Saturday, October 19, 2019

Weekend reading links

1. The US withdrawal from oil-rich north-east Syria, paving the way for Turkish troops to attack the Kurdish forces which had been at the forefront of the successful war against the Isis, is certain to reinforce the geo-political recalibration happening in the region away from the US. Russia and Iran would be definite beneficiaries.

The Kurdish militia which ran the region named Rojava which was taken over after the defeat of the Isis, People's Protection Units (YPG), responded by striking a deal with President Bashar Al Assad in an agreement mediated by Russia. They invited the Syrian army to fight the Turkish army alongside them. This is a good primer on the issue and the roles of different countries.

2. FT points to the changing portfolio compositions of leading financial institutions, mostly driven by the world of low interest rates and the search for yields,
In addition to its traditional roles advising on mergers and trading debt and equities, Goldman is now: a venture capitalist investing in the likes of Uber and WeWork; a retail bank offering accounts and short-term loans to ordinary consumers; a credit card issuer in partnership with Apple; and a software developer with a suite of applications... Finance is full of companies uncomfortable in their own skins and trying to adopt more fluid identities. Blackstone, notionally a private equity firm, today makes more money from property. BlackRock, famous as one of the world’s biggest owners of public equities, is now getting into private equity buyouts. Elliott Management, an activist hedge fund, has ended up owning a football club, AC Milan, and two bookstore chains, Barnes & Noble and Waterstones.
Apart from straying into areas where they may have limited expertise, the other worrying thing is the illiquid nature of many of these assets, which in turn pose challenges of runs, as faced by the collapse of leading UK fund manager Neil Woodford following suspension of withdrawals after customers started demanding their money back.
This week’s Global Financial Stability Report from the IMF pointed to renewed risks from pension funds’ headlong rush into alternative assets. The allocation to alternatives such as property and private equity has risen from just over 5 per cent in 2007 to more than 20 per cent today.
3. In recent days we've had two similar financial market failures in India and UK.

In UK, Neil Woodford, the country's best known fund manager was ousted from all his investment vehicles following the collapse of his flagship £3 bn equity fund. It followed suspension of withdrawals by fund administrators after a flood of investors demanding their money back. An article in the FT writes,
The problems... began after he loaded up his flagship £3bn “equity income” fund with investments that provided no income. About a fifth of the portfolio was composed not of the dividend-paying public stocks that one would expect, but a rash of exotic private businesses such as Industrial Heat, a company whose nuclear fusion dreams have attracted Brad Pitt — and the scepticism of physicists. These instruments cannot be sold in a hurry and, in June, when Mr Woodford’s customers wanted their money back, the fund’s administrators suspended withdrawals and then, this week, decided to liquidate the assets, resulting in the end of the firm.
And this,
Mr Woodford became a household name during 26 years at Invesco where he turned £1,000 invested into more than £25,000. But he was later known for a reckless investment style, piling into illiquid and unquoted stocks, which led to the destruction of his clients’ savings. The Equity Income Fund was suspended in June after being crippled by relentless redemption requests and investment losses, sparking the biggest crisis in the European fund management industry in a decade and an investigation by the UK’s Financial Conduct Authority. Problems at the fund stemmed from its exposure to stocks that cannot easily be bought or sold.
In India, something similar happened with a regional co-operative bank, Punjab and Maharashtra Cooperative Bank (PMC). As news of RBI putting the bank under its direct control for six months emerged, the depositors rushed to pull out their money, forcing imposition of limits on withdrawals by the regulator. It also emerged that 73% of PMC's Rs 8,800 Crore loan book was exposed to just one account, Housing Development and Infrastructure Limited (HDIL), a real estate developer whose credit worthiness was already under the cloud. This was four times the regulatory cap on exposure to single entity.

The country's 1500 plus co-operative banks have dual regulation - by RBI on financial supervision and State government's Registrar of Co-operative Societies for bank management. But the influence of political leaders in the running of these banks erodes the professionalism in their management.

