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Saturday, March 2, 2024

Weekend reading links

1. Europe's counterpart to the American stock market's Magnificient Seven is the eleven companies dubbed Granolas

The crunchy acronym was coined by Goldman Sachs for pharma companies GSK and Roche, Dutch chip company ASML, Switzerland’s Nestlé and Novartis, Danish drugmaker Novo Nordisk, France’s L’Oréal and LVMH, the UK’s AstraZeneca, German software company SAP and French healthcare firm Sanofi. In the past 12 months the group has accounted for 50 per cent of gains on the Stoxx Europe 600 index, which hit a new high on Thursday, and for about half of all mergers over the past five years... The Granolas as a group have climbed 18 per cent over the past 12 months beating the Stoxx 600’s 7.5 per cent rise over the same period. Over the past three years, the Granolas have performed in line with the US’s Magnificent Seven... and with much lower volatility... The Granolas are more diverse than the exclusive tech focus of the Magnificent Seven. The top performer in the past 12 months is Novo Nordisk, which has been boosted by investor enthusiasm over its weight loss and diabetes drugs, and is up 69 per cent. The Granolas’ share of the Stoxx Europe 600 index has climbed to 25 per cent, approaching the Magnificent Seven’s 28 per cent weighting in the S&P 500. However, the European grouping, which has a combined market capitalisation of about $3tn, is dwarfed by its US peers, which have a combined value of around $13tn. The Granolas are cheaper than the Magnificent Seven on an earnings multiple, trading at 20 times next year’s forecast earnings, compared with the Magnificent Seven’s 30 times. Both sets of companies are widely seen as having strong balance sheets and healthy margins, and — despite European companies’ reputation for focusing on dividends — invest similar shares of cash flow into research and development and capital expenditure.
2. As it rides the demand for chips to train and run LLMs that underpin generative AI to breach the $2 trillion market capitalisation and become the third most valuable company in the world, Nvidia's margins have been rising spectacularly
3. As the Nikkei 225 regains its 1989 peak after 34 years, here's an important factoid that points to the possibility of a psychological barrier being broken. 
Japanese stocks this week finally surpassed the peak (only in nominal terms, mind) after a 17.5 per cent rise this year. The great question now is whether this will actually be taken by the endlessly patient Japanese public as marking the end of the post-bubble era. And, if it is, whether Japanese households decide it is time to channel some of their $7.7tn hoard of cash and deposits into domestic stocks that, even here, look cheap compared with those in the US. The Bank of Japan calculates that only 13 per cent of Japan’s liquid household assets are in equities, against more than 40 per cent in the US and 21 per cent in Europe.

4. Fascinating account of the spectacular rise of Lotus Bakeries and its Biscoff brand of caramelised biscuit and spread that has become a favourite of Gen Z. After decades of sleepy growth, the 92-year-old Belgian company's shares have boomed over the last decade. 

Group sales have risen three-fold since 2013, while those of Biscoff-branded goods have almost quadrupled as recipes ranging from Biscoff cheesecake to Biscoff espresso martinis proliferate on social media, particularly on TikTok, where they garner millions of views... The newfound popularity has propelled Biscoff into the top five biscuit maker globally by sales, according to the company, as the pandemic-accelerated snacking boom continues despite inflation pinching consumers’ budgets. The group, whose brands also include Nakd snack bars and Trek flapjacks, reported a 21 per cent rise in annual sales last year helping it surpass €1bn in revenue for the first time. Within this, sales of Biscoff-flavoured products hit a €500mn milestone, having also risen a fifth. Shares of Lotus Bakeries, which have more than tripled in four years rallied 20 per cent in a day earlier this month to a record high...

A brand version of Belgium’s speculoos — a spiced shortcrust biscuit — Lotus Bakeries has been based in Lembeke, a town close to the Dutch border, since 1932. Its recent burst of success can be traced back to 2009, when chief executive Jan Boone, then managing director, partnered with Christophe De Vusser, his schoolmate and former colleague at Bain & Co and now the incoming chief executive of the consulting group, to develop a business plan focused on internationalising the Biscoff brand. They were convinced that it could go further than traditional Belgian market because of its unique taste, long shelf life and low-cost production process. “Back then as a company, we said, ‘If we can create one global brand, I think we’ve done a good job,’” Boone, the grandson of the founder, told the Financial Times. “We obsessively managed Biscoff . . . and you see that focus really works out for the company.” 

In 2019 Lotus Bakeries opened its first US factory for Biscoff in Mebane, North Carolina, freeing up capacity in its Lembeke facility to pursue more markets in Europe including Germany and France. Starting with founder Jan Boone Sr, Lotus has long marketed its biscuits as a good accompaniment for coffee with Biscoff being a portmanteau of the words biscuit and coffee. “If somebody thinks about a coffee, we want them to think about Biscoff,” said Isabelle Maes, chief marketing officer at Lotus Bakeries. Its popularity has soared in recent years, boosted by increased demand during the pandemic for snacks and at-home baking as well as the explosion of user-made videos suggesting recipes. Boone said content on TikTok has helped convert the nearly century-old company into a “young and interesting” brand which it has capitalised on through partnerships with global brands including McDonald's, KitKat, and Krispy Kreme.

5. Fascinating article about the ageing fleet of wind turbines in Europe and the end-of-life dilemma it presents on whether to invest in upgrades or walk away from them.

About a fifth of the continent’s roughly 90,000 onshore turbines are at least 15 years old — and the normal lifespan of a wind farm with minimal maintenance is 20 years. In Spain, a pioneer of wind power in the 1990s along with Germany and Denmark, wind parks aged 15 or older are half of the total — the highest proportion in the EU, according to trade body WindEurope... What is best for the bloc’s electricity system — and indeed the planet — is not always the right choice for corporate owners. At the same time, there is pushback from local residents who do not want the vast structures in their backyard... Letting them expire would waste a valuable resource because the earliest wind farms are in prime sites with the strongest gales... Madrid, and the EU, are pushing for what experts call repowering: taking down the oldest turbines and using the same sites to erect cutting-edge new windmills, which are taller, more efficient and pump out more electricity. But the shift can be a costly, complicated process...

A typical 20-year-old machine, whose blade tips reach as high as 90 metres, generates 800kW. A new model produces 7,000kW with blades that rise to 240m or more, surpassing the height of the One Canada Square skyscraper in London’s Canary Wharf. A single rotation produces more energy than an average Spanish household consumes in a day. Because new turbines capture more wind, WindEurope estimates that repowering on average triples a facility’s annual electricity output (in gigawatt hours) with a 25 per cent reduction in the number of machines. Deloitte estimates that repowering could deliver two-thirds of the increase in wind capacity Spain needs to meet its 2030 targets... A repowering overhaul means sacrificing, for a time, the steady cash flow that operators earn from selling electricity... The simple alternative is to extend a turbine’s lifetime with a few replacement parts, whether that is new blades, gearboxes or generators. A carefully maintained existing machine can keep spinning for 35 or 40 years, but will not get the EU closer to its target of renewable power accounting for 42.5 per cent of overall energy consumption by 2030.

