beyond, people who identify as conservative are having almost as many children as they were decades ago. The decline is overwhelmingly among those on the progressive left, in effect nudging each successive generation’s politics further to the right than they would otherwise have been. This may ultimately mean more curtailing of individual freedoms, not less. Of course, children do not inherit their parents’ politics wholesale, and each successive generation has historically tended to be more liberal than the last on social issues. But it is well established that children’s values are strongly shaped by those of their parents. A growing left-right birth rate gap will slow that liberalising conveyor belt, and could result in societies and politicians that are less liberal and less concerned with the environment than would otherwise be the case.

6. China dominates EV sales across the developing world, with Vietnam and India being the exceptions. This is data from 2023 and 2024. 

7. The rise and rise of government bond yields.

8. Nvidia's market cap now exceeds FTSE, CAC, and DAX! (HT: Adam Tooze)

9. The importance of Airline loyalty programs in the US.

In a 2023 report, Mr. de Boer and a colleague estimated that Delta’s SkyMiles program was the world’s most valuable loyalty plan, worth about $28 billion. Investors value Delta itself at around $40 billion, based on its stock price. The loyalty program at American is worth about $24 billion, while United’s is worth $22 billion, according to the report. At Southwest Airlines, which started as a low-fare airline but has become one of the country’s biggest carriers, the loyalty program is worth around $9 billion.

The airlines share little publicly about their loyalty programs, but American and Delta each received about $7 billion from frequent-flier programs last year and United about $6 billion, according to an analysis of financial filings by Jay Sorensen, who runs IdeaWorksCompany, a consulting firm that works for airlines and other aviation businesses. Those programs are supported in part by the millions of people who use airline credit cards and then earn airline points for spending. The banks that issue those cards buy those points from the airlines in bulk, typically spending many billions of dollars every year... Banks recoup that money by charging interest and fees to card users and from fees paid by retailers, restaurants and other merchants every time customers pay with credit cards. For the banks, airline cards bring in many customers who fly and spend a lot.

Last year, consumers spent about $186 billion on Delta-branded credit cards, according to an analysis of securities filings of American Express, the airline’s credit card partner. That was about 12 percent of global spending on cards issued by the bank. Delta said in a financial filing that cash sales of loyalty points to American Express were $7.4 billion in 2024, an 8 percent increase from the year before. 

Many travelers love the cards and loyalty programs. By earning status, they can board planes early, enter airport lounges and enjoy other perks. Racking up points for dream vacations or seat upgrades is a powerful motivator, too. Those benefits create what Dwight James, Delta’s senior vice president of loyalty, calls “an emotional bias” toward the airline... Loyalty programs have become so valuable that during the pandemic, American, United and Delta each used their programs as collateral to borrow billions of dollars. The companies were struggling because they had to ground many planes and others flew largely empty.

10. New York City is a big outlier among US cities, thanks to its intra-city mass transit and high FAR.  

11. India's declining foreign capital inflows

These numbers point to large amounts being taken out by foreign investors who invested earlier and have been exiting their positions.  

A lot of FDI that flowed into India from roughly the middle of the last decade, peaking in 2020-21, were in the form of private equity (PE) and venture capital (VC) investments – in diverse sectors, from retail, e-commerce and financial services to green energy, healthcare and real estate. Those who put in this money are now cashing out by selling the shares they had originally bought, either to other firms engaged in the same business or via initial public offerings by the investee companies. Such exits by investors seeking to monetise their profitable “mature positions” were valued at $24 billion in 2022, $29 billion in 2023 and $33 billion in 2024, according to Bain & Company. The American management consulting firm reckons about 59% of PC/VC exits in 2024 to have been through public markets that were, in turn, enabled by the rich stock valuations in India.

12. Labour-intensive exports made up 35% of India's exports to the US in FY25, down from 50% in FY19. However, the share of the US in each of them have risen in the period. 

Textlies and food processing, in particular, are major employers.

And also forms a major share of manufacturing wages.

13. Tej Parikh writes that the US economy is already in recession based on several of NBER's economic indicators. 

While private investment has shrunk, AI investments have propped up net investment. Total private fixed investment rose by about 3 per cent year on year in the second quarter, but it would have fallen by around 1.5 per cent if AI-related components were excluded.

Health care and social assistance jobs made up 86% of the 598,000 jobs created in this Trump term till date.

And household spending has been propped up by the well off households who also have been the beneficiaries of the stock market boom. 

14. China and the US compared economically.

Its economy, while slowing, is still nearly 30 percent larger than America’s when one accounts for purchasing power. China has twice the manufacturing capacity, producing vastly more cars, ships, steel and solar panels than the United States and more than 70 percent of the world’s batteries, electric vehicles and critical minerals. In science and technology, China produces more active patents and top-cited publications than the United States. And militarily, it has the world’s largest naval fleet, a shipbuilding capacity estimated to be more than 230 times as great as America’s and is fast establishing itself as a leader in hypersonic weapons, drones and quantum communications.

The balance changes when compared with allies.

Together with economies such as Europe, Japan, South Korea, Australia, India, Canada, Mexico, Taiwan and others, there is no competition. This coalition would be more than twice China’s G.D.P. when adjusted for purchasing power, more than double its military spending, the top trading partner of most countries in the world, and would represent half of global manufacturing to China’s one-third. It would possess deeper talent pools, create more patents and top-cited research, and wield a degree of market power that could deter Chinese coercion. Allied scale would win the future.

Weekend reading links

1. Animal spirits contribute to inflation

One recent academic paper argued that animal spirits or bubbles in markets can themselves be responsible for as much as an additional 0.8 percentage points on US inflation rates. 

2. Apple joins the list of Google, Amazon, and Meta which are currently under various stages of anti-trust actions by US competition regulators. Apple with a net income in 2023 of $97 bn, more than the GDP of over 100 countries, and with a services revenue of $85 billion, has been accused of using its market power in the smartphone market to quash competition and limit consumer choice. The lawsuit has been brought by a bipartisan group of 16 state and district attorneys and accuses the company of imposing contractual limitations on developers and making it difficult for users to switch developers. 