All this highlights atleast three things. One, financial market regulation invariably runs the risk of being behind the curve. Two, the widespread perception among opinion makers about Indian financial market regulators are especially inept does not quite square up with the pervasive similar failures in the most advanced markets. Finally, it underlines the need for financial market regulation. Asset management industry is among the most competitive segments of the financial market. Such competition could not keep the most high-profile asset manager in UK honest. This again questions the underlying ideological premise about the self-regulating nature of financial markets.

4. The Economist has an article which refers to Jevons Pradox, which argues that the more efficient use of a substance inevitably leads to higher total consumption. Sample this,
Vaclav Smil, a Czech-Canadian scientist, argued that as goods become lighter and cheaper the market for them explodes and, as Jevons predicted, increases demand for resources. The weight of the average mobile phone in 2011 was one-sixth what it had been in 1990. But the number of phones ballooned from 11m to 6bn. So the total mass of phones globally went from 7,000 tonnes to about 700,000 tonnes. Less, Mr Smil writes memorably, is “an enabling agent of more”.
5. The Economist on whether share options may have had the effect of lowering business investment and productivity,
The proportion of cash paid out to shareholders by non-financial American companies was 40.7% from 2000 to 2017, when share options became popular. Between 1947 and 1999, when they were not, it was 19.6%. As a corollary, the proportion used for investment fell.
6. Good survey in The Economist on the changing rules of the game in the world economy. Sample this about low inflation and why inflation targeting as a regime may be past its relevance,
The IMF counts among its members 41 countries in which monetary-policy targets inflation. Add in the euro zone and America (where the Fed has multiple goals), and you get 43. Of those 28 will either undershoot their inflation targets in 2019 or have inflation in the bottom half of their target range, according to the fund’s most recent round of forecasts. (When those forecasts are updated on October 15th, after this special report goes to press, that number will probably rise.) By GDP 91% of the inflation-targeting world is an inflation laggard on this measure.
It talks about the breakdown of the Phillips curve relationship between inflation and unemployment, persistence of low inflation despite massive increases in credit supply, and technology making inflation statistics unreliable.

Evidence about how global value chain integration contributes to synchronisation of inflation,
The recent growth in cross-border supply chains has created conduits along which cost changes in one part of the world flow into the prices of goods that emerge from factories elsewhere. Research by Raphael Auer of the Bank for International Settlements (BIS), Andrei Levchenko of the University of Michigan and Philip Sauré of Johannes Gutenberg University in Mainz has found that half of global synchronisation in producer-price inflation is attributable to prices that can be traced through supply chains. Via this mechanism the average country imports one-fifth of any change in inflation in the rest of the world. Prices are more intertwined in integrated trading regions such as America, Canada and Mexico... In other work with his colleagues at the bis, Claudio Borio and Andrew Filardo, Mr Auer finds that the greater a country’s integration into cross-border supply chains, the more inflation tracks slack in the global economy. If imports of inputs to production double as a share of GDP, the sensitivity of inflation to global economic conditions also appears to double. Messrs Ha and Kose and Ms Ohnsorge also find that global factors explain a greater share of inflation in countries which participate more in global supply chains.
Another long-held view being questioned is the belief in depreciating currency to boost exports.
And although in theory a falling exchange rate should at least boost exports, this effect is limited by the fact that so much trade is invoiced in dominant currencies like the dollar or the euro. Research by Gita Gopinath and Emine Boz of the imf and Mikkel Plagborg-Møller of Princeton University has found that a strong dollar tends to gum up world trade, as well as making dollar debts harder to repay. As a result, even emerging markets with independent central banks and floating exchange rates can appear to be at the mercy of international financial conditions, in particular the policy of the Federal Reserve.
7. From $47 bn in late 2018 to $8 bn apparently now, the fall and fall of WeWork valuation!

8. The post-IPO balance sheet of 2019!
9. Finally a very good article about the excellent satirical Malayalam cartoon characters, Bobban and Molly, which was part of the state's folklore for a long time. Thinking about it, one of the things that made Malayalam cinema stand-out, especially till perhaps the early noughties, was its very sensitive characterisation of real-world life issues. 

No comments: