I wanted to share a quick professional update: Earlier this year, I started writing at Citrini Research. While I’d love to take credit for the thought-provoking 2028 Intelligence Crisis article and for being Analyst #3 — that work was undertaken by my talented colleagues. Nevertheless, you can read some of our latest work linked below:

Citrini Research

Semis Memo: Supply Chain Inheritance

Introduction…

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6 days ago · 390 likes · 6 comments · Citrini

Citrini Research

Agentic Utilities

Introduction…

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2 months ago · 455 likes · 14 comments · Citrini

Citrini Research

Let There Be Light

Introduction…

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2 months ago · 388 likes · 15 comments · Citrini

I’m very excited for this chapter and thank you all for being a captive audience for the past several years.

If you’d like to continue following my work, please consider subscribing at the link below.

Citrini Research

Citrini Research provides insights on thematic equity investing and global macro trading—with cross-asset, lateral thinking. Our promise: you’ll never have to ask “what’s the trade?”

Thank you all again for your support. Wishing you all a happy Memorial Day and wonderful summer ahead.

Sincerely,

Tom - The Global Capitalist

In case you missed some of my last articles:

Onto the article!

Bitcoin’s genesis block, or the first bitcoin ever minted, is coming up on its 17th birthday this January. On the genesis block you can find a snippet of a newspaper headline left in the coinbase1 by Satoshi Nakamoto, Bitcoin’s anonymous founder who has become somewhat of a modern religious figure. The headline stems from an article in the Times, detailing yet another bank bailout in the wake of the Global Financial Crisis. The message suggests that Nakamoto was taking a jab at the British banking system, insinuating that bitcoin could emerge as an alternative to the existing monetary and banking system that we utilize today. Said another way, banks were corrupt and fragile. In that same vein, fiat currencies were unreliable stores of value, given that they could be produced at the whim of governments and central banks.

Legacy banking systems were also subject to the permission and regulatory structure of the local government. There was no guarantee that you were able to retrieve “your cash” from your bank. After all, “your cash” is merely a banknote, or a debt obligation from the central bank, backed by the full faith and credit of a sovereign issuer. This dynamic was particularly salient in Cyprus circa 2013, in which Cypriots were unable to access cash from the bank in the fallout of the Eurozone crisis.

Bitcoin was said to be the antidote to this system by allowing holders (hodlers?2) to bear ownership of their own currency, rather than having their wealth be comprised of debt obligations. Bitcoin is also “permissionless”, meaning that you may transact in bitcoin without any impediment from any unrelated third party. By contrast, the Bitcoin blockchain and node operators govern every transaction. Fees generated by the blockchain on behalf of node operators create an incentive structure in which transactions are processed safely, accurately, and secure. The technological foundation of bitcoin and cryptocurrency writ large have created an entirely new asset class with an anti-establishment ethos — promulgated by brokers like Coinbase.

Paradoxically, however, bitcoin’s remarkable performance makes it a poor currency. A rational actor would prefer to hold an appreciating asset, instead of spending it on non-durable goods and services. Intuitively, this description doesn’t apply to fiat currencies. Inflation (gradually depreciating currency) serves as a built-in incentive to spend or invest, which is why “cash equivalents” typically carry some interest. This hasn’t, however, dampened the market’s enthusiasm for crypto products.

Bitcoin caught an enormous bid in 2021 as the global economy was flush with cash, resulting in eye-watering inflation prints. On top of that, Donald Trump, the then-former president of the United States, was banned from social media, sparking outrage from his supporters and advocates of free speech. Trump’s suspension was orchestrated at the management levels of large tech companies, revealing that users and content could be unilaterally suppressed by only a handful of powerful individuals. The risks of centralized authority galvanized Bitcoin, given its characteristics of immutability and decentralization. Affinity for these principles ultimately spilled into other cryptocurrencies like Ether (Ethereum) and Solana — digital ecosystems underpinned by blockchain, transparency, and the ability to bear ownership of your digital presence. No longer would Google and Facebook be able to solicit your data to inquiring advertisers — users themselves would be able to harness the fruits borne from their own online activity. This architecture was branded “Web3” and promised to be the next frontier of internet economics. Blockchain technology, in a way, reinforced the concept of a digital identity, leveraging financial incentives for people looking to capitalize on time and money spent on the internet. It was a compelling pitch, prompting rapid price jumps in $ETH and $SOL, the cryptocurrencies associated with the Ethereum and Solana blockchains. Patrons of the crypto community compared buying web3 infrastructure tokens like Ethereum and Solana to “buying a piece of the internet”. Then again, it’s crucial to recall how, in the post-pandemic, zero-interest rate era — there was a large appetite for outlandish forecasts.

2022 was a less fortuitous year for bitcoin and cryptocurrency, as the market endured “crypto winter”. High-profile fallouts from TerraLuna (May 2022), Voyager (July 2022), Celsius (July 2022), BlockFi (November 2022), and of course, FTX — reinvigorated crypto skepticism. Before FTX’s collapse, the company had achieved a $32 billion valuation backed by blue-chip venture capitalists like SoftBank, Insight Partners, Lightspeed Venture Partners and others. Sam Bankman-Fried, FTX’s chief executive, had even testified in front of congress to advocate for a new regulatory framework for digital assets.

As bitcoin sank to two-year lows, the company was on the precipice of a rescue acquisition by Binance, one the largest crypto brokers in the market. As negotiations progressed, FTX revealed that their balance sheet was far more rickety than originally advertised. The company held roughly $900MM of liquid securities and over $15B of “less liquid” assets, compared to $9B in liabilities. The issue, however, is that the “less liquid” bucket was mainly comprised of random tokens issued by FTX themselves. The tokens were marked at far higher prices than where the market was willing to pay, thus driving FTX into insolvency. Bankman-Fried was arrested and subsequently sentenced for securities fraud in the months thereafter.

Trivia: FTX was infamously backed by several professional athletes. Can you name them? Answer below.

Cryptocurrency was left for dead by the end of 2022 — investors had concluded that crypto businesses were more concerned with financial engineering rather than shipping innovative products. Cryptocurrency investors, however, were rescued by the advent of the bitcoin ETF. In June 2023, Blackrock ( ) submitted an application to list a “spot” bitcoin ETF3, which allowed traditional (“TradFi”) investors to gain tangible exposure to bitcoins through an exchange-traded product. No longer would you have to go through the pain of opening a Coinbase account, or connecting your MetaMask wallet to a decentralized exchange — you could simply buy and hold bitcoins in your brokerage account or IRA. Bitcoin finished 2023 up over 150%, ultimately breaking into a new all-time-high by March 2024.

As bitcoin rallied into new highs, the concern of “TradFi” co-opting the decentralized nature of crypto was noticeably absent. The world’s largest money managers — Blackrock, Fidelity, Invesco, to name a few — would effectively own bitcoins on behalf of their clients. Again, if we are to subscribe to the idea that Satoshi invented bitcoin to contend against the inherent risks of centralization, this participation feels rather puzzling.

For better or for worse, index fund providers have come under fire in recent years for their outsized role as public company shareholders. That said, it hasn’t mattered much to the crypto markets — the launch of bitcoin ETFs coincided with the “halvening”, thereby cutting the supply of newly minted bitcoins in half. Fundamentally, of course, a shorter supply of new bitcoins, coupled with a wave of demand from institutional investors, was bullish for the token.

In the eyes of many, the whole episode of institutional adoption unmasked the true objective of cryptocurrency: Number Go Up. Bitcoin remains stubbornly above the $73,000 seen at the beginning of 2024, yet there are no glowing narratives about the revolutionary prospects of an unbanked society. Web3 economics have failed to accrue any sort of meaningful share in finance services, social media, or software. Farcaster, which posited itself as a decentralized Twitter, has an estimated 40,000-60,000 daily active users as of last September. Total value locked (“TVL”) across the decentralized finance ecosystem tallies up to about $150B, equivalent to the asset base of a mid-sized bank. Filecoin, Helium, among other “infrastructure” tokens have seen tepid adoption, despite what appears to be compelling technology.

Perhaps this was the objective since the beginning. Yes, blockchain adoption is occurring somewhere, according to press releases from consulting agencies. However, the average person doesn’t derive any meaningful utility from this technology. The crypto community’s apathy for user adoption, perceived utility, or simple fundamentals remains absent. This is particularly frustrating to technology enthusiasts and investors (like myself) who dream of cool, innovative products underscored by distributed ledger, or blockchain technology. Meanwhile, we are stuck with NFT artwork, dog coins, and pump-and-dump schemes orchestrated by the President of the United States.

All of this being said — I don’t believe crypto is going away anytime soon, if ever. The money management industry has a tendency to slap fees on anything that attracts asset flows. Furthermore, trading desks can bask in the wide bid-ask spread found on digital assets. Bitcoin ETF inflows continue to climb while new ETF filings for tokens like Ethereum, Solana, — even Dogecoin, continue to garner investor attention. Digital asset treasury transactions, or “DATs”, are generating generous fees to bankers and crypto investors seeking to unearth the next Microstrategy ( ). It’s worth noting that the companies undergoing these reverse mergers are effectively SPACs with the simple objective of owning and holding cryptocurrency in a publicly-traded vehicle.

The extent to which crypto has innovated beyond speculation and financial services remains limited. Blockchain gaming and social networking have, to a small extent, created a proof of concept for web3 economics. But let’s not kid ourselves here: The objective even for folks on a decentralized social network or video game is capital appreciation, not user adoption — if those two elements can even be separated.

Trivia Answer: FTX investors included household name athletes such as Tom Brady, Naomi Osaka, Shaquille O’Neal, and Stephen Curry.

In emerging and developing Europe, growth is projected at 0.0 percent in 2022 and 0.6 percent in 2023, with a 1.4 percentage point upgrade for 2022 and a 0.3 percentage point downgrade for 2023, compared with the July forecast. The economic weakness reflects –3.4 percent and –2.3 percent projected growth in Russia in 2022 and 2023 and a forecast contraction of 35.0 percent in Ukraine in 2022, as a result of the war in Ukraine and international sanctions aimed at pressuring Russia to end hostilities.

— IMF World Economic Outlook; October 2022

There was a consensus view in early 2022 that the Russian invasion of Ukraine (or “Special Military Operation”, depending on who you ask1) would send the Russian economy tumbling due to the severity of Western sanctions. The IMF, for one, had forecast that the Russian economy would contract by -3.4% in 2022 and -2.3% in 2023, as international sanctions weighed on the country’s industrial output. This was a fundamentally sound outlook: Russia’s vast oil and mineral exports allow them to operate their economy at a consistent current account surplus, meaning that they export more goods than they import2. By shutting the country off the banking system and disincentivizing trade with Russia, the sanctions were intended to roll their industrial base — which comprises roughly 30% of GDP.

It is to the chagrin of Ukraine’s allies, however, to see Russian GDP expand 3.6% in 2023, followed by an acceleration to 4.2% in 2024. The country, at least on paper, has persevered through Western sanctions and has proven to be much more resilient than most had expected, with credit due to an enormous spending boom in the defense sector. An estimated 4.5 million Russians are employed in the defense industry, up from an estimated 2 million people in 2019 and equaling ~3% of the Russian population. The United States, by comparison, employs roughly 2.2 million people in the aerospace and defense sector as of 2023 (equal to 0.005% of population), despite being twice the size of Russia. Russian war volunteers are offered lucrative wages3 — paying nearly three times the country’s minimum wage — thereby pushing up wages across the entire economy but especially in war-sensitive sectors like manufacturing and logistics. Meanwhile, Russian consumers are still able to access western luxuries like automobiles, hand bags, and clothing through neutral, third parties — a phenomenon known as parallel imports. Bilateral trade between the Russia and the U.A.E., for instance, has more than doubled since 2021. Other neighboring countries like Kazakhstan, India, China, and Turkey have also seen significant boosts in bilateral Russian trade.

The story of the “Russian Rebound” wouldn’t be possible without the help of Elvira Nabiullina, the governor of the Central Bank of Russia (CBR). Despite attempting to resign in the wake of the Ukrainian Invasion, Nabiullina has been instrumental in limiting the damage inflicted by Western sanctions thanks to overarching capital controls and monetary policy levers. Since the invasion in 2022, Nabiullina and the CBR have made it exceptionally difficult for Russians to purchase foreign currencies4, meanwhile they have forced Russian exporters to convert their foreign currency holdings into rubles. The exchange of rubles for competing currencies creates a bid for the ruble and has helped the country’s exchange rate recover from historic lows seen in February 2022.

Nabiullina has applied the same technique to the CBR’s foreign currency reserves, aggressively rotating out of dollar-denominated assets (“de-dollarizing”) into gold, yuan, and other non-reserve currencies. The Central Bank of Russia is said to hold over $200B worth of gold as of March 2025, making them the 5th largest owner of gold reserves in the world. The CBR has also been accumulating Chinese yuan (CNY) as the two countries remain close allies, as evidenced in their pursuit of a BRICS economic alliance. China has recently become Russia’s largest trade partner — driving the RUB/CNY pairing into the largest currency trade by volume on the Moscow Exchange, supplanting the U.S. dollar as the primary medium of trade in the Russian financial system5.

Finally, Nabiullina has also taken a hawkish stance on Russian monetary policy, hiking interest rates as high as 21% in October 2024 to curtail capital flight and inflation. The competitive rates on Russian sovereign debt has helped slow loan growth and has created incentives for Russian market participants to save, rather than spend or invest. As a consequence, inflation has slowed from a high-teens clip seen in 2022 to a still-elevated 8.8% as of July 2025. The policy rate has been reduced to 18% as of last month and the CBR believes room remains for an additional 300bps of rate cuts should inflation continue to decelerate.

Trivia: What country carries the highest-yielding 10-year treasury security?

Answer below.

This is not Nabiullina’s first rodeo: Her tenure dates back to 2013, prior to the 2014 Annexation of Crimea, in which she embarked on a similarly aggressive maneuver to triage Russia’s economy amidst the Russian financial crisis of 2014-16. Her activity during this period won her the title of Euromoney’s “Central Banker of the Year” in 2015 as well as Banker Magazine’s “European Central Banker of the Year” in 2017. She is known for conveying her views on the economy or monetary policy by wearing colorful, symbolic brooches during her public appearances. For instance, Nabiullina wore a hawk brooch in March 2021 when the CBR voted to hike interest rates by 25bps, the first time in almost 3 years. She has also worn dove brooches when the CBR has cut rates, snowmen for when rates are “frozen”, in addition to scales, jungle cats, and other inanimate objects.

While Nabiullina has denied any sort of intentional symbolism through her outfits, that has yet to deter financial market participants from producing their fair share of memes and theories.

The resilience of the post-sanctions Russian economy presents a dilemma for Western nations looking to curtail the advance in Ukraine. While the Ukrainians were able to successfully deter the Russian advance for several years, the Armed Forces of Ukraine have had difficulty holding ground in the hotly-contested Donbas region, which is composed of the Donestk and Luhansk oblasts. This area is both strategically significant from an industrial perspective as well as for the history of Ukraine and its independence.

Nevertheless, the attrition on both sides of the conflict is staggering. Over 1.5 million casualties have been recorded since the start of the war, of which +1 million are Russian casualties. The Russian death toll from the Ukrainian Invasion is over fifteen-times the amount of people who perished in Russia’s ten year war with Afghanistan. As a function of this, Russia’s male population has shrunk by an estimated 600,000 people since 2021, exacerbating one of the most severe gender imbalances in the world. Even in this light, the country has explored implementing year-round conscription, versus the biannual process that is employed today. It does not appear that Russian leadership has much urgency for a ceasefire. Perhaps it is because the Russian economy has grown drunk off their war dependency. The country spends over 6% of GDP on defense spending, putting them only behind Saudi Arabia in terms of relative spend. While this allocation has translated into high-paying jobs across logistics and manufacturing, President Vladimir Putin has expressed concern over how this elevated spend might impact Russia’s budget and inflationary pressures. This imbalance can be viewed as a real world example of the crowding out principle, which stipulates that higher government spending can deter private investment. In theory, increased government spend will push up interest rates across the market, making it harder for domestic industries like construction and tourism to access capital. Even oil, after hitting $110/bbl in the summer of 2022, has traded down to levels not seen since 2021.

The imbalance in Russia’s economy is showing up in economic forecasts: Russia’s Ministry of Economic Development is forecasting 1.5-2.5% GDP growth for 2025 while the CBR carries a more sober outlook between 1-2%. The country is rapidly spending down CNY reserves as the ruble continues to flounder. What’s more, the softening oil market has weakened Russia’s current account surplus, putting stress on the country’s ability to finance their war efforts. Nabiullina, in her July statement, lauded the country’s progress in slowing inflation although warned about the ramifications of a weakening ruble, cheaper oil, and ongoing shortages in the labor market. The Russian Federation has a historically low unemployment rate of 2.3%, creating a labor shortage estimated to be greater than 2 million people.

Russia’s battlefield advantage has emboldened the country’s to demand control of the Donbas region in exchange for a ceasefire. This urgency, however, appears inconsistent with the country’s struggles with inflation and modernizing their economy. Russia’s semiconductor industry is only capable of producing 90nm to 65nm chips, a far cry from the leading edge of 3nm-2nm. This had made Russia reliant upon foreign semiconductor businesses like Texas Instruments, STMicroelectronics, and Taiwan Semiconductor for drones and other weaponry. The Russian labor market has also been patched together with North Korean conscripts, fake job adverts for African immigrants, and increased foreign labor from Southeast Asia. Finally, the dwindling value of the Russian Ruble has jeopardized Russia’s bargaining power with Chinese exporters, exacerbating Russia’s inflation dynamic. What Russia had hoped would be a harmonious trade relationship has quickly turned into another looming systemic risk.

Calls for the demise of Russia have borne fruitless over the last decade or so. It appears that the militarized Russian economy is here to stay, at least in the interim. If anything, this episode reinforces the view that there is a larger degree of multi-polarity in the global marketplace.

I don’t think, however many days we are into this nonsense, that GameStop is a particularly important story (though of course it’s a fun one!), or that it points to any deep problems in the financial markets. There have been bubbles, and corners, and short squeezes, and pump-and-dumps before. It happens; stuff goes up and then it goes down; prices are irrational for a while; financial capitalism survives.

But I tell you what, if we are still here in a month I will absolutely freak out. Stock prices can get totally disconnected from fundamental value for a while, it’s fine, we all have a good laugh. But if they stay that way forever, if everyone decides that cash flows are irrelevant and that the important factor in any stock is how much fun it is to trade, then … what are we all doing here?

— Matt Levine, Money Stuff (January 2021)

In finance and markets lore, 2021 is generally regarded as one of the more irrational, bubbly markets in recorded history. IPO activity reared to all time high as pockets of froth emerged in assets like real estate, trading cards, collectibles, and how could we forget – non-fungible tokens (NFTs), of which some sold to celebrities for millions of dollars. Special purpose acquisition companies, or SPACs, also had their moment in the sun, in which private equity sponsors took speculative, unproven business models to the public market through intricate, reverse-merger transactions. To be fair, this mania was fairly widespread: Technology businesses traded up to eye-watering valuations, including Zoom Communications (Ticker: ) at 55x forward sales / +$150B market capitalization and Shopify (Ticker: ) which traded at a similar multiple of 50x forward sales and a market cap greater than $200B1. Notably, neither of these companies have been able to recapture their peak valuations sustained during 2021.

2021 SPAC Boom: What was the largest company taken public via SPAC in 2021?

Answer below

All of this “froth” was allegedly justified given the backdrop of zero interest rates. Economic theory tells us that given an absent return in risk-free assets (U.S. treasuries), investors will climb up the risk curve into more speculative assets to achieve their required rate of return.

If we take a step back to examine today’s market environment, it is hard to find any overlap with the economic landscape of 2021. American labor markets are robust, inflation is running at a higher clip than where central bankers might prefer, the risk-free yield is oscillating between 4-4.5%, and mortgage rates are considered to be “restrictive” by many market participants. That being said, markets continue to roar to all-time highs. High growth software multiples, as illustrated by Altimeter Capital, have surpassed the peaks seen in 2021. The “Buffett Indicator”, or the market capitalization of the Wilshere 5000 relative to U.S. GDP, has hit an all-time high at over 210%. Bitcoin trades at nearly $120,000 per token while memecoins like Fartcoin, Dogecoin, Dogwifhat, and others command multibillion dollar token capitalizations2. Unproven, speculative businesses in quantum computing, artificial intelligence, and space technology have made successful public market debuts and continue to trade higher on investor enthusiasm. All of this goes without mentioning the “Bitcoin Treasury” or “digital asset treasury” companies, which have somehow managed to trade at multiples of their cryptocurrency holdings. I know the internet likes to joke about the death of fundamental investing, value investing, however you want to hack it – but at this point, are they wrong?

That being said, I’m curious to know if there is a rational case to be made as to why stocks appear to be so expensive? And is this sustainable?

Fewer Stocks, More Money

One of the core axioms of economics is the function of supply vs. demand. The larger supply of a specific good, the cheaper the price, given a certain level of demand. The more demand, given a fixed level of supply, the higher the price. So on, and so forth.

Notably, the number of publicly traded stocks has shrunk dramatically over the last 30 years. In 1996, there were around 7,300 publicly traded companies versus roughly 4,300 today, a 40% decrease3. When thinking of the “Wilshere 5000”, there aren’t even enough public companies available to populate that index4! Given that fact, it’s hard to believe that we can rely upon the “Buffett Indicator” as a reliable measure of valuation.

One way of understanding why stocks are so expensive is simply because there are fewer stocks to buy, meanwhile institutional investors and household balance sheets are flush with cash. The more dollars chasing fewer stocks implies that public stock valuations are buoyed by a dearth of supply, not unlike real estate prices in many Anglophone countries5. This problem is potentially exacerbated by the explosion of exchange-traded or index fund products. These products are generally “price takers” in the sense that their goal is to merely create exposure to a specific index (like the S&P 500, or Wilshere 5000), industry (technology, industrials, etc.), or factor (momentum, value, growth, etc.) without consideration for valuation6. Employee benefit and retirement accounts are the largest contributors to these products – as more money flows into these funds, the portfolio is forced into the market to buy more shares to match their exposure, thus creating a sustained bid behind these companies’ valuations.