This dilemma comes on the back of the gradual disappearance of wind power subsidies, a bad year in 2023 for the wind industry, surging wind power costs in Europe since the pandemic, NIMBY hostility conflated with rural-urban divides, bird deaths, and litigation. 

6. The higher interest rates have sparked an interesting reversal of fortunes for US pension plans.

The average top 200 US corporate pension fund now has 105 per cent of the assets needed to fund its benefits, the highest ratio in 15 years, according to BlackRock, which has urged its corporate pension clients to consider reopening their plans.

This has triggered some thinking about opening up closed defined benefit pension plans, with IBM recently opening its long-closed DB plan to new participants.

Nearly half of large US employers still sponsor a DB plan, though only 21 per cent are open to new hires, according to consultancy Mercer. It recently surveyed chief financial officers and found that 65 per cent of other big companies with residual pension plans have considered reopening them and 88 per cent would do so if they could reduce their concerns about risk. Should interest rates go back down sharply, today’s surpluses would turn into liabilities. That’s a big driver of a parallel trend in the other direction that has seen a record number of US companies paying to offload their closed pension plans to insurers while rates are high.

There's a new option being considered,

Market-based cash-balance plans pool resources and offer the option of payments for life like a traditional pension, but the final payout is based on the plan’s investment returns, limiting the employers’ exposure. On the plus side for employees, each participant gets a personal account and can opt for a lump sum at retirement instead of a regular payment. To my mind, this is the best solution to date, as it shares the market risk while also giving employees an account balance they can check and control. Ideally, employers would follow IBM’s example by offering a supplemental 401k plan to allow employees to put in pre-tax dollars and benefit from long-term equity market growth.

7. Interesting reality-check about Indian startups.

India is proud that it has produced about 110 startup unicorns. Bravo. However, only 13 have faced the test of the public markets, accounting for just $1.5 billion out of a total of $4,200 billion; of the 13, only six are reported to generate positive operating cash flows, which is the most basic test of business acumen and success. All of these six positive-cash flow unicorns were founded around 2005, and have built an enterprise track record of almost two decades, and the average age of these six founders was 57 when they began.

8. Fine New Yorker profile of author Vaclav Smil.

The average American used two hundred and eighty-five gigajoules in 2012, he said, and two hundred and eighty-four gigajoules in 2022, despite significant efficiency gains in every category. And our record would look worse if, during the past few decades, American companies hadn’t shifted so much manufacturing to fossil-fuel-powered factories in Asia. This dilemma is easy to see on American roads. The best-selling vehicles in the United States last year were Ford F-Series pickup trucks (which for many drivers have taken the place of station wagons). As has often been observed, many models get roughly the same number of miles per gallon as the Ford Model T, which was first manufactured in 1908. But the reason is not that modern engines are inefficient. On the contrary, they’re so remarkably efficient that they now power vehicles that weigh multiples of what the Model T did, despite being loaded with power-hungry features and requiring comparatively little maintenance. In all our vehicles, no matter how they’re powered, improvements in energy efficiency often result in increases in curb weight. A Tesla Cybertruck weighs more than three tons; an all-electric GMC Hummer EV’s battery pack alone weighs almost a ton and a half, or roughly eight hundred pounds more than an entire Mitsubishi Mirage. Manufacturing those vehicles is energy- and raw-material-intensive, and it has devastating environmental impacts beyond adding to the atmosphere’s carbon load.

9. Vivek Kaul questions the premiumisation story about the Indian economy - a trend towards an increasing share of premium products in the consumption basket of consumers. Two data points are useful - the share of two-wheelers in the total vehicle population, and the volume of air travel compared to rail travel. This is about two wheelers

Further, as per the Road Transport Yearbook 2019-20, cars, jeeps and taxis formed 13.8% of vehicle population in 1991. In 2020, they formed 13.4% of the vehicle population. During the same period, the proportion of two-wheelers increased from 66.4% to 74.7%. So, three out of four vehicles are two-wheelers. This may have marginally changed in the last few years as two-wheeler sales have slowed down and cars may now form more than 15% of India’s vehicle population, but trying to pass this off as premiumization of the entire Indian economy is a little too much... Further, from April 2023 to January 2024, firms sold 14.97 million two-wheelers in the domestic market. If this pace continues they will end up selling close to 18 million units in 2023-24, significantly better than the 15.86 million units sold in 2022-23, but still well short of 21.18 million units sold in 2018-19. Also, entry level two-wheelers, like entry-level cars, aren’t selling well.

And this is about air and rail travel

From April to November 2023, the total number of passengers taking domestic flights stood at 101 million. If things continue at this pace, the number of domestic passengers in 2023-24 should cross 150 million, higher than the 2019-20 peak of 141.6 million... From April to September 2023, the latest data available, around 1.47 billion individuals travelled the Indian Railways. At this pace 2.94 billion passengers will travel the Railways by the end of the current financial year. Now, compare this to the more than 150 million passengers expected to travel by air. That is around 5% of non-suburban railway travel. How can any premiumization story not take the 95% into account? Also, 2.94 billion people will be lower than the 3.65 billion people who travelled in 2018-19 and 3.94 billion in 2012-13, but higher than 2.6 billion in 2022-23. In addition, as the Indus Valley Report of 2023 pointed out, 1% of Indians account for 45% of flights.

In another article, Rama Bijapurkar provides more data that questions the premiumisation of the economy. 

In the table, enthusiasts for defining the “middle class” are free to locate the middle class anywhere they think appropriate. What does not change is the modest expenditure levels vis-a-vis most other markets. While we await data on household characteristics by monthly per capita consumption expenditure (MPCE) class, using Kantar data the 4 million urban and 0.4 million rural households having car, air conditioners and laptops/PC probably fall into L5, and the 114 million households, equally divided between urban and rural areas, with a refrigerator, two-wheeler, and colour TV mostly belong to L2.
Also interesting is that in the richer band of L4, there are almost double the number of rural consumers than urban. L3, the bridge class of 100 million urban people, is likely what a lot of marketers empirically observe and create the “mild premium” segment for (and incorrectly bet large on it). Now to put some perspective into the Lamborghini discourse: A little over 100 Lamborghinis have been sold in a year in India. The equivalent number for Maruti Swift is over 200,000 and for all cars is 4.1 million. Lamborghini has sold 10,112 cars worldwide — so India’s 100 is certainly a big deal for them. But how big a deal is it for us to peg our consumption theories around? Secondly, even the 4.1 million new cars sold in this country are mostly bought by the richest 10 per cent of households with some spillover into the next 10 per cent.

Just 25 million people, in perhaps 6-8 million households, have annual consumption expenditure of above Rs 11.25 lakh!

All this also underlines the point recently made by Uber CEO Dara Khosrowshahi while on an India visit that Indian consumers are extremely demanding but are unwilling to pay for anything. He also indicated that Uber in India was currently serving the upper middle class. 

