1. While all the attention on China has revolved around President Trump's actions, the Australian government under Scott Morrison has been at least as bold by seeking to completely redefine the country's relationship with China.
The country has a $172 bn trading relationship with China, and $51 bn surplus, making Australia, on the face of it, extremely vulnerable to Chinese actions. But Australia has turned the tables and leveraged its position as the supplier of 60% of Chinese iron ore imports, to basically take on China's aggressions on the country's interests. And popular opinion has been strongly in support of the government's actions. (HT: Ananth)
2. Excellent grahical story in NYT of the Beirut port explosion that killed nearly 200 people. The shocking thing was that everyone was aware that ammonium nitrate, oil, acid, kerosene etc were stored carelessly in the port hangar constituted a grave danger, pointing to the rampant corruption and dysfunctionality of the Lebanese state. The materials were sitting in the hangar since October 2014. Since then, the port and customs authorities had contacted everyone concerned in Beirut, including the judiciary, alerting them of the dangers and requesting that it be shifted out, but to no avail.
3. SEBI last week issued a circular mandating that must-cap funds must invest atleast 75% in equities by February 2021, up from 65% now, and have 25% each in large-caps, mid-caps, and small-caps. This naturally raised concerns since most of the multi-cap money is invested in large-caps. Debashis Basu exposes the folly of the directive,
Assets under management of multi-cap funds are Rs 1.53 trillion. This means funds will need to have 25 per cent of that in small-cap stocks, which means putting in over Rs 38,000 crore. Funds currently have about Rs 11,240 crore invested in small-caps. So, they need to buy around Rs 27,062 crore of small-cap stocks. Is this practical? How big is the small-cap universe? According to the Sebi classification, the top 100 companies in terms of market cap are large-caps, the 101st to 250th are mid-caps, and 251st onwards are small-caps. The market capitalisation of the 251st to 500th company is Rs 9 trillion. Most of them are not investment-worthy. Even if they were, there is no liquidity. Promoters own 50-75 per cent of the capital. Where will multi-cap funds find small-caps to invest such large amounts? And if there are so many opportunities, why haven’t they invested in them? Here is another bit of data. While Sebi wants multi-cap funds to invest another Rs 27,000 crore in small-caps, the assets in small-cap funds are Rs 52,000 crore. This means a sum that is 50 per cent greater than the current assets of small-cap funds will now have to be additionally bought by multi-cap funds from a list of small-cap stocks.
Hard to understand where such ideas crop up from. It'll inform a lot about the problems with state capacity and competence if we can know more about its origins and the processes that led to this directive.
4. C Rajamohan writes about the implications for India from the changing alignments in the Middle East,
India’s framework of non-involvement, however, is unlikely to survive the present wave of structural change in Afghanistan and Arabia. As the old order begins to crumble in the greater Middle East, the question is no longer whether India should join the geopolitical jousting there; but when, how and in partnership with whom.
5. Despite the ongoing boom in equity markets, India's IPO sales have remained muted over all of last decade, even as follow-on offerings by incumbents have risen. In particular, since the beginning of the year, there have been 18 IPOs raising $2.1 bn, whereas there have been 52 follow-on offerings which raised $30.2 bn
This is one more pointer to the trend of the big businesses being able to attract more capital and grow bigger, thereby leading to business concentration across sectors.
6. The rise and rise of zombie companies in the US on the rise of the long period of ultra-low interest rates and the ongoing stimulus program and market interventions by the Fed.
At the end of last year, 13 per cent of companies in the Leuthold 3000 Universe index — akin to the Russell 3000 index of US companies — had staggered along for at least three years with a repayments shortfall, up from 8 per cent at the end of 2008.
On zombie firms, this BIS study finds,
Using firm-level data on listed non-financial companies in 14 advanced economies, we document a rise in the share of zombie firms, defined as unprofitable firms with low stock market valuation, from 4% in the late 1980s to 15% in 2017. These zombie firms are smaller, less productive, more leveraged and invest less in physical and intangible capital. Their performance deteriorates several years before zombification and remains significantly poorer than that of non-zombie firms in subsequent years. Over time, some 25% of zombie companies exited the market, while 60% exited from zombie status. However, recovered zombies underperform compared to firms that have never been zombies and they face a high probability of relapsing into zombie status.