The Game Within the Game

One way of alleviating this stress on public companies would be if there were more stock issuance via IPOs, spinouts, and other equity capital markets activity. According to EQT, more than 300 companies a year went public between 1980-2000. That number has shrunk to under 100 per year as of 20247. Even in that regard, it’s worth noting that companies that do go public have figured out ways of creating scarcity in their shares. In the instance of Circle Group, a newly-listed stablecoin issuer, the company only floated 25% of their shares, with the difference subject to standard investor lock-ups and other restrictions. Shares of Circle (Ticker: ) traded up +200% on its first day of trading and hit a peak of nearly $260 per share before an at-the-market equity issuance earlier this summer. CoreWeave, another bumper IPO this year (Ticker: ), had a free float of merely 13% as of July, driving a peak return of over 350% in June. Coreweave, too, has since come back down to earth following an all-stock acquisition of Core Scientific, a cryptocurrency mining business8. Note that the floats of Circle and Coreweave stand in stark contrast to the S&P constituent with an average 95% free float. It’s a mirror of the supply-demand imbalance facing the market at large, albeit on a micro level.

This also doesn’t take into account the persistence of buy-and-hold investors, of whom continue to YOLO/diamond hand/hodl stocks like GameStop, Tesla, and Palantir Technologies. Perhaps it’s notable that the three aforementioned businesses have entire subreddits dedicated to discussing the company’s stock, with over 600,000 collective members encouraging each other to hold, or buy more, while sharing screenshots of their P&L from their brokerage accounts9.

In the venture markets, there is a similar, albeit mechanically different method of manipulating valuations. I don’t mean this in a nefarious way – venture and private markets at large, are inherently illiquid and are thus not subject to the same price discovery process that public markets adhere to. Said another way, a publicly traded company has no input over the price of their stock, regardless of stock buybacks or other efforts to financially engineer their valuation. A privately held company, by contrast, not only has the benefit of not being marked to market like a public security but also having discretion over who can invest in their company. It’s like opening a restaurant but only seating diners that intend on ordering the porterhouse.

Companies like SpaceX, OpenAI, and Anduril are very stringent about who can invest in their companies and can effectively dictate the price of their business through structured transactions. SpaceX in particular holds a bi-annual tender offer in which employees, early investors, and founders are able to cash out of their positions to a select few investors who are willing and able to pay the price set by the company. Notably, these companies have achieved some of the largest private valuations in the world, with OpenAI commanding a $500B valuation, SpaceX a $400B valuation, and Anduril a $32B valuation10.

Cleanest Dirty Shirt

One final hypothesis as to why American equity markets appear so expensive is that American businesses are perceived to be more dynamic and exciting to investors compared to their international counterparts.

It’s worth highlighting that the largest holding in the largest European equity ETF, the Vanguard FTSE European ETF (Ticker: ) is SAP, which is a 50+ year old company and can be considered “legacy” software. Among the top 10 largest constituents in that fund include companies from staid industries like pharmaceuticals (Roche, Astrazeneca, Novartis), financials (HSBC, Allianz), and consumer staples (Nestle). The other technology business worth any weight in the index is ASML, a Dutch semiconductor capital equipment company, who’s largest customers include Asian and American semiconductor fabrication businesses like Taiwan Semiconductor, Samsung, and Intel.

In that vein, Asian equity markets tend to have a larger tilt towards technology than European developed markets, but their economies are hamstrung by concerning demographic trends and in the case of China — illiberal market policies. To paraphrase Larry Summers:

Europe's a museum, Japan's a nursing home and China's a jail.

Time will tell if U.S. equities continue on this voracious tear. In the interim, a 4% yield on your cash doesn’t feel so awful!

Thanks for reading.

- Tom

Answer: Altimeter Capital took Grab Holdings public via SPAC in a deal valuing the business at $40B. Grab has since traded down to a $20B valuation since its debut in April 2021.

It’s been a while, so I decided to write a little about capital allocation.

It’s a little long (and perhaps boring to some), so no hard feelings if you don’t read it, I promise.

Happy Summer!

Tom

i) Introduction

The core impetus of a business is to generate an accounting profit. More often than not, this is created by grossing revenues greater than the aggregate cost of doing business1. This is far from a novel concept: The renowned economist, Milton Friedman, was notorious for his assertion that companies should be run to maximize shareholder profit. After all, a company’s shareholders are the beneficial owners of the business and are interested in seeing the value of their ownership increase. The concentration of this constituency helps to align interests and drive consensus among interested parties. 

The existence of “shares” is not exclusive to publicly traded companies. Start-ups, housing cooperatives, and private equities are also typically underscored by a joint stock structure, in which fractional ownership is represented by shares of stock. A company’s shareholders, while not directly active in day-to-day operations, can exercise influence onto a business through board representation and voting2. The board, on the other hand, is responsible for hiring management and guiding the company’s strategy towards making profits. Companies tend to compensate both the C-Suite and the board with stock awards, option grants, and other equity-related forms of pay as a means of aligning incentives and eliminating conflicts of interest. 

Contrast the dynamics above with the principles of stakeholder capitalism, which suggest that corporations have obligations beyond their shareholders. More succinctly, corporations have an obligation to all stakeholders - encapsulating regulatory bodies, local communities, and anything or anyone else that may be influenced by the existence of the business. This strokes a broad brush across the gamut of economic externalities and appears to be intentionally vague – for reasons we’ll get to later.

While not entirely congruent, stakeholder capitalism is promulgated by the institutional adoption of the environmental, sustainable, and governance (ESG) investment framework. The ESG strategy seeks to favor (invest in) companies that practice sound governance and are mindful of things like carbon footprints, net emissions, and progressive social values. Negative economic externalities, if you will. The crux of this ideology stems from the fact that all companies are somewhat interconnected and should therefore prioritize the benevolence of society over the well being of their shareholders. A proponent of the ESG framework might argue that oil drillers should stop drilling because a warming climate will drive up the cost of food production. An increase in food costs would precede lower discretionary incomes, which would mean fewer people buying iPhones – so on, and so forth. 

Another read of the ESG mandate might suggest that shareholders, both institutional and retail, own many stocks or broad-market index funds. As a fiduciary, it is your obligation to maximize the aggregate value of their shareholders portfolio rather than the value of an ESG unfriendly company. In addition, stocks generally move in the same direction (beta, for the uninitiated3). By maximizing societal benefits, a roaring bull market could help boost the shares of an ESG unfriendly business. Then again, shareholder value can be maximized in other ways besides boosting profit margins, but again we’ll come back to that later.

Let’s assume there’s an extreme third school of thought which argues that corporate profitability is inherently exploitative because a company's employees (laborers) are entitled to the total value of their production. In this vein, an accounting profit implies that someone else (a capitalist, usually) is reaping the benefits of (exploiting) someone else’s work. While popular among certain niche political systems, the reality of today’s labor market consists of collective, symbiotic relationships between employee and employer. Furthermore, publicly-traded and other joint stock enterprises can compensate non-shareholding employees with benefits including stock options, 401(K) matching and other forms of capital as a means of attracting talent and aligning interests. 

To summarize thus far – companies seek to make profits to benefit their shareholders. Shareholders can be composed of a variety of parties and are generally interested in maximizing the value of their shares. 

Yet, in spite of this supposed gold standard of capital allocation, a simple screen run at the end of Q2 ‘23 reveals over 300 publicly traded companies with positive share-based compensation (often to the tune of hundreds of millions of dollars), negative earnings (net income), and net cash outflows. What gives?

A scrutinizing read of this dynamic might accuse the enterprise of being run solely for their workforce at the expense of shareholders. Outside shareholders would presumably be upset over the absence of profitability and the cost of dilution from share issuance. On the other hand, any form of worker compensation, including share-based compensation, is an operating expense. Many businesses, particularly service-oriented businesses, are only as strong as their workforce, or human capital will allow them to be. Losing human capital and the relationships that tag along can be fatal in the corporate world. Companies that rely upon the prowess of their human capital are prudent to reduce employee turnover and departures to rival firms. 

Again - there are technicalities! There are companies who are unprofitable, although yield positive cash flows through non-cash equity compensation, working capital drawdowns, and other balance sheet mechanisms. Assuming there are no outside shareholders, companies with these characteristics appear to be the closest thing to model #3 – reserving company profitability exclusively for the company’s employees, regardless of shareholder overlap.

ii) The Etymology of Capital

The model of a business is rather simple. Financiers provide an enterprise with capital, typically in the form of debt (loans) or equity (ownership). The company uses that capital to figure out how to make more money and generate an accounting profit. Once a company is profitable there is theoretically no need for additional capital4. Companies stuck with too much capital are known to be “overcapitalized” and will often seek to return excess capital back to shareholders.

Once a company is profitable, the company’s financiers will look to get their capital back (and then some) in exchange for the risk incurred. In the case of debt, creditors’ primary concern is conservation of capital. Lenders will structure their loans against something safe like the company’s tangible assets or income streams. The creditor can sleep soundly at night knowing there is recourse in case the loan isn’t paid back.

Equity, on the other hand, is innately more riskier. Unlike debt, equity simply represents ownership in the company and a junior claim on assets. In the case of insolvency, senior debt holders must be made whole before equity holders get anything. In exchange for this risk, equity returns are undefined and potentially infinite. Equity is appealing to investors because of this risk profile and, unlike debt, does not have a defined “payback period” in which capital must be returned. 

Tapping the equity markets, however, comes at a cost: Issuing or selling new shares dilutes existing shareholders’ ownership in the business. Unprofitable businesses, as an example, might prefer to issue equity to reinforce working capital and sustain operations given that they do not throw off enough cash to cover interest expenses. Not that they have much of a choice! Again – lenders are interested in preservation of capital over financial return. They likely wouldn’t be interested in lending to an unprofitable company.

The function of returning capital to equity holders is a little trickier than debt. As highlighted earlier, debtholders are enshrined with seniority in the cap structure and are paid periodic interest before receiving their principal investment. Equity holders, by contrast, see capital returned in the form of dividends, buybacks, or a sale of the business – although none of these outcomes are guaranteed, even if the company nets a profit. This limited tool set of returning capital to shareholders is one of several reasons why a public listing is so monumental: The ability for investors to liquidate shares on a public exchange enables earlier financiers to secure a return on their capital without diluting other shareholders or drawing down company assets. 

What about remaining shareholders? Well, that would take us back to our core theme: Company management is tasked with maximizing shareholder value, usually by growing earnings and cash flows5. Companies will leverage the liquidity provided by the capital markets to reach profitability, as one does when seeking to optimize shareholder value. Floating shares of a company on a public exchange enables investors to obtain a return on their capital without influencing existing shareholders. A public listing serves to reduce the company’s cost of capital while providing liquidity to shareholders and financiers. 

iii) The Triangle

It is said that corporations receive the shareholders they deserve. In other words, management teams attract investors based upon how they allocate capital. A retiree, for instance, might have a larger allocation to dividend-paying stocks compared to a younger investor. The issuance of a dividend instead of, say, a new R&D initiative, being a significant capital allocation decision. 

On the other hand, a company that is promising new products many years out into the future might have their shareholder demography composed of speculators and momentum traders, opposed to conventional buy-and-hold funds and investors. This dynamic is accentuated by institutional investment mandates – dividend funds own dividend paying stocks, tech funds own tech stocks – so on, and so forth. Infamously, Exxon Mobil suspended their company’s 401(K) match in the summer of 2020 so they could maintain their dividend and keep their stature within “Dividend Aristocrat” funds.

Again, this is a significant capital allocation decision! The removal of Exxon from dividend aristocracy would’ve torpedoed the company’s stock price as managers moved to dump their shares6. 

Indeed, capital allocators and management teams are confronted by a plethora of constraints in the pursuit of maximizing shareholder value. Not to mention, companies today need to adhere to the seemingly infinite needs of stakeholders, spanning far beyond shareholders and employees. The opportunity costs that emerge in appeasing all stakeholders (equity holders included) presents an intuitive framework for understanding businesses and their capital allocation strategies. 

Below, I depict what I call “the Triangle of Capital Allocation”, depicting the trade-offs evident in the pursuit of maximizing shareholder value. The idea reads that the constraints of capital allocation are narrow – companies can optimize for, at most, two of the three constituencies:

1. Shareholders

2. Customers

3. Employees

Optimizing for two-of-three constituencies doesn’t necessarily mean ill intent towards the missing third. The reality is that there are inevitable concessions that must be made in how and where a company spends its money. A price hike, as an example, might be beneficial for shareholders & employees (wider margins, reduced sales quotas) but detrimental to customers. Companies seeing turbocharged top-line growth may look to appease customers (lower prices) and employees (compensation incentives) without a blueprint of how to return capital to shareholders. 

iv) Companies Run for Investors:

Companies that are run for shareholders are generally characterized by their emphasis on shareholder value. These companies, if public, tend to be supported by proactive investor relations teams tasked with conveying the company’s strategy and benchmarks for capital returns. As discussed before, there are three main ways of returning capital to equity holders: Share buybacks, dividends, or a full sale of the business. 

A full sale of the business is the simplest and most straightforward method of returning capital – a buyer simply buys all of the outstanding shares of the company for cash or equity considerations7. The buyer typically bids a premium to fair market value as any acquisition is subject to investor approval. Cash received upon the closing of an acquisition can be spent or allocated elsewhere.

Share buybacks serve a different (albeit similar) function in the capital returns equation. In lieu of a full sale, companies will often undertake share buyback schemes to try and maximize shareholder returns. Fundamentally, a company buying back their shares must purchase their shares from (provide cash to) existing investors. Assuming those shares remain in the company’s treasury, existing shareholders benefit from a step-up in ownership and a greater claim on the company’s cash flows. Once again, cash received from buybacks can be spent or reallocated into other securities.

Finally, dividend issuance appears to be the most linear path of returning capital to equity holders as a dividend is merely cash paid out from the company’s earnings. The bond-like elements of a dividend appeal to investors looking for stable income streams as there is the perception of safety and predictability. Companies that maintain and hike their dividends over time are known as dividend aristocrats and can benefit from capital flows into dividend growth funds. 

Texas Instruments (NYSE: TXN), featured in the screenshot below, exemplifies a business that prioritizes shareholder value. The company begins their Investor Relations page by highlighting three KPIs specifically geared towards shareholder value creation. The hyperlinks in the two rightmost columns serve to supplement investors’ understanding of the left-hand side with videos (“Capital Allocation”), papers (“Investor Kit”), and other resources. 

Note that the luxury of being a “shareholder-run” enterprise can be elusive for many enterprises. Surely, every company would like the luxury of sharing positive, shareholder-friendly results on a quarterly basis. Again, the constraints of capital allocation help to reveal the primary focus of any enterprise.

v) Characteristics of Customer-Focused Businesses:

“We’re not competitor obsessed, we’re customer obsessed. We start with what the customer needs and we work backwards.” — Jeff Bezos (former CEO, Amazon)

One of the many virtues of capitalism is that it is an inherently democratic system. With the exception of local monopolies and regulated markets – consumers pay for goods and services from the companies they wish. Businesses have built incredible brands upon an ethos of customer obsession, successfully differentiating their offering in what is, in many cases, a commoditized market. Amazon stands out in this instance - the Prime membership is often credited with generating a consumer surplus for Amazon’s customers. Users on the platform are, in essence, receiving more value than what they’re paying for from perks like free shipping, streaming, and more. 

Perhaps uncoincidentally – Amazon was unprofitable until 2015, going nearly two decades as a public company before generating an accounting profit. Again – this can be seen as a technicality: The absence of profitability was offset by positive cash flow generation and explosive top-line growth. Amazon’s share of the global retail market spiked as customers grew accustomed to their vast catalog and expedient shipping. Meanwhile, Amazon stock stood out as one of the top performing names of the 2010’s, compounding 33% per annum between ‘10-’20. Shareholders, by virtue of customer obsession, benefited from the company’s aggressive, albeit articulate, go-to market strategy. 

Now consider the outstanding party – Amazon’s employees. Without leaning too hard into narratives and headlines, Amazon is perhaps most infamously known for their tough working conditions and relatively meager pay. A simple Google Search for “Amazon Working Conditions” yields over 2B results, most of which do not paint Amazon as a champion of labor. Indeed, while Amazon promotes competitive wages for their 1.5MM employees, critics of the online retailer have accused the company of sub-optimal working conditions and grueling oversight of warehouse workers. It is perhaps revealing that Amazon has fended off several attempts at unionization, despite the lucrative benefits offered to their workforce. 

Beyond Amazon, recent events surrounding the entertainment business have shone light on how studios and the owners of intellectual property have eschewed the interests of their talent amidst the industry’s digital transformation. Specifically, the emergence of streaming platforms has upended the cinematic business model – kneecapping both linear and box office revenues as well as residuals spun-out to employees. Disney, as an example, has staked the company’s future on a pivot to streaming and direct-to-consumer sales. In doing so, the company hangs in the unique situation of being formerly run for shareholders & employees to now being run for consumers and employees. 

It’s important to understand that Disney underwent the digital shift in pursuit of maximizing shareholder value. Shifting the market’s perception of Disney as a technology business rather than a legacy media franchise would serve to boost earnings multiples and improve returns on capital. It’s likely that the bundled product of Disney+, ESPN+, and Hulu is artificially under-priced to acquire customers and drive top-line growth. Artificially, that is, given that Disney’s direct-to-consumer division has yet to net a profit, despite boasting over 100MM subscribers. This “land-grab” exhibited by the direct-to-consumer segment epitomizes the shift depicted above: Disney is eschewing shareholder interests (free cash flow generation, share repurchases, dividend aristocracy) in favor of more employee and customer-oriented initiatives (top-line growth, consumer surpluses). 

Historically, media businesses were known to be shareholder-friendly, passing on price hikes to  customers while enjoying ample dividends and free cash flow margins. It didn’t really matter if customers didn’t want to pay for a tertiary channel like ESPN News – Disney’s bundled channels allowed the company to charge more for what was effectively the same amount of content. 

Employees didn’t fare too poorly under the old model, either. Top-tier cinematic talent would often get a direct cut of box office sales, yielding seven to eight-figure paydays for high-grossing films. Not to mention, cable’s seemingly endless selection of channels helped to create demand and extend the lifetime value of legacy IP. Airing old movies or TV shows on channels like TBS, ABC, or TNT provided actors and writers with a steady, residual stream of income, while cable customers footed the bill. But, as we discussed prior, Hollywood is confronted by an evolving marketplace. Studios are competing with other mediums of entertainment while content delivery moves from a linear to digital model. Not to mention, the streaming model has yet to demonstrate structural profitability, much to the ire of shareholders. The ongoing writers’ strike makes it apparent that studios will have to increase worker’s compensation, likely working to the detriment of shareholders who have been hoping for profit margins to revert to historical means. 

vi) Characteristics of Employee-Focused Businesses:

Employee-ran businesses are typically concentrated in service-oriented industries bolstered by human capital. Technology and IT, as an example, is incredibly human capital-intensive.  Software engineers are among the highest compensated employees in the world because their skills & expertise endow their employer with competitive advantages in the marketplace. Because of this dynamic, software engineers and other tech employees are conceivably overcompensated to ensure that they do not depart for a competitor or a fledgling, young startup. The meme of ping pong tables in every tech company’s lobby stems from the industry’s desire to retain talent, even if it means losing some productivity here and there.

Banks & financial services are relatively similar in this regard, these are predominantly relationship-driven services. The value of say, an investment banker, is loosely tethered to who they know and how they leverage that relationship. This became evident in the Silicon Valley Bank dissolution as other banks were quick to try and court SVB’s bankers over to their franchise. Ideally, these bankers would be accompanied by trade secrets and relationships that could eventually translate into underwriting fees, trading commissions, and other banking business. 

Perhaps uncoincidentally, financial services, engineering, and technology appear to be among the industries most subject to aggressive non-competes, indicating how valuable their human capital is. These jobs can also be characterized by high degrees of share-based compensation. This, in a sense, serves to “flatten” the Triangle of Capital Allocation by collapsing the shareholder and employee constituency into one body, thus reducing the square footage of their stakeholdership. 

“Flattening the triangle”, however, is not a panacea. As we discussed, share-based compensation reduces net income and dilutes existing shareholders. The combination of both might deter outside investors, thus reducing liquidity and hiking the company’s cost of capital. 

Equity compensation is not exclusive to public companies, however. Managers of private companies can deliver monetary value to employees in several forms including a tender offer or sale of the business. Notably, SpaceX conducts a bi-annual tender offer for employees, providing liquidity should they wish to capitalize on investor demand. Other companies, particularly in the software space, look to sell their business to a larger platform as a means of boosting distribution and benefiting from a larger resource pool. The acqui-hire trend was particularly salient in the 2010’s as niche software products found easier paths to market under a larger corporate umbrella. Platformification, if you will…

The American automotive industry is perhaps infamous for leaning too heavily into employee-focused capital allocation strategies. General Motors notoriously burdened an $100B pension liability prior to the Global Financial Crisis in 2008 – which was estimated to be $20B underfunded. Indeed, the lack of innovation from legacy automakers like General Motors and Ford is frequently attributed to the company’s pension burdens to which they carry to this day.

vii) Conclusion

“Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1.”

— Warren E. Buffett

Businesses are nuanced entities — I accept that it’s not always fair to paint a business as being explicitly “pro-consumer”, or “anti-employee”, or anything of that sort. This is, to a certain extent, why ESG investment funds lack standardization and are often mocked for their resemblance to broad-market indexes. Over the lifespan of an enterprise, a company could find themselves in any of the three corners of the Triangle of Capital Allocation.

The objective of an investor is to figure out how they will get their money back, plus a rate of return. By studying the way in which businesses allocate capital, investors can ascertain the strategies and motivations of company management. Not to mention, understanding the company’s maturity and their capacity to generate shareholder returns. Then again, there is no correct way to run a business.

Enjoy!