10.  Interesting statistic about the variations in the trends with fiscal devolutions over time

The share of the southern region (Andhra Pradesh, Telangana, Karnataka, Tamil Nadu and Kerala) in the divisible tax pool has declined from 21.1 per cent during 2000-05 (the award period of the 11th Finance Commission) to 15.8 per cent during 2021-26 (under the 15th Finance Commission). However, over the same period, northern states like Uttar Pradesh (including Uttarakhand) and Bihar (including Jharkhand) have also seen a fall in their share, though in lesser magnitude. Odisha, too, has seen a decline in its share. Among those who have gained are high income states like Gujarat and Maharashtra, low income states like Madhya Pradesh (including Chhattisgarh), Rajasthan and the Northeastern states, with the exception of Assam. This is not really a North-South divide as it is made out to be.

This on the declining divisible pool

Even as the states’ share in the divisible tax pool (tax collected by the Centre and shared with the states) has gone up from 29.5 per cent under the 11th FC to 41 per cent under the 15th FC, the divisible tax pool itself has shrunk. With the Union government relying more on cesses and surcharges to raise resources the divisible tax pool has shrunk from 88.6 per cent of Centre’s gross tax revenues in 2011-12 to 78.9 per cent in 2021-22 as per the RBI. As a result, states’ share has averaged just about 34 per cent of gross tax revenues.

11. Ruchir Sharma on the Indian equity markets

Since early 2023, the median stock is up more than 40 per cent... foreign money is flowing in, but not as fast as domestic money. As a result, foreign portfolio investors now own less than 40 per cent of the stocks that are available for public trading, down from 60 per cent a decade ago... The amount of money Indians hold in targeted investment plans has tripled this decade to nearly $110bn. Over the past two decades, the number of publicly listed companies in India multiplied by a factor of nearly five to 2,800, even as it was falling by a quarter to 4,700 in the US, where oligopolies began to exert a stronger grip on most industries, not just tech. Remarkably, 180 companies in India have tripled in value this decade and now have a market capitalisation of $1bn or more. That is more than in any other country, including the US. Most bull markets see excesses build up over time; in India, they are visible in subsets of the growing retail investor class. In 2023, Indians purchased more than 85bn options, or nearly eight times the volume in the US, and on average held those contracts for less than half an hour. Amid the frenzy, regulators ordered trading platforms to open with a warning that 90 per cent of retail investors are losing money on these trades.

12.  The Math premium in the UK

The £500,000 lifetime earnings premium that a maths graduate can expect relative to other graduates: this equates to more than 15 additional years of median earnings. Even those who do maths to A-level enjoy a 10 per cent earnings premium relative to someone else in the same job.

13, It'll be very interesting to see what happens in Javier Milei's experiments in Argentina!

A political outsider inaugurated in December on a promise to take a chainsaw to the state, Milei surprised Argentina by eking out the country’s first budget surplus in 12 years in January. That was achieved by slashing payments to provinces, freezing budgets and not uprating pensions and benefits fully for inflation, which was running at 254 per cent a year last month. Economists have warned that such drastic spending cuts may not be sustainable. But Milei, a former economist and TV pundit, believes that having brought down inflation from a peak of 25.5 per cent a month in December to 20.6 per cent in January and an expected 15 per cent in February, he can turn around the crisis-stricken economy this year without congress... 
According to a report by consultancy Invecq, nearly half of the fiscal adjustment the government made to reach a surplus in January came from not fully uprating pension and social spending for inflation, though some social security payments, such as food stamps and child benefit, have been increased. Analysts warn that the key to Milei’s success will be how long poorer Argentines, who have already endured runaway price increases, tolerate such measures. Argentina’s confederation of unions has already held a nationwide general strike against his government and several smaller protests have taken place.

It remains to be seen whether the admiration for his actions among free-marketers will remain once the consequences start to show. I guess, they'll then argue that the opponents sabotaged and diluted the actions of the President. 

14.  The problem with timing the stock market exits

Duncan Lamont, head of strategic research at Schroders, calculates that US stocks have been at a record high in 30 per cent of the 1,176 months going back to 1926. If anything, the market performs slightly better in the 12 months after a record is struck, churning out 10.3 per cent above inflation compared with 8.6 per cent the rest of the time. The adage that it is time in the market that matters, rather than timing the market, also holds. Resisting the temptation to jump out of stocks around the time of record highs delivers meaningful benefits. If you switch in to cash at those points, then over 10 years you lose 23 per cent of your wealth, he calculates.

15. Finally, one of the things with the US economy is its resilience. Times has an article that points to the possibility that easing of restrictions on immigration may have played an important role in boosting the economy.

A resumption in visa processing in 2021 and 2022 jump-startedemployment, allowing foreign-born workers to fill some holes in the labor force that persisted across industries and locations after the pandemic shutdowns... Net migration in the year that ended July 1, 2023, reached the highest level since 2017. The foreign-born now make up 18.6 percent of the labor force, and the nonpartisan Congressional Budget Office projects that over the next 10 years, immigration will keep the number of working Americans from sinking. Balancing job seekers and opportunities is also critical to moderating wage inflation and keeping prices in check. International instability, economic crises, war and natural disasters have brought a new surge of arrivals who could help close the still-elevated gap between labor demand and job candidates.

Thursday, February 29, 2024

The Norwegian economy proves the norm

National economies and their policies are a bundle of paradoxes and contradictions. While one can discern the broad direction of policy-making, simplistic labels like free market capitalist or green economy conceal more than they reveal. As the cliche goes, the world is rarely black or white. 

Norway is an interesting exhibit in this regard. It is perceived as a free market economy, has a special reputation for promoting peace globally, is a vocal supporter of the decarbonisation and green economy movement, and so on. Here is a more complex reality,

Norway, a nation of 5.5 million people, where energy represents about a third of economic output and where, not unlike Saudi Arabia, the government owns not only the oil and gas fields but also large stakes in companies extracting them. By increasing demand for this energy, the war in Ukraine has helped add about $100 billion to Norway’s oil and gas earnings... Energy companies made adjustments that increased gas production at the expense of oil. The result was an 8 percent increase in gas production last year, which made Norway the source of about one-third of the gas consumed in Europe...

Norway has reaped handsome financial rewards for coming to Europe’s aid. Just as energy companies like Shell and BP pulled in record profits last year, Petoro earned about $50 billion in 2022, almost three times what it made in 2021, and Equinor reported record adjusted earnings of $75 billion. Revenues from oil and gas contributed $125 billion to the Norwegian state in 2022, according to government estimates — about $100 billion more than in 2021. That money flows into a $1.3 trillion sovereign wealth fund formally called the Government Pension Fund Global but known to many as the oil fund. It holds, on average, 1.5 percent of 9,000 listed companies worldwide, and the government can tap its expected annual earnings to finance almost 20 percent of the state budget. This arrangement helps shield the Norwegian economy, which grew 3.3 percent in 2022, from the ups and downs of oil and gas prices... In 2020, the government put into effect temporary tax changes to ensure that the pandemic did not halt investment in the industry. These incentives have led to a burst of new drilling and development, worth an estimated $43 billion. An oil and gas company based outside Oslo, Aker BP, plans to invest $19 billion to increase output by a third by 2028... Hilde-Marit Rysst, the leader of SAFE, a union that represents 12,000 energy workers, said working on petroleum platforms was more stimulating and rewarding than the work available in the renewable energy industry. “You use your brain, your education and your experience,” she said. “It doesn’t look like you are going to get that from wind turbines.”