8. Very good article on how Germany manages crises with the least turmoil.
I defy anyone to name any other nation that could have absorbed 17m poor neighbours with so little trauma? Germans paid for Aufbau Ost (Rebuilding the East) through a solidarity tax, the Soli, a surcharge which only now is being phased out. They paid it with little fuss. It is estimated that by 2030 at the latest GDP per capita will have equalised. In any case, the differential between the once-decrepit East Germany and the West is less than it is between the north of England and London. Good governance; high skills; solid public finances; regional strengths; social solidarity — and a new-found characteristic, compassion. The Germans have shown the world how these attributes help deal with the crises they have faced, of which Covid-19 is only the latest. The measure of a country — or an institution or individual for that matter — is not the difficulties it faces, but how it surmounts them. On that test, contemporary Germany is a country to be envied. It has developed a maturity that few others can match...
She told citizens what she, her ministers and scientists knew and what they didn’t. She never blagged. Germany’s success in dealing with the crisis is due in part to Merkel’s style of leadership. But it is about more than that. It is about the role of the state and society. It is about social trust... Langsam aber sicher, slow but sure, is the abiding principle that dominates public life. Create consensus where you can; value thoroughness in a politician over rhetorical flourishes. Everything in politics and public life is designed to mitigate risk. In a newspaper interview in 2004, shortly before becoming chancellor, Merkel was asked what emotions Germany aroused in her. She replied, “I am thinking of airtight windows. No other country can build such airtight and beautiful windows.” This is about more than buildings. It is a metaphor for constructing a country, a society, where reliability is the most prized asset.
This about balanced regional development is interesting,
The Mittelstand — the hundreds of thousands of small and medium-sized enterprises dotted around hundreds of small and medium-sized towns — employs around three-quarters of the country’s workforce and produces more than half the economic output. Manufacturing never became a dirty word. Advanced engineering is central to Germany’s sense of success — and of place. Companies of all sizes are spread around the country — Adidas is in Herzogenaurach near Nuremberg, BASF’s is in Ludwigshafen; software giant SAP is in a place called Walldorf... Local employers in Germany are required to act as good citizens. They are not thanked for sponsoring sports teams and music clubs. It’s required of them. Mitmachen. Loosely translated: to get stuck in. Wealth is not secreted in the capital city. Unlike France or Britain, Germany is the only country where GDP per capita is lower in the capital than in the country at large. Without Berlin Germany would be 0.2 per cent richer. (By contrast, the economy of the London metropolitan area contributes a third of the economy’s entire economic output).
9. Four very good articles chronicling the rise of Reliance Jio, and its implications for India's telecoms market. This and this from Vedica Kant, and this and this from Ben Thompson.
10. Fascinating account of the shareholding structure at Baba Ram Dev's Patanjali and its recently acquired Ruchi Soya. It is for all practical purposes a completely family owned and run business, perhaps with all the problems associated with it.
11. BS has a list of the top 25 global venture fund leaders. An interesting feature is that pretty much all of them are funds floated by technology, pharma, or energy companies. In other words, funds established primarily to manage cash surpluses that have been generated by their parent companies. It's fair to believe that their investments would be motivated primarily by their main business considerations.
12. Ananth has a very good article that rightly questions the inflation targeting framework. Instead the recommendation is to continue with the existing multiple indicators approach,
If central banks redefine their mandate as control of overheating rather than targeting a rate of inflation over which they have very little control, they will be helping the economy better. Overheating manifests in credit growth, in asset markets (financial and real), and in trade deficits even if it does not manifest in the rate of inflation all the time. Focusing on overheating more broadly also helps in ensuring financial stability which an inflation targeting regime does not achieve. Of course, it is important to bear in mind that changes to policy regimes should not be capricious and not be dictated by proximate experiences alone. Doubtless, they play a role in triggering a review. But we should be careful not to overweight it. Just as the high inflation rates of 2008 to 2013 played a role in India opting for an inflation targeting regime, recent anxieties about India’s growth outlook near-term and medium-term should not be the principal motivations for a review of the inflation targeting regime. In other words, the alternative chosen should be seen to work both during low and high inflation regimes. India’s multiple indicators approach that was in vogue from 1998 to 2016 offers itself as the choice.