Generative AI is a subset of machine learning that leverages enormous datasets to produce new, computer-generated content like text, images, and video. In recent months, tech-savvy consumers have grown familiar with a new suite of products born out of this technology, including Large Language Models (LLMs) like ChatGPT, Text-to-Photo models like Midjourney, and Text-to-Video models like Runway. In all cases, it’s worth highlighting that the mechanics of generative AI resemble that of a matching process, rather than a critical thinking process. Said another way, Generative AI models deduct results not on account of their own intelligence but through a probabilistic matching function. Asking ChatGPT what the color of the sky is will produce an output reading “Blue”, but only because the mountains of data in which the model is trained on tends to produce that very fact. This results in a familiar dynamic within the tech sector: Generative models are only as strong as the data it's trained on. Consequently, the most resourceful technology companies (Apple , Microsoft , Amazon , Alphabet , Meta ) are likely the best equipped to capitalize on this trend, given their access to massive data sets and cheaper compute costs. The quasi-marriage of OpenAI and Microsoft only serves to bolster this competitive advantage, particularly as the ChatGPT product finds soft market-fit in the Search and Messaging verticals. Nevertheless, smaller disruptors have also emerged onto the scene as the broader tech ecosystem licks their wounds. Profitability is paramount for today’s public market investors. Broadly speaking, Big Tech’s renewed focus on cost discipline and efficiency has created a vacuum for new startups to tackle this market. Outside of OpenAI, prominent operators in this market include Stability AI, Midjourney, Runway, Jasper, and many more. 

Perhaps unsurprising to many, the frenzy surrounding generative AI has provoked a mix of reactions across all varieties of the economic spectrum. Creative types — particularly artists, writers & musicians — have admonished the technology, highlighting that generative content (specifically art) is simply piecemealed from countless uncredited sources, infringing on intellectual property without proper compensation or acknowledgement. Others warn of the consequence that generative AI will exacerbate misinformation and spam on the internet, as it takes mere seconds for a generative model to produce content ready for mass distribution. These concerns are worth heeding – the marginal cost of generating content has shrunk to nearly zero. A deluge of AI generated content has the potential to crowd out authentic, human-generated content – and the probability of such an outcome is higher than most would like to admit. What would this look like, in practice? Generative models trained upon content produced by other generative models could render this technology ineffective, while also obliterating trust in the internet economy. 

Technologists, on the other hand, are ecstatic about the onset of this technology. In their view, Generative AI will be integral towards boosting labor productivity, a figure that has languished in the aftermath of 2008. They insist that jobs will not be replaced by this technology. Rather, information (white collar) workers will employ this tech in their Day-to-Day responsibilities, saving time and costs as a result. Asking a generative AI model to publish 1,000 words on banking regulations, for example, will cut out the time sink and grunt-work of essay structure. The model should help address key terms and provide context for the essay, while the end-user will be responsible for tightening up the model’s work, adding specific details to the argument, providing deeper explanations of key facts, and adding a personal style that GPT models are inherently forced to borrow. Most writers, if not all, appreciate that it is often easier to edit than it is to write from scratch. The process behind this kind of workflow has become known as “Sandwich Work” as generative models provide the buns of a product, while the end-user adds the meat to the piece. It wouldn’t be difficult to picture similar processes taking place across the Film, Art, and music industries as the cost of generating new content moves closer and closer to zero. 

As highlighted earlier, Big Tech has been the first industry to bring this product to market, albeit with mixed responses. Microsoft’s partnership with OpenAI felt like a veiled declaration of War against Google’s Search Monopoly, with CEO Nadella taking implicit jabs at Alphabet’s profit margins. Meanwhile, Google’s rollout of Bard, their own language model, was met with disappointment as their highly-anticipated Demo Day featured an incorrect response on a question regarding the Webb Telescope. Google fumbled the optics of their Go-To Market efforts, leading some to describe ChatGPT and competing LLMs as “Google Killers”. That being known, it’s not entirely clear to me that generative models, at least in their current state, are appropriate substitutes for search platforms. The workflow is clunkier than traditional search functions and there is no guarantee of valid results, despite the confidently presented answer. Thus far, the data reinforces this view, as most Search users have yet to migrate over to the new GPT-infused Bing, although that has yet to deter Google from rolling their language models out to market. 

On the other hand, I see enormous market potential in the creative and personable elements of Large Language Models. I see iterative improvements over existing AI-assistants like Alexa (Amazon), Siri (Apple), Cortana (Microsoft), and Watson (IBM ) thanks to the conversational nature of large language models. In addition, I see generative AI anchoring the tool set for metaverse developers – particularly as games like Horizon Worlds, Roblox (), and Minecraft leverage bots or daemons to create authentic social experiences in digital spaces. Finally, the loneliness epidemic is real, and has worsened since the pandemic, with surveys painting dour stories about the social lives of American adults and their children.  The presence of a personalized AI model could help alleviate this sense of loneliness, as demonstrated in the disturbing case with Replika.AI, while also helping people reduce anxiety in other social settings. I’m certainly less sanguine about the broader implications of this use case, although I believe this market serves as a potent addressable opportunity for tech companies, particularly in the communications and gaming spaces. 

Finally, I am specifically excited about the generative AI applications that will be brought to market by digital advertisers like Meta and Google. Meta and Google can specifically leverage generative models for the benefit of their advertising customers, generating fresh ad campaigns while allowing the company to iterate and edit where they deem fit. In Meta’s case, the company is navigating the integration of Reels into Facebook and Instagram feeds as short form video grows more popular in consumer apps. While the Reels product has been successful and popular among users, it does not monetize as well as Feed or Stories. One reason being that Meta is trying to incentivize advertisers to buy up new ad inventory: Newly introduced advertising slots are value-priced to accelerate adoption amongst existing customers. Then again, the novelty of the Reels product means that advertising teams are 1) Not as familiar with the Return-on-Ad-Spend (RoAS) from this product and 2) Not equipped with the tools to create enticing short-form video. This is clearly a focus area from Meta’s management, as video now comprises roughly half of a user's time spent on Instagram. Looking forward, I think Meta will begin to generate short form video ads and other pieces of content for their customers as they tighten their grip on the digital ads market.

Thanks for reading! We will revert to emerging markets in the coming weeks with a feature on evolving power dynamics across Europe and the Middle East.

— Tom

Thank you for your support!

Always & Everywhere

One model of understanding economic growth is to think of it in terms of the money supply. As the money supply grows, so does the economy. As the money supply contracts, the economy does too. Fundamentally, this formula makes sense — the money supply expands as a function of rising demand for credit and increased loan issuance. Consequently, this newly created money ultimately finds its way into the productive components of the economy — things like capital equipment, housing, and financial assets. If there is a shortage of productive tangible assets (capital equipment, for example), then newly created money will be reflected in costlier financial assets (i.e. — lower interest rates, expensive property and equity markets).

This is the primary concern stemming from this school of thought: An increase in the money supply without an accompanying capacity for productive assets will ultimately drive inflation as newly created money is “absorbed” into higher prices for goods and services. Of course — this is somewhat the goal of monetary policy. Inflation is a feature, not a bug of the monetary system in the eyes of policymakers. Moderate increases in consumer and producer prices help to encourage investment and disincentivize hoarding, which in turn boosts economic growth. On the other hand, too much inflation can be extremely hazardous for an economy, dampening consumer sentiment and reducing real incomes for households, businesses, and individuals. Central bankers and policymakers are cognizant of this trade-off — by maintaining a healthy spread between the rate of economic growth and the rate of inflation (otherwise known as the “real” rate of GDP growth) an economy can grow richer. When this spread narrows, the economy grows incrementally poorer.

At this point, it’s important to remember that this model is a flawed understanding of the economy. The United States, as an example, saw M2 money supply growth fall for the first time on record last year — while real GDP grew roughly 2%. Meanwhile, contracting economies, such as the United Kingdom and Russia, saw expansion in their monetary aggregates during 2022. There are certainly idiosyncratic reasons as to why those economies grew or shrunk in the way that they did, but the underlying point is that policymakers have accepted expansionist monetary tools as a means of goosing economic growth, despite the uncertain causality between money supply expansion, real economic growth, and even inflation. Nevertheless, the absence of evidence has yet to deter the Bank of Japan from continuing over twenty years of loose monetary policy, despite a recent surge in consumer prices.

Now Do Japan

In February, Japan posted its highest inflation reading in over 40 years — invoking memories of the Baburu Jidai, or the “Bubble Era” of the 1980’s. Much ink has been spilled over this era of exuberance, which often finds parallels to other financial manias of lore, including the South Sea and Dot Com bubbles. Infamously, the Tokyo Imperial Palace, home of the Japanese emperor, once received an appraisal that valued the property greater than the collective value of Californian real estate. Of course, this boom era followed the entrenched bust known today as Japan’s Lost Decade, an era of paltry economic growth and deflation. Even today, the Nikkei 225 (Japan’s largest stock index) remains nearly 10,000 points (-30%) below the peak seen in 1989, prompting some to question if Japan had ever escaped their lost decade.

In the absence of sustained, real economic growth, (and demographic headwinds ) the Bank of Japan embarked on an ambitious monetary experiment with the introduction of quantitative easing, or QE in 2001. QE underscored the BoJ’s effort to combat deflation and induce economic growth through the open market purchases of Japanese Government Bonds (JGBs), thereby increasing the money supply and reducing interest rates. Interest rates on JGBs would be anchored to nearly zero, and if the markets began to push the rate on a 10-year JGB, the Bank of Japan would step in to purchase as many bonds needed to bring the rate back to their target. With routine injections of monetary stimulus and rates kept so low, policymakers believed the Japanese economy could see inflation return to a healthy average of 2% per year, buoying GDP growth in tandem.

Japan would sunset QE briefly in 2006 as the country demonstrated some progress towards their 2% inflation target and sustained real GDP growth — only for the Global Financial Crisis to kneecap Japanese exports two years thereafter. In the 2010’s, the BoJ would run at least three iterations of quantitative easing, including the ambitious Abenomics package architected by the late former Prime Minister, Shinzo Abe, during his second term. Abenomics earned recognition for its progressive approach to easing, including the introduction of negative interest rates, to boost the appeal of Japanese exports. Abe would also take aim at structural impediments within the economy, such as the country’s flailing labor participation and productivity rates, by encouraging immigrants and women to enter the workforce. Abe’s tenure as prime minister helped the country recover from a treacherous stretch spanning the Asian Financial Crisis in 1997, followed by the Dot-Com Bust, which was then followed by the Global Financial Crisis, and finally punctuated by the Fukishima Nuclear Disaster. Yet, while Japan’s economic picture has improved markedly since Abe's incumbency, the country has still yet to see economic activity return to the levels seen in the 1980’s.

Persistent monetary easing sustained over nearly two decades helped endow the Japanese economy with the largest debt burden of any sovereign nation relative to its GDP. The Bank of Japan, in a similar vein, carries the second largest balance sheet of any central bank. As of this writing, the Bank of Japan has a balance sheet totaling 750 trillion yen, equivalent to $5-$6 trillion USD, or nearly 1.5x Japan’s GDP. If the magnitude of these figures makes you uncomfortable — you are not alone. Macro skeptics and bond vigilantes alike have warned of the systemic risks that Japan’s debt poses to the global economy. They claim that the Japanese debt burden is (or will become) unsustainable, prompting a default from the world’s third largest economy and spreading contagion through the international bond market. Of course, the Japanese central bank is a massive buyer of other sovereign debt. Without their participation in the treasury market, other countries (ThinK: the U.S., E.U, PRC) would find it more difficult to finance their deficits.

Others speculate that the Bank of Japan will run into a situation where spiking inflation will force a pivot on monetary policy, spurring the BoJ to lift rates unexpectedly. These hikes, in turn, would eventually destabilize the Japanese economy as the magnitude of the debt service cost, or the interest on JGBs, would become too burdensome to pay. As a consequence, the Bank of Japan would have to print more currency to meet their obligations, thus prompting hyperinflation.

Perhaps Japan is invoked so often in Armageddon scenarios because aforementioned systemic risks are hidden within perceived safe financial assets. Despite the jarring figures on Japan’s debt, one could argue that JGBs remain safe haven assets in the eyes of investors globally. JGB yields fell to the lowest level in over a year in the days following the Ukrainian Invasion, for example. Furthermore, Goldman Sachs Research published a memo in early ‘22 highighting the merits of the Yen as a safe haven asset, particularly in the case of a U.S. recession. Finally — it’s worth highlighting that betting against JGBs or the Bank of Japan’s appetite for bond purchases has been a historically unprofitable trade — pejoratively known as the “widowmaker” trade. All things considered, the Japanese economy is operating fairly normal, with lower inflation than most developed nations and perhaps a misunderstood growth story. Then again, could it be this growth in itself that breaks the Bank of Japan’s conviction in their own policy?

Our hope is that wages start to rise and that could make the 2% inflation target to be met in a stable and sustainable manner, but we have to wait for some time.

— Bank of Japan Governor Haruhiko Kuroda

While the case for JGB’s safe haven status has held firm for the past several decades, one could argue that is this perceived belief is beginning to crack. With Japanese inflation breaking out to 40-year highs, the bond market has begun to price-in a conclusion to the BoJ’s easing regime. In late December, the Bank of Japan loosened their reins on the 10-year treasury, letting the yield float in a wider band — between -0.5% and 0.5%. Yields almost immediately shot up to meet the upper-bound of the trading range, reflecting the market’s view that the BoJ would soon begin to tighten. The Bank responded aggressively with open market bond purchases aimed at making keeping the yield below that 0.50% ceiling. Curiously, the resurgence in bond purchasing from the Bank of Japan has produced a peculiar phenomenon in which the central bank owns over 100% of some treasury issuances, thanks to some crossed wires in margin lending and short selling. This is only slightly different to the market irregularity seen in the U.S. in early 2021, in which over 100% of floating GameStop shares were sold short.

Kuroda, the current Chair of the Bank of Japan, is scheduled to retire in April. His successor, Kazuo Ueda, will be watched with eager eyes as investors await direction from the world’s second largest central bank. An academic, Ueda is not a stranger to the status quo of loose policy. He served on the board of the Bank of Japan during the introduction of zero interest rates in the late 1990’s and also during the introduction of quantitative easing in 2001. Ueda also voted to keep zero interest rate policy in place in the early-mid 2000’s and has been a vocal supporter of the negative rate regime undertaken by Kuroda.

Regardless, while his voting record fails to dress him as a hawk, Ueda’s perception of being an “Ideas Guy” has led investors to believe that he will pioneer the Bank of Japan’s tightening procedures. Ironically enough, Ueda is also the author of a 2005 book whose title roughly translates into Fighting Zero Interest Rates.

A reversal in policy, including the dissolution of bond purchases or a hike in interest rates, would represent a massive shift in philosophy from the BoJ. Not only that — but these actions would add considerable stress to the ongoing economic tightening attributed to the actions of central bank peers. It’s estimated that the Bank of Japan deployed upwards of $300B to defend the yield curve cap in the wake of the December ‘22 announcement. This incremental liquidity was alleged to be the primary driver of looser financial conditions in the back half of last year.

On the other hand, a continuation of the policy — whether successful in spurring growth or not — would almost certainly prompt a reexamination of the role of sovereign debt, particularly in the context of a looming U.S. “default”. In the chart above, countries with Debt-to-GDP greater than 50% are ominously painted red, implying an looming risk that these countries might go belly up if they don’t alleviate their debt burden. Yet Japan, who has carried such an enormous burden for so long, has only begun to see inflationary risks rattle their economy. Perhaps the causality of money supply growth and inflation is not as linear as once believed.

Should Japan succeed in corralling inflation and expanding their economy — all while maintaining a bloated central bank balance sheet and an enormous monetary aggregate — would other monetary sovereigns follow suit? Time will tell.

Thanks for reading!

— Tom

Onto the newsletter!

From the WSJ:

“We’re doing this even though China is way cheaper,” Mr. Madar said. “How good is it to have cheaper components when you cannot get them? For a consumer-products company like us, you need to have super stability in supply.”

The New York-based fragrance seller is among a collection of companies shifting operations back to the U.S. from China and other countries where cheap labor and easy access to factory capacity had far outweighed costs of shipping products across the ocean.

The pandemic and ensuing global supply-chain meltdown have made businesses—from beauty companies and auto manufacturers to global retailers and small businesses—rethink low-cost importing.

One of the earliest themes we discussed in TGC was the decoupling between the United States and People’s Republic of China. While this skirmish was aggravated by Trump-era trade policies, there has always been some semblance of popular support for bringing home domestic manufacturing. Politicians and marketing departments are known to boast “Made in America” labels wherever they can, a subtle nod to American exceptionalism (Or American nationalism, for my international readers) and perhaps a hint of protectionism — but we’ll get back to that in a second.

The quote above highlights the fact that the pandemic made it extremely popular for multinational corporations to shake up their supply chain, announcing public-private partnerships with local governments and exuberant capital expenditure projects. Notably in the U.S. — we saw TSMC announce a $16B fabrication plant in Arizona, closely followed by Samsung’s plan to build a $17B fab in Taylor, Texas. Sure, these expenditures could’ve been specifically egged on by the CHIPS Act — which as I write this, hangs in its final deliberations. However, not only is the re-shoring trend active, its reach spans far beyond just semiconductors. More from the article above:

Close to 20% of supply-chain executives surveyed by consulting firm McKinsey & Co. said they had brought some production back to a nearby country in the past year, double the number from a year earlier. More than 30% said they added suppliers in nearby countries in that same period, up from 15% a year earlier. The study included 113 respondents surveyed between March 28 and April 29.

It’s worth highlighting that most re-shoring efforts aren’t undertaken from a noble sense of patriotism, even if we’d like them to be. By contrast, we can assume most companies are economically rational and are thus, profit driven. In the quote above, the manager acknowledges that China would be cheaper, although is not worth the headache for his operation. While I risk extrapolating too much with this anecdote, it does appear that China’s COVID Zero policy is accelerating this trend, prompting companies to explore the market for new suppliers even if it may be more expensive. From a loss minimization framework, the argument reads that companies are anticipating the profits lost from undelivered goods, delayed shipments, or factory closures will be greater than the profits lost from relatively higher input costs, or new supply partners. The discourse is red hot in corporate America, per Bloomberg:

The Russian Invasion of Ukraine is also a material catalyst in this equation — given the looming risk of a Chinese attack on Taiwan. Keep note, the sanctions package saddled on the Russian Federation didn’t technically bar businesses from operating in Russia… Rather, the sanctions have made it so onerous to operate in Russia that there is virtually zero incentive to sustain those business lines. The result has been a little messy, but relatively insignificant in the grand scheme of the global economy. Russia’s economy pales in comparison to China’s, and while the war has sparked a horrific humanitarian crisis on the emerging world, the divestiture of Russian assets has had a near negligible effect on private sector financial statements. Even many of the commodities sensitive to the conflict have returned to pre-war prices.

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In contrast to Russia, a sanctions package similarly issued against China in the case of an invasion would have enormous economic ramifications, given the magnitude and reach of China’s economy. The private sector is aware of this: On top of shifting supply chains, American brands and Fortune 500 companies are reportedly being briefed on the peril of war in Taiwan, blueprinting evacuation maneuvers and other emergency measures in case of an invasion. Then again, Russia’s swift expulsion from the global financial system might’ve deterred any immediate plans of invasion. China’s costly response to COVID has brought their economy to a screeching halt — its largest property developers are facing local defaults, other builders are faced with delinquent mortgages, and the birth rate shrank to its lowest on record. While GDP growth has managed to remain in the green, thanks to surging exports, — the latest growth estimates fall far below where the country’s leadership would like them to be.

From the FT:

Where Production is Going (& What it Means for Inflation)

For years, the Chinese manufacturing advantage was obvious: China provided an abundance of cheap labor, favorable regulatory conditions, and proximity to what would eventually become the world’s second largest economy. When analyzing the dis-inflationary forces of the late 20th/early 21st century, one cannot omit China’s enormous labor supply and the innovative boom in Southeast Asia as key contributors.

Then again, the China of 20 years ago is no longer. While not technically a developed nation per MSCI and other ratings agencies, it’s clear that China’s demography has evolved to resemble that of a “developed economy” — supported by rising consumption, a burgeoning middle class and consequently, rising wages. Rising wages are inherently good, but become regressive when confronted with a shrinking labor force stemming from an aging population. All things considered, the Chinese market simply does not offer the competitive advantages it once did, given the risks and costs involved. The currency markets appear to be reflecting this new reality — the strength of the renminbi versus competing currencies like the Yen and Won have highlighted the emerging advantage of neighboring exports.

From the Daily Shot below:

From Koyfin:

The dynamics depicted above may lead some to believe our supply chain solutions are obvious: Vietnam can take our manufacturing! The country has already begun to establish itself as a manufacturing powerhouse in Southeast Asia, with the Prime Minister even visiting the New York Stock Exchange earlier this year. Taiwan & Korea continue to maintain a cost and quality advantage in fabricating microchips relative to the U.S. and E.U.. Chile, Bolivia, and Peru will refine precious metals — as they are home to some of the world’s largest copper, lithium, and rare earths reserves, a vital input in the push for green energy and electrification.

Access to these markets is not guaranteed, nor is there any accompanying promise that these markets will provide the same deflationary kickers captured from the Chinese market. While the cost of a shipping container has retreated from earlier this year, the U.S. still suffers from a severe container shortage, aggravating existing supply chain congestion and likely driving up the cost of shipping and storage. Sustained reliance on Southeast Asian manufacturing makes it very plausible that the U.S. supply hiccups in the Pacific could worsen. Vietnam has taken a similarly aggressive stance to COVID, albeit unrelated to China’s policy. In addition — Taiwan, Korea, and Japan, to name a few, all face demography crises similar to China’s. The role of aging societies should really not be understated when discussing inflation: A shrinking labor force reflects rising consumption patterns without the productive supply substitute from younger generations, often leading to structurally persistent inflation.