The DoJ’s antitrust chief Jonathan Kanter described Apple’s response to competition over the years as “a series of ‘Whac-A-Mole’ contractual rules and restrictions” that had allowed it to crush competition. The complaint accuses the company of abusing its market power in a variety of ways: to squash the growth of innovative apps and messaging services, reduce the appeal of rival smartwatches, keep rival tap-and-pay apps from its devices and block the development of game streaming apps.

The lawsuit is centred on Apple's services business, which the company sees as its next frontier as its iPhone sales have plateaued. 

The US has portrayed the alleged scheme as stretching all the way back to Steve Jobs, the company’s iconic founder who died in 2011. It was Jobs’ vision to maintain an oppressive monopoly, identifying at an early stage the power the iPhone could wield over the online economy — and going so far as to direct executives to “force” developers to use only its own payment system to keep them locked into its ecosystem, the US alleged. The core of the claim is that Apple uses its market-leading device to draw a growing share of services revenue from users, excluding competitors from access. Services revenue — which includes its App Store, Apple Pay, and TV and music streaming — has been a continuing success story and an increasingly important source of growth for the company as its hardware sales face challenges.

3. Highlighting the lengths companies can go to avoid regulatory oversight, Microsoft has found a creative way to avoid sharing information on its acquisitions. Instead of buying a startup firm wholesale, it has decided to hire the co-founders and staff of the startup, in an acqui-hire model!

Microsoft’s decision to hire co-founders and staff of artificial intelligence start-up Inflection is not an acquisition, according to the companies... On the surface, the plan appears to skirt the Hart-Scott-Rodino Antitrust Improvements Act that requires companies to report pre-merger notifications for acquisitions. In addition to hiring staff, Microsoft is reported to be paying to license Inflection AI software but the deal is not exclusive. Inflection will remain an independent business, albeit a hollowed-out one. It can keep licensing its technology and can even be acquired. The curious set-up is still likely to attract regulator interest. If agencies are concerned that it will reduce competition in a potentially transformative area of technology, they can investigate.

4. Exactly a hundred years after their launch, mutual funds are facing rising competition from ETFs and others.

Mutual funds manage nearly $20tn in US assets and about $63tn worldwide, including everything from stakes in fledgling tech start-ups to government bonds. More than half of all American households and 116mn of the country’s 333mn residents hold shares in at least one mutual fund... US mutual funds suffered more than $1tn in net outflows from January 2021 to December 2023. While they gathered about $13bn in net inflows in February, it was the first time they had a positive month in two years, according to Morningstar, a data group. The active stockpicking funds that have been the industry’s bread and butter have suffered the biggest decline as a newer option, exchange traded funds, amassed more than $2tn in inflows in the US since January 2021, including more than $575bn last year alone... the alternatives to mutual funds have fundamentally reshaped the investment marketplace, as customers opt not just for ETFs but also separately managed accounts and collective investment trusts. 

For investors, ETFs are like mutual funds on speed. Instead of pricing the pooled assets once a day, as mutual funds do, ETFs trade continuously on exchanges as stocks do. They can keep up this frenetic pace because shares are sold through online trading platforms, and financial firms create and redeem shares with in-kind baskets of securities, rather than having to buy and sell the underlying assets. That structure attracts frequent traders who want to bet on market movements or the price of specific assets such as gold or bitcoin and also gives ETFs distinct advantages in the competition for long-term investors. ETF sponsors do not have to invest in the same level of back office customer service, so their costs can be lower than traditional mutual funds. And due to a quirk of the US code, ETFs avoid the annual capital gain tax charges that buy-and-hold mutual fund investors incur when they invest outside a retirement plan...

Between 2014 and today, US ETF assets quadrupled from $2tn to $8tn, according to the Investment Company Institute. While that total is still well shy of the $19.6tn in mutual funds, ETFs are closing the gap... There are also secondary challenges brewing from other pooled accounts that cater to very wealthy people and institutional investors. Separately managed accounts grew from about $856bn at the end of 2014 to $1.7tn by 2022, while collective investment trusts nearly doubled from almost $2.4tn to more than $4.6tn in that time, according to Cerulli data... Nearly 2,000 ETFs launched in the US between 2019 and 2023, nearly double the 1,100 new mutual funds, according to Morningstar.

5. After 17 years, the Bank of Japan increased interest rates in response to rising inflation in the country.

With this, the country also exited the negative interest rate regime, the last major economy to do so.

6. The Basel III rules on banking regulation that have been announced in recent months have generated strong pushback from large US banks. The rules are proposed for implementation in EU and UK from January 2025 and in US from July 2025.

The roots of the current battle stretch back to an agreement reached by the committee in 2017 in response to concerns that Basel III, the package of reforms implemented in the aftermath of the 2007-08 financial crisis, had failed to close all potential loopholes in the rules designed to safeguard the banking system. In particular, they wanted to revisit risk-weighted assets, or RWA. These are calculated by applying a risk weighting to banks’ businesses, including loans they have made to their customers. They are the denominator in the capital ratios that show how well positioned banks are to withstand losses; lower RWAs make banks look healthier. A set of rules dating back to 2004 allowed banks to use their own models to calculate RWA rather than standard measures of risk laid down by supervisors — and a string of studies had shown vast discrepancies in the ways that banks did that...

The committee argues that a “wide range of stakeholders lost faith in banks’ reported risk-weighted capital ratios” and that its proposed revisions, which greatly restrict the use of in-house models, “will help restore credibility in the calculation of RWA”... US regulators issued rules that would increase system-wide capital requirements by 16 per cent. In a nod to last year’s regional banking crisis, the package also proposed that banks with $100bn to $250bn of assets would have to follow most of the Basel rules for the first time. That brought the number of banks covered by the measures to 99, but still left the vast majority of US banks unaffected by the new rules...