13. The race for Covid 19 vaccine is certain to create its set of mis-steps, calamities, and even frauds. It remains to be seen what would be the fate of the 20 seconds saliva test, Virolens test, of obscure UK tech firm, iAbra,
The device is manufactured in Hartlepool, in the north-east of England, by a listed UK company, TT Electronics, whose share price rose more than 40 per cent on last week’s announcement, valuing it at £439m... The Virolens test is “based on microscopic holographic imaging and artificial intelligence (AI) software technology”, according to iAbra, which is a highly specialised field of structural biology. The company says the technology “uses a digital camera attached to a microscope to analyse saliva samples, with the data run through a computer which is trained to identify the virus from other cells”... iAbra seems an unlikely company to deliver such a product. Mr Compton, who grew up in Bedfordshire and left school aged 17, said he was “always a computer kid”, and wrote his first computer program aged seven. He had several IT jobs, first at Italian telecoms company Tiscali, then at Capita and BSkyB, but never any formal training. He said he came up with the idea for the Covid-19 testing technology while standing at Dubai airport with his sister. None of the other employees has any expertise in viruses or microscopy, though one has a PhD in physics.
The test has so far not received any external validation. The article points to several areas of concern, which cannot but not bring to mind the comparison with Theranos.
14. Another company struggling to shake off comparisons with Theranos is Nikola, the truck start-up, which without even producing one vehicle has stock market valuation higher than Ford. A short-seller's report has described it as an "intricate fraud" and has cast serious aspersions on its founder Trevor Milton. Some of the allegations are plain shocking at the nature of the fraud,
The report on Thursday claims that, among other things, Nikola had bought electrical inverters from a supplier while claiming it had made them in-house, covering the branded label with tape during a demonstration video. In another instance, the short seller said Nikola faked a product video in 2018 by rolling its Nikola One truck along a downhill stretch of highway, to disguise the fact that the vehicle had no working engine, and filming it to appear it was being driven. A person familiar with the video confirmed to the Financial Times that Nikola had filmed its promotional video showing a moving truck by letting it roll down a hill in an isolated area in Utah, then edited the video to make the terrain look flat.
This FT story too points to a likely clean-up coming. Interestingly, amidst all this controversy, GM has announced a $2 bn deal with the start-up!
15. A CBI Court in Jodhpur has rejected the CBI's closure report which did not find enough evidence to launch prosecution, and revived the 2002 privatisation of Laxmi Vilas Palace Hotel by ordering the registration of cases against the Minister and Secretary concerned and the District Collector to take immediate possession of the property and manage it through an organisation of the Government of India which has experience of the same.
The systemic damage from such judgements are enormous. The property is now one of the leading five star hotels in the state. It is most certain to again reinforce the decision paralysis within government. It's easy enough to ask the Collector to take over a fully functioning hotel and manage it, but it is a massive administrative exercise even to get some agency to manage it, leave aside the management quality. And then there are the economic damages associated.
16. More things change, more they remain the same. Never mind all the deregulation on the purchase, storage and movement of agriculture produce, with elections round the corner, a rise in onion prices leads to the inevitable abrupt export restrictions. This time, apart from farmers, the decision also seems to have angered Bangladesh, which depends on Indian exports. Besides, at a time when India is trying to boost its exports, how does it work when its traders renege so abruptly on their commitments?
The decision itself appears questionable on merits.
The decision itself appears questionable on merits.
17. As their income tax exemptions expired in April 2020, Bibek Debroy writes about India's 373 notified Special Economic Zones.
18. Scott Galloway unmasks Peter Their, who Tyler Cowen elevates as one of the "five most influential public intellectuals", and Palantir, which is just about to go public.
18. Scott Galloway unmasks Peter Their, who Tyler Cowen elevates as one of the "five most influential public intellectuals", and Palantir, which is just about to go public.
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