Populism & Protectionism in South America

On the other hand, South America’s relatively younger demographics offer a promising supply of labor but sit at growing risks of protectionism. Peru, Bolivia, Chile, Colombia, and Brazil — have seen, or will see elections underscored by populist rhetoric, featuring aggressive, government-sponsored economic policies to combat wealth inequality and rampaging inflation. Some candidates — such as Gustavo Petro of Colombia — have proposed initiatives to ban new leases for oil and gas businesses, an industry that comprises nearly 1/4th of the country’s GDP. Other candidates, such as former President Lula de Silva of Brazil and incumbent President Lopez Obrador of Mexico, have highlighted nationalization as a tool to boost domestic economic activity and combat inflation. Finally, the Republic of Chile — once a bastion of neoliberal economic policy — is seeking to overhaul their constitution to repair decades of wealth inequality. Critics of this new constitution warn of rising commodity prices thanks to narrow access to Chile’s copper market, estimated to contribute greater than 25% of global production. While the push for these goals is surely earnest in intention, it’s evident that there will be significant economic and monetary ramifications.

Trivia: Peruvian President Pedro Castillo is known for what prominent article of clothing?

Some leaders, such as Pedro Castillo of Peru, ran on economically illiberal platforms but have begun to back off on their agenda in recent months. Castillo renounced his membership in the Marxist Free Peru party as an explicit commitment to more centrist economic policy. Furthermore, Brazilian incumbent Jair Bolsanaro — who once threatened to leave Mercosur (the South American Free Trade bloc) — has overseen the brokering of multiple bilateral trade deals and has vouched for reducing tariffs as a means of tackling rising prices. Keep note, these reductions only last until 2023 — foretelling a brief reprieve from Brazil’s double-digit inflation, and perhaps an attempt at winning voters prior to October.

The violent ascent of energy prices have made South America home to some of the highest inflation prints in the world — exacerbating existing economic turmoil from the pandemic and causing broader political unrest. Argentina, which we spoke about a few years back, is facing yet another hyper-inflationary episode, with CPI rising over 60% in June. While South America may offer rich natural resources and a healthy labor pool, the risks apparent reveal there is not quite an economic edge to be secured in the continent.

From @CharlieBilello:

The Cost of Re-Shoring

From Bloomberg:

Unfortunately, the tight labor market in cities and states across the US isn’t helping. Despite the economy’s historic post-pandemic comeback, there are still roughly 6 million fewer people employed in the US than before Covid struck. The percentage of unfilled jobs is at its highest level since at least 2001, and the share of Americans in the labor force is near its lowest since the 1970s, according to Labor Department figures.

“There’s just not enough younger workers to replace certain functions, and that’s hit the transit industry very much — especially in the operator position,” Chris Van Eyken, the author of the report, said in an interview. 

Ultimately, the last resort for so-called “developed market” production would be the developed markets themselves. As highlighted in the beginning of this post — domestically produced goods and services are extremely popular from a political lens. This philosophy was reinforced in the farewell speech given by outgoing British Prime Minister Boris Johnson — who made sure to share his view that the U.K. was the best place to live and invest. Newly-elected Australian Prime Minister Anthony Albanese won affinity from voters with his ambitions of propelling Australia to green energy dominance, citing the robust mining sector. Furthermore, French incumbent Emmanuel Macron won re-election in the spring on his France 2030 campaign — an effort to position France at the pinnacle of green energy production. At last, the U.S. has embarked on an enterprising push to re-shore key manufacturing processes, with bills supporting semiconductor fabrication and green auto investment at the forefront of the agenda. Quizzically, the aggressive capital expenditure undertaken by these nations and their private sectors sit at contrast to the investment activity seen over the last decade. The U.S. oil patch is a salient example of this — Labor shortages and reduced refinery capacity stem from years of underinvestment following the Global Financial Crisis in 2008 and the subsequent oil bust in the mid-2010’s — resulting in the spiking oil prices we see today.

As we scramble to on-shore additional refinery capacity, we are witnessing the distresses of this operation in real time. Moving the supply chain will take time and will be expensive. Should labor shortages persist in the US, EU, Australia, and elsewhere, we can anticipate sustained inflation for years to come.

Thanks for reading!

Tom

Trivia Answer: Pedro Castillo is known to wear his signature straw hat, also called a chotano.

More reading:

• Odd Lots Podcast

• The Great Demographic Reversal — Pradhan & Goodhart

Koyfin Markets

From CNBC:

The U.S. dollar reached a new 20-year high on Monday as risk-off sentiment stemming in part from concerns over the Federal Reserve’s ability to combat high inflation boosted the greenback’s safe-haven appeal.

The dollar has risen for five straight weeks as U.S. Treasury yields have climbed on expectations the Fed will be aggressive in attempting to tamp down inflation.

The fortitude of the U.S. Dollar has been a salient, yet curious, theme since the onset of the pandemic. As of this writing, the Dollar Index (DXY) index sits above 100, or roughly around 2017/2020 highs. Of course, the global inflation boogeyman has ensured that all tangential economic discussions be shelved until central bankers and politicians are shamed for decades-high CPI prints and spiking commodity prices. Putting the headlines aside, I'm intrigued by the ramifications of a strengthening dollar in an increasingly fractured global financial system.

In some circles of economic thought - the concept of a strengthening dollar and record-high inflation sit at odds with one another. Fundamentally, inflation implies the erosion of purchasing power, while a stronger currency equates to rising purchasing power over imports and commodities. Foreign exchange and international trade is obviously much more nuanced than that! Crude Oil is selling for nearly $120/bbl - likely exacerbating global inflation, while the DXY remains near highs.

How can this all make sense?

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Narrowing Deficit (For Now)

From Politico:

Buoying the country’s fiscal outlook in the near term, the U.S. is expected to rake in a substantial amount of cash from taxes this year and see a dip over the next two years in federal debt held by the public. Both of those boons are expected to be short-lived, however.

After dipping to 96 percent of GDP next year, federal debt held by the public is projected to reach 110 percent of GDP a decade from now, higher than it has ever been. Federal debt will then grow to 185 percent of GDP in 2052, the budget office predicts.

The other week President Biden touted that the U.S. successfully shrank their deficit by over $1 trillion in 2021 with expectations of shrinking the deficit by over $1.5 trillion in 2022. Without giving too much credence to political speak, it’s not clear this windfall was entirely intentional, but it does support the premise of a strengthening dollar. Put simply, higher tax revenue translates into more cash to service debt obligations, easing the burden of debt payments from government bodies. By extension, some economic theories view taxation as a “dollar destruction” process, reducing the supply of currency and subsequently pushing up the “price” of a dollar. If we are to adhere to these theories, the strengthening dollar lines up with record high tax receipts from 2021, derived from increased payrolls, property appraisals, and capital gains bills. Currency appreciation, as we’ll soon learn however, can cut both ways.

The Ruble

A perplexing, albeit fascinating development in the FX market has been the V-shaped recovery found in the Russian Ruble. Immediately following the invasion of Ukraine, NATO countries and their allies swiftly saddled Russia with sanctions, torpedoing the Ruble and blocking the country off from the international financial system. The Russian Federation would retaliate with sanctions of their own, while the Central Bank of Russia would take the policy rate to 20% in order to shore up the Ruble. Russia’s sanctions sought to vacuum-seal capital within the nation’s borders, going so far as to ban dividends and interest payments to “unfriendly countries”. What’s more, Russian commodities would now have to be purchased in Rubles, despite contractual obligations that allowed Dollars and Euros. Yet, despite all of this obstruction, Russia has still not technically defaulted. And while their current account surplus grows wider by the month, the odds of a default are growing daily.

TRIVIA:

Who was the last Asian country to default on their debt? What year did it occur?

Answer below.

In the months since the invasion, the Ruble has not only recovered to pre-invasion levels but has rallied into one of the top performing currencies of the year. Indeed, in a bizarre spasm in foreign exchange markets, the Russian Ruble is, by some measures, the best performing currency in the world. It’s important to note, quotes for RUB pairings have been heavily disputed by local sources. Regardless, the sporadic price action found in their currency tells a unique story about monetary economics and the ongoing economic crisis.

RUB/USD - Koyfin

One could argue that the Ruble’s rally is supported by economic fundamentals: Rising energy prices, a swelling current account surplus, and competitive yields on OFZs are a recipe for strong inflows. In fact, these kinds of factors have been credited for the ascent of other export-heavy currencies such as the Brazilian Real, albeit with a major asterisk. Commodity-exporting countries are actually hindered by strengthening currencies, as they are competing with other commodity exporting nations to offer attractive prices for raw materials.

Given recent events, you can probably see why this is perilous for Russia. Not only is the country confronting the world’s strictest sanctions, but their remaining customers do not share the same demand for oil and gas imports as the EU and the U.S. do. India and China, two of the largest economies yet to issue sanctions against Russia, are both net exporters of petroleum products, and can likely find competitive advantages from a softer currency.

From CNBC:

Following an extraordinary meeting, policymakers opted for another 300 basis point cut, the Bank’s third since an emergency hike of the key rate from 9.5% to 20% in the immediate aftermath of Russia’s invasion of Ukraine, and the imposition of punitive sanctions by Western powers. At the time, the CBR also imposed strict capital control measures in a bid to mitigate the impact of sanctions and prop up the ruble.

“The latest weekly data point to a significant slowdown in the current price growth rates. Inflationary pressure eases on the back of the ruble exchange rate dynamics as well as the noticeable decline in inflation expectations of households and businesses,” the CBR said in a statement Thursday.

“In April annual inflation reached 17.8%, however, based on the estimate as of 20 May, it slowed down to 17.5%, decreasing faster than in the Bank of Russia’s April forecast.”

I find curious in this situation that Russia’s solution to boosting their economy (The World Bank is currently projecting Russia’s economy to contract 10% in 2022) is to cut rates, while the United States plan to tackle a surging greenback and backstop an economic slowdown is to hike rates and draw dollars out of the system.

What does this dynamic imply? The dichotomy is worth examining further.

Real Yields & the Death of the Carry Trade

Readers of this newsletter understand that the U.S. dollar is unique in that it currently stands as the de facto world reserve currency. In this sense, U.S. treasury debt is considered risk-free, given that those securities are not susceptible to credit nor default risk, merely interest-rate risk. The interest on a 10-year treasury, known as the risk-free rate, is also a key input for calculating asset prices and valuations. The risk free rate can also serve as a leading indicator for both U.S. GDP growth and inflation expectations. The ubiquity and significance of this figure is why yield curve inversions often cause such uproar in the financial markets (See April ‘22, August ‘19, December ‘05 of late) and commonly precede recessions.

Furthermore, the significance of these instruments has attracted droves of foreign investors towards U.S. dollar denominated assets as a means of reinforcing their own currency, gaining membership in the “Dollar system”, or simply generating yield. “Chasing yield” in U.S. debt securities had become somewhat of a meme in recent years, a byproduct of dovish U.S. monetary policy responses following the GFC and COVID-19 recession. With perspective, it’s important to note that the ever-memeable Bank of Japan has kept interest rates at or around 0% over the last 20 years or so while the European Central Bank, at least over the last decade, has closely followed suit. The byproduct of zero interest rate policy has proliferated a popular function in FX markets known as the Carry Trade. In this instance, investors could borrow in Yen or Euro denominated securities at low or zero interest rates and deploy capital into yield-bearing U.S. treasuries, collecting a spread in the process. The spiking “cost” of U.S. dollars, however, is threatening the greenback’s role in this process.

BBG

The Yen traded to a 20-year low relative to the U.S. dollar in May, driving up the exchange-adjusted costs of U.S. debt for Japanese investors. The rapid appreciation of the dollar, coupled with the expectation of higher rates in the future, has exacerbated the selloff in U.S. fixed income, stoking further inflation fears. Unfortunately for the U.S., Japan is not the only economy seeing soaring exchange costs. Last month, the Chinese Yuan fell to a 2 year low while the Euro fell to a 5 year low against the dollar. The dollar’s appreciation, coupled with fears of tightening financial conditions amidst an inflationary environment, has led some to speculate that the dollar’s reign as the reserve currency is coming to an end.

There’s a few ways in which people will interpret the above graphic:

• Investors are fleeing dollars and dollar-denominated assets because of looming systemic risks, like debasement, hyperinflation, default, etc.

• Investors are increasing their exposure to commodity-heavy currencies like Australia and Canada because they can find competitive yields reinforced by raw material exports and reserves

• U.S. debt offers noncompetitive yields relative to other countries which has driven foreign investors elsewhere

All of the above could very well be true, although I’m inclined to agree with the latter two bullets. For starters, the emergence of this trend is not inconsistent with the theme of free trade in the late 1990’s (note the beginning of the X-axis). Given this trend, it appears intuitive for countries to diversify their reserves in the face of a globalizing economy. By contrast, I’m less inclined to believe the first bullet because the increase in “Other” currencies can be attributed to the Canadian and Australian dollars’ growing share of reserves. These currencies are virtually dollar system benefactors, given their expansive trade relationships with the U.S. and their allies. You could even lump in the Swiss Franc as a dollar benefactor, given the country’s (unspoken) economic allegiance to the U.S. dollar system.

FRED; 10-yr Breakeven Inflation

Of course, there will always be the risk of Bullet #1. As mentioned above, the U.S. carries one of the world’s largest Debt-to-GDP ratios (albeit smaller than Japan, Italy, and a few others) and relies considerably upon foreign treasury demand (Foreigners hold roughly 33% of publicly held debt, according to Congress) to bankroll trade and the operations of the U.S. government. More saliently, the U.S. is suffering from a bout with inflation, printing some of the highest CPI figures seen in modern U.S. history. Fundamentally, this inflation has provoked a sell-off in fixed income securities, as attractive yields found in a 2% inflationary environment are considerably less appealing in a 7-8% environment.

In a vicious cycle of sorts, the dearth of demand in today’s bond market is exacerbating U.S. inflation expectations and subsequently causing a melt-up in the dollar. If we’re to assume that long duration treasury yields (10 & 30 year maturities) track long-term inflation expectations, one could argue the selloff in those securities occurred in anticipation of persistent inflation. This, in turn, would create enormous demand for dollars that could be redeployed into yield-bearing securities at higher interest rates in the future. This dynamic is consistent with the appreciation in the DXY, while also highlighting the monetary component of anchoring inflation expectations. Inflation, after all, is (at least partially) a monetary phenomenon.

I want to emphasize that creditors still find solace in U.S. debt securities. These instruments are, in essence, backed by the future earnings power of the U.S. economy, the world’s largest economy and consumer market with the most liquid capital markets. Frankly, if treasury auctions are any indicator, there is little reason to believe that U.S. treasuries are losing demand as a safe haven asset.

It is also not entirely certain that Dollar rivals like the Renminbi or the Ruble carry comparable risk/return profiles, especially in light of China’s COVID-zero policy or Russia’s expulsion from the global financial system. In this light, rising yields on U.S. debt will reengage foreign investors alienated by a spiking dollar, anchoring inflation expectations and replenishing liquidity in the treasury markets.

The unfortunate repercussion of this procedure is that higher rates correlate with tighter financial conditions for emerging economies - some of which, have already begun to crack under the weight of a new monetary order.

Who’s Next?

Sri Lankan Rupees; Getty Images/BBC

From the FT:

This extra debt is a worry: during the crisis, poorer countries were helped by ultra-low interest rates in richer economies. That created a flow of cheap money that they could surf. As inflation has taken off in the developed world, however, so interest rates are now rising in response. Investors can no longer risk as much in emerging markets. States cannot afford to borrow.

It is not only higher rates doing the damage. Lower expected growth and new fiscal problems driven by the war in Ukraine are also a worry. The food and fuel price surge is causing havoc. According to the UN, key foods are 19 per cent more expensive than they were in December.

The island nation of Sri Lanka was ravaged by the pandemic, forcing the country into the first default from an Asian-Pacific country since the 1990’s. While Sri Lanka’s tourist-dependent, post-Civil War economy may not serve as an appropriate model for other distressed economies, they are certainly not the only country struggling amidst our new monetary landscape. Argentina, Ecuador, Lebanon are among a litter of nations who fell into default in 2021. This year, the IMF has identified 8 countries they estimate to be in debt distress, in addition to 30 other countries at high risk of default.

As we just examined, the root of this distress appears obvious: Emerging economies can expect to see increasing costs for imports, commodities, and most notably, debt in response to a new monetary regime. As central bankers aim to bridge the gap between monetary and physical constraints, we are once again reminded of the nuances within the capital cycle and the contemporary economy.

Thanks for reading.

Tom (@tgc_tom)

TRIVIA: Pakistan defaulted in 1999, the last default from an Asian country prior to Sri Lanka’s default in 2022.

Hey everyone - Our next piece will actually be out next week. Thanks again for all your support!

— Tom

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Trivia

By the time this newsletter is out, the 2020 (2021) UEFA European Championship will have started. Italy will face off against Turkey at Stadio Olympico at 3pm EST. Without further ado...

1) Who won the 2016 EuroCup?

2) Which player scored the most goals?

3) What was the last UEFA event to be hosted at Stadio Olympico?

Answers below.

The Mainichi: BOJ buys no ETFs in May, 1st month without purchases under Kuroda

The BOJ's opting out came after it removed a 6 trillion yen ($55 billion) annual target for purchases to make ETF buying more flexible in March, responding to mounting criticism of the central bank's huge presence in the stock market.

The last time that the BOJ did not make any ETF purchases for a whole month was in December 2012. Kuroda took the bank's helm in March 2013.

———————————————

A decade later, the BOJ became a top shareholder of Japanese stocks, partly because the coronavirus pandemic prompted it to step up purchases, but it faced criticism that such buying distorted market mechanisms.

HOW DOES INTERNATIONAL MONETARY LEADERSHIP END? THE STERLING AREA REVISITED

The US dollar still dominates the global financial order. Yet there appears to be an inexorable decline in US geostrategic power, and cracks have emerged in the liberal international order. In this paradoxical context of dominance and decline, the question of how monetary leadership ends has taken on a new salience.

———————————

The most obvious lesson of this history is that international currencies are not immune from the shifting structures of international economic and political power. There is clear evidence that, albeit with some lag, monetary relations follow shifting patterns of international trade and capital flows. The gravitational economic pull of an international currency cannot be maintained indefinitely, absent the productive base and international flows of real resources that stand behind it.

S&P Global: Container shipping grapples with China ports operational delays

"The Yantian port can only handle 500 boxes a day now compared with 30,000 before... The vessels can't call Shekou or Nansha because these ports don't carry the capacity to handle such large volumes," a logistics provider based in Hong Kong said, adding that the congestion had spread to other ports.

"The Yantian issue will definitely snowball. Even if they say the resolution will be found by July, it will have lingering effects," the logistics provider said.

————————————

Meanwhile, global container shipping rates remain elevated due to strong demand for consumer goods amid strong market fundamentals. A lower number of ships were available with carriers wanting to secure more tonnage.

"During Q4, global container volumes continued to increase due to a strong demand for consumer goods. Asia-North America trade volume increased in Q4 by 40% year on year," container transportation company Ocean Network Express said in its financial results presentation for the year ended April 30, 2021.

Twitter:

CNBC: Turkish lira hits record low after Erdogan renews call for interest rate cuts

“If we remove the burden of interest rates from investments and costs, then we will enter a calmer environment because it’s the interest rates that cause cost inflation,” Erdogan said. 

————————

So far, Kavcioglu has held Turkey’s key interest rate at the steep 19% that his predecessor Naci Agbal had increased it to. It is widely suspected Kavcioglu has been hired for his tendency to agree with Erdogan’s monetary policy views. 

Since Erdogan’s firing of Agbal in mid-March, the lira has lost 16% of its value. 

Bloomberg: IMF Sees Risks After El Salvador Makes Bitcoin Legal Tender

El Salvador’s congress approved a law this week requiring businesses to accept Bitcoin in exchange for goods and services. President Nayib Bukele said the digital currency will help counter El Salvador’s low banking penetration and cut the cost of sending remittances.

———————————————

The nation’s bonds dropped, sending the yield on its bonds coming due in 2025 up 71 basis points to 7.8% at 10:40 a.m. in New York. El Salvador’s bonds are the worst performers in emerging markets this week, according to a Bloomberg Barclays index.

Al Jazeera: Saudi Aramco to sell $6B of dollar-denominated Islamic bonds

Saudi Aramco, the world’s biggest energy company, is selling $6 billion of bonds in its first dollar-denominated Islamic bond sale.

The state-controlled company is offering sukuk due in three, five and 10 years, and the longest portion will yield 120 basis points above Treasuries, according to a person familiar with the matter. That’s down from initial discussions of around 160 basis points.

Aramco’s oil revenue accounts for about 40% of Saudi Arabia’s gross domestic product and the recent increase in crude prices may drive this even higher, Bloomberg Intelligence analysts Jaimin Patel and Damian Sassower wrote in a note Tuesday. Saudi Arabia’s plans to reduce its dependence on Aramco will be challenged by the nation’s fiscal deficit, they said.

Fortune: The ECB is boosting bond buying even as the Eurozone economic forecast looks up

ECB policy makers accelerated the pace of their 1.85 trillion-euro ($2.25 trillion) bond-buying program three months ago to rein in rising borrowing costs, and several argued before the meeting that the economy isn’t ready for a withdrawal of support, setting the scene for a repeat pledge.

————————————————

In the euro area, inflation climbed to 2% in May, technically above the ECB’s target. The institution’s last forecasts, however, showed it missing its goal both next year and in 2023.

Officials have repeatedly warned that it is too early for a debate around winding down pandemic measures. The ECB’s emergency program is currently set to run through March 2022, and most economists don’t expect it to be extended.