Consider these snippets

1. Norway's SWF contributes about 20% of national budget revenues!

2. All the oil and gas fields are owned by the government, and it also owns major shares in the oil companies!

3. Norway has been increasing its investments and capacities in oil and gas exploration, even as it has been at the forefront of the green movement!

4. For all its green signalling, Norway is as much an oil-gas economy as Saudi Arabia!

5. Finally, it may not be incorrect, in the final calculus, to argue that Norway may be the biggest financial beneficiary of the Ukraine invasion!

These paradoxes capture the messy realities of our world. As Ha Joon Chang and others have described eloquently with examples, examine the policies of any developed free-market economy today and you'll see traces of very active state involvement everywhere. It's disingenuous to prescribe privatisation of the extraction of your primary natural resources (mostly to foreign mining companies) as the only option, instead of encouraging the creation of effective governance arrangements. It can be argued that corruption from failed governance systems may be slightly less worse than corruption by mortgaging the country's natural resources to foreign interests. 

The irony about the reliance on oil and gas and its capacity expansion in the face of all talk about a green economy is stark. This dissonance between talk and actions is emblematic of many things about the energy transition. At a macro and global level, the ESG investing craze and its countless problems are the manifest examples. At the national level, the unrealistic push towards decarbonisation glosses over the bitter realities of social and economic adjustment costs associated with such shifts. 

That Norway may perhaps be the biggest beneficiary of the Ukraine invasion is the most striking irony. Europeans accusing India of buying Russian oil already overlook that the same refined oil finds its way back to Europe from India. This is just another reality check. 

Monday, February 26, 2024

Thoughts on Affordable Housing VII

Affordable housing is a very big problem across cities of the world. While there are several targeted policies to address it, including the construction of public housing, there’s enough evidence (see this), especially in the context of developed countries, to show that an increased supply of housing tends to benefit all income segments and increases housing choices for everyone

But there are two big constraints to increasing the supply of housing - restrictive zoning regulations and neighbourhood opposition to redevelopment permissions (or the NIMBY phenomenon). The former is a problem across cities of developed and developing countries. Since zoning regulations are highly centralised in many developing countries, NIMBYism is less of a problem in their cities. 

I have blogged in earlier posts in this series (hereherehereherehere, and here) about how cities and countries across the world have been trying to address the problem of affordable housing. This post will point to an Israeli innovation that combines the easing of building regulations and local participation but with an opt-out provision to overcome NIMBYism. It’ll also discuss the successes in Texas and elsewhere due to liberalised planning regulations. 

In the latest edition of Works in Progress, Tal Alster points to two housing schemes in Israel, known together as urban regeneration or UR, that have spurred densification by delivering one-third of the country's new homes and more than half of new homes in Tel Aviv. Being in earthquake zones, many Israeli homes need to be rebuilt to increase resilience. This has created opportunities for regeneration. 

Urban planning is more centralised in Israel than in many countries and the zoning approval process is lengthy. In 1999 the government enacted a program to incentivise redevelopment of dilapidated buildings and older buildings without earthquake resilience, called Evacuate and Rebuild, or Pinui Binui in Hebrew. In 2005 it introduced a second program, TAMA 38, that allowed apartment owners in buildings built before 1980 to collectively opt to let their buildings be rebuilt with extra floors and larger land footprints, with new apartments in the building being sold to fund the redevelopment. The main objective was to reinforce earthquake resilience in older buildings. The combined impact of the two programs has been dramatic.

From just two percent in 2010, urban regeneration programs – TAMA 38 and Pinui Binui combined – now account for 37 percent of Israel’s annual housing production. The data is even stronger in high-demand areas. In the Tel Aviv district, Israel’s economic heartland, more than 50 percent of new construction is now achieved through the densification and demolition of existing housing stock. Both schemes – Pinui Binui and TAMA 38 – at heart are based on an agreement to develop between homeowners and developers. Under TAMA 38, homeowners need only make an agreement with developers; under Pinui Binui, they must also go through a zoning and planning process with the municipal, or even the regional, government.

TAMA 38, historically and currently the more productive of the two programs, offers by-right development for buildings constructed before 1980 provided the existing property owners agree, making it relevant for tens of thousands of residential buildings in Israel. There are two main versions of the scheme: TAMA addition, in which the existing building remains, but is reinforced, and extra floors are added on top, along with added floorspace on the existing floors; and TAMA demolish and rebuild, where the entire existing building is demolished and replaced by another. Developers can also propose projects through TAMA 38 that apply to several adjacent buildings, requiring consent from each, but most schemes involve single buildings. Development done through TAMA 38 usually adds three floors to each building, including one set-back top floor, normally referred to as 2.5 floors. But article 23 of the plan allows municipalities some flexibility in adjusting the limits upward or downward to meet the local context. Some municipalities allow TAMA redevelopments to add more floors, while others (mostly in high-demand areas) have limited the number below 2.5.

The scheme works mainly through property developers who contract with the landowners. The article writes about the mechanism for mobilising landowners and obtaining consent and the incentives provided.

The core mechanism in both schemes – TAMA 38 and Pinui Binui – is an agreement between a developer and the homeowners (but not renters) of one or a group of apartment buildings. In both cases, the agreement specifies the size and interior specification of the new apartments, plus what other amenities such as parking and storage space will be built, along with expected timelines and withdrawal conditions. Usually, before a developer is selected, a representative body of homeowners is elected by a general assembly of the homeowners. These representatives have the mandate to choose a developer based on criteria such as the size of the new apartments they offer, the apartments’ specifications, the developer’s experience and past developments, and its financial abilities. After a developer is selected, a legal agreement written by the developer is offered to all homeowners, who can sign it, comment on it, or refuse to sign, using their own legal advice.

If two thirds of homeowners sign, the developer can proceed with the planning and permitting process. Technically, all homeowners need to sign, but the developer can sue them to force them to do so if two thirds are agreed – so long as the objectors don’t have a very strong legal case not to sign. This generally only extends to unfair deals that don’t benefit all residents, cases where the developer hasn’t provided temporary accommodation during development, or risky cases where the objectors don’t have strong enough guarantees that the developer won’t disappear or go bankrupt. The majority have a strong bargaining position, as only a narrow set of grounds are accepted for refusal, and if the court rules that the refusal to approve the deal is unreasonable, it can even force reluctant homeowners to compensate the others for delaying or preventing the deal. Initially, rules required 80 percent of homeowners to agree on a deal. Lawmakers reduced the threshold to two thirds, in order to streamline the process and lower the bargaining power of holdouts – especially those who hope to extract surplus profits from the project, on top of that available for the rest of the owners...

