Saturday, September 25, 2021

Weekend reading links

1. More on the share buybacks by Wall Street giants, especially the technology firms.

Microsoft’s share count has fallen by almost a third since the tech bubble two decades ago — even after taking account of all the new shares handed to employees or used in acquisitions... Apple has spent nearly $450bn since it began the repurchases in 2013. Its shareholders may one day look back and regret that it did not risk a slice of that money on some entirely new market, like automaking, but few currently question its level of investment in a broad range of technologies... IBM, Oracle, Intel and Cisco have each reduced their outstanding share count by between 40 and 50 per cent since the tech bubble... Oracle’s enterprise value may have crept up by only a quarter since the start of the millennium but, thanks to the falling share count, its stock price has almost doubled... IBM has bought back about half of its stock since the peak of the tech bubble, but its share price is roughly the same level it started the millennium at. Failing to invest enough at the dawn of the cloud computing era has left it well behind the leaders, and catching up looks a stretch. IBM’s capital spending dropped to $2.6bn last year.

2. Mahesh Vyas points to a very striking data point about India's formal sector

In a country of over a billion adults, there are less than 80 million salaried jobs.

3. India middle class fact of the day, 

India sells 3.2 million new cars a year, about the same in used cars and about 21 million two-wheelers a year. The average new car is $10,000, which is just one fourth of the US car price. The average used car price is $4,000. For scooters it is $1,000-1,500. Harley Davidson models in India start at Rs 10 lakh and go up to ₹50.3 lakh. “This is what Indians can afford. There are only 120-odd million households with an income between $7,700 and $15,400 and this is the real pool,” says Ravi Bhatia, director and president at Jato Dynamics, an automotive business intelligence firm.

Even the 120 million households number is questionable. 

4. Aswath Damodaran goes to the heart of the problem with the claim that ESG investing will enhance returns,

The notion that adding an ESG constraint to investing increases expected returns is counter intuitive. After all, a constrained optimum can, at best, match an unconstrained one, and most of the time, the constraint will create a cost.

And this on why ESG investing is a gravy train that has entrenched its rent-seeking ecosystem.

5. The controversy surrounding the World Bank's Ease of Doing Business rankings and its decision to end the survey is only the latest example of how high stakes rankings distort incentives. It will invariably trigger efforts to both game the data that feeds into the rankings and also pressure the rankers. 

This has important lessons for India which uses various rankings to foster competition among states. It's important that NITI Aayog be cognisant of similar efforts by all concerned. This also underlines the importance of keeping ranking parameters simple and easily observable. 

6. Fascinating account in the Times about the Israeli assassination of Mohsen Fakhrizadeh, who was leading the Iranian nuclear bomb program. Isreali agents had been chasing him for at least 14 years. The assassination story is, as the article describes, straight-out-of-science-fiction-story and involved a pre-positioned remote controlled machine gun. 

The operation’s success was the result of many factors: serious security failures by Iran’s Revolutionary Guards, extensive planning and surveillance by the Mossad, and an insouciance bordering on fatalism on the part of Mr. Fakhrizadeh. But it was also the debut test of a high-tech, computerized sharpshooter kitted out with artificial intelligence and multiple-camera eyes, operated via satellite and capable of firing 600 rounds a minute. The souped-up, remote-controlled machine gun now joins the combat drone in the arsenal of high-tech weapons for remote targeted killing. But unlike a drone, the robotic machine gun draws no attention in the sky, where a drone could be shot down, and can be situated anywhere, qualities likely to reshape the worlds of security and espionage...
Israel chose a special model of a Belgian-made FN MAG machine gun attached to an advanced robotic apparatus, according to an intelligence official familiar with the plot... But the machine gun, the robot, its components and accessories together weigh about a ton. So the equipment was broken down into its smallest possible parts and smuggled into the country piece by piece, in various ways, routes and times, then secretly reassembled in Iran. The robot was built to fit in the bed of a Zamyad pickup, a common model in Iran. Cameras pointing in multiple directions were mounted on the truck to give the command room a full picture not just of the target and his security detail, but of the surrounding environment. Finally, the truck was packed with explosives so it could be blown to bits after the kill, destroying all evidence. 

There were further complications in firing the weapon. A machine gun mounted on a truck, even a parked one, will shake after each shot’s recoil, changing the trajectory of subsequent bullets. Also, even though the computer communicated with the control room via satellite, sending data at the speed of light, there would be a slight delay: What the operator saw on the screen was already a moment old, and adjusting the aim to compensate would take another moment, all while Mr. Fakhrizadeh’s car was in motion. The time it took for the camera images to reach the sniper and for the sniper’s response to reach the machine gun, not including his reaction time, was estimated to be 1.6 seconds, enough of a lag for the best-aimed shot to go astray. The A.I. was programmed to compensate for the delay, the shake and the car’s speed. 