The Week Ahead:

Monday — 🇨🇴 Feast of the Sacred Heart; 🇭🇰 🇹🇼 Dragon Boat Festival; 🇳🇿 Queen’s Birthday; 🇨🇭 Swiss PPI; 🇮🇳 India Inflation; 🇪🇺 E.U. Industrial Production; 🇳🇿 Australia Home Price Index;

Tuesday — 🇮🇩 Indonesian, 🇪🇺 E.U., 🇯🇵 Japanese,🇳🇿 New Zealand, Trade Balance; 🇬🇧 British, 🇨🇳 Chinese Unemployment; 🇩🇪 German, Italian, 🇵🇱 Polish, 🇮🇱 Israeli CPI; 🇺🇸 U.S. PPI; 🇺🇸 U.S. Retail Sales; 🇷🇺 Russian GDP;

Wednesday — 🇿🇦 Youth Day; 🇬🇧 British,🇨🇦 Canadian, 🇦🇷 Argentinian Inflation; 🇨🇳 Chinese Industrial Production; 🇪🇺 Eurozone Wages; 🇩🇪 Germany 10-Yr Auction; 🇮🇱 Israeli, 🇳🇿 New Zealand GDP; 🛢 Crude Oil Inventories; 🇺🇸 Federal Reserve Interest Rate Decision; 🇧🇷 BCB Interest Rate Decision; 🇳🇿 Australian Unemployment;

Thursday — 🇮🇸 Iceland Independence Day; 🇨🇭 Swiss National Bank, 🇮🇩 Bank Indonesia; 🇹🇼 Bank of the Republic of China, 🇳🇴 Norges Bank, 🇺🇦 National Bank of Ukraine, 🇹🇷 CBRT, 🇯🇵 BoJ, Interest Rate Decision; 🇪🇺 E.U., 🇯🇵 Japanese CPI; 🇪🇸 Spanish 10-Yr Obligacion;

Friday — 🇬🇧 British Retail Sales; 🇩🇪 German PPI; 🇷🇺 Russian Interest Rate Decision;

Trivia

In 2016, France’s Antoine Griezmann scored six goals in seven matches on his way to earning the Golden Boot. France, however, would fall short to Portugal, led by Cristiano Ronaldo, in the 2016 Finals.

And while Ronaldo may not be playing in Stadio Olimpico this year, Ronaldo is certainly familiar with Italy’s largest venue. In 2009, Manchester United, led by Wayne Rooney and Cristiano Ronaldo, fell to Barcelona, led by Lionel Messi and Thierry Henry, 0-2 in the 2009 UEFA Champions League Finals.

Hey everyone — Sorry for no letter last week, I ended up taking an MDW break.

I’m finishing up class in a couple of weeks so I’m hoping to get back on a routine with long-form pieces. In the meantime, I always appreciate any advice or feedback on my writing.

I hope you all had a great short week.

— Tom

Friendly reminder that this is a free publication. Please consider subscribing below or sharing this post to support my work.

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Trivia

Only 6 economies can boast an economy larger today than it was prior to the pandemic. Can you name them? Answer below.

FT: Work on a Bali beach? Indonesia to send civil servants to island

This is part of the government’s efforts to create demand so that hotels and restaurants in Bali can survive,” Odo Manuhutu, deputy for tourism and creative economy at the minister’s office, told reporters. “In line with the health ministry’s guidelines, Bali’s vaccination rate is currently the highest and fastest [among Indonesia’s provinces] . . . to make sure that Bali is safe to visit.”

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With 80 per cent of its economy dependent on tourism and related sectors, Bali reported the deepest contractions among Indonesia’s 34 provinces in 2020 and in the first quarter of this year — at 9.3 per cent and 9.85 per cent, respectively. Indonesia’s economy, meanwhile, shrank 2.07 per cent and 0.74 per cent in the two periods.

Karthik Sankaran: How I learned to stop worrying and (mostly) love the Euro.

Instead, I would characterize the ECB’s role in the Eurozone as acquiescence in fiscal dominance for single national governments, but with such acquiescence conditional upon commitment by the government to the broad political and economic project of the EU. The level of such commitment is gauged by the ECB, key national governments (essentially Germany and France), the European Commission and is further tempered by consideration of the size, systemic importance and “oppositional” or “cooperative” character of the government in question.

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And the important lesson here is that while the argument that the Euro was/is a political project rather than an economic one has been deployed by Euroskeptics as a reason for its projected failure, it is precisely that the fact the Euro is a political rather than an economic project that has kept it alive through extraordinary and once unthinkable interventions every time it was given up for dead.

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Does this mean all is well? Obviously not. The 2010s have clearly been a lost decade for the Eurozone periphery, with terrible human costs. But the answer to this is not to exit the Eurozone and lose the shelter and support provided by the ECB, a level of support that is extremely unlikely to be matched in terms of market credibility were it to be provided by a post-exit successor NCB. Rather it is to use the umbrella provided by a full-service ECB to expand the ability of both the Union as a collective and of single Eurozone members to engage in proactive fiscal policy for the purposes of both countercyclical stimulus and the enhancement of structural growth trends. 

WSJ: Macron Acknowledges France’s ‘Terrible Responsibility’ for Rwandan Genocide

“France has political responsibility in Rwanda, it has a duty to recognize the share of the suffering it inflicted on the Rwandan people,” Mr. Macron said, shortly after laying a wreath at the memorial. “I have come to recognize our responsibilities; only those who survived can perhaps forgive.”

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On Thursday, Mr. Kagame hailed Mr. Macron.

“This visit is about the future, not the past,” he said. “This is an act of tremendous courage.”

Pekingnology: "Rapid appreciation of the RMB is not sustainable"

Q: Recently, the spot exchange rate of RMB against USD rose above 6.4. How do you think about the recent strengthening of RMB against USD and its reasons?

A: The RMB exchange rate has risen and fallen, and two-way floating has become the norm. Since the second half of last year, the RMB spot exchange rate has appreciated by 8.2% against the USD and has stabilized at the end of last year, with the RMB fluctuating around 6.5 against the USD.

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At the same time, China has become the world's number one investment destination. In recent years, the spread of interest rates between China and the United States has widened, once as high as 2 percentage points or more. Data show that foreign capital increased its holdings of domestic bonds by $186.1 billion in 2020, and direct investment (FDI) inflows into China bucked the trend to reach $212 billion, up 14%. The significant increase in foreign holdings of RMB assets has also pushed up the RMB exchange rate.

The strong performance of the RMB exchange rate in the second half of last year should be said to have already fully reflected these favorable factors; since the end of last year, without new favorable factors, the RMB exchange rate performance has been generally stable. However, recently, misled by some inappropriate remarks, the RMB has experienced some overshooting against the USD.

This year, the dollar index has risen and then depreciated, falling by 2.2% in the last month and a half, while the euro and the yen appreciated by 2.3% and depreciated by 0.4% respectively against the dollar, but the RMB appreciated by 2.9%. Especially recently, the dollar index has been around a relatively low level of 90.00, the U.S. economy is recovering faster than Europe and Japan, and the possibility of the dollar index going down again is smaller. According to the laws of the market, the exchange rate of RMB against USD should also be relatively stable, but the recent record high of RMB against USD shows that there is overshooting in the market.

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Bloomberg Green: G-7 Set to Back Green Rival to China’s Belt and Road Program

A G-7-backed plan to rival China’s infrastructure strategy was initially pushed by U.S. president Joe Biden, and has featured in technical discussions between diplomats preparing next week’s meeting in Cornwall, England, one of the people said.

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Germany, France and Italy are keen for it to support activities in Africa, while the U.S. is pushing for action in Latin America and Asia. Japan argues for more focus on the Indo-Pacific region. But all nations broadly agree on the need for a more transparent alternative to the Chinese program, the person added.

Visual Capitalist: The Median Age of the Population on Every Continent

While it is not surprising that Monaco – a small and wealthy city-state that sits on the French Riviera with a population of just 40,000 people – is the oldest country in the world, it seems that age could be a real challenge for the major economies that also make this list.

Germany, Italy, and Japan have some of the largest economies in the world with a combined nominal GDP equal to 12.2% of global output. At the same time, they are also three of the oldest countries right now, and they are each projected to hit a median age of 50 years or higher by the year 2050.

On the other end of the spectrum, there are more than 30 countries that have median ages under 20 years, with most of them existing in Africa or the Middle East. One exception to this is Timor-Leste, a small country bordering Indonesia, which has a median age of 18.9 years.

The Grumpy Economist: Brazilian Inflation

In February 1994, the government launched its last stabilization plan, the Real Plan, which would finally put an end to the hyperinflation. The plan that conquered Brazilian inflation did not have the blessing of the IMF, an always troubled relationship in the previous decades. The plan’s concepts were different from the previous ones: it aimed to reduce deficits, modernize firms, and reduce the distortions that arose from previous price freezes...

Its first stage...[I]t included an increase in existing tax rates, such as income tax, the creation of new taxes, such as the tax on financial intermediation, and the renegotiation of subnational government debt in an attempt to control the deficits of subnational governments... a way to suspend part of the earmarked revenues of states and municipalities, providing more flexibility in the government budget. 

On the monetary side, a clearly stated intention to limit issuances of the new currency led to the adoption of a high interest rate policy and high reserve requirement ratios (100 percent reserve requirements on new deposits after July 1, 1994). In addition, the plan included changes in the institutional framework in which the central bank operated...

The Africa Report: Palm oil, timber, cocoa: What to expect from Africa in 2021

CyclOpe expects that commodity prices will continue to rise in 2021, particularly for all agricultural products: +26% for palm oil, +20% for coffee, +20% for maize, +11% for cotton, +5% for rice and +1% for cocoa.

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The report also analyses the paradoxical bean market. The tug of war taking place between Côte d’Ivoire and Ghana – which was responsible for 62% of the world’s production between 2019 and 2020 – as well as multinational chocolate companies, seemed to benefit producers.

The Week Ahead:

Monday — 🇨🇴 Corpus Christi Day; 🇲🇾 Agong’s Birthday; 🇳🇿 Queen’s Birthday; 🇨🇭 Swiss Unemployment; 🇨🇭 Swiss, 🇷🇺 Russian CPI; 🇨🇳 Chinese, 🇯🇵 Japanese Trade Balance; 🇯🇵 Japanese GDP;

Tuesday — 🇩🇪 Germany, 🇦🇷 Argentina Industrial Production; 🇪🇺 E.U., 🇿🇦 South African GDP; 🇧🇷 Brazilian Retail Sales; 🇺🇸 U.S., Canadian Trade; 🇨🇳 Chinese CPI & PPI;

Wednesday — 🇩🇪 German Trade; 🇲🇽 Mexican, 🇧🇷 Brazilian, 🇺🇦 Ukrainian CPI; 🇨🇦 Bank of Canada & 🇵🇱 Bank of Poland Interest Rate Decision;

Thursday — 🇫🇷 French Payrolls; 🇩🇰 Danish, 🇸🇪 Swedish CPI; 🛢 OPEC Monthly Report; 🇪🇺 ECB Interest Rate Decision; 🇺🇸 U.S. CPI; 🇳🇿 New Zealand Retail Sales;

Friday — 🇬🇧 British Industrial Production; 🇪🇸 Spanish CPI; 🇷🇺 Russian Interest Rate Decision;

Saturday - 🇵🇭 Philippine Independence Day; 🇳🇬 Nigerian Democracy Day;

Trivia:

Australia, Chile, China, Lithuania, Romania and South Korea were the six economies to grow in 2020.

Hey everyone. I started a new job this week so I may be a little behind on the next long—form piece. Hope you all enjoy!

— Tom

Trivia:

Last week, I posted a chart featuring the best performing stock index in the world YTD. What country was that index located in?

Answer at the bottom.

Bloomberg ($): TSMC Is Stuck in the Middle of a Global Panic Over Chip Supply

It dominates the smartphone sector, and its chips are in everything from cars to fighter jets. The Covid-19 pandemic further cemented its dominance. TSMC’s 2020 revenue was $45.5 billion, a 31% increase from the year before, and its adjusted net income of $17.3 billion dwarfed its profits from any previous year. The company is now worth about $590 billion, more than two and a half times Intel’s market value.

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Companies like Intel both designed and manufactured chips for their clients, but Chang envisioned a model known as the pure-play foundry, where his company would take on the intricate task of producing chips for clients that wanted to design their own but didn’t want to run the multibillion-dollar manufacturing facilities known as foundries, or fabs.

It was one of those ideas that seem obvious only in retrospect. When Chang approached Intel in 1985 to see if it wanted to invest, it turned him down. Companies that later became important partners were skeptical at first. “I was thinking to myself, ‘This is crazy,’ ” said Arm Ltd. Chief Executive Officer Simon Segars during a 2017 event celebrating TSMC’s 30th anniversary. “It turns out it is a really good idea. We wouldn’t be here today without it.”

Financial Times ($): Covid batters India’s aspiring middle classes

Economists warned that the latest outbreak could have long-term ramifications for middle-class Indians, whose rising consumption was expected to be the country’s growth engine for many years.

“India, at the end of the day, is a consumption story,” said Tanvee Gupta Jain, UBS chief India economist. “If you never recovered from the 2020 wave and then you go into the 2021 wave, then it’s a concern.”

India reported more than 320,000 Covid-19 infections and 3,800 deaths on Monday. Experts maintain that both figures are vastly undercounted.

Nikkei Asia: Meituan shares slide after chief posts ancient poem on book-burning

Meituan is currently under a Chinese government antitrust investigation for abusing its market dominance, following a record $2.8 billion fine levied on its chief rival Alibaba last month.

Users of Twitter-like Weibo compared the Tang dynasty poem posted by Meituan's Wang Xing to a speech given at a forum in October by ecommerce billionaire Jack Ma in Shanghai. Some blame Ma's speech, in which he criticized the regulation of China's banks, for Beijing's last-minute suspension of a $37 billion initial public offering of his payments company, Ant Group.

"First we have Jack Ma's speech, then Wang Xing reposted a poem, one verse and people's hearts are breaking," said one Weibo user. Further posts appeared to have been censored on social media.

Points of Return: The Bigger Inflation Scare Is Emerging World Food

But while commodity inflation is no longer of such direct import to the developed world, it still has serious effects on emerging economies. When we look at commodities’ share of final consumption, we find that emerging Asia is far more exposed to commodity prices than Europe and North America. Sub-Saharan Africa, not shown here, is even more commodity-dependent:

Rising interest rates can be almost as unpopular as food price inflation in the developing world, particularly in a time of pandemics, so central banks will naturally try to avoid them. But this is where the most difficult inflationary challenges lie at present. In the developed world, the uptick in inflation might still prove a transitory quirk caused by reopening. In the emerging world, food price inflation is already forming a serious social and economic challenge.

Reuters: Naspers, Prosus launch share swap deal to shrink S.Africa discount

Naspers is Africa's biggest listed company because of its Tencent (0700.HK) holding but its shares trade at a steep discount to the value of its stake, which led it to list Prosus in 2019.

Under the deal announced on Wednesday, Prosus will issue new shares to buy up to 45.4% of Naspers shares, effectively moving part of Naspers from the Johannesburg bourse to Euronext in Amsterdam, another fillip for the Dutch market which has won ground from London following Brexit.

Twitter

Bitcoin Magazine: Check Your Financial Privilege

In reality, only 13% of our planet’s population is born into the dollar, euro, Japanese yen, British pound, Australian dollar, Canadian dollar or Swiss Franc. The other 87% are born into autocracy or considerably less trustworthy currencies. 4.3 billion people live under authoritarianism, and 1.2 billion people live under double- or triple-digit inflation.

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Mo is beginning to see just how massive the Lightning Network will be for Sudan because most users will be in the micropayment space, sending transactions of $5 or $10, and will not be able to afford the increasingly high on-chain fees. If international exchanges can choose to service Sudan, and enable Lightning withdrawals and deposits, he said that would be an enormous step forward for financial empowerment.

As for the likes of Bill Gates and Buffet, Mo said they might understand the technology behind Bitcoin, but they will never be happy about it because it is coming to seize a place on the global stage that they used to have just for themselves. In direct contradiction to billionaire claims that Bitcoin is worthless and has no social value, Mo knows many Sudanese who rely on it as a lifeline. Maybe, Mo said, the critics just cannot see past their financial privilege.

Wall Street Journal ($): Hedge Funds Face Backlash From Europe in Bond Market

The pushback was prompted by unusually large orders placed by hedge funds for new bonds, which can then potentially be sold—sometimes within hours—to the European Central Bank for a profit, bankers, investors and a government official said. Order books, which track demand for new bonds and help determine the prices, have ballooned since hedge funds began to pile into this trade.

FT Alphaville ($): No, ‘hyperinflation’ is not here

To boot, take away stimulus cheques and furlough schemes, and the labour market on either side of the Atlantic is nowhere near strong enough to trigger the sort of wage-price spiral that saw inflation surge into the double digits in the US and UK in the 1970s. Even in Germany, where manufacturing unions are still relatively strong, companies like Volkswagen say they don’t need to pay their workers more. Those are workers who did not get a pay rise in 2020, nor will they get one this year either — though they will see a 2.8 per cent bump from 2019 levels in 2022.

The Week Ahead:

Sunday — Pentecost Eve; 🇨🇳 Chinese Industrial Production; 🇹🇭 Thailand GDP;

Monday — 🇳🇴 Norwegian Constitution Day; Pentecost; 🇨🇴 Colombian Ascension Day; 🇨🇭 Swiss PPI; 🇮🇳 Indian, 🇮🇹 Italian, CPI; 🇷🇺 Russian, 🇯🇵 Japanese GDP;

Tuesday — 🇬🇧 British Unemployment; 🇭🇺 Hungarian, 🇪🇺 E.U., 🇮🇱 Israeli, GDP; 🇳🇿 New Zealand PPI; 🇯🇵 Japanese Industrial Production;

Wednesday — 🇭🇰 Hong Kong National Day; ☸️ Buddha’s Birthday; 🇬🇧 British, 🇿🇦 South African,🇪🇺 E.U., 🇨🇦 Canadian, CPI; 🇩🇪 10yr Bund Auction; 🇦🇺 Australian Unemployment; 🇨🇳 PBoC Loan Prime Rate Decision;

Thursday — 🇩🇪 German PPI; 🇪🇸 Spain 10yr Obligacion Auction; 🇿🇦 South African Interest Rate Decision; 🇯🇵 Japanese CPI;

Friday — 🇨🇱 Chilean Navy Day; 🇬🇧 British, 🇲🇽 Mexican, 🇨🇦 Canadian, 🇺🇸 U.S. Retail Sales; 🇫🇷 French, 🇩🇪 German, 🇬🇧 British, 🇺🇸 U.S., 🇪🇺 E.U. PMI;

Trivia Answers:

— Tom

Bloomberg: How Cyril Ramaphosa Won South African Ruling Party Power Play

Escalating tensions in South Africa’s ruling African National Congress finally came to a head on Wednesday when its Secretary-General Ace Magashule was informed by his deputy, Jessie Duarte, that he’d been suspended pending his trial on graft charges.

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While the bizarre standoff could ultimately end up in court, Ramaphosa clearly has the upper hand. The president has the backing of most members of the ANC’s National Executive Committee, or NEC, which calls the shots in the party and has unequivocally stated that all officials facing prosecution will have their membership revoked if they refuse to quit their posts.

Insider: Beijing's campaign to rein in Tesla has begun, now experts say it has a limited time to sell cars before it gets canceled

But things in China can change fast — especially when the central government decides it's time to shake things up. And in the past few weeks, Beijing — through state-controlled media — has joined the chorus of Tesla critics, and it has the most important and loudest voice of all.

"Xinhua and People's Daily have been publishing opinion pieces regularly saying that Tesla ignores the rights of consumers," Anne Stevenson-Yang, the founder of the investment firm J Capital Research in China, said in an email to Insider. The violations are said to include a right to transparent pricing and to data about accidents.

"Commentators say that Tesla has abrogated its investment commitment (14 billion yuan) and its commitment to pay taxes (2.23 billion yuan annually). The company is not meeting its sales targets," Stevenson-Yang said. She added, "Several commentators have recommended kicking Tesla out, like Google. These are not just your local op-ed writers — it's a campaign."

New York Times: They Were Promised a Socialist Paradise, and Ended Up in ‘Hell’

His wife died in 2013, and now Mr. Lee lives alone in a small rented apartment in Seoul. “But I have freedom,” he said. “I would have sacrificed everything else for it.”

Mr. Lee has formed an association with 50 ethnic Koreans from Japan who migrated to North Korea and escaped to the South. Every December, the group meets to mark the anniversary of the beginning of the mass migration in 1959. His memoir is nearly complete. His generation is the last to have firsthand experience of what happened to those 93,000 migrants, he said.

“It’s sad that our stories will be buried when we die,” Mr. Lee said.

YouTube: Bombay Stock Exchange (1995)

Reuters: Turkey's tight monetary policy held for now, finance minister says

Turkey's finance minister said on Thursday that the central bank has maintained its tight monetary policy stance "at the moment", after the bank held its key interest rate steady at 19% earlier in the day as expected.

In an interview televised on CNN Turk, Lutfi Elvan said the fight against inflation was a priority. He added that his ministry was closely monitoring loan growth, and that macro-prudential measures may be taken.

Instagram: Monaco Grand Prix (1968)

Twitter

CNBC: ‘Millionaire’s tax’: Argentina passes levy on the super-rich to help pay for Covid response

Lawmakers in the Senate passed the bill, dubbed the “millionaire’s tax,” by 42 votes to 26 late on Friday.

It means those with a personal fortune of over 200 million pesos ($2.4 million) — approximately 12,000 people — will have to pay a one-off tax of at least 2%.

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“History shows that once these benefits are introduced it would be very difficult to remove them. Overall, the new tax would further undermine Argentina’s already deteriorated business environment,” he added.

Of the proceeds raised by the levy, AFP reported that 20% would go toward medical supplies, 20% would go to small and medium-sized companies, 15% to social developments, 20% to student scholarships and 25% to natural gas ventures.

Al Jazeera: Rickshaw ‘ambulance’ offers free oxygen to India’s COVID patients

Khan, a 34-year-old driver in the central Indian city of Bhopal, sold his wife’s jewellery and converted his three-wheeled vehicle into a small ambulance, fitting it out with an oxygen cylinder, an oximeter to measure oxygen levels in the blood, and other medical supplies.

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Khan briefly ran into trouble with the authorities when police charged him for operating his auto-rickshaw without an emergency permit during Madhya Pradesh state’s virus lockdown, India Today reported.

But after an outcry on social media, police withdrew the charges and issued him with a special pass, the broadcaster added.