There are several reasons why the impact of the package has been greater in the US. But the main one is that regulators there chose to exceed the global standards, particularly in “operational risk” — such as cyber crime — where the US has gone for a more conservative approach that means banks with lower historical losses cannot use that to reduce their current capital requirement. Banks say the changes to RWA calculations will lead to significant hikes in capital requirements for mortgages, corporate loans and loans to other financial institutions. More capital will also be needed for the less risky sectors such as wealth management that banks were encouraged to pivot towards in the aftermath of the crash. JPMorgan said it was facing a 25 per cent jump in capital requirements, while analysts at Autonomous predicted American Express might need 40 per cent more capital... Bank executives argue that the rules are not needed because banks are already financially strong. According to the Financial Services Forum, which lobbies for the eight largest US banks, its members had $940bn of capital at the end of 2023, up from just under $297bn in 2009... They also say higher capital requirements for trading businesses will have real-world consequences — threatening activities such as hedging contracts for airlines’ fuel bills or retailers’ foreign-exchange exposure — while rules on credit risk threaten lending to ordinary Americans and small businesses.

The opposition by banks is also a reflection of their fight to protect their margins.

Michael Hsu, the current Comptroller of the Currency, points out that if lending becomes more expensive, banks could spend less of their multi-billion-dollar profits on dividends and stock repurchases, rather than rationing loans. “There’s a choice to be made with capital,” he told the FT in January. The regulators’ proposals note that based on end-2021 calculations, five large banks were short between 16 and 105 basis points of capital to meet the new requirements. But they also state that “the largest US bank holding companies annually earned an average of 180 basis points of capital ratio between 2015 and 2022” — implying they should have no difficulty covering any shortfall.

Getting the proportionality of the capital ratio increase right is clearly a difficult problem to solve and involves reconciling conflicting objectives. The challenge is to ensure that the risk weights are not increased beyond what's required. But getting this requirement right is the problem. It's important to ensure that the rules don't end up significantly increasing the cost of capital for the real economy. It's also important to ensure that banks don't end up palming off the increases to their borrowers while retaining their current margins. 

See also this.

7. Excellent graphical feature in FT on the semiconductor chip making process.

A diminishing number of companies have been able to keep pace in the race to build the most advanced smartphone chips in recent years. The design and manufacturing processes have become extremely long, complex and costly, requiring ever more specialist equipment and knowledge. Advances take years of experimentation and require staggering levels of R&D spending. Working at nanoscale is also full of jeopardy. Precision, repeatability and cleanliness are some of the biggest challenges, says Sell, explaining that any particle, even those smaller than a bacterium, could “kill” a chip on contact. Inside chip fabrication plants, more than a thousand precisely controlled steps create each integrated circuit, layer by layer. Every time a new generation of chips is developed, these stages all need to be reviewed... A new chip generation also requires new tools and processes, says TSMC’s Cao. The transistor advances in the next 2nm chips mean some elements need to be built laterally, rather than vertically, bringing extra challenges, he adds...

Creating the tiny components for a chip’s circuits requires cutting-edge equipment: machines that can transfer microscopic patterns on to each wafer using a process called photolithography. For the smallest chips, multi-million-dollar machines made by a single Dutch company, ASML, use extreme ultraviolet light to create these fine stencils. The machines are the size of a bus, but so accurate they could direct a laser to hit a golf ball as far away as the Moon... While leading manufacturers are hoping the 2nm chip will solve many of the 3nm generation’s problems, the limits of scaling mean engineers are already developing alternative ways of getting more power and efficiency out of the same space. Building on current 3D designs, engineers plan to stack transistors on top of each other, rather than cramming them in side-by-side... 

Packaging developments have paved the way for another shift in semiconductor architecture: “chiplets”. Engineers are moving away from building an entire microprocessor on a single piece of silicon — the monolithic “system on a chip” — and towards multi-chip modules (MCMs). These MCMs see groups of chips with different functions built on separate pieces of silicon and then bundled together to work like a single electronic brain... Many believe chiplet manufacturing is the only way to keep Moore’s Law alive in the longer term. Intel, AMD and Apple have already launched products, while others, like Nvidia, have indicated they have them in development. AMD’s latest MI300 employs modular architecture. The companies investing in MCMs say one of their key advantages is flexibility — they can be adapted for different customers because makers can swap in chiplets depending on requirements. They also offer manufacturers the option of mixing older and newer designs and upgrading elements incrementally, rather than overhauling a chip’s entire system at once.

This graphic captures the increasing cost associated with smaller chip manufacturing.

8. Marginal Revolution points to this far-reaching set of urban planning reforms in Wellington, New Zealand. 

The first is the inner-city character areas, which have been reduced from 306 hectares to 85 hectares. This is huge. This is the most desirable, most density-friendly land in the city. The reason these suburbs have “character” is because they are old. They’re old because they’re the closest places to the city, so they were the first places anyone built houses. The character protections effectively prevented any development whatsoever from occurring in these suburbs. Thanks to Thursday’s votes, this land will be able to become apartments for thousands of new residents (which will also mean huge value uplift for current homeowners, whose land has suddenly become more developer-friendly). 

The second huge win is for the northern suburbs. By defining the Johnsonville rail line as “rapid transit”, the council has enabled thousands of new homes to be built along the train line. Anything within a walking catchment of a rapid transit station must automatically be zoned for six-storey apartments. A successful amendment by Nīkau Wi Neera took it even further, expanding the rapid transit walking catchment from five minutes to 10 minutes. Multiplied across nine train stations on the Johnsonville and Kāpiti lines, this adds up to enormous potential for new housing.