This follows the killing of Maj Gen Qassim Suleimani, the leader of the Iranian elite troops, Al Quds, in January 2020 in a US drone strike with help of Israeli intelligence. 

7. Graphical summary of the 16 year Merkel era in FT. While there is no doubt that her reign was associated with a dramatic resurgence in the country's economic fortunes, this about immigration will remain one of her most contested legacies - Germany absorbed more than 1 million of the refugees fleeing war in Afghanistan, Iraq, and Syria. 

8. The rising influence of China in the Gulf. Sample this,

Riyadh’s decision to use Huawei 5G in Neom, Crown Prince Mohammed bin Salman’s $500bn flagship development project to include a futuristic city, even though the “Americans were dead set against it”. The tech firm is already building its biggest overseas retail outlet in the kingdom as China cements its position as Saudi Arabia’s biggest trading partner. Over the past two decades, trade between the two has soared from less than $4bn in 2001 to $60bn in 2020, nearly half of which was Chinese imports... China has influence with [Saudi Arabia’s rival] Iran. It’s virtually Iran’s only valuable ally, so exceedingly important to Saudi Arabia... the US refusal to sell armed drones to Gulf states that has caused both Riyadh and Abu Dhabi to procure the weapons from China instead... US concerns that the sale of F-35 fighter jets to the UAE risks China gaining access to some of America’s latest military technology... And from a Gulf perspective, China offers something the US and other western powers cannot — an autocratic, state-led development model that resonates with the Gulf’s dynastical rulers.

9. Global housing prices (HT: Ananth) are at levels that has priced out the vast majority from home ownership, thereby triggering discontent across nations and scramble for all kinds of ideas to bring down prices. 

10. Akash Prakash points to the rise of shareholder activism and improved corporate governance in the Boards of listed Indian companies. Over the last fifteen years, the share of institutional investors in the equity of BSE 500 has risen from 25 to 35%, and abstentions in institutional votes has fallen precipitously from 90% to 10% in a decade. This is perhaps a good example of how progressive regulations released over the years have all started to finally show results. 

11. Tamal Bandopadhyay points to an existential crisis facing banking sector due to the twin headwinds on capital raising and technology. On the former, the glut of liquidity is making it easier for both customers and competitors like NBFCs to raise capital and cheaply at that. On the latter, the fin techs are disrupting and threaten to displace a significant share of bank's customers. 

Consider the capital deluge,

In the financial year 2021, corporations raised Rs 14.87 trillion from the market through bonds — 40 per cent higher than what they had raised in the previous year. Money raised through equity was Rs 5.91 trillion in 2021... Both the streams — corporate bond issuances and the equity issues — have gained further momentum in the current year.

This is at the heart of the problem,

Banks are allowed to raise deposits from the public and hence their cost of money is cheaper than the non-banking financial companies (NBFCs). Since they raise cheap money, they must have an exposure to the weaker section of society or the “priority sector” up to at least 40 per cent of the loans they give. Besides, they also need to keep 4 per cent of their deposits with the regulator in the form of cash reserve ratio (CRR), on which they don’t earn any interest, and buy government bonds to the extent of at least 18 per cent of deposits. That’s the Grand Bargain. The deluge of liquidity has changed all equations. It’s advantage well-run NBFCs now. How? The cost of money for the best-managed banks is between 4 and 4.5 per cent. Add to this at least 2 percentage points fixed cost (for branches, technology, wage bill and others). This makes the cost 6-6.5 per cent. In contrast, the best-rated NBFCs have around half a per cent fixed cost, and they have been raising one-year money at around 4.2 per cent. Indeed, banks can do many things which NBFCs cannot do, but when it comes to lending, banks today have clearly a 1.5-2 per cent disadvantage on cost of money vis-à-vis the best NBFCs. This is excluding the cost of reserve requirements. If you are running a sweetmeat shop, will you manage a dairy for milk supply or buy milk from the market? Banks are running a dairy (which has its cost for processing milk), while NBFCs are buying milk from the market.

12. On oil prices in India

India’s retail price for petrol is currently among the highest in the world in terms of US dollar per litre. Care Ratings has an interesting take on how to realistically gauge comparative petrol prices across different countries. The rating agency believes that a comparison with the price of a staple item such as milk is more appropriate. This comparison shows that, in India, the ratio of petrol price to milk ($ per litre for both) is the highest in the world—1.91.

13. Tax paid by technology companies in the US against those paid by the others

14. Livemint has some interesting data on the evolution of India's automobile market.

The market is concentrated in the largest two players - Maruti and Hyundai who have 68% combined share.