When the agreement reaches a sufficient majority of support to be approved, then apartment owners are effectively trading their rights over their building, and the land underneath it, with a developer. Usually this is for a new, improved, and bigger apartment, often with additional amenities such as a balcony and underground parking. The developer, on the other hand, gets to sell the additional units added to the building. Regulators encourage developers to offer to enlarge the current owners’ apartments by an extra room each, or about 12–13 square meters. But this can vary enormously... Pinui Binui projects normally add as many as four or five new apartments for each existing one, meaning much bigger windfalls for homeowners, after the slower and riskier approvals process... Typically when developers or homeowners use new planning permissions they have been granted, they pay a 50 percent betterment levy on the increased value paid to the local authority, so the local community can capture some of the benefits. Under TAMA 38, owners are completely exempt from the betterment levy; under Pinui Binui it is usually set at a reduced rate of 25 percent.

The critical thing here is the role of qualified majorities which ensures that certain hardcore recalcitrant individuals cannot hold out in the hope of bargaining a higher price or for some other reason. It removes their veto and encourages developers. Such vetos can be overturned and redevelopment facilitated through two means.

Either development can be approved directly by the central government, cutting out the veto players that gum up the process locally, as New Zealand recently did in the rebuilding of Christchurch, and like the Établissement publics d’aménagement development corporations in France that built, among other things, Paris’s La Défense skyscraper-heavy financial district. The other option is to establish, at the central government level, rules that allow existing residents to overrule objectors locally and approve development directly. A similar sort of mechanism exists in most countries with so-called strata title for apartment buildings, such as Australia, Canada, Japan, and Singapore. Strata title is a legal construct that allows residents to own their own property outright, plus a share in a sort of company, which manages the building, charges fees, carries out repairs and maintenance, and more. Previously, owners in a strata corporation had to get unanimity if they wanted to dissolve it – most often because they wanted to redevelop the land. This was generally insurmountable due to holdouts, but strata owners can now usually agree by supermajority to drag along objectors, if those are small in number.

The Israeli government has adopted an iterative approach to the urban regeneration program.

Every year, the national legislation process tweaks the TAMA 38 and Pinui Binui programs in response to the needs of owners, developers, and municipal governments by shifting supermajority requirements, adjusting tax exemptions, creating compensation mechanisms for legitimate objections and for vulnerable groups such as elderly owners, and improving the rules to protect homeowners from mis-selling, fraud, and predatory pressure. The supermajorities for Pinui Binui and TAMA 38 demolish and rebuild were reduced from 80 percent to two thirds in 2021 and 2023, respectively. In 2018, in response to the unique needs and interests of elderly owners in Pinui Binui projects (that can easily last over a decade from start to finish), lawmakers amended the law to require developers to offer them alternatives to the new apartment. For owners above the age of 75, the developer must offer three choices in addition to the new apartment – to fund a stay in a senior home during the construction of the new building, to purchase an equivalent apartment instead moving to a temporary unit and then back to the new building (in order to avoid two moves), and to offer cash payment instead of a new apartment. Mis-selling has also been a problem. Less-informed and less-well-off owners sometimes agreed to unfair deals with developers... A 2017 law introduced the obligation to include timelines in agreements, and the need to inform the owners of the agreement in a meeting that includes at least 40 percent of the owners. The law also obliges developers to translate the agreement into any relevant languages.

The public agencies governing the schemes have evolved too. The Urban Regeneration Authority, which began as a department in the Ministry of Construction and Housing, became an independent authority in 2016, making it less political, more professional, and more powerful. It manages the yearly legislation to streamline and improve the process, actively promotes specific Pinui Binui plans (usually in less-affluent areas), tries specifically to encourage urban regeneration in Arab and ultra-Orthodox communities (where it is currently almost nonexistent), and publishes up-to-date data on the state of urban regeneration. The Israeli Ministry of Finance, usually considered to be fiscally hawkish, nearly tripled the Urban Regeneration Authority budget between 2020 and 2022, indicating that the government believed the programs were working well. Municipal regeneration agencies, working inside the municipalities and supervised by the national Urban Regeneration Authority, were established to mediate between developers and homeowners, and are generally considered to have succeeded in getting municipal governments to be more committed to urban regeneration. Alongside these public interventions, some practices have developed incrementally via markets. For example, it is now standard for owners to hire a lawyer and a construction supervisor specializing in TAMA 38 in order to help them decide among interested developers – the developer that wins pays them a standardized fee.

Alster proposes making more changes to make UR schemes attractive for tenants and renters too.

Renters are practically invisible in the Israeli urban regeneration process, despite the fact that around a third of them have been living in their current apartment for five years or more… If Israeli policymakers want to retain the urban regeneration schemes, they should consider making them work for tenants more directly. Other options exist, such as relocation assistance for the displaced renters (available in Washington, DCSeattle, and Chicago), or more radical steps such as a right to a home in the new project (as happens in California). Perhaps the most obvious option is to include tenants in the vote on whether to implement the project (as happens with public housing tenants in London).

This is a very strong conclusion

The data suggests that the NIMBY/YIMBY debate is not really about economic or cultural ideology, race, or class – it is about veto players and incentives. If incentives are closely tied to the decision about whether to upzone, and homeowners can make the choice for themselves, then developers can offer strong-enough incentives for new development to make homeowners the most powerful political engine in support of densification... give homeowners the right powers and incentives, and you have a good chance of delivering a lot more housing – with the enthusiastic support of locals.

John Burn-Murdoch in FT has a brilliant article where he points to the success of Texas in keeping housing prices affordable through increased supply from liberalised planning regulations. 

In the year ending March 2023, construction began on 72,000 new homes in Houston, Texas, population 7.5mn: more than three times the 20,500 new homes started in London, whose population is considerably larger… Swap Houston for Austin, and London for San Francisco or New York, and the disparity would be even larger. Unsurprisingly, these wildly divergent rates of housebuilding have an impact on prices. You would have to pay $1.2mn dollars for the average property on sale in the San Francisco/Oakland area today, around $800,000 for the typical homes in London and New York, but just $300,000 in Houston. 

The disparities only become more striking if you consider the local context. New York, San Francisco and London are led by progressives who wring their hands publicly over their acute and long-running housing crises. Texas, meanwhile, is a red state, not generally given to pursuing socially beneficial projects. But actions speak louder than words. Homes in Texan cities are cheap and their populations soaring because the state has made urban development easy. California, New York and London are overheating and squeezing out young families because their planning systems place artificial constraints on supply, making urban development extremely difficult.

Burn-Murdoch points to how cities like Houston and Auckland have overcome local opposition with creative opt-outs and focusing on smaller developments.