There are countless smaller wins. The Gordon Wilson flats will no longer be a heritage-protected blight, staring over The Terrace menacingly like a diseased predator. Finally, (finally!), Victoria University of Wellington will be free to demolish the building and do something better with that land... Rebecca Matthews successfully passed an amendment to remove front and side yard setbacks. This goes much further than the National Policy Statement on Urban Development, or the Medium Density Residential Standards. Put simply, it means people building new townhouses or apartments don’t have to leave a gap between the house and the front or side of a section (as is common with UK-style terraced housing). That means more of the land can be used for housing. In many cases, it actually means larger backyards, because you don’t have to leave an ugly, weird dark alleyway along the side of the flat. It’s a small difference on every individual property, but it will add up enormously across the scale of the city. It will mean larger townhouses, or more townhouses per section, both of which are a win for density.

As can be seen, there are a lot of details here. It means that cities must have the capability to figure out which areas need to be applied with which set of urban planning instruments.

9. For every convincing argument, there's an even more convincing counter-argument. From David Andolfato. 

You could also add globalisation, the emergence of China, technological advances etc to the mix of factors that has contributed to the stabilisation of the economy. 

10. Finally, we worry needlessly about what has not happened in a thousand years. Hyperinflation edition.

Some thoughts on government interventions to prevent recessions

Ruchir Sharma points to a very important point about government interventions to prevent or mitigate recessions and its moral hazard and cushioning effect,

Faith in government as a saviour in recessions has been worming its way into people’s minds for most of their lifetimes. Since 1980, the US economy has spent only 10 per cent of the time in a recession, compared with nearly 20 per cent between the end of the second world war in 1945 and 1980, and more than 40 per cent between 1870 and 1945. One increasingly important reason is government rescues. Combined stimulus in the US, the EU, Japan and the UK, including government spending and central bank asset purchases, rose from 1 per cent of gross domestic product in the recessions of 1980 and 1990 to 3 per cent in 2001, 12 per cent in 2008 and a staggering 35 per cent in 2020. Though the 2020 recession was sharp, it was the shortest since records begin, lasting just two months. Government bailouts in the pandemic came so fast and large that it felt to many people, particularly white-collar employees working from home, as if the recession never happened. Their incomes and credit scores went up. Their wealth exploded with rising stock and bond markets. Now this experience of recession as a non-event seems baked into the professional psyche.

The article also points to the likelihood of a period of higher inflation,

The most lasting legacy of Covid may be its impact on work and wage inflation. One in eight people say they plan “no return” to pre-pandemic activities, including work... In conversations I hear chief executives saying that they have “pricing power” for the first time in decades... Meanwhile, the world is changing in fundamentally inflationary ways: birth rates have been falling for years but are now rapidly shrinking working-age populations. Countries are retreating inward, offshoring to the nearest and most friendly nations rather than to the least costly. The pressure from demographics and deglobalisation will push the new normal for inflation higher, closer to 4 than to 2 per cent.

Some observations

1. On the point about government interventions over the years leading to the build up of excesses, I am reminded of a Howard Marks newsletter (which I blogged here),

In the forestry business, if there's a small fire they let it occur and sometimes they even cause some small fires to burn up the fuel that lies on the forest floor. And if you don't permit any small forest fires, when you finally have one that you can't put out right away, you're going to have a doozy because of all the accumulated fuel on the forest floor.

I believe that if they prevent every recession, that will give rise to such excesses on the high side, it will be, as I say, unsustainable and will cause a recession and that's going to be a doozy. So it just seems to me that if I were running Fed, which I'm absolutely unqualified to do, I would opt for leaving it alone most of the time, the economy, and having it do what it does naturally...We're all in the investment business because we believe in the efficacy of the free market as an allocator of resources. So if you do, then shouldn't you leave the economy and the capital market alone as much as you can so that it can freely allocate resources?

Excessive interventions invariably come in the way of the self-correcting mechanisms of the market, of which recessions are one. However, no matter the logical arguments against such interventions, the political economy of the times cannot help avoid such interventions. In the circumstances, there is little to be done except to endure and face up to the reality. 

2. The normalisation of the resolve (and public acceptance) to undertake such massive interventions by governments also means that they could in theory pull some more cards out to backstop and cushion the next recession, even as more excesses (in the form of debts, zombie companies, financial market distortions etc) build up. Further, the powers and instruments available with governments today (combined with the willingness to use them) to mitigate recessions are more than ever. It may require the later recession to bring the house down. The can could be kicked down the road. 

3. The forces pulling in the direction of higher inflation will have to be seen against those pulling in the other direction. I had blogged here about how the period of low interest rates may continue for long into the foreseeable future. 

4. Besides, I think a steady state inflation of 4% should not be seen as the arrival of a period of higher inflation. Instead it should be seen as a return to more normal times. Instead, the last two decades and more of 2% and below inflation have been an aberration.

Update 1 (28.03.2023)

Ruchir Sharma has more on the culture of reflexive bailouts

In stark contrast to the minimalist state of the pre-1929 era, America now leads a rescue culture that keeps growing to new maximalist extremes... A restrained government was a key feature of the industrial revolution, marked by painful downturns and robust recoveries, resulting in strong productivity and higher per capita income growth. Right into the 1960s and 1970s, resistance to state rescues still ran deep, whether the supplicant was a major bank, a major corporation or New York City. Though the early 1980s is seen as a pivotal moment of broader government retreat, in fact this era was marked by the rise of rescue culture when Continental Illinois became the first US bank deemed too big to fail. In a move that was radical then, reflexive now, the Federal Deposit Insurance Corporation extended unlimited protection to Continental depositors — just as it has done for SVB depositors... In each crisis, rescues held down the corporate default rate to levels that were unexpectedly low, compared with past patterns. They are doing the same now even as rates rise and bank runs begin... The rescues have led to a massive misallocation of capital and a surge in the number of zombie firms, which contribute mightily to weakening business dynamism and productivity. In the US, total factor productivity growth fell to just 0.5 per cent after 2008, down from about 2 per cent between 1870 and the early 1970s. Instead of re-energising the economy, the maximalist rescue culture is bloating and thereby destabilising the global financial system. As fragility grows, each new rescue hardens the case for the next one... constant rescues undermine capitalism. Government intervention eases the pain of crises but over time lowers productivity, economic growth and living standards.