The Week Ahead:

Sunday — 🇰🇿 Kazakhstan National Day; 🇦🇺 Australian Retail Sales

Monday — 🇩🇰 Danish, 🇨🇳 Chinese CPI; 🇬🇧 British, 🇯🇵 Japanese Retail Sales; 🇯🇵 Japanese Government Bond 10yr Auction

Tuesday — ☪️ Eid al-Fitr; 🇹🇷 Turkish Retail Sales; 🛢 OPEC Monthly Report; 🇧🇷 Brazilian Inflation; 🇲🇾 Malaysian GDP; 🇳🇿 New Zealand Retail Sales;

Wednesday — 🇬🇧 British, 🇯🇵 Japanese Trade Balance; 🇬🇧 British Industrial Production; 🇳🇴 Norwegian, 🇬🇧 British GDP; 🇸🇪 Swedish, 🇺🇸 U.S., 🇮🇳 Indian, 🇫🇷 French, 🇩🇪 German CPI; 🇳🇿 New Zealand Wages;

Thursday — 🇺🇸 U.S. PPI; 🇲🇽 Banxico Interest Rate Decision; 🇦🇷Argentine CPI; 🇺🇦 Ukrainian Trade Balance;

Friday — 🇵🇱 Polish, 🇪🇸 Spanish, 🇮🇱 Israeli CPI; 🇵🇱 Poland GDP; 🇺🇸 U.S. Retail Sales;

China last month formalized tariffs of more than 200% on Australian wine for five years, though the higher duties had been in place since November. The tariffs followed a raft of measures barring Australian imports from coal and copper to barley last year.

The slump in China was too steep to compensate for increased shipments from Australia to the U.K., Germany and New Zealand: The value of Australia’s total wine exports fell 4% to A$2.77 billion in the year ended March.

Financial Times($): Indian food delivery group Zomato looks to raise $1.1bn in IPO

The Gurgaon-based company, which counts Jack Ma’s Ant Group and Uber as major shareholders, was last valued at $5.4bn in a fundraising round in February. The start-up has filed an initial prospectus, according to papers submitted to the market regulator on Wednesday.

Zomato’s move comes as India is battling a catastrophic wave of coronavirus infections. The country of 1.4bn has reported record daily cases and deaths in the past month, with health infrastructure in some cities collapsing under the sheer volume of cases.

The pandemic lockdowns have made consumers globally even more reliant on food delivery companies.

The timing of Zomato’s IPO is “perfect”, said Neil Shah, an analyst at Counterpoint. 

“If you look at how reliant we are on Zomato and Swiggy, the demand is unparalleled,” he said, referring to Zomato’s main rival in India. The company is serving some 70m customers each month.

Pragmatic Capital: The Scarcity of Money Myth

Money is actually a very unnatural thing. We’re the only species that uses it because it is pretty much something we conjure up in our minds. More specifically, “money” is really just a bunch of contractual agreements. It’s “I’ll give you 25 apples at this time next year and this monetary note will settle that debt”. Loans create deposits. Deposits are money.

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The more important key point is that money is elastic. This means that we can create more of these agreements as needed to meet the demands of the economy. A lot of us have been trained to believe that more money is necessarily bad/inflationary. But this need not be true so long as we produce the corresponding real resources to support the demand for that money. In fact, this is a good thing because it provides us with a monetary system that can flexibly react to the needs of its users. And this is what all credit based monetary systems are – flexible systems that can expand and contract financial assets as needed. Within the piping of the existing system banks are the primary issuers of the loans that supply that needed liquidity.

Points of Return: Markets Are Insulated From India's Agony, for Now

Outflows this month have been massive. Foreign investors had plowed $5.3 billion into Indian equities and bonds from January to March, according to Societe Generale SA, buoyed by expectations of one of the world’s strongest economic recoveries. The IMF’s forecast was for 12.5% growth next year. But $6.1 billion of capital has exited so far this month: This SocGen chart shows portfolio flows in and out of stocks and bonds combined since the beginning of last year:

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Again, this can be looked at two ways. The pandemic hasn’t had much financial impact yet, but there is time for it to wreak considerably more damage. As SocGen shows in this chart, the yields available on Indian deposits (the “carry” for holding assets in rupees) is now more appealing than those of any other main Asian currency, so this should act as some kind of a buffer.

Securities Finance Times: Pass test to invest, South Korean regulator tells retail short sellers

The South Korean financial regulator says the measures, designed to protect and enhance opportunities for retail investors to engage in securities lending and short selling announced in February, will come into effect from 3 May.

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If an investor has shorted a company’s stock within the period of one day after the announcement of the company’s capital increase plan until the determination of the issuing price, the investor is not allowed to participate in the company’s capital increase.

A monetary penalty of up to 1.5 times the undue profit gained from violating this rule can be imposed.

Investors with net holding balance above a certain level due to short sale activities should report to the FSC and the KRX.

A monetary penalty of up to KRW 30 million (USD 26,936) can be imposed for violating this rule on each incident.

Twitter

Nikkei Asia: Chinese regulators summon Tencent, ByteDance and fintechs

The aim of the interview, as in the case of Ant, was to prevent monopolies and the "disorderly expansion of capital," while also examining poor corporate governance, regulatory arbitrage and unfair competition, the authorities said.

The companies summoned Thursday, with large-scale operations and considerable influence in the sector, epitomize some of these problems, the People's Bank of China -- the country's central bank -- said in a release.

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The regulators did acknowledge that in recent years, online platforms have played an important role in improving the efficiency of financial services, the inclusiveness of the financial system and reducing transaction costs, but they said the development of fintech business must serve the real economy and the reduction of financial risks.

Alibaba was hit recently with a record $2.81 billion antimonopoly fine.

FT Special Report — Investing In Chile ($): Chilean miners fear struggle to meet copper demand

But miners warn that Chilean politics could delay investment in the country’s rich resources of both copper and lithium. A combination of social unrest, Covid-19 and plans to rewrite the country’s Pinochet-era constitution risks deterring financial backers, according to Diego Hernández, the president of Sonami, Chile’s national mining society.

“If you are an investor, you probably will want to wait to see what is the result of this process instead of making investment decisions now,” he says. There is no doubt about the world’s growing hunger for copper. Wind turbines, solar farms and their networks use up to 12 times as much of the metal as non-renewable energy systems.

Net Interest: When Irish Eyes Are Smiling

For a few years at least, the domestic focus paid off. Ireland was hot. Economic growth was running at around 7% a year. Tax incentives, competitive wages and European Union membership drew people in from around the world. Most of all, having signed up to the single currency in 1999, Ireland had access to deeper pools of liquidity and therefore cheaper credit than it had ever had before. All of this fuelled a boom in real estate markets and Irish Life and Permanent was there to cheer it on.

Having been kindled by positive developments in the general economy, real estate markets soon overshadowed most other sectors, becoming a major driver of the economy themselves. The construction industry swelled to contribute close to a quarter of GDP as homebuilders rushed to mine new houses. They built around half as many new homes per year as their peers in the UK were building, despite a population a fifteenth the size. By the mid 2000s, the construction industry employed around one in five of the Irish workforce.

Markets

Data from Trading View

The Week Ahead:

Author’s Note: Seemingly every country is reporting PPI results next week.

Sunday — 🇰🇷 Korean, 🇹🇼 Taiwan,🇵🇭 Philippines, 🇮🇩 Indonesia, 🇦🇺Australian Manufacturing PMI; 🇮🇩 Indonesia, 🇦🇺 Australia, 🇵🇪 Peru Inflation;

Monday —  🇩🇪 Germany Retail Sales; 🇹🇷 Turkish PPI; 🇰🇷 Korean, 🇹🇷 Turkish, 🇧🇷 Brazilian CPI; 🇨🇱 Chilean Economic Activity; 🇿🇦 South African Vehicle Sales; 🇦🇺 Reserve Bank of Australia Interest Rate Decision;

Also...

Reporting Manufacturing PMI: 🇮🇳 India, 🇸🇪 Sweden, 🇹🇷 Turkey, 🇭🇺Hungary, 🇪🇸 Spanish, 🇨🇭 Swiss, 🇮🇹 Italian, 🇳🇴 Norwegian, 🇪🇺 EU, 🇧🇷 Brazil, 🇸🇬 Singapore, 🇨🇦 Canada, 🇺🇸 U.S., 🇮🇪 Ireland, 🇨🇳 China, 🇸🇦Saudi Arabia, 🇦🇪 United Arab Emirates;

Tuesday — 🇷🇺 Russian, 🇭🇰 Hong Kong, 🇵🇱 Polish, 🇬🇷 Greek, 🇬🇧 British Manufacturing PMI; 🇭🇰 Hong Kong Retail Sales; 🇳🇿 New Zealand Unemployment; 🇵🇭 Philippines,🇹🇭Thailand CPI; 🇵🇱 Narodowy Bank Polski interest rate decision;

Wednesday — 🇸🇬 Singapore Retail Sales; 🇳🇴 Norway Unemployment; 🇨🇭 Swiss CPI; 🇹🇭 Bank of Thailand Interest Rate Decision; 🇪🇺 European, 🇺🇸 U.S., 🇯🇵 Japanese, 🇨🇳 Chinese Services PMI; 🇧🇷 Brazilian Industrial Activity, Interest Rate Decision;

Thursday — 🇷🇺 Russian Services PMI; 🇲🇾 Bank Negara Malaysia, 🇳🇴 Norges Bank, 🏴󠁧󠁢󠁥󠁮󠁧󠁿 Bank of England, 🇹🇷 Central Bank of the Republic of Turkey, Interest Rate Decision; 🇦🇷 Argentinian Industrial Activity; 🇨🇳 Chinese Trade Balance

Friday — 🇨🇭 Swiss, 🇨🇦 Canadian, 🇺🇸 U.S., Unemployment; 🇩🇪 German Industrial Production; 🇲🇽 Mexican, 🇷🇺 Russian CPI; 🇧🇷 Brazilian Retail Sales;

I may have some updates soon!

Cheers,

— Tom

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Money, Money, Money

“Bitcoin fixes this” is a phrase that, for those of us who spend a lot of time on Twitter, are far too familiar with. Of course, this saying has now been meme—ified beyond any serious interpretation. Yet, the “Bitcoin Maximalist” crowd remains sanguine about the revolutionary prospects of digital assets.

Indubitably, bitcoin has seen an emphatic return into the mainstream since the first wave of crypto—mania seen back in 2017. During that time, bitcoin (amongst other cryptocurrencies) were largely dismissed as fads or scams by respected leaders of the business community. Bitcoin’s subsequent decline from $20,000 to $3,500 served to vindicate the skeptics who warned of bitcoin’s speculative nature. Then again, Bitcoin’s supporters were unperturbed by BTC’s drawdown. Surely, the price was irrelevant! The booming popularity of bitcoins (note, lowercase “b”) reflected the growing potential of the (uppercase “B”) Bitcoin network and contingently, blockchain technology. Generally speaking, a bitcoin maximalist believes that bitcoin will eventually supplant the U.S. dollar as the world’s reserve currency.

Fast forward to today and bitcoin trades north of $50,000, over an +150% premium versus its 2017 high. Concurrently, this rally endows Bitcoin with a market capitalization1 of over $1 trillion, a figure only matched by multinational juggernauts like Apple, Amazon, Microsoft, and Saudi Aramco. Not to mention, cornerstone financial institutions such as BNY Mellon, PayPal, and MassMutual have shown an unprecedented appetite for cryptocurrencies, accelerating Bitcoin’s adoption into the global financial system.

Finally, how could we forget Coinbase’s bombastic public listing? The offering, which valued Coinbase at a whopping $100 billion2, signaled yet another major milestone in Bitcoin’s maturity. Coinbase, the world’s largest crypto exchange, commanded a valuation over two times greater than Nasdaq Inc, the parent company of the Nasdaq Composite, which — ironically enough — hosted $COIN’s direct listing.

Yes, I know— I’m complaining about valuation again. Before you start drawing the pitchforks, and this is not investment advice, take this into consideration:

Coinbase, on average, will trade $3-$4 billion worth of crypto a day ($1.5 trillion per annum). Nasdaq, by comparison, is expected to trade about $1.3 trillion of European equities alone in 2021. Then again, the appraisal of Coinbase, much less any cryptocurrency, appears to be beyond the comprehension of any traditional valuation methods.

To summarize thus far: A lot has happened in the crypto community since 2017. It’s all too much to fit into one newsletter, quite frankly. Fascinating new ventures are born every day as this technology continues to transform the economics of computing.

Yet, the thought persists: Why are Bitcoiners celebrating $BTC’s rise to $60,000? Sure, okay— As a bitcoin investor, bitcoin has been a remarkable investment. There are few, if any, asset classes that can hold a candle to bitcoin’s returns over this past decade. But, again, what does this mean for bitcoin’s utility as a crypto currency?

Fundamentally, returns are not a quality we seek in our currencies. An appreciating currency is inherently deflationary and would (in theory) reduce future expected consumption. Indeed, one could make the argument that we saw this dynamic unfold last spring. Prospective airline passengers were hesitant to purchase new flights on the possibility that they might turn even cheaper in the future. Renters, particularly in urban settings, delayed leasing new apartments in hopes of capitalizing on a reduction in prices. Meanwhile, as consumption plummeted, the dollar index hit a three year high.

Bitcoin, by extension, is a deflationary asset relative to government-issued currencies. In general, people don’t purchase goods with bitcoin because the price of a bitcoin is up over 3 million percent since 2011. In fact, the aversion towards spending your bitcoins (opposed to saving, or HODLing it) stems from an infamous folktale within the crypto currency community.

The first ever recorded bitcoin transaction took place on May 22nd, 2010. A man exchanged 10,000 bitcoin for two pizzas, or the equivalent of about $40 during that time. Today, those two pizzas live in infamy, with an estimated present—day value of over half a billion dollars.

Za: Can you guess what kind of pizza was purchased?
Answer at the bottom.

Curiously, despite Bitcoin’s advances since 2011, bitcoins still serve as a rather poor medium of consumption. On average, bitcoin transactions take 10 minutes to settle— although that duration will vary depending on the level of traffic on the Bitcoin blockchain. What’s more, bitcoin market volume appears to move in lockstep with price, incurring potential liquidity risks should a “race for the exit” ever occur. In other words, the higher bitcoin loads, the more people will trade it. Conversely, one could expect volume to plummet should the price of bitcoin decline. This is a perilous flaw in the bitcoin market microstructure.

Bitcoin’s validators are compensated in bitcoins. Intuitively, a drawdown in $BTC would attract fewer validators to the Bitcoin network, which would make it more difficult to transact bitcoins at, or near, fair market value.

Sound familiar?

It should be noted — albeit with a grain of salt — that Bitcoin’s velocity, or the frequency at which it exchanges hands, has recently surpassed that of M1 money supply. Granted, monetary velocity has floundered since the onset of the coronavirus recession. Regardless, this occurrence poses an interesting question about the relationship between government “money—printing” and inflation... But that will have to be a conversation for another time.

Conclusively3, bitcoins fail to demonstrate currency—like characteristics. Rather, the sensitivity of bitcoin against varying macroeconomic backdrops indicates that bitcoins trade similarly to a‘risk—on’ asset. In turn, I subscribe to the belief that Bitcoin is the first in what is the new frontier of digital assets, serving as a “Proof—of—Concept” for future cryptographic technologies and applications.

Should bitcoin ever become money, however, a lot would have to change.

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Not A ForEx Scam

So if not Bitcoin, then who?

Ripple Labs, the parent company of XRP (“Ripple”) is one of the more controversial cryptocurrencies of our era. For starters, the company has ambitions of disrupting the colossal foreign exchange (“ForEx”) market. This will be no easy task — the ForEx market is the largest and most liquid of all the capital markets, reaching over $6.5 trillion in daily volume in 2019. For context, the NYSE traded roughly $47 billion in total volume on 4/27/21.

Ripple aims to disrupt this market using their XRP token in tandem with the RippleNet platform. RippleNet enables customers to cheaply and quickly exchange currencies via their mobile device, using the XRP token as the medium of exchange. On a grander scale, Ripple’s technology seeks to upend the market for foreign exchange services, helping both retail and institutional customers swap currencies.

Traditionally, on an institutional level, multinational companies will hire a bank or other financial intermediary to help hedge currency risk via the foreign exchange market. An oil company in Nigeria, for example, may be advised to purchase a currency swap or forward to hedge against a decline in the naira. While this practice helps businesses forecast future costs and revenues, it remains extremely costly and carries perilous tail risk.

In the consumer vertical, foreign exchange services have mainly been used by expatriate laborers who send remittances to their home countries via a money transfer service (Read: Western Union, Money Gram).

This service, however, faces a similar dilemma to institutional ForEx. In this situation, expatriate workers require a means of wiring money internationally, yet are limited in their options (although, there are certainly no shortage of startups looking to supply one). It is not uncommon for money—transfer services to offer unfavorable exchange rates and corrosive fees on simple cash transfers. Not to mention, the additional costs incurred in sending money to the underbanked always seems to penalize those who can least afford it.

That all said, it is not hard to see why people are hungry for alternatives.

Ripple’s most notable partnership is held with Banco Santander, one of the world’s largest banks by assets. Banco Santander has been particularly vocal about their partnership with Ripple, as Ripple’s blockchain serves as the engine driving Santander’s One Pay FX platform. According to the bank, customers from across 6 different countries have exchanged a total of over €450 million since the program’s inception. Besides Santander, Ripple assists hundreds of other financial companies their international payments across over 50 different countries.

Interestingly enough, Ripple was one of only a few cryptocurrency—oriented businesses with registered members advising on ISO 20022, the new international, standardized manual on business payments. Other registered members include some of the world’s largest central and multinational banks, regulatory bodies, and financial technology companies. However, two of Ripple’s listed members have since left the company — presumably because of this:

FOR IMMEDIATE RELEASE
2020-338

Washington D.C., Dec. 22, 2020 —

The Securities and Exchange Commission announced today that it has filed an action against Ripple Labs Inc. and two of its executives, who are also significant security holders, alleging that they raised over $1.3 billion through an unregistered, ongoing digital asset securities offering.

I’ve never seen The Wire, but I do know that if you come at the king, you best not miss. Besides the premise that Ripple might be an unregistered security, XRP is simply an unlikely candidate to become a widespread medium of exchange. First, the token has revealed itself to be prone to manipulation and unwanted volatility. Ripple’s protocol, unlike Bitcoin’s, is centralized, or in this case, privately managed by Ripple Labs. The company, despite the aforementioned allegations of manipulation, has full discretion over the circulation of XRP tokens. Keep note: Total supply is capped at 100 billion tokens.

There is a strong argument to be made that the structure of Ripple’s enterprise effectively defeats the purpose of cryptography. Additionally, you could make a similar (albeit weaker) argument that Ripple is a FinTech company masquerading behind an ICO... but I digress.

King in the Castle: Where does Ripple rank amongst other cryptocurrencies in terms of market capitalization? Can you name the top 5 cryptocurrencies by market capitalization? Answer below.

By this point, one could make the fair assumption that I am a cryptocurrency pessimist. Rest assured, I am not. The ecosystem for cryptography is still quite young and exposed to growing pains. To be frank, we may look upon this letter in the future and laugh at antiquated this thought process is...

... And it may happen sooner than we think! The People’s Bank of China is apparently close to releasing their own digital currency in the coming weeks. Naturally, however, that is a conversation for another time.

Trivia

Za: The Bitcoin pizza was ordered through Papa John’s in 2011. Papa John’s, unfortunately, did not have the foresight to add BTC to their balance sheet.

King in the Castle: Ripple is the fourth largest cryptocurrency by market capitalization. The Top 5 are as Follows:

1) Bitcoin

2) Ethereum

3) Binance Coin

4) Ripple

5) Tether

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**None of this should be taken as investment advice. Do your own research or speak with an advisor before investing in emerging or frontier markets.**

Sorry — Next longform piece out next week. I’ve been getting carried away with some programming projects.

Hopefully will be able to share some soon!

— Tom

Bloomberg: Huarong Bonds Drop After Report Regulators Consider Restructuring

The declines follow a three-day rally in the firm’s dollar bonds that accelerated Friday after China’s financial regulator said that the bad-debt manager was operating normally and had ample liquidity. The statement, made after a regular briefing in Beijing, were the first official comments since the company jolted Asian credit markets by missing a deadline to report preliminary earnings on March 31.

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A potential restructuring or default for China Huarong would be the nation’s most consequential since the late 1990s. Any signs that Beijing is rethinking its support for a central, state-owned firm like China Huarong would have deep repercussions for the broader dollar bond market. The company is majority owned by China’s Ministry of Finance and is deeply intertwined with the nation’s $54 trillion financial industry.

Financial Times: Xi warns against economic decoupling and calls for new world order

Xi did not name the US in his 18-minute speech but he took aim at Washington’s efforts to decouple supply chains and bar critical American semiconductors and other high-tech goods from being sold to Chinese companies such as Huawei.

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Despite the geopolitical tensions, US businesses are eager to expand operations in China, which posted 18.3 per cent year on year economic growth in the first three months of 2021. US banks in particular have been keen as Beijing gradually opens up its financial markets.

Western executives scheduled to participate in the Boao Forum included Apple chief executive Tim Cook, Goldman Sachs president John Waldron, Tesla boss Elon Musk and Stephen Schwarzman of Blackstone.

Indian Premiere League Standings

Royal Challengers Bangalore will face-off against the Chennai Super Kings this upcoming Sunday, April 25th.

The Economic Times:  Flipkart likely to bag Cleartrip for $40 million in distress sale

Flipkart is finalising the acquisition of Cleartrip, one the oldest travel booking portals in India, two people in the know said, as the Walmart-owned online retailer continues to make strategic investments across sectors to strengthen its portfolio and build an ecosystem around it.

The Flipkart-Cleartrip deal, which will be a mix of cash and equity, is likely to value Cleartrip at around $40 million in what is considered to be a distress sale for the 15-year-old Mumbai firm amid the pain that the pandemic has inflicted on the travel and hospitality industry.

Riyadh Bureau: Saudi Arabia to localise all jobs in malls

Latest official data show that unemployment among Saudi citizens fell to 12.6% in the fourth quarter from 14.9% in the third quarter of 2020, returning to pre-pandemic levels as the government relaxed coronavirus restrictions and gradually allowed the resumption of economic activity.

Last year saw as many as 129,000 expatriates leaving the kingdom on final exit visas, while 74,000 Saudi men and women joined the workforce during the same period, according to figures released by the General Organization for Social Insurance.

Unemployment will continue to be the most difficult problem vexing the crown prince’s economic reform plans, and the aforementioned numbers are leaving many observers scratching their heads.