In Houston, a 1998 change to planning laws empowered landowners to turn one home into three — instantly creating space for new families in the heart of the city, while generating a tidy profit for themselves. A crucial detail was the inclusion of an opt-out for individual neighbourhoods whose residents wished to keep things as they were, increasing the scheme’s durability. Auckland’s 2016 upzoning plan worked in a similar way, creating new defaults that facilitate modest densification in areas close to the city centre and transit stations while keeping carve-outs for neighbourhoods of historical significance. In both cities, construction has soared and prices stayed much lower than elsewhere. Crucially, by focusing on what urbanists call “gentle density” — involving developments of anywhere from three to six storeys, designed with local character in mind — and building in exceptions, both plans have endured political upheaval.

He also points to the success of London suburb Croydon’s brief experiment which allowed homeowners to convert large homes into multiple apartments, that increased supply and lowered prices. 

In 2018, the borough of Croydon published new planning guidance allowing homeowners to redevelop their large single-family homes into medium-rise apartment buildings containing multiple units, provided the new designs were broadly in keeping with the form and building materials of the local area. The policy applied to the whole borough, with no carve-outs. The number of these small developments rocketed, adding hundreds of new apartments selling at prices far below the previous norm. Both supply and affordability improved dramatically almost overnight. But it didn’t last. The new policy became a key focus for anti-development campaigners in a fiercely fought mayoral election, and the borough’s new Conservative mayor repealed it just four years after it was announced. With that, the small densification projects came to an abrupt halt.

Some observations with relevance to the Indian context:

1. The Isreali example is very relevant for India. Mere incentivisation by way of higher FAR or lower building fees will not be sufficient to encourage landowners to redevelop in significant numbers. There’s also the need to overcome the financing (the financing required to redevelop) and co-ordination (to mobilise owners in a multi-tenament unit or bring together adjacent lands) problems. Policies that facilitate builders and developers address this problem is the crucial innovation in Israel. 

The success of such policies depend on how attractive it is to both the landowners and builders. The former should be able to get a larger and higher-valued property without being significantly inconvenienced during the transition. The latter should find the deal commercially attractive - they get enough additional units to make up for the units foregone to landowners and get a handsome profit. The credibility of this scheme will depend on whether the landlords generally abide by the provisions of the contract and deliver the houses at good quality and within the stipulated timelines. 

This can be a challenge given the widespread presence of unscrupulous practices in the real estate sector in the country. It’s therefore important that any such scheme and registered developments be tightly regulated. 

2. The Israeli example also highlights the importance of iteration with complex policies like TAMA 38 and Pinui Binui. There will be several emergent problems once the first version of the scheme is announced, necessitating several iterations before the scheme stabilises. One of the big problems likely in the Indian context would be concerning the possible exploitation of landowners by unscrupulous builders in connivance with the local politicians and officials. Therefore the use of qualified majorities will have to be phased in very carefully. 

3. Another problem with such renewal is the strong likelihood of displacement of the existing lower-income owners and the resultant gentrification. The redeveloped units will be bigger and better, and have maintenance costs. They will also fetch a much higher market price. The owners are therefore likely to find it attractive to sell the redeveloped property to higher-income households. The longer-term consequence of such gentrification is that even blighted and older areas of a city become out of bounds for all but the well-off households. The city becomes less inclusive. Such policies will therefore have to address this problem by iterative evolution. 

4. As I have blogged here, I’m not convinced that easing regulations alone will be sufficient to increase affordability in any meaningful manner. The reason is that the relationship between eased regulations, supply, and affordability is far from linear. For one, the easing has to be very significant (especially in terms of much higher FAR) to trigger meaningful increases in supply. There’s also the possibility that the eased regulations and increased supply will end up being consumed by the pent-up demand from the well-off households without triggering any cascade of displacement of demand that would transmit the supply across all income groups.

Saturday, February 24, 2024

Weekend reading links

1. The Times has an article on the spectacular rise of BYD as the world's leading electric vehicle manufacturer. 

The Swiss bank UBS found last year that a BYD Seal electric hatchback sedan cost 35 percent less to make than a slightly smaller Volkswagen ID.3 of similar quality made in Europe. The savings came only partly from the cheaper lithium iron phosphate batteries. BYD makes three-quarters of the Seal’s parts. Like Tesla, BYD uses only a few electronic systems in each car. By contrast, VW outsources up to two-thirds of its components. BYD also has benefited from lower labor costs in China, although those have risen as factories compete to hire skilled workers.

Interesting that BYD uses iron and phosphate batteries and mostly sells cheaper and plug-in hybrid vehicles with lower ranges. Plug-in hybrids make up nearly half of its sales. In contrast, Tesla sells costlier and purely electric vehicles for larger ranges. Given the smaller ranges of typical urban commuters, Indian electric car manufacturers should focus on hybrids with lower ranges that are cheaper and can be used to expand the demand for these vehicles. 

2. Some facts about the Indian equity markets

Currently, we have about $35 billion entering the markets from domestic investors (mutual funds, insurance, Employees Provident Fund Organisation and National Pension System ). This number will rise to at least $60 billion in the next five years. Combine this with a normalised $20 billion from foreign portfolio investors and we have a structural bid of $80 billion annually for equities.

3. China may never match TSMC in its domestic semiconductor chip manufacturing mission.

At the forefront of the many incredibly complex supply chain challenges Chinese companies will need to overcome is photolithography equipment. Arguably, ASML’s EUV machine is not one but three separate technological challenges - light source/laser, optics, and the instrument worktable - all of which combine to create a machine with over 450,000 components. In etching a semiconductor, a laser in a photolithography machine does not just have to be capable of firing an accurate beam. To create a 13.5nm chip, the laser must hit its target (30 millionths of a meter in diameter) at 50,000 times a second while the target is traveling over 200mph. The many lenses used in the machines must be smooth on the atomic level. Zeiss, the leading (and only) German optical manufacturer capable of providing lenses and mirrors to ASML, likens the challenge of creating mirrors for ASML to “enlarging the mirror to the size of Germany, with elevations no greater than 0.1 mm”. The last major component of an EUV machine is the precision instrument worktable, which in an ASML machine takes over 55,000 components to control the transistors' carving into the silicon accurately.

Shanghai Micro Electronics Equipment (SMEE) is the most advanced Chinese photolithography company, founded in 2002. It’s advanced for China but not for Taiwan or South Korea: its current SSA600 series machines can be used to create 90nm, 110nm, and 280nm chips, generations behind ASML technology. SMEE previously announced plans to release a machine capable of manufacturing 28nm chips, with the initial release scheduled for 2021. As of January 2024, it has still not released a device... Contrary to the Chinese government's goals of establishing an indigenous semiconductor manufacturing industry, SMEE's suppliers depend on foreign parts, with Chinese companies UP Optotech, Focuslight Technologies, and MLOptic Corp sourcing equipment from abroad. In 2022, UP Optotech revealed that German company iC-Haus was their second-biggest supplier. Doubtlessly, there will be dozens of other examples demonstrating the very high barriers to an entirely de-Westernized semiconductor supply chain... Attaining its own semiconductor industry or leapfrogging TSMC or ASML to become the leader in fabrication or photolithography are both extremely unlikely. 