Weekend reading links

1. Fascinating graphic which shows how the US and UK resemble societies where the poor are poorer than the developed country average, and the rich are richer.

While the top earners rank fifth, the average household ranks 12th and the poorest 5 per cent rank 15th. Far from simply losing touch with their western European peers, last year the lowest-earning bracket of British households had a standard of living that was 20 per cent weaker than their counterparts in Slovenia... In 2007, the average UK household was 8 per cent worse off than its peers in north-western Europe, but the deficit has since ballooned to a record 20 per cent... The rich in the US are exceptionally rich — the top 10 per cent have the highest top-decile disposable incomes in the world, 50 per cent above their British counterparts. But the bottom decile struggle by with a standard of living that is worse than the poorest in 14 European countries including Slovenia.

2. I have blogged here about the difficulties presented in evaluating the current episode of economic slowdown. As the graphics show, on most parameters of labour market health, the current situation is far better than in any recession over the last ten years. 

The picture is mixed on the consumption

... and production sides.

3. Indian cinema industry fact of the day

Affluent southern states often have more cinema screens than the Hindi-speaking heartlands. Tamil Nadu, with a population of less than 80mn, has 1,104 screens; Hindi-speaking northern Uttar Pradesh, India’s most populous state with nearly 230mn inhabitants, has just 539.

4. Local government financing vehicles (LGFV) in China have stepped in as buyers of last resort in the property market, thereby allowing cash strapped local governments raise money by selling lands and also backstopping the real estate market from crashing.

According to official data, land acquisitions by LGFVs rose to Rmb400bn ($57bn) in the first half of the year, up more than 70 per cent compared with the same period in 2021. This is despite overall land purchases, which have previously been dominated by private developers, falling by almost a third as Beijing cracks down on real estate speculation. The buying spree is intended to help cash-strapped local authorities, for whom selling land is an important source of income. But the LGFVs, which play a critical role in funding long-term infrastructure development, are being forced to borrow more from state banks and issue bonds to finance the deals... Most LGFVs, which typically have little experience in property development, are leaving their newly purchased plots idle. This, combined with the larger housing market meltdown, means the short-term relief that local authorities get from the financing vehicles’ land purchases ultimately risks bigger problems for China’s already faltering economy...

Official data show LGFVs accounted for almost a quarter of land sales in the first half of this year, compared with 9 per cent in the same period a year ago. The ratio exceeded 50 per cent in some less-developed small cities... To make up for the lack of bidders, many cities have raised the minimum price for land auctions. That has often forced LGFVs to pay a premium even as the market is weakening... Most LGFVs face cash flow constraints as they derive the bulk of their income from government-backed infrastructure projects with long-term horizons for returns. In the meantime, state lenders are willing to either issue loans to LGFVs against land as collateral or buy the latter’s bonds in the hope authorities will step in if a crisis occurs.

5. The global race to dominate semiconductor manufacturing

The article outlines what China is doing to achieve self-sufficiency in the cutting-edge technology sectors. It's packing its bureaucracy with technocrats instead of bureaucrats, and picking winners among emerging businesses and supporting them with fiscal concessions.

At a national meeting held this month in the eastern province of Jiangsu, China named 8,997 enterprises as “little giants”, putting them in line for tax breaks so they can help China compete with the US and other western powers... In the past few years, China has overseen the establishment of more than 1,800 so-called government guidance funds, which have raised more than Rmb6tn ($900bn) to invest largely in tech sectors that Beijing deems “strategic”. The funds’ salient feature is that they are mostly run by provincial and local governments or by state-owned enterprises... Companies had to be vetted by local governments in the first instance, opening up the potential for favouritism and corruption. At the same time, government officials can be poor assessors of a company’s prospects, especially when it involves technology that is hard to understand.

6. Tamal Bandopadhyay has some interesting snippets about government bond market in India,

Till the last week (September 16), the government has raised Rs 7.72 trillion without any hiccups. Net of redemptions, the net borrowing has been Rs 4.39 crore... In FY2019, it had borrowed Rs 5.71 trillion gross amount (net Rs 4.23 trillion). The next year, the gross borrowing was Rs 7.10 trillion (Rs 4.74 trillion). In the Covid-hit FY2021, the gross borrowing zoomed to Rs 13.7 trillion (Rs 11.43 trillion). Last year, it dropped to Rs 11.27 trillion (Rs 8,63 trillion) before rising to its historic high of Rs 14.31 trillion this year (Rs 11.61 trillion)... In FY2019, the gross SDL was to the tune of Rs 4.78 trillion (Rs 3.49 trillion); in FY2020, it rose to Rs 6.35 trillion (Rs 4.87 trillion) and further to Rs 7.99 trillion (Rs 6.52 trillion) in the next financial year. Last year, the states raised Rs 7.02 trillion (Rs 4.92 trillion). Till September 16 this year, the states have raised just Rs 2.44 trillion (net Rs 1.29 trillion) from the market, much less than the estimated Rs 4.01 trillion in the first half of the financial year.

The article also had an interesting factoid which underlines the problem of low investment appetite among corporates

Till June, the net corporate bond issuance has been negative. This means, redemptions of old bonds have been higher than fresh bond floats. Contrast this with Rs 4.04 trillion net issuance in FY2022 and Rs 3.59 trillion in FY2021.

7. Fascinating set of stats about Roger Federer, Novak Djokovic, and Rafael Nadal.

More on Roger Federer. Barney Ronay in The Guardian

And with Federer greatness was as much about style and form and texture. There was a sense in his talent of something that never quite reached its end point. Even at its most concentrated pitch one never felt one got to the limits of what Federer might do. There is probably still a bit in there, Rog, if you ever feel like giving it another go... His backhand was frankly ridiculous, overblown, hilariously good. This, one thought, watching that thing – the flex of the knee, the flourish of the wrist – is a kind of artefact, a European cultural treasure, like a Bach cantata or a complete acorn-fed Iberian ham, the kind of backhand a power-crazed Bond super villain might try to steal from its laser-guarded case and transport to the moon... It was not the styling, the deep, piercing (woof) eyes, the balletic grace in his movements. The real Federer hit was the way these things were combined with accuracy, power, shot selection, competitive will. Federer was never just getting the ball back or staying in the rally but challenging to live at this pitch, to exist in his sporting world.