South China Morning Post: It’s Indonesia’s ‘Silicon Valley’, but has Algorithm Hill done the maths?

Creating a Silicon Valley-style tech hub is central to President Joko Widodo’s vision of ushering in a fourth industrial revolution built on advanced technology and human resources in time for 2045, when the country will celebrate 100 years of independence.

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“We are still seeing digital inequality in Indonesia. There is a gap between Jakarta and other areas, particularly in the eastern part of Indonesia. This shows that we need to allocate some of the resources to those areas so their productivity can increase, and Indonesia’s GDP per capita can rise,” said Cuaca of East Ventures. 

Indonesia’s internet economy is the largest in Southeast Asia. Its value is projected to reach US$124 billion by 2025, up from US$44 billion last year, according to a joint report by Google, Temasek, and Bain & Co.

Twitter

Wall Street Journal: Germany’s Conservatives Select Chairman as Election Candidate

Ms. Merkel, one of the longest-serving democratic leaders of the postwar era, will bow out of politics after 16 years as chancellor in September.

Armin Laschet, chairman of Ms. Merkel’s Christian Democratic Union and state premier of North-Rhine Westphalia, will lead the bloc’s election bid.

Mr. Laschet has generally supported Ms. Merkel’s centrist, sometimes left-leaning, brand of conservatism. He has backed her liberal asylum policy and her championing of economic ties to China and Russia despite U.S. objections.

Ray Dalio’s Principled Perspectives: Why in the World Would You Own Bonds When…

Author’s Note: This post is from 3/15/21.

Consistent with this classic cycle there is now a shifting from US bonds to Chinese bonds going on. Chinese bond holdings held by international investors are rising fast, though they are now only about 6% of allocations in global portfolios. This shift is going on because

a) global investors are overweighted in US bonds and underweighted in Chinese bonds relative to sensible criteria of what weights should be based on sensible portfolio-weighting processes, such as the relative sizes of their economies, their relative shares of world trade, and the relative sizes of their capital markets,

b) Chinese bond and other capital markets investments are growing fast and are increasingly open to foreign investment,

c) Chinese bonds offer relatively attractive yields with relatively attractive currency returns because of China’s favorable balance of payments conditions, and

d) China’s currency is increasingly being internationalized.

The Week Ahead:

Sunday — 🇳🇿 🇦🇺 ANZAC Day, 🇪🇬 Egyptian Liberation Day;

Monday — 🇸🇬 Singapore, 🇮🇱 Israel Industrial Production; 🇫🇮 Finnish PPI; 🇵🇱 Polish, 🇮🇱 Israeli Unemployment; 🇲🇽 Mexican Economic Activity; 🇧🇷 Brazilian FDI; 🇰🇷 S. Korean GDP; 🇯🇵 Bank of Japan Interest Rate Decision;

Tuesday — 🇩🇰 Danish, 🇱🇹 Lithuanian, 🇯🇵 Japanese Retail Sales; 🇸🇪 Swedish Unemployment, PPI; 🇭🇺 Hungarian National Bank, 🇸🇪 Riksbanken, Interest Rate Decision; 🇧🇷 Brazilian, 🇦🇺 Australian CPI; 🇺🇸 U.S. New Home Sales; 🇲🇾 Malaysian Trade Balance;

Wednesday — 🇳🇴 Norway, 🇸🇪 Sweden, 🇮🇪 Ireland, 🇱🇻 Latvia, 🇨🇦 Canada Retail Sales; 🇭🇺 Hungarian Unemployment; 🇹🇭 Thailand Industrial Output, 🇦🇹 Austrian Manufacturing PMI, 🇳🇿 New Zealand Trade Balance; 🇺🇸 U.S. Federal Reserve Interest Rate Decision;

Thursday — 🇩🇰 Danish, 🇪🇸 Spanish, 🇩🇪 German, 🇯🇵 Japanese Unemployment; 🇸🇪 Swedish, 🇱🇻 Latvian, 🇺🇸 U.S., 🇧🇪 Belgian, GDP; 🇮🇹 Italian, 🇬🇷 Greek, 🇿🇦 South African, 🇦🇺 Australian PPI; 🇯🇵 Japanese, 🇨🇳 Chinese PMI; 🇮🇸 Iceland, 🇧🇪 Belgium, 🇩🇪 German, 🇯🇵 Japanese CPI, 🇧🇼 Botswana, 🇪🇬 Central Bank of Egypt Interest Rate Decision; 🇰🇷 S. Korean Industrial Output;

Friday — 🇫🇷 French,🇩🇪 German, 🇪🇸 Spanish, 🇦🇹 Austrian, 🇨🇿 Czech, 🇮🇹 Italian, 🇵🇹 Portuguese, 🇹🇼 Taiwanese, 🇱🇹 Lithuanian, 🇨🇦 Canadian GDP; 🇨🇭 Swiss, 🇪🇸 Spanish Retail Sales; 🇫🇷 French, 🇦🇹 Austrian, 🇭🇺 Hungarian PPI; 🇳🇴 Norwegian, 🇨🇱 Chilean, 🇨🇴 Colombian Unemployment; 🇮🇹 Italian CPI; 🇨🇴 Bank of the Republic Interest Rate Decision; 🇰🇷 S. Korean and 🇿🇦 South African Trade Balance

Hey everyone — I’ll have a piece on cryptocurrencies & the FX Market out next week.

Enjoy the weekend.

Tom

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South China Morning Post: Biden’s US$50 billion for US chip industry puts South Korea on the spot with China

Samsung and SK Hynix together control more than two-thirds of the market for memory chips that handle an ever-expanding sea of data, while in Taiwan, Taiwan Semiconductor Manufacturing Company (TSMC) supplies processors that power Apple’s iPhones and Google’s artificial intelligence technology.

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South Korea’s semiconductor exports stood at US$99 billion in 2020, 60 per cent of which went to China and Hong Kong, he said.

TSMC and Samsung were among the companies invited to a White House discussion on Monday when Biden described his proposal, and this was widely seen by observers as an implicit message they should build more plants in the US.

Samsung is reportedly considering ploughing US$17 billion into a new chip plant in Austin, Texas, in addition to its foundry factory there.

Financial Times Opinion ($): Dollar threatens the emerging markets party

Before the pandemic, emerging markets interest rates were higher than those in major economies to compensate investors for taking more risks. Currencies in EM economies tend to be more volatile and vulnerable to sudden shocks than the dollar or the euro. But in 2020, central banks across the world moved in concert to slash rates to near zero, leaving little to tempt investors.

The key question is how they respond and how fast. Ed Al-Husseiny, a senior rates and currencies analyst at Columbia Threadneedle, says South Africa, Brazil and others will have to raise rates much faster than before to keep inflation in check and stop their currencies plummeting. But raising key rates too fast can kill off budding economic recoveries.

“The Fed is priced for no hikes this year but the market expects a four percentage point hike in Brazil, that’s how bad it is,” Al-Husseiny says. “EM central banks cut rates last year and they’re now paying the price.”

alizila: A Letter to Our Customers and to the Community

Author’s note: Alibaba was issued a $4 billion fine for anti-competitive practices last week. That figure is equivalent to 95% of $BABA’s 2019 CapEx, or 20% of EBITDA.

Today Alibaba Group received the Administrative Penalty Decision issued by the State Administration for Market Regulation (SAMR) of the People’s Republic of China. We accept the penalty with sincerity and will ensure our compliance with determination. On this occasion, the entire team at Alibaba would like to express our gratitude to the trust and patience that our merchants, consumers, partners and shareholders have given us. We would like to share our thoughts and plans for the long-term healthy development of our business in the future.

——————————————————

Alibaba would not have achieved our growth without sound government regulation and service, and the critical oversight, tolerance and support from all of our constituencies have been crucial to our development. For this, we are full of gratitude and respect.

Reuters: China factory gate prices rise by most in nearly 3 years as economic recovery quickens

China’s producer price index (PPI) rose 4.4% in annual terms, the National Bureau of Statistics (NBS) said in a statement, far above a 3.5% rise forecast in a Reuters poll and up sharply from a 1.7% increase in February.

—————————————

China’s consumer price index (CPI) rose 0.4% from a year earlier in March, the statistics bureau said in a separate statement, beating a median forecast for a 0.3% rise in a Reuters poll and returning to inflation after two months of price falls. CPI fell 0.2% year-on-year in February.

Falling food prices, especially for pork, continued to drag on consumer inflation last month, according to a note from an NBS official released alongside the data.

Keeping Up With India: The Cat is Out of the Bag

Tiger Global Management, the NY-based American Investment Fund, has been quite active in India of late. Just last week, they participated in four investments in the country that would value each company over $1B dollar - CRED on April 6th, Groww on April 7th, ShareChat and GupShup on April 8th.

—————————————

But Tiger isn't alone in propping up the venture market in India. This by far has been the buzziest and busiest the industry has been since 2015, though there is a key difference this time around - we might actually get a couple of public exits in 2021. If 2019 and 2020 were years when Seed rounds in the country were exploding, 2021 certainly seems like the year where Series A and growth stage firms are chasing companies who are growing quickly and on a breakout trajectory and pre-empting future rounds.

Baseball Updates

We’re Talkin’ Baseball: Los Angeles Angels Superstar Shohei Ohtani hails from which NPB Team? Answer listed below.

Twitter

Bloomberg Green: Secrecy and Abuse Claims Haunt China’s Solar Factories in Xinjiang

Almost no one outside China knows what goes on inside these factories, or two others elsewhere in Xinjiang that together produce nearly half the world’s polysilicon supply. State secrecy cloaks the raw material for a green boom that researchers at BloombergNEF project will include a nearly tenfold increase in solar capacity over the next three decades. Solar is set to grow by about a quarter this year after record installations in 2020 backed by almost $150 billion in investment. That means millions of homeowners buying solar panels everywhere face moral uncertainty: Embrace the green future, and you have no way of knowing if you're purchasing products made by forced labor and dirty coal.

—————————————

That corporate pride about uplifting the poor people of Xinjiang turns to secrecy when journalists show up. A policeman stood at the government office near the Xinte facility, and two men carrying leather briefcases stepped out from a gray car following behind. A guard at the complex said all the polysilicon executives were busy in a meeting. “Don’t take any pictures,” he said.

The Straits Times: Grab nabs world's biggest SPAC deal but traders hold their applause as market fervour eases

As it stands, the blockbuster tie-up would be the largest special purpose acquisition company (SPAC) merger ever, dwarfing the one announced between Lucid Motors and Churchill Capital IV in February, valued at US$24 billion. The transaction is expected to close in July and the company will trade at the Nasdaq with the catchy symbol GRAB.

But investors do not seem much interested in seizing this SPAC opportunity.

Shares of Altimeter SPAC rose on the day merger rumours surfaced, but modestly relative to others, and they have since fallen towards pre-announcement trading levels in the latest example of Spac market pain.

Trivia Answer:

Shohei Ohtani played for the Nippon-Ham Fighters for 5 seasons before joining the Angels.

The Week Ahead:

Sunday — 🇮🇱 Israeli GDP, 🇯🇵 Japanese Trade Balance, Industrial Production; 🇦🇪 UAE CPI;

Monday — 🇮🇱 Israeli Interest Rate Decision; 🇨🇴 Colombian Trade Balance;

Tuesday — 🇬🇧 British, 🇷🇺 Russian Unemployment; 🇩🇪 German, 🇨🇿 Czech, 🇰🇷 Korean PPI; 🇷🇺 Russian Retail Sales; 🇳🇿 New Zealand CPI; 🇮🇩 Bank Indonesia Policy Rate Decision;

Wednesday — 🇬🇧 British, 🇿🇦 South African, 🇨🇦 Canadian CPI; 🇵🇱 Polish PPI, Industrial Output; 🇨🇦 Bank of Canada Interest Rate Decision; 🇳🇱 Dutch Retail Sales;

Also: Tiradentes Day (🇧🇷 Brazilian Markets Closed); Hung Kings Festival (🇻🇳 Vietnam Markets Closed); Ram Navami (🇮🇳 Indian Markets Closed);

Thursday — 🇵🇱 Polish Retail Sales, 🇹🇼 Taiwan, 🇲🇽 Mexican, 🇭🇰 Hong Kong Unemployment; 🇦🇷 Argentine Industrial Activity; 🇯🇵 Japanese, 🇲🇾Malaysian CPI; 🇯🇵 Japanese PPI; 🇪🇺 ECB Interest Rate Decision;

Also: 🇮🇸 Icelandic National Day;

Friday — 🇸🇬 Singapore, 🇭🇰 Hong Kong CPI; 🇺🇸 U.S. 🇩🇪 German, 🇫🇷 French PMI; 🇬🇧 British, 🇲🇽 Mexican Retail Sales; 🇱🇹 Lithuanian, 🇹🇼 Taiwanese,🇦🇹 Austrian Industrial Production;

Hey everyone — Trying something new out.

Rest assured, I’m working on the next long-form piece as we speak.

Enjoy the weekend.

— Tom

Bloomberg: Jokowi Doubles Indonesia’s Wealth Fund Goal to $200 Billion

That’s double the $100 billion target set earlier this year, and a long way from the fund’s $15 billion start. The fund has been in talks with 50 fund managers and has received pledges from those in the United Arab Emirates, Japan, the U.S. and Canada, which will help it grow to $20 billion in six months, the president said Wednesday.

Home to the world’s largest nickel reserves, Indonesia is determined to climb up the value chain and become a hub for end-to-end battery-making. It recently set up its own electric vehicle battery holding company and is seeking joint ventures with several global players, including China’s Contemporary Amperex Technology Co. Ltd. and South Korea’s LG Chem Ltd.

Almost Daily Grants: Arrears Window

The Kingdom of Saudi Arabia ran a $79 billion fiscal deficit last year, equivalent to 12% of GDP (nearly triple 2019’s shortfall relative to output), while FX reserves fell to $438 billion as of Jan. 31 from a $730 billion high water mark in September 2014.  Awash in red ink, the government responded last year by tripling the value added tax to 15% and raising its self-imposed cap on sovereign debt to 50% of GDP from 30%. 

———————————————————

Meanwhile, bin Salman told reporters last Tuesday that he is counting on local enterprises to invest $1.3 trillion in capital spending into the Saudi economy over the next decade, with Aramco and Sabic kicking in 60% of those funds.  In exchange for that generous donation, Aramco could decrease its $75 billion in annual dividends, the vast majority of which accrue to the state government.  

Prospective dividend relief could prove a temporary boon for the oil giant, and a further dose of stress for government bean counters. Last year, Aramco paid the Kingdom a total of $110 billion across dividends, royalties and income taxes.  That’s not only far in excess of the $49 billion in net income and free cash flow generated in 2020, but also a material chunk of the Saudi government’s $272 billion state budget last year.

Pekingology: Josh Rogin's WashPo column & book misrepresents a U.S. diplomatic cable from Wuhan

Author’s Note: Pekingology is written by Zichen Wang, who is recognized as Chinese state media. Wang is contesting Josh Rogin’s recent column that suggests COVID—19 was derived from the Wuhan Institute of Virology. I figured it’s only fair to share both perspectives.

The cable was now public, and I hate to repeat this, but please note all the indirect information quoted above is what Rogin and others telling you what the cable says. He wouldn’t let the cable do its own talk, again.

On the Politico Magazine’s web page, there was a link to Rogin’s column, but not to the full cable.

A bit on the other cable, which Rogin didn’t obtain when writing the column: the U.S. Consulate in Wuhan, after visiting WIV again, sent another cable back home three months later, in April 2018. You can access it on the State Department’s FOIA page

The Acquirer’s Podcast: African Value: Adrian Saville on pan-African and frontier investing

TC: You have this unusual feature in South Africa that you’ve got a very large tech stock in Tencent. What’s the update on Tencent?

AS: Well, if you’re an active manager, it’s an absolute curse because Tencent initially was held through a company called Naspers. Naspers acquired substantial stake in Tencent many years ago, and that has become a huge component of the broad Johannesburg Stock Exchange making up more than 25% of the index. When I give that example, I’m reminded of Nokia. In a way, Nokia became the single stock expanding 80% of the index. If you get it right, you look like a superstar, if you get it wrong, you look like an idiot. That makes a very strong case for actually indexing, just owning the index basket. To get to your question more exactly, Naspers has been under a lot of pressure to try and release the trapped value because Naspers trades at about 50% or 50 cents on the dollar of its Tencent valuation. There’s no good reason for this, why would have traded that type of discount?

Twitter

Financial Times ($): South Korea’s LG to exit global smartphone business

LG’s fortunes in the smartphone market stand in sharp contrast to Korean adversary Samsung, which has surged into pole position globally. LG shipped 23m phones last year compared with 256m for Samsung, according to Counterpoint.

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The company is expected to shift more of its resources towards the fast-growing electric vehicle components business, taking advantage of its ties with affiliates including battery leader LG Energy Solution, display maker LG Display and camera module supplier LG Innotek. The company plans to launch a joint venture with automotive supplier Magna International in July to make components for electric vehicles.

Reuters: Turkey inflation above 16% in test for new cenbank chief

Turkey’s annual inflation climbed above 16% in March for the first time since mid-2019, data showed on Monday, piling pressure on the central bank’s new chief to maintain tight policy after his surprise appointment sparked a lira selloff.

———————————

Annual rises were driven by energy and imports, which raised transportation-related prices by nearly 25%.

According to a February forecast, the central bank expected a maximum of 17% inflation in March and a bit more in April. Analysts predict it will rise through April, when Goldman Sachs expects it to peak at 18%.

Financial Times: Put a focus on Greensill’s ‘prospective receivables’

Author’s Note: The FT published an open letter from Sanjeev Gupta of Greensill infamy regarding the allegations of fraud against the supply chain financier.

As has already been reported in the press, many of Greensill’s financing arrangements with its clients, including with some of the companies in the GFG Alliance, were “prospective receivables” programmes, sometimes described as future receivables.

—————————————

Therefore, although RPS Siegen GmbH was a company identified as a potential customer of Liberty Commodities, it is not one currently. We note that, as reported in the financial press, Bluestone has described similar arrangements with Greensill in its public court filings in the US. We look forward to seeing Greensill’s response to Bluestone’s complaint.

The Week Ahead:

Monday — 🇮🇳 Indian CPI;

Tuesday — Ramadan🕋; 🇺🇸 U.S. CPI; 🇰🇷 S. Korean Unemployment; 🇸🇬 Singapore GDP;

Wednesday — 🇪🇸 Spanish, 🇸🇰 Slovakian, 🇸🇪 Swedish, 🇮🇱 Israeli CPI; 🇦🇺Australian Unemployment; 🇰🇷 S. Korean Interest Rate Decision;

Thursday — 🇩🇪 German, 🇫🇷 French, 🇮🇹 Italian, 🇵🇱 Polish, 🇸🇦 Saudi, 🇦🇷Argentinian CPI; 🇬🇷 Greek Unemployment; 🇨🇳 Chinese GDP; 🇺🇦 Ukraine,🇹🇷 Turkey interest rate decision;

Friday — 🇪🇺 Eurozone CPI; 🇷🇺 Russian PPI

Hi everyone — Apologies for the pun at the top. I’m going to try something new next week so bear with me.

This one is long, so feel free to skip around or come back to it later. I think you all will enjoy it!

— Tom

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Much Ado About Central Banking

Why are central banks so boring?

Because they have low interest rates!

I’ll see myself out...

Lately, interest rates and central banking have become the topic du jour across global capital markets. Indeed, the collective fiscal reaction to the COVID recession has spurred ceaseless debates about the future of our global economy.

For some, the unprecedented levels of fiscal stimulus and monetary easing paint a bitter picture of our economic future — a future stymied by hyperinflation and currency debasement. In contrast, others have celebrated the emergence of a new policy regime, underscored by the principles of Keynesianism and government intervention. Surely, the outcomes of the CARES Act has shown us that targeted fiscal stimulus can be extremely effective in achieving certain (nominal) policy outcomes — especially compared to the efficacy of monetary policy.

Make no mistake, however: this is an experiment with an indefinite realized outcome. Then again, of course, we’ve learned not to get too comfortable with our conventional economic wisdom.

When considering the implications of monetary policy, it’s imperative to remember that not all policy rates are set equally. We explore below:

Brazil

South America’s largest economy has seen calmer days, to say the least. For starters, the coronavirus appears to be an after-thought for Bolsonaro and his administration, despite a perpetuating climb in daily cases and deaths. President Bolsonaro, who had once boasted the highest approval rating of any world leader last year, has seen his fandom vanish following a series of scandals tied to his administration. Keep in mind — corruption was a key “pain point” during Bolsonaro’s victorious 2018 campaign, as the infamous Lavo Jato animated the Brazilian electorate.

Speaking of Lavo Jato... former President Luiz Inácio Lula da Silva (Better known as “Lula”) was relieved of his corruption charges last month on the basis of a “biased jurist”. Justice Minister Sergio Moro, the jurist who had served Lula’s sentence in 2018, was ominously promoted to Minister of Justice not too long after Bolsonaro’s presidential victory.

As of this writing, Lula is the favorite to win the Brazilian General Election, which is scheduled to take place next year on October 2nd, 2022.

Onto central banking...

• The other week, the Banco Central do Brasil (BCB) lifted interest rates (the SELIC rate) for the first time since 2016.

• Inflation printed 5.20% in February, prompting the Central Bank’s committee (the Copom) to hike rates by 75bps versus consensus estimates of 50bps.

• The current SELIC rate is 2.75%.

• Brazil’s Ibovespa is down over 3% year-to-date.

Financial Times: Inflation fears prompt Brazil to lift rates for first time in 6 years

Before the decision, Alberto Ramos, Latin America chief economist at Goldman Sachs, said a normalisation of monetary policy was “in order” in Brazil, but there was “no reason to hit the panic button at this stage”.

“It’s a balancing act between an economy that’s weak and [inflation] headwinds that have intensified in the short-term,” he said. “They can’t really hike too much because the economy is pretty weak.”

—————————

A steeper Selic may also provide some support to the exchange rate, which has weakened as investors worry about government spending and borrowing levels. The Brazilian real is among the worst-performing major emerging market currencies this year.