15. On household debt from the All India Debt and Investment Survey (AIDIS) released by the National Sample Survey Office (NSSO),

The average debt of rural households increased between 2012 and 2018. It grew by 84 per cent to almost Rs 60,000, and for urban households the equivalent increase was 42 per cent off a higher base, ending at over Rs 1.20 lakh. Debt, however, grew fastest for the urban self-employed in a period that included the twin shocks to the informal sector of demonetisation and the introduction of goods and services tax. Economists at the State Bank of India project that it has further doubled in the three years since the AIDIS data was collected in 2018, given the exigencies of the pandemic and the need to borrow to supplement sharply falling income in several areas. The debt-to-assets ratio has also deteriorated sharply between 2012 and 2018, indicating a greater fragility to the household balance sheet.

This has implications for the household consumption engine of India's economic growth,

Since the downturn in private investment in the 2011-12 period, it is clear that private consumption had become the main driver of the India story. Yet this consumption was essentially insecure, driven by the build-up of household debt. But even in this period, the growth rate of private consumption expenditure was slower than what it was between 2004-05 and 2011-12, and losing momentum throughout that period. Since then, there have been additional blows to this engine of growth. For one, the crisis in non-banking financial companies closed one major conduit for credit to households. The RBI’s consumer confidence surveys, meanwhile, indicated that perceptions of urban current income went into a decline from 2011-12 onwards. Growth momentum, which depends upon households diminishing savings and running up debt, is inherently unsustainable. It appears likely that the pandemic has pushed India to the moment of truth where this household debt-fuelled growth can no longer move forward. Research suggests that scarring from the pandemic will have affected those at the lower levels of the income distribution much more than those at the top, reducing the overall demand stimulus since it is that section that consumes more of its income. Without expectations from consumer demand, there is unlikely to be a revival in private investment either.

16. The Nikkei Asian Review has a feature pointing to the emerging new normal in demographics, declining global population or a baby bust,

The population growth rate reached a peak of 2.09% in the late 1960s, but it will fall below 1% in 2023, according to a study by the University of Washington, published last year. In 2017, the growth rate of people aged 15 to 64 -- the working-age population -- fell below 1%. The working-age population has already begun to drop in about a quarter of countries around the world. By 2050, 151 of the world's 195 countries and regions will experience depopulation. Ultimately, the study forecasts that the global population will peak at 9.7 billion in 2064 and then start declining... The University of Washington predicts that China's population will begin to drop from next year, and that by 2100 it will plummet to 730 million from the current 1.41 billion. By that same year, 23 countries, including Japan, will see their populations shrink to half their current levels or less... South Korea had about 272,400 births in 2020, and its total fertility rate was only 0.84 that year, the lowest in the world. If a country's TFR stays under 1.5 for a long time, it becomes almost impossible to raise it.

A long period of sustained decline, the first time ever, beckons. And its consequences are profound,

The new reality will create new dynamics -- already visible in some cases -- in areas from monetary policy to pension systems to real estate prices, to the structure of capitalism as a whole. As global population approaches its peak, many governments are increasingly under pressure to rethink their policies, which have so far relied mostly on demographic expansion for their economic growth and geopolitical power... Global population growth has slowed to 1%, and economic growth and inflation have both slowed to between 2% and 3%. Interest rates have fallen to historic lows, casting doubts over the sustainability of pension systems... Even with low-interest rates, capital investment will not increase if companies do not expect the economy to grow. The government can increase public investment, but this will only lead to an increase in government debt if the investments are not put to use. Continued stimulus measures probably won't make up for the effects of a declining population.

It raises the importance of immigration,

Without immigration, many advanced economies already cannot sustain their labor pool. In the U.K. after Brexit, the combination of immigration restrictions and the pandemic has led to a severe labor shortage. Before the pandemic, 12% of heavy truck drivers were from the European Union. However, drivers can no longer be hired from outside the country under the U.K.'s new standards. According to the British Road Haulage Association, the country faces a shortage of more than 100,000 commercial heavy truck drivers. Logistics companies are becoming desperate, raising hourly wages by 30%.

17. KP Krishnan points to the challenges with attracting and retaining talent with professional competence in financial market statutory regulatory authorities (SRAs),

The General Financial Rules (GFR) of the government mandate that organisations that receive more than 50 per cent of their recurring expenditure in the form of grants-in-aid should formulate terms and conditions of service of their employees in a way that they are not higher than those applicable to similar categories of employees in government. In exceptional cases relaxation may be made in consultation with the Ministry of Finance. Another rule of the GFR requires that all proposals for creation of positions in such bodies shall be submitted to the sanctioning authority.

Given the weight of history and the general risk aversion of civil servants, notwithstanding explicit provisions in a parliamentary legislation, in practice the executive instructions contained in GFR triumph over the provisions of statute. Sebi escapes this tyranny today as it is not a grant-in-aid institution and generates its own resources in accordance with the law establishing it... SRAs are a category that need autonomy in the area of human resources for ensuring both capability and integrity required to avoid capture. The Financial Sector Regulatory Reforms Commission recommendations in this context, fully empowering the board of the SRA on these matters, along with appropriate changes in the GFR is the way forward.

This applies just as much to certain public sector organisations too.

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