8. In an interview with CBS News, President Joe Biden has clearly indicated that the US would defend Taiwan from a Chinese attack by sending US forces to defend Taiwan. 

Whether he intended it or not, there is a game being played out here. Hitherto there was a strategic ambiguity about the likely American response in case of a Chinese invasion. This and the three previous statements by President Biden should serve as sufficient enough indication to the Chinese that there may no longer be any ambiguity about US response. To this effect, it has atleast significantly reduced, if not removed, from the Chinese calculations the possibility of US staying out in case of an invasion. One can reason that this, coupled with the outcomes from the ongoing Ukraine crisis, would have significantly reduced, at least for now, any possibility of a Chinese invasion.  

9. From Martin Wolf, in the context of UK economy, the point about limited correlation between tax rates and economic prosperity.

And this about product and labour market regulation among western economies.

10. Business Standard reports that the RBI has cracked down on outsourcing of loan recovery operations by lending institutions. 

The Reserve Bank of India (RBI) on Thursday barred non-banking financial services company Mahindra & Mahindra Financial Services(MMFSL) from outsourcing recovery agents, days after a 22-year-old pregnant woman died in Jharkhand’s Hazaribagh while trying to block loan recovery agents from taking away her father’s tractor and was crushed under the vehicle. The loan was taken from M&M Financial. “The RBI has… in exercise of its powers under Section 45L(1)(b) of the Reserve Bank of IndiaAct, 1934, directed MMFSL, Mumbai, to immediately cease carrying out any recovery or repossession activity through outsourcing arrangements, till further orders,” the RBI said... This is probably the first time the regulator has cracked down on lenders on recovery by coercive methods, which is typically a hallmark of outsourced recovery agents.

As the report says, given the widespread use of this practice, it remains to be seen how the RBI will be able to enforce its circular. 

It has become an increasingly common practice among banks to outsource its two critical activities - credit-worthiness assessment and recovery operations. In the circumstances, the lender becomes a fund manager who takes deposits, manages it, and transacts through the third parties. If you add securitisation of the loan book, the lender has limited skin in the game. 

11. Following concerns raised by Amundi Asset Management's Chief Investment Officer Vincent Mortier a few weeks back, now Mikkel Svenstrup, the CIO at ATP, Denmark's largest pension fund has compared the private equity industry to a pyramid scheme. 

Mikkel Svenstrup... said he was concerned because last year more than 80 per cent of the sales of portfolio companies by the private equity funds that ATP has invested in were either to another buyout group or were “continuation fund” deals, where a private equity group passes it between two different funds that it controls. “We’re a big fund investor, we have hundreds of funds and thousands of portfolio companies,” he said. “This is not good business, right? This is the start of, potentially, I’m saying ‘potentially’, a pyramid scheme. Everybody’s selling to each other . . . Banks are lending against it. These are the concerns I’ve been sharing.” ATP is a major investor in private equity funds. It has $119bn under management and has committed money to 147 buyout funds, according to PitchBook data...Mortier said some parts of the private equity industry “look like a pyramid scheme in a way”. Svenstrup said the “exponential growth” of the private equity industry in recent years, as investors have poured cash into its funds, would stop “at some point”, adding that this was “just a question of time”.

These calls may be the canary in the coal mine with respect to the PE industry. 

12. In The Rise of Finance, we discussed the adverse effects of US monetary policy spillovers on developing countries. The ongoing rate hikes and consequent strengthening of dollar, and associated sudden stops and capital flows reversals and imported inflation into developing countries is only the latest instance. 

The Fed, which on Wednesday made its third 75 basis point increase in a row, is playing catch-up. While that may be the best course of action for the US economy, its aggression is triggering what Maurice Obstfeld, of the Peterson Institute for International Economics, labels “beggar-thy-neighbour” policies. The consequences of the Fed‘s mistakes are effectively exported from the US, burdening America‘s trade partners. Higher US rates have bolstered the dollar, exacerbating inflation elsewhere by raising the cost of commodities which are, more often than not, priced in the greenback. A “reverse currency war” is in full flow, with monetary authorities across the world now ditching their standard quarter-point increases in favour of 50, 75 and — in the case of Sweden and Canada — 100 basis point moves in order to stem dollar declines. Rate rises, while necessary to quell inflation, have become so aggressive the World Bank 

warned last week they risk sending the global economy into a devastating recession that would leave the world’s poorest countries at risk of collapse... Since the 2008 global financial crisis the Fed and other major market central banks have deployed wave after wave of stimulus. That left global interest rates at ultra-low levels for years on end. The result of that — plus the pandemic — is international debt levels are close to all-time highs. As financing costs rise, more and more of the world’s poorest countries are seeking support from the IMF and the World Bank.  

13. On gastronomy and air travel,

Business and first class account for about one-third of all airline seats but generate up to 70 per cent of revenue. The promise of a better meal is part of what motivates passengers to buy a premium ticket... At 35,000ft, the human tongue goes partially numb, causing you to lose about one-third of your taste buds. The microclimate of an aeroplane is drier than most deserts, which has an effect on the nose roughly equivalent to stuffing one nostril with toilet paper. Even the sound of the engine changes the way food tastes. Exposure to the background noise of an aeroplane, which can reach 80-85dB, dulls your sensitivity to salty and sugary flavours, while enhancing your perception of the proteinous fifth taste, umami. This explains the enduring love affair between air passengers and tomato juice, which is ordered as much as beer in flight. If you drink it in the sky, it will taste richer, more savoury, and less acidic.