4. Very good article in Livemint about restrictive building regulations limiting the extent of land utilisation of factory lands. It points to a study of regulations in 10 states by a think tank Prosperiti that finds factories can lose over 50% of their land to comply with them. The full report is here. Setbacks, parking, ground coverage, and FAR are the four reasons for the loss of land. 

The restrictions vary across states in their degrees.

The opportunity costs of these restrictions are prohibitive,
An industrial entrepreneur has to shell out large sums of money to keep part of their plot fallow forever. Based on Prosperiti’s estimates, factories in these 10 states stand to lose between ₹2.67 lakh in a micro-factory to ₹3.16 crore in a mega factory. These regulations may be driving an irrational location of factories. Factories should ideally go where land prices are lower. However, restrictive regulations in cheaper areas may drive factories to more expensive locations... Even if the land loss on account of regulations was halved, states could generate between 30-74 jobs in a medium-sized factory. These losses at the factory level can compound to millions of job opportunities lost. For instance, large factories in Maharashtra could have space for 563,000 more industrial jobs had the state reduced the land lost by half. This is 38% of the factory workers currently employed in Maharashtra generating more than ₹500 crore per month in additional wages.

I'm not sure about some of these numbers, but the scale of losses from such restrictions are nevertheless very high. 

5. The warmest winter on record coupled with surging production (which hit a record 105 bn cubic ft a day in December) has left US natural gas prices close to their lowest levels since 1995 at $1.61 mmBTU. 

US natural gas production has mirrored petroleum production, driven by shale gas.
6. FT reports that the EU is set to announce a nearly 500 million euro penalty on Apple for placing restrictions on Apps that inform iPhone users of cheaper alternatives to access music subscriptions outside the App Store. The action follows a complaint by Spotify in 2019. 
The Commission will say Apple’s actions are illegal and go against the bloc’s rules that enforce competition in the single market, the people familiar with the case told the Financial Times. It will ban Apple’s practice of blocking music services from letting users outside its App Store switch to cheaper alternatives. Brussels will accuse Apple of abusing its powerful position and imposing anti-competitive trading practices on rivals, the people said, adding that the EU would say the tech giant’s terms were “unfair trading conditions”. It is one of the most significant financial penalties levied by the EU on big tech companies... Companies that are defined as gatekeepers, including Apple, Amazon and Google, need to fully comply with these rules under the Digital Markets Act by early next month. The act requires these tech giants to comply with more stringent rules and will force them to allow rivals to share information about their services.

7. A new renewable energy race has begun - the tapping of naturally available hydrogen, estimated at 5 trillion tonnes in underground reservoirs. While only a small proportion is likely to be available for tapping, even a small percentage share will be enough to meet the annual demand of around 500 million tonnes for centuries. 

The demand for hydrogen as a fuel and industrial raw material, particularly to make ammonia for fertiliser production, has been mainly met so far by chemically reforming gas that is made up largely of methane, known as “blue hydrogen” when the carbon emissions are captured or “grey hydrogen” when they are not. A smaller amount is made by splitting water through electrolysis using renewable energy sources, known as “green hydrogen”. But Mengli Zhang of the Colorado School of Mines said tapping natural hydrogen — also known as geologic or gold hydrogen — would be cleaner and cheaper than blue or green hydrogen. “A gold rush for gold hydrogen is coming,” she told the conference. The prospect is beginning to attract interest from investors. US start-up Koloma raised $91mn last year from funds including Bill Gates’s Breakthrough Energy Ventures... Previous scientific opinion held that little pure hydrogen was likely to exist near Earth’s surface because it would be consumed by subterranean microbes or destroyed in geochemical processes. But geologists now believe hydrogen is generated in large quantities when certain iron-rich minerals react with water

8. China's spectacular rise as the world's leading automobile exporter and its dominance of the global EV value chain may well be a defining moment in the world trade agenda for the coming decades. 

Chinese companies today dominate the entire value chain of EVs - EV chassis, autonomous driving software, CoNi batteries etc. - as well as the vehicle production itself.  
Paul Li, founder of Chinese electric vehicle parts supplier U-Power, claims working with the country’s EV sector, which is by far the world’s biggest, can mean foreign companies developing cars years faster than they have traditionally and reducing costs by as much as half. As evidence that foreign carmakers are realising the advantages, he points to Volkswagen’s $700mn tie-up with Chinese rival Xpeng last year. That deal was soon followed by a €1.5bn investment in Chinese EV start-up Leapmotor by Stellantis, which makes Jeep cars in the US and owns the Fiat and Citroën brands in Europe... Li’s company... designs and sells EV chassis — known as skateboards. U-Power last month signed a deal to supply New York-based EV start-up Olympian Motors with its skateboards. The company is also working with Singapore-based FEST Auto to sell EVs to the European logistics market. In another example, Shenzhen-based Appotronics, which provides laser projectors for nearly half of China’s cinemas, will supply BMW with laser technology for some of the German group’s latest in-car displays. And Shenzhen-based DeepRoute.ai, which already has a US office, is now setting up one in Europe to sell its mapping technology for driverless cars.

This is a defining moment for US and European trade policy. Corporate interests will mount pressure to allow them to tap the Chinese suppliers for their EV businesses. But this in turn will only end up amplifying the leverage China already has on the global EV industry. The Chinese firms are trying to overcome US restrictions by establishing factories in Eastern Europe and Mexico and then exporting to the US. Some are even establishing JVs with European manufacturers. 

9. Nvidia's $740 share price is nuts? FT Alphaville hints it might be.

This week Nvidia’s market cap passed the $1.8tn mark, leapfrogging Alphabet — whose 2023 net income was greater than Nvidia’s 2023 revenues — to become the third most valuable US company after Microsoft and Apple... To get to a $740 share price simply requires that the company maintain a monopolist-like operating profit margin of 55 per cent for the next decade, while also growing sales tenfold, from $60bn a year to more than $600bn. For context, the entire industry sold $527bn worth of chips last year, according to the the Semiconductor Industry Association. Over the past decade Nvidia did admittedly achieve a similar level of growth: in 2014 its sales were a mere $4bn... Nvidia’s unusual profitability is a recent phenomenon related to the very high prices pushed through in response to overwhelming demand: The EBIT Margins were all over the place from 2014-2023 (range of 12-37 per cent) and certainly nowhere near a steady 55 per cent... At a 15 per cent growth rate and 30 per cent sustainable margins his antiquated model cranks out a share price of $176!

The share has since surged following its latest quarterly earnings report. It added $277 bn in market capitalisation in a single day, which is bigger than the entire market capitalisation of Reliance Industries of $243 bn!

10. A health check of Indian banks presents some very promising numbers.

Believe it or not, 21 of 32 listed banks, including SBI, HDFC Bank, ICICI Bank, Bank of Baroda, Axis Bank, Kotak Mahindra Bank, IDBI Bank and IDFC First Bank have less than 1 per cent net NPAs. Indian Bank has the lowest net NPAs (22 basis points), followed by HDFC Bank and CSB Bank (31 basis points each). One basis point is a hundredth of a percentage point. Lower bad loans have led to lower provisions. In fact, provisions in the December quarter Y-o-Y have dropped 39.51 per cent, from Rs 38,852 crore to Rs 23,503 crore. As a result, collectively the net profit of all listed banks has grown 15.29 per cent to Rs 74,976 crore even though the operating profit growth is just 2.05 per cent at Rs 1.31 trillion.