William Jackson, chief emerging markets economist at Capital Economics, said fiscal concerns “have made foreign investors wary about investing in Brazil”.

“The other is that real interest rates are so low, probably minus 1.5 to minus 2 per cent,” he added.

Russia

Once again, Russian President Vladimir Putin and the Russian Federation have found themselves at the heart of an egregious infraction of democracy and human rights. The attempted assassination (and eventual imprisonment) of Kremlin critic Alexey Navalny has reminded the world of how illiberal Russia’s “democracy” really is.

As anticipated, the Kremlin has deflected all accusations of wrongdoing, even going so far as accusing the long-time Putin critic (who Putin almost exclusively refers to as a “blogger”) of poisoning himself with a Soviet-Era nerve agent. Before his arrest, Navalny had released a 2-hour documentary (shown above) featuring a $1.5 billion palace allegedly owned by President Putin. As of this writing, the video has over 115 million views.

Nevertheless, Putin’s blatant nihilism towards democracy and the rule of law has incensed the Russian populace. In late January, protests broke out across nearly 200 cities to protest Navalny’s imprisonment, resulting in over 1,600 arrests. Curiously, amidst the peak of the protests, large swaths of the country lost access to social networking platforms like YouTube, Twitter, and Google. While Russian authorities have attributed this outage to a datacenter fire, Google has challenged these claims.

Fortunately, the world’s stewards of democracy are familiar with the malice of Putin’s regime. Last month, the European Union invoked the “Magnitsky Act” in issuing sanctions on Russian nationals involved with Navalny’s poisoning. U.S. Secretary of State Antony Blinken would follow suit shortly thereafter, invoking the breadth of the U.S. Chemical and Biological Weapons Control and Warfare Elimination Act of 1991 in levying sanctions on those same Russian officials.

Democracy Reigns: The Magnitsky Act was lobbied by which famous British/American investor? Answer below.

Central Banking? I’m glad you asked!

• Last Friday, the Central Bank of Russia (CBR) issued a rate hike of 25bps, the Bank’s first hike since 2018.

• Russian CPI grew 5.7% in March, the fastest pace since 2016. Similarly, December real wages grew 4.6% (YoY) vs. forecast estimates of a -1.5% contraction.

  • The CBR’s decision stems from a rapid acceleration in inflation expectations. The bank’s current inflation target is 4.00%.

• The Ruble has depreciated ~3.25% against the dollar and is unchanged versus the Euro since the beginning of the year.

• Following the hike, the CBR’s key rate stands at 4.50%, just above all-time lows.

Bloomberg: Russia Surprises With Rate Hike, Signals More to Come

The central bank considered a bigger increase on Friday, but decided that policy changes should be gradual, Governor Elvira Nabiullina, who was wearing a brooch in the shape of a hawk, said at a news briefing after the decision.

“Time is of the essence,” she said. “If you postpone a rate hike, inflation may accelerate and inflation expectations won’t decrease. This will move inflation further from the target and that will require a more significant rate hike in the future.”

The ruble climbed and 10-year bond yields rose to their highest level in a year.

——————

The threat of new U.S. sanctions has clouded the outlook for the ruble, which could add new inflationary pressures in coming months. Relations between Russia and the U.S. reached a new low this week after U.S. President Joe Biden vowed to make the Kremlin “pay a price” for election interference.

Turkey

The Republic of Turkey is notorious for espousing some rather paradoxical monetary philosophies. Specifically, Turkish President Recep Tayyip Erdoğan is a vehement opponent of high interest rates, believing that higher rates, not lower rates, beget inflation. Of course, conventional economic theory (and the struggles of the Turkish Lira) would contend that belief. Yet, Erdogan, who once referred to higher interest rates as “the mother and father of all evil” has squashed any semblance of monetary hawkishness.

The other week, the Central Bank of the Republic of Turkey (CBRT/TCMB) hiked their seven-day repurchase rate by 200bps, reaching a near-world-high of 19.00%. Erdogan was clearly displeased with the Bank’s decision, as he fired Naci Agbal two days following the rate hike. For context, Agbal was Turkey’s third Central Bank governor in the last two years.

Erdogan’s hawkishness persists despite reeling double-digit inflation and economic deterioration. Turkish inflation has averaged 14% per annum and economic output is down roughly 20% from its 2013 highs. Sure, the Turkish economy eked out a nominally positive growth rate in 2020, but at what cost? The Lira has depreciated considerably against developed market currencies like the Dollar and the Euro.

What else? (Central Banking)

• The Central Bank of the Republic of Turkey (TCMB) hiked rates by 200bps last Friday. The current 1-week repo rate stands at 19.00%.

• Through 3/31/21, the Borsa Istanbul 100 shrank 6%.

  • Garanti (BIST: GARAN) — Turkey’s largest bank — is down 32% YTD. BBVA, one of South America’s largest banks, owns a 49% stake in Garanti’s business.

• Şahap Kavcıoğlu, Turkey’s new Central Bank governor, has committed towards keeping Turkey’s policy rate above the rate of inflation.

Al Jazeera: Turkey’s new central bank boss to hold talks with bankers: Report

In his less than five months in the job, Agbal had increased the key rate to 19 percent from 10.25 percent, including a 200 basis point rise on Thursday to head off inflation near 16 percent and a recent lira slide.

His hawkish stance lifted the lira from record lows beyond 8.5 per dollar in November, dramatically cut Turkey’s CDS risk measures and started to reverse a years-long trend of funds abandoning local assets.

The lira had gained more than 3 percent since Thursday’s rise.

Daily Sabah: Policy rate to remain above inflation, Turkish central bank chief says

"The high levels of inflation and inflation expectations in the current period require a strict monetary policy stance," Central Bank of the Republic of Turkey (CBRT) Governor Şahap Kavcıoğlu told the bank's annual general assembly meeting in the capital Ankara.

"We will continue to use all the tools we have, independently and effectively," Kavcıoğlu said, reiterating the commitment to bring inflation down to 5%.

Everyone’s a Dove

Quite frankly, the aforementioned countries pose an exception to most of the central banking activity occurring across the world. Generally speaking, central bankers have been extremely accommodative with regards to the coronavirus recovery. As of this writing, thirty countries carry a key rate of 0% while another nine countries yield an uninspiring 25bps. Collectively, over 50 of the world’s central banks offer a benchmark yield lower than 1%.

Yet, if we are to take central bankers at their word, rates should remain this way for the foreseeable future.

Real Interest: Can you name three other countries which issued rate hikes so far in 2021? Answer below.

Deflation? In this Economy?

Yes, quizzically enough, deflation still poses a risk for segments of the world economy, despite the largess of fiscal and monetary aid. Granted, much of this peril can be loosely traced to the dismal recovery of the Eurozone Crisis — although that is a topic for another time.

Nevertheless, the Eurozone is still teetering on deflation, as the EU recorded five straight months of price contraction last autumn. While the bloc has shown an improvement in CPI growth this year, ECB President Christine Lagarde remains devoted to the Bank’s asset purchase program(me), scooping up bonds at a clip of roughly €20 billion per month. This, however, has been futile in compressing European yields. Spain, Greece, Italy, Germany, and France have all seen their 10yr yields soar by over 30bps this year.

Fundamentally, this represents a rise in inflation expectations — generally a good thing for a disinflationary economy like the E.U! However, ECB leadership has been adamant in their desire for lower yields, believing that looser monetary policy would engender stronger real economic growth. Then again, this thesis has yet to play out in their favor.

Also, European rates have been so breathtakingly low for so long that this ongoing “bond selloff” really doesn’t mean all that much1. Indeed, the cardinal risk to the Eurozone’s recovery lies within the inefficacy of their tools. This isn’t to say that the ECB is constrained in their open market operations (there is nominally no limit as to how much debt the Bank could add to its balance sheet). Rather, the question is as to what tools the E.U. could leverage in achieving its goals. Investors, economists, and government officials alike are gradually losing confidence in the potency of quantitative easing as a method of stimulating growth.

Perhaps there is a French translation for “stimmy”?

Market Insider: Christine Lagarde calls rising bond yields 'undesirable' as ECB steps up purchases to soothe the market

European Central Bank chief Christine Lagarde said on Thursday the recent rise in bond yields could have an "undesirable" impact on the economic recovery, after the ECB announced it would ramp up the speed of its asset purchases to try to calm the market.

The Eurozone's central bank left its coronavirus bond-buying envelope at 1.85 trillion euros ($2.21 trillion) and its key interest rate at -0.5%. But it said it would "significantly" step up the pace of its purchases within the asset-buying scheme over the next three months.

Lagarde said in a press conference after the decision that the ECB was responding to a rise in "market interest rates" including bond yields, which have climbed rapidly in recent weeks and weighed on market confidence.

"If sizeable and persistent, increases in these market interest rates, when left unchecked, could translate into a premature tightening of financing conditions for all sectors of the economy," she said.

Of course, the ECB is not alone in their dovish endeavors. The Bank of Japan (the dove-iest of all dovish central banks) has maintained a similar consistency in their easing strategies — again — to little avail. Indeed, Japanese inflation has averaged a mere 0.10% since 2000, considerably lower than the Bank’s long-term target of 2%. In pursuit of this metric, the BoJ has accrued a balance sheet totaling over ¥700 trillion in assets, equivalent to about $6.5 trillion in dollar terms.

Then again — the swelling size of central bank balance sheets doesn’t seem to scare anyone anymore — and why would it? Inflation is all but present in the world’s largest economies, despite continued asset purchases and monetary easing. Thus, it begs several questions: How effective are these programs? Are we wrong about economic theory? If these programs continue to be ineffective, how much longer will they continue? And how will they unwind?

Recently, the BoJ quietly retreated from their ETF purchasing program, relieving themselves of a ¥6 trillion annual commitment towards ETF purchases. Mind you, this does not mean the Bank is completely halting their operations. Instead, the BoJ claims they are rescinding these commitments to ensure greater flexibility in their relief efforts. Historically, the BoJ has forayed into the equity markets when the market falls 50bps during the morning session2. Nevertheless, one might ask if this decision reflects the Bank’s acknowledgement of the inability to stimulate inflation through the equity markets.

What’s more, there is also concern as to how this program will eventually unwind. As of early March, the Bank of Japan is sitting on a $120 billion capital gain, representing roughly 7% of the entire Tokyo Stock Exchange.

MarketWatch: Bank of Japan drops stock-buying target

On Friday, it dropped the ¥6 trillion target but reiterated it was ready to step in with larger purchases if needed. It said the higher purchase limit, previously described as a temporary pandemic response, would continue even after the pandemic subsides.

The move came after a rapid rise in stock prices over the past year that has brought the Nikkei Stock Average near a 30-year high. As of March 1, the BOJ's stockholdings were worth more than $450 billion, according to NLI Research Institute, making it the single largest holder of shares in the Tokyo market.

————————————

The BOJ said the 10-year Japanese government bond yield could move more freely around its zero target. It said it would let the 10-year JGB yield move in a range between minus 0.25% and plus 0.25%. The target range, put in writing for the first time, compared with previous verbal guidance that put the band roughly between minus 0.2% and plus 0.2%.

Indonesia’s economy, in a similar light, has been crippled by their own disinflationary dilemma. Last summer, Indonesian CPI contracted for three consecutive months, driving undesired tailwinds behind the Indonesian Rupiah and signaling Indonesia’s first recession since 1997. What’s more, despite countless reductions in Bank Indonesia’s key rate and the unveiling of a new treasury purchasing program last spring, the nation has yet to meet the central bank’s target of 2—4% inflation. Not to mention, a meager CPI reading in February prompted Bank Indonesia to cut their 7-day repo rate to an all time low of 3.50%.

We’ve spoken previously about the role of foreign exchange in economic development. Disinflation (not to be confused with deflation) is especially perilous for an emerging economy as a country risks pricing themselves out of their economic advantages. In Indonesia’s case, the undesired strength of the Rupiah has obstructed their economic recovery as Indonesian exports grow more expensive on an exchange-adjusted basis. Since April 2020, the Rupiah has appreciated 10% against the Dollar, 12% against the Yen, and 2% against the Renminbi. Concurrently, Indonesian exports fell 6.2% through July of last year as GDP is expected to contract by roughly 2% in 2020.

Finally, tourism — one of Indonesia’s chief economic engines — has effectively vanished, depressing the country’s economic potential and hampering the country’s long—term developmental goals. Foreign visits were down over 80% in February versus the year prior.

Despite the clear messaging from Indonesia’s central bank, investors and economists alike are forecasting at least one rate hike from Bank Indonesia in 2021, as forthcoming inflation will likely persuade the central bank to hike rates earlier than anticipated. Similar to other 10yr treasuries found across the globe, the Indonesian 10yr has soared above 6.75%, from 6.00% in January.

Surely, Bank Indonesia must be working on their own “Dot Plot” to help quell the ongoing bond selloff.

Trivia

Democracy Reigns: Bill Browder, the founder of Hermitage Capital Management, is known as the architect behind the Magnitsky Act. Browder details his journey in getting this act implemented and passed in his memoir Red Notice.

Real Interest:

Georgia (50bps — 8.5%)

Zambia (50bps — 8.5%)

Burundi (60bps — 6.6%)

Ukraine (50bps — 6.5%)

Kyrgyzstan (50bps — 5.5%)

The Global Capitalist

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**None of this should be taken as investment advice. Do your own research or speak with an advisor before investing in emerging or frontier markets.**

Hey everyone, thank you all for the kind feedback on the Taiwan letter. If you haven’t read our conversation with Michael Tatarski, I highly recommend checking it out!

As a reminder, your input and suggestions are always welcome.

Thank you all again for your continued support!

— Tom

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Coming to America

This will come as a surprise to few: The United States of America is far and away the world’s largest importer of goods and services.

In 2020, the U.S.A. bought an estimated $2.4 trillion dollars worth of foreign goods. By comparison, the second largest country by imports, the People’s Republic of China, purchased roughly $2 trillion of goods in 20191. The third largest country by imports would be Germany, who underwrote $1.1 trillion worth of imports in 2020. If you’re keeping up with the math, the spread between American imports and German imports is larger than the total sum of German imports.

Yet, does this surprise anyone? American obsession with foreign goods is deeply embedded in our consumerist culture. We’ve grown familiar with the “Made in _____” labels we find on our clothing tags and plastics. Our media and popular culture endows a higher status upon those who own foreign cars or clothing, compared to a domestically manufactured equivalent. Plus, how could we ever forget the perpetual discourse surrounding “re-shoring” American manufacturing?

Fundamentally, all of this makes sense in the meta-game of economic development: A highly developed country, like the U.S., is primarily boosted by a robust services sector. Service businesses, by definition, do not require the production nor exchange of tangible goods. Consequently, these businesses are able to operate at comparatively higher margins than their industrial counterparts. Industrial businesses, by contrast, often command high maintenance costs and large capital expenditures. The capital-light nature of a services economy enables the private sector to abundantly reinvest earnings into the greater economy in the form of intangible expenditures like R&D, education, and healthcare.

In other words, service businesses are more likely to make large investments into human capital. People-oriented businesses (services) are generally more profitable and can achieve positive economic (albeit immeasurable) returns on these expenditures. In contrast, industrial companies are limited in their ability to invest into similarly ambitious projects2, as their margins are comparatively lower and their operations warrant large expenditures into tangible, fixed assets like property and equipment.

Of course, there are exceptions — the most notable being South Korea, a country which leveraged the industrial prowess of Samsung and Hyundai to catapult themselves into the blooming society it is today. That’s a story for a later time.

Hyund—Ayy: Hyundai Motors originally got its start in what line of business? Answer below.

All of this being said, the dichotomy between service-driven and industrial-driven economies underscores a greater dilemma within modern-day economic development. The opportunity cost of procuring an elevated standard of living, buttressed by a thriving services economy, is interwoven within the friction and costs of doing business in that nation.

For instance, consider the landscape of foreign direct investment (FDI) into the United States: Despite a countless number of multilateral trade deals and partnerships, we have seen a deterioration of America’s manufacturing and industrial capabilities. The U.S. shed over 5.5 million manufacturing jobs between 2000—2017 and since 20013, over 60,000 American factories have shut their doors.

To clarify: This is not to say that the U.S. is a poor business landscape, nor is this really an indictment of globalization. Rather, the process of outsourcing is a function of efficient capital allocation. Owning and operating a manufacturing plant in a foreign country not only carries economic advantages, but enkindles more multilateral trade agreements and commercial symbiosis.

The oil marketplace is a great example of this dynamic. Despite being the world’s largest producer of oil, the U.S. imported nearly $200 billion worth of mineral fuels in 2019 — $13 billion worth coming from the Arab Peninsula4 and another $100 billion coming from Canada & Mexico. In response, the Arab peninsula purchased upwards of $40 billion worth of American goods that year, including $13 billion worth of machinery and $2 billion worth of weaponry. Our North American neighbors were also generously reciprocal: In 2019, Mexico and Canada imported nearly half a trillion worth of American goods, including $31 billion worth of vehicle parts and $137 billion worth of machinery.

War Dogs: Which countries are the largest buyers of U.S. weapons? Which countries sell the most weapons to the U.S.? Answer below.

All of this said, the pursuit of a capital-light economy carries plenty of unintended consequences. The charts shown above tell a story on how a country risks “pricing—out” job creation and investment when relegating labor to emerging economies. NAFTA, as an example, bolstered the development of Mexico’s auto—industry, albeit at the cost of U.S. manufacturing jobs.

Conversely, one could contend that NAFTA rescued America’s ailing auto industry. Prior to the agreement, Japan’s innovative automakers were swiftly consuming their share of the U.S. auto market. General Motors, the largest American automaker at the time, saw their share of the U.S. auto market shrink from 45% in 1980 to 34% in 1989. Meanwhile, the likes of Toyota and Honda had more than doubled their market share over that same timeframe. By the end of the decade, the Honda Accord had become the best selling car in the United States, despite the company only operating one plant in the country.

Happy Honda Days: Honda’s first U.S. manufacturing plant was based in which U.S. city? Answer below.

In its own perplexing manner, it was America’s own cutthroat consumerism which accelerated the demise of American auto—manufacturing. U.S. automakers simply could not keep up with the economic allure of Japanese cars, thus prompting allocators to find more efficient, profitable destinations for their capital.

This was (is) a good thing! This is how capitalism, especially on a global scale, is built to function.

The Mexican economy has progressed considerably since 1994, North American automakers are reaching a substantially larger customer base, and U.S. consumers are paying less for their automobiles. Certainly, there is also a convenient element in having your southernmost neighbor produce your cars at a fraction of the cost.

It’s also worth mentioning: The U.S. auto-manufacturing industry was anything but ready for a resurgence of American production. Quite frankly, had it not been for NAFTA, Ford and General Motors would’ve shifted their production to China much earlier than realized.

Which brings us to our next point...

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Where in the World is my Playstation 5?

And the seaborne freight industry is tapped out. The Port of Los Angeles, the busiest in the U.S., is operating above what is considered full capacity in a normal market, JPMorgan Chase & Co. analyst Brian Ossenbeck said in a note Monday.

“There’s no fast way to recover there,” [Bob] Biesterfeld said. “There are no extra ships sitting around waiting to be deployed.” Customers that normally could book a container days before shipping now have to act weeks in advance. Some companies in desperation are turning to more-expensive air freight.

“We’re running weekly charters today from the EU to the U.S. and from Shanghai to the U.S., just to keep up with the incremental demand coming from our customers,” he said. “The demand is pent up and it continues to remain strong.” — Bloomberg

We spoke about Taiwan the other week, particularly how their chip-making dominance has aggravated the already—soured relationship between the U.S and People’s Republic of China. While Taiwan is a particularly unique situation, this dilemma epitomizes the fragile nature of our international supply chain. Aside from semiconductor scarcity, we’ve seen shortages in shipping containers, plastic bags, and even beer cans. Speaking of which — has anyone checked the commodities index lately?

The disarray gripping our industries has garnered the attention of the world’s most prominent lawmakers. In late February, President Biden signed an executive order mandating an 100-day investigation into America’s most critical supply chains, stressing a concerning dependency on “rival” nations. The private sector has certainly perked up in response to this initiative: American multinationals like Intel and Ford Motors have been vocal in their support for a return to American manufacturing. That is, of course, if it is accompanied by lucrative tax breaks and incentives.

The U.S. is not alone in this endeavor: German Chancellor Angela Merkel contentiously passed the “Supply Chain Act”, which seeks to repel German manufacturers away from nations who abuse human rights. Following suit would be the Commonwealth of Australia, who unveiled their Modern Manufacturing Initiative geared towards shoring—up Australia’s minerals sector. Finally, in the People’s Republic of China, CCP leadership is hoping to improve China’s lackluster semiconductor capacity with a $2.5 billion joint venture alongside SMIC.

We touched upon the eventual “de—coupling” of global supply chains sometime last year. Based upon the sentiment conveyed during China’s Two Sessions, this trend should continue over the coming years.

For those who may not be aware, China’s Two Sessions (Lianghui in Chinese) is the Middle Kingdom’s most significant political event. Each , the country’s leadership lays out specific economic, social, and legislative goals for the year ahead.

This year’s conference was particularly significant, given that China was one of the few major economies that grew in 2020. Thanks to strong gains in public infrastructure spending and industrial output, the People’s Republic of China saw GDP expand by 2.3%. Strangely, CCP leadership had lamented the type of growth keeping their economy afloat. As Michael Pettis articulated on the Odd Lots podcast, the Middle Kingdom has stressed their intention to pivot away from an industrial—oriented economy (“low-quality” growth) towards a consumption and investment oriented economy (“high-quality” growth). However — as we’ve now learned, the transition into a “consumer” economy comes with countless costs and burdens.

The question is, can China afford it?

Trivia

Hyund-Ayy:

Hyundai, coincidentally enough, got its start in construction. Hyundai would foray into other business lines thanks to generous subsidies under President Park Chung Hee.

War Dogs:

Data from Observatory of Economic Complexity

Happy Honda Days:

Honda’s first manufacturing plant was located in Marysville, Ohio. Go Buckeyes!

The Global Capitalist

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**None of this should be taken as investment advice. Do your own research or speak with an advisor before investing in emerging markets.**