14. Finally, Andy Mukherjee calls for greater scrutiny of the drivers of wealth creation of Gautam Adani.

Adani’s commodities, energy and transportation empire the $255 billion stock-market juggernaut it is today, even when the combined annual net income of its seven publicly traded firms is less than $2 billion... Elara India Opportunities Fund, which has amassed $4.2 billion — practically all of its assets under management — from three stocks: Adani Transmission Ltd., Adani Enterprises Ltd., and Adani Total Gas Ltd. APMS Investment Fund Ltd., whose $3.6 billion portfolio also includes Adani Power Ltd., has done it with four. There are three more of these Mauritius-based entities among major shareholders: Cresta Fund Ltd., LTS Investment Fund and Vespera Fund Ltd. A sixth, Albula Investment Fund Ltd., has exited Adani firms, with its portfolio shrinking to about $240 million from $1.6 billion in December, according to Bloomberg data. Between them, these publicity-shy investors own a combined $12 billion of Adani stock.

And the staggering reach of the conglomerate

The coal he mines, moves through his ports, and burns at his power stations provides electricity to Indians. Adani supplies families with piped gas when they’re sitting down to dinner, in which the cooking oil is also his, and the wheat probably stored at his warehouses. The new structures that will adorn the landscape of an underbuilt India over the next couple of decades will take construction materials from Adani, who just acquired 70 million tons of cement capacity and now wants to double it in five years. The businessman will collect toll on roads in the states of Gujarat and Andhra Pradesh, and host Indians’ data when they’re browsing the internet, waiting for a flight to take off from one of his airports. He’ll also help book the airplane tickets. And before you complain about the impact of coal, cement, palm oil and data centers on the environment, Adani says he’ll invest $70 billion into “cooling the planet down” with green hydrogen, wind turbines and solar panels. Throw in forays into media and money-lending to small businesses, and Adani may soon command a bigger share of an average Indian’s life than Amazon will ever garner from a typical American’s wallet.

Weekend reading links

1. The prioritisation of resilience over pure efficiency maximisation may end up boosting the demand for warehouses

The chastening experience of a pandemic during which stocks of everything from face masks to toilet paper ran short has shifted the way a range of businesses operate. Their priorities are now orientated towards building supply-chain resilience rather than pursuing maximum efficiency at all costs. That is creating demand for more local warehouse storage to guard against future shortages. “Every single person we talk to from an occupational perspective is talking about this: pharmaceutical companies, retailers, everyone,” says Preston. His company, Tritax EuroBox, has leased a vast warehouse in the southern Netherlands to food retailer Lidl. The shed is packed full of non-perishable goods that Lidl has no immediate intention of selling. “It’s a resilience package for them, full of pasta, tinned tomatoes, goods that won’t go off. Because when Covid came along, shelves were emptied, they learnt their lesson,” he says.

2. The private equity industry buys out Senator Krysten Sinema who blocked a bipartisan legislative effort to remove the so-called carried interest loophole that allows PE and hedge fund managers to have their investment gains taxed at a lower 20% compared to the marginal income tax rate of 37%. Sinema forced the dropping of the change in the tax provision in return for her support for the Inflation Reduction Act, a wide-ranging climate, health care, and tax bill. 

3. Despite the government's efforts to increase local manufacturing, the share of Indian companies in the smart phone market fell from 21% in 2017 to just 1% in 2021. Indian companies like Lava, Micromax etc have struggled to fight the Chinese competition. 

4. NYT article about the efforts in the US to regulate the container shipping industry 

The ocean carriers have multiplied their shipping rates and imposed a bewildering assortment of fees. The container shipping industry is on track to make $300 billion in profits before taxes and interest, according to Drewry, an industry research firm. The White House has seized on these two realities — soaring prices, and record profits for carriers... Three alliances of shipping companies control 95 percent of routes across the Pacific, according to the International Transport Forum, an intergovernmental body based in Paris. As shipping prices have soared, and as delays have besieged ocean transit, retailing giants like Amazon and Walmart have chartered their own vessels, prompting complaints from smaller importers that they are at an unfair disadvantage.

5. More on the strange recession this time around in the US,

Typically, in recessions, the problem is that businesses don’t want to hire and consumers don’t want to spend. Right now, businesses want to hire, but can’t find the workers to fill open jobs. Consumers want to spend, but can’t find cars to buy or flights to book. Recessions, in other words, are about too much supply and too little demand. What the U.S. economy is facing is the opposite... To most people, of course, this doesn’t feel like a boom. Measures of consumer confidence are at record lows, and Americans overwhelmingly say they are dissatisfied with the economy. That perception is grounded in reality: High inflation is eroding — and in some cases erasing — the benefits of a strong job market for many workers. Hourly earnings, adjusted for inflation, are falling at their fastest pace in decades... 

There is also a subtler consequence: uncertainty. No one knows how long the boom will last, or what the economy will look like on the other side of it, which makes it hard for workers, businesses and governments to adapt... Businesses have now spent two and a half years in a state of constant adjustment. In early 2020, practically overnight, Americans traded restaurant meals for home-baked bread, and gym memberships for socially distanced bike rides. Those shifts caused huge disruptions, in part because businesses were reluctant to make long-term investments to address short-term spikes in demand... Instead, the lingering disruptions of the pandemic, uncertainty over what the post-Covid economy will look like and fears of a recession have made businesses reluctant to make bets on the future. Business investment fell in the most recent quarter. Employers are hiring, but they are leaning heavily on one-time bonuses rather than permanent pay increases.

See also this.

6. FT long read on the changing face of private equity investing. From being small mercenary takeover specialists in the 1970s to early nineties, PE firms today manage nearly $10 trillion in assets. Their new area of focus is private debt,

Firms that once bludgeoned opponents now nurture complex business relationships with their competitors. Private equity has become just a fraction of their overall assets under management, with credit investing businesses now managing hundreds of billions of dollars, including providing loans for leveraged buyouts... With private equity deals now accounting for over 25 per cent of global M&A activity — a record market share — the collective power of the leading groups is starting to attract the attention of regulators... 