11. Cory Doctrow has an excellent essay on how social media platforms have degenerated through a process that he describes as enshittification

It’s a three-stage process: first, platforms are good to their users. Then they abuse their users to make things better for their business customers. Finally, they abuse those business customers to claw back all the value for themselves. Then, there is a fourth stage: they die... Facebook arose from a website developed to rate the fuckability of Harvard undergrads, and it only got worse after that. When Facebook started off, it was only open to US college and high-school kids with .edu and K-12.us addresses. But in 2006, it opened up to the general public. It effectively told them: Yes, I know you’re all using MySpace. But MySpace is owned by a billionaire who spies on you with every hour that God sends. Sign up with Facebook and we will never spy on you. Come and tell us who matters to you in this world. 

That was stage one. Facebook had a surplus — its investors’ cash — and it allocated that surplus to its end users. Those end users proceeded to lock themselves into Facebook. Facebook, like most tech businesses, had network effects on its side... But Facebook didn’t just have high network effects, it had high switching costs... So Facebook’s end users engaged in a mutual hostage-taking that kept them glued to the platform. Then Facebook exploited that hostage situation, withdrawing the surplus from end users and allocating it to two groups of business customers: advertisers and publishers. To the advertisers, Facebook said: Remember when we told those rubes we wouldn’t spy on them? Well, we do. And we will sell you access to that data in the form of fine-grained ad-targeting. Your ads are dirt cheap to serve, and we’ll spare no expense to make sure that when you pay for an ad, a real human sees it. To the publishers, Facebook said: Remember when we told those rubes we would only show them the things they asked to see? Ha! Upload short excerpts from your website, append a link and we will cram it into the eyeballs of users who never asked to see it. We are offering you a free traffic funnel that will drive millions of users to your website to monetise as you please. And so advertisers and publishers became stuck to the platform, too. 

Users, advertisers, publishers — everyone was locked in. Which meant it was time for the third stage of enshittification: withdrawing surplus from everyone and handing it to Facebook’s shareholders. For the users, that meant dialling down the share of content from accounts you followed to a homeopathic dose, and filling the resulting void with ads and pay-to-boost content from publishers. For advertisers, that meant jacking up prices and drawing down anti-fraud enforcement, so advertisers paid much more for ads that were far less likely to be seen. For publishers, this meant algorithmically suppressing the reach of their posts unless they included an ever-larger share of their articles in the excerpt. And then Facebook started to punish publishers for including a link back to their own sites, so they were corralled into posting full text feeds with no links, meaning they became commodity suppliers to Facebook, entirely dependent on the company both for reach and for monetisation... Facebook now enters the most dangerous phase of enshittification. It wants to withdraw all available surplus and leave just enough residual value in the service to keep end users stuck to each other, and business customers stuck to end users, without leaving anything... But that’s a very brittle equilibrium.

They argue that in the pre-enshittification era, there were restraining forces like competition, regulation, self-help and worker power that prevented uncontrolled enshittification. over time each of these constraints have eroded and enhittification has been happening unchecked. The author argues in favour of restoring each of these restraints to reverse the process of enshittification. 

This is a good example,

When Diapers.com refused Amazon’s acquisition offer, Amazon lit $100mn on fire, selling diapers way below cost for months, until Diapers.com went bust, and Amazon bought them for pennies on the dollar.

12. The post-Cold War peace dividend enjoyed by Europe

Estimates suggest the continent would have spent an additional $8.6tn on defence over 30 years had they maintained cold war levels of military expenditure.

This, as JD Vance writes, is also an implied tax on US citizens to ensure European security.

13. Amidst geopolitical uncertainties, crackdowns on foreign consultancies and an increasingly hostile environment for foreign firms, foreign investment in China has fallen to its lowest level in 30 years

China’s direct investment liabilities, a gauge of foreign capital flowing into the country, totalled about $33bn in 2023, according to data released late on Sunday by the State Administration of Foreign Exchange. This was an 82 per cent decline from the previous year and the lowest annual figure since 1993.
14. Good set of graphics about the struggling Pakistani economy. This is about the very large share of revenues going into debt-servicing.
15. The Red Sea ship attacks have imposed large costs and increased shipping times, thereby creating shipping fleet shortages.
Diversions to a route round the Cape of Good Hope have added 10 days to two weeks to each voyage between Asia and north Europe and vastly complicated the task of serving some parts of the world... The 102-day time required to complete a loop between Asia and north Europe and back via the Cape of Good Hope means a line needs to deploy 16 ships for a weekly service, instead of the normal 12.
17. This week the Nikkei surpassed the level it reached 34 years back in 1989. The FT article describes the changes in Japan over this time.

The IMF expects Japan’s ratio of public debt to gross domestic product to reach 256 per cent in 2024, compared with 65 per cent in 1989... In 1989 Japanese companies, particularly banks, dominated the global top 10 by market capitalisation. No Japanese companies make the top 10 now. Today, Toyota has risen to become the world’s largest carmaker by sales and the most valuable company in Japan. Sony, which is now more famous for its entertainment business and PlayStation games than the Walkman portable music player, is ranked third while semiconductor equipment maker Tokyo Electron is fifth... In 1989, six of the world’s 10 richest people were Japanese. At the top of the list was Yoshiaki Tsutsumi, the former owner of Seibu Railway, whose wealth Forbes estimated at $15bn. Now, only three Japanese people are ranked among the world’s top 100 billionaires, with Tadashi Yanai, founder of Uniqlo owner Fast Retailing, and his family ranked 30th with an estimated net worth of $40bn... Decades of deflation and economic stagnation, however, have also sapped the appetite for investment, leaving companies sitting on a massive cash pile of ¥343tn... 

By 1989, Japan had also begun to make its name as one of the world’s pre-eminent exporters of soft power, and of the idea that Japan as a country and a culture had something unique to share with the world. Hello Kitty, Mario, Gundam and Sonic enthralled, and Japan’s power to entertain became one of its best-known superpowers. As the stock market neared its peak, Nintendo released the handheld Game Boy console — a machine that would go on to sell more than 100mn units worldwide and physically put Japanese games, a Japanese pop-culture aesthetic and Pokémon in pockets around the world. Just three days before the Nikkei peak, US audiences had their first glimpse of Akira, the seminal anime that would create a global generation of Japanese cartoon fans. In 2024, Japan retains much of this soft power and a significant store of wealth but has lost much of its pre-eminence.

Arguably the biggest change has been with the country's demographics - nearly 30 per cent of the population is over the age of 65!

18. Finally, David Solomon's unreasonable 24% pay rise as Goldman CEO while presiding over one of the firm's weakest performances has naturally triggered discontent within the firm. The firm has already seen several high-profile bankers leave and is now facing the threat of more departures.