The modern day private equity buyout traces to Michael Milken’s Drexel Burnham Lambert, the investment bank that popularised the “junk bond”. Drexel financed small teams of dealmakers targeting corporate giants such as Disney, Texaco and then RJR Nabisco, the signature LBO of the go-go 1980s. Milken, and many of Drexel’s clients, were considered aggressive outsiders, unafraid to gatecrash Wall Street... By the 2008 crisis, private equity had become part of the financial mainstream as it pulled off a string of ever-larger takeovers. These so-called “club deals” hinted at the willingness of some firms to co-operate out of self-interest...

Investment banks, hamstrung by new regulations like the 2010 Dodd Frank Act, were curtailed from holding risky assets such as low-rated debts, which has limited their ability to finance many deals. As a result, corporations and private equity buyers have had to seek new ways of issuing debt. Blackstone, Apollo, KKR and Carlyle stepped into the void. They bought billions of non-performing loans from banks in the US and Europe, betting that the portfolios would stabilise. As markets recovered, they shifted to originating new loans, underwriting midsized private equity takeovers that banks would not finance. It set off private equity’s march into new businesses such as lending, insurance-related investments, real estate and infrastructure, which were far from their original speciality in buyouts... These private financings have continued as interest rates rise — just as many investment banks have been refusing to make new lending commitments until loans from deals struck earlier in the year have been sold on.

Another trend is the rise of sales from one PE firm to another, or "GP-led secondary transactions",

The fastest way for buyout firms to deploy their nearly $2tn in “dry powder,” or funds they have raised that have yet to be invested, is to buy companies directly from other private equity firms. A record 442 of such deals worth $62bn were struck last year, according to Refinitiv. These deals can close in less than three months, say bankers, versus as long as nine months to acquire a public company. They can also be expedient: sellers sometimes look to quickly lock in gains and show strong returns as they raise their next fund, notes one private equity firm executive... There has also been a surge in so-called “GP-led secondary transactions,” where one private equity firm sells a large stake in an existing investment to another firm at a higher valuation. 

7. The pandemic induced surge in demand for goods is tapering off,

Consumer goods retailers and ecommerce companies who profited amid lockdowns and mistakenly expected the good times to continue rolling have been hard hit. Big box retailers Target and Walmart, which won last year by scooping up inventory and paying extra for air freight, are now having to slash prices and cancel orders to clear excess stock. Ecommerce companies such as UK fast fashion site Asos are similarly coming down to earth, as it becomes clear that pandemic-related online buying marked a one-time jump rather than a permanent shift to faster growth. Overall US online prices for goods fell in July for the first time since May 2020, with price drops recorded in 14 of 18 categories tracked by Adobe. Electronics, the largest ecommerce category, saw a 9.3 per cent year-on-year decline, as the bulge driven by home office upgrades begins to recede.

But the demand in services shows no signs of abating,

Now it is the service providers who are struggling to keep up. After two grim years marred by closures and limited demand, their sales are climbing. Walt Disney reported record revenue in its theme parks division, hotel chain Marriott bragged of “outstanding” results and both American and United Airlines returned to profit for the first time since the start of the pandemic.

8. Unintended consequences of private equity in housing

Right to Buy was a remarkable success in that it led to the sale of more than 2mn homes and resulted in an immediate transfer of wealth. But one of its direct, longer-term consequences has been that, rather than increasing home ownership, it contributed to the rapid growth of an under-regulated and precarious private rented sector. In 1979, more than a third of people in England lived in council housing built, owned and administered by local government. Now, more than 40 per cent of the council homes bought under Right to Buy have been sold on to private landlords, who rent them out at three or four times the price of an equivalent property in the social housing sector. The result is that, in many parts of the country, private renting is unaffordable for those on lower and even middle incomes, excluding people from the market and leading to a continuous cycle of eviction.

9. From FT about couple of graphics about the shipping industry. Interesting that the global LNG capacity has been more or less stagnant over the past five years.

Container freight rates have rocketed

10. Don't know the source of these numbers, Arun Maira quotes about India's labour market growth,

The gap between where our economy is and where it needs to be is increasing. Between 1980 and 1990, every one per cent of GDP growth generated roughly two lakh new jobs; between 1990 to 2000, it decreased to one lakh jobs for every per cent growth; and from 2000 to 2010, it fell to half a lakh only.

But it's most likely in some similar range. 

11. Satyajit Das points to the private markets being the faultline for the next financial crisis. Investors have poured $9.8 trillion into unlisted equity, private debt, and seed and venture capital. The illiquidity, opacity, and diffusion of risks have led to valuation bubbles. Consider this recent example,

After being valued in 2021 at $46bn, a 2022 $800mn funding round valued Klarna at $6.7bn (an 85 per cent fall). As the disappointing initial public offerings of Uber and WeWork highlight, the case is not isolated.

Das points to the faultlines, 

First, as private investments are inherently illiquid, investors cannot cauterise losses easily. Monetisation, largely reliant on initial public offerings and trade sales, is now difficult, especially at previously anticipated prices... Second, the lack of market prices means opaque valuations, which frequently misstate investment or fund values... Third, private equity originally focused on long holding period investments purchased with substantial borrowings in traditional industries that offered undervalued shares, strong cash flows, low operating risk and the potential for business improvements. Today, many of these elements, other than leverage, are frequently absent... Fourth, for non-profitable or cash-flow-negative enterprises, availability of follow-on funding necessary for operations is presumed... Finally, private markets exhibit complicated layers of risk... Today, investments are frequently held through tiers of funds, some with borrowings from banks or private providers. Securitisation of private equity loans and non-bank credit display familiar opacity and exacerbate leverage in the system. Falls in asset value anywhere can create instability elsewhere within the financial system.