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Saturday, April 9, 2022

Weekend reading links

1. FT has a long read on how the long list of electric vehicle startups chasing the dream to become the next Tesla are stumbling at the critical last stage - making their vehicles. 

But the combination of Tesla’s helium-filled valuation and the market tolerance for lightly scrutinised reverse takeovers led to a stampede of EV businesses listing their shares. As a result, companies with neither profit, nor in many cases even revenues, found themselves on public markets, squinting into the full glare of the world’s investment community. Canoo, Lucid, Nikola, Lordstown, Fisker, Arrival and Rivian were all among businesses that went public before shipping a single completed vehicle to a customer. Yet investors piled in. At least 18 automakers have listed in the past two years through a special purpose acquisition company, or Spac, according to data from PitchBook, while Rivian completed an initial public offering... There is a timeless, undentable automotive truth: making vehicles is hard. The lesson was best demonstrated by Tesla, whose decade-long struggle towards mass production saw it grapple with pitfalls galore, from getting the right parts in time to assembling cars so that they did not leak when it rained.

Tesla benefited from its vertical integration in making its cars, batteries, and software. The newer ones have been grappling with the idea of outsourcing, which in the car industry may not work. At the least you have to make your own cars. 

2. Somit Dasgupta points to an important problem with renewable power tariff regime - the absence of two-part (fixed and variable cost) tariffs like conventional sources. This, he says, creates a problem

The renewable sector has been given a “must run” status. This means that any generation from renewables needs to be dispatched first. The logic is that if we do not use the sun’s rays or for that matter the wind velocity, it is lost forever. The state load dispatch centres (SLDCs) are under instructions to adhere to this principle. The problem is that “must run” runs counter to the basic economic theory that in order to minimise total cost, dispatch should commence from the source offering the cheapest variable cost and then move upwards. Here lies the problem. With a single part tariff for renewable generation, the entire cost is variable and at Rs 2.5 per unit for solar generation, it is not the cheapest source. There are several NTPC coal-fired pit head plants whose variable costs are far lower, for example, Simhadri (Rs 1.36), Korba (Rs 1.36), Sipat (Rs 1.43), Vindhyachal (Rs 1.70), and Talcher (Rs 2.00). This list is only indicative and not exhaustive. In fact, Rs 2.5 per unit is only for those solar generators that are of recent origin. For the older solar plants, the tariff could be well above Rs 3 per unit and for wind-based generation, it is even higher, averaging around Rs 4.5 per unit. It is no surprise, therefore, that the SLDCs often flout the principle of “must run”, since the distribution companies would save money by asking the renewable generator to back down while keeping the tap on for a coal-based generation.

He therefore advocates a shift towards two-part tariffs for renewable power. 

3. SBI has a research report on pension reform in India. This assumes great significance in light of the trends across states to reverse the contributory pension schemes and move towards defined benefit schemes. 

4. Turkish inflation rises above 60%.

The CPI rise 61% year-on-year in March, up from 54% in February. Food costs which make up a quarter of the country's inflation basket, rose 70% year-on-year while energy costs rose 103%. 

5. Amidst the pandemic, executive compensation has continued to rise unabated,
For the 280 S&P 500 companies that have reported figures this year, the median chief executive’s pay has jumped to a record $14.2mn for 2021, up from $13.5mn in 2020, according to ISS Corporate Solutions, a data provider. Equilar, another data company that tracks chief executive rewards at the biggest companies by revenue, said the median among 196 companies that have reported this year has rocketed 20 per cent to $14.3mn, after having dipped to $12mn in 2020... The median ratio has shot up to 245 for 2021 from 192 for 2020, Equilar said. If the trend holds, “it would be the largest year-over-year increase since the ratio became a required Securities and Exchange Commission disclosure during the 2018 proxy season”, Equilar said.

6. Rising tide of global trade is lifting all export boats,

It remains to be seen as to how long this will last.

At the war’s outset Beijing appeared close to Moscow, but less than a month later the tone shifted as Washington bore down on it. China’s global television network CGTN began reporting extensive civilian casualties from Russian targeting. Russian foreign minister Sergei Lavrov had his flight to Beijing on March 17 abruptly turned around en route, evidently to avoid public embarrassment at being disappointed by the Chinese. On March 30 he finally made it but nothing positive emerged from the meeting. Now Sinopec, China’s state-owned energy giant, is freezing an investment and marketing deal with Russia.

A close relationship with Putin looks likely to damage China more than benefiting it.  

8. In the coming weeks, the Fed will almost certainly hasten the pace of its normalisation. Its actions will be centred around two instruments - rate hikes and balance sheet reduction.

The minutes of the last FOMC meeting released this week shows that from its $9 trillion balance sheet, the Fed has set a monthly target of shedding $95 bn of assets ($60 bn of Tresuries, and $35 bn of MBS) to be phased in over a period of the next three months or "modestly longer if market conditions warrant". This would amount to a reduction of the Fed balance sheet by less than a trillion dollars in a year. However, it would be much more aggressive than the last effort in 2017, where the reduction was capped at $50 bn which itself took a year to reach.

Robert Armstrong discusses the likely impact of Fed's balance sheet reversal, quantitative tightening (QT). He argues that while there is less uncertainty about the likely effects of interest rate changes, the same cannot be said about QE or QT. In case of QT, the Fed sells Treasuries to suck liquidity out of the system. The excess of Treasuries has the effect of lowering the interest rates. 

He also points to the still-wide 10 year/3 month yield spread, which academics consider is a more reliable predictor of recession than the 10 year/2 year curve inversion. The former only inverts when the market anticipates the Fed to move rates up fast. 

Another article in FT points to the change in market expectations about Fed policy actions. 

The markets appear to be pricing in expectations of one or more 50 basis points rate hikes, the first since 2000.

9. On the flattening yield curve, the FT points out that while the curve has inverted now, it also did the same in late 2019 without leading to a recession. 

However, it does point to the strong correlation between inverting yield curves and recessions.

At least since 1980, while an inverting yield curve may not always lead to a recession, all recessions appear to have followed an inversion of the curve. 

9. Janan Ganesh alludes to the possibility that the United States may be the real winner from the Russian invasion. Events in the aftermath of the crisis show that talk of demise of US supremacy was premature. He argues that the American role in mobilising western unity and rapidly rolling out the wide ranging sanctions has re-ignited American leadership. 

10. FT reports how the US led decision to quickly declassify and make public intelligence information about Russian troop movements and strategies has helped the western alliance win the information war and also put the Russians on the defensive. 

The revelations are a plank of a wider strategy that has been in place since the start of the war to declassify information about Russia’s plans and movements to rally international support for Ukraine and combat Russian efforts to carry out “false flag” operations and spread disinformation... The US shared information about the scale of the Russian build-up on the border with Ukraine and the assessment by Washington that Putin was preparing to attack. That helped shore up support for the sanctions that followed and persuade sceptical allies such as France and Germany about Putin’s seriousness about invading. Between early November and mid-February the Biden administration conducted more than 300 meetings and calls with allies and partners on the Ukraine crisis, including many that focused on intelligence sharing, a US official said... The western intelligence frames Russia’s pullback from Kyiv as a clear loss rather than a strategic pivot and weakens the country’s bargaining position in peace talks with Ukraine, which the US says Moscow has not approached seriously.

11. Good New Yorker article on Putin's kleptocrats,

Invoking Dean Acheson’s famous observation, in 1962, that Britain had “lost an empire but not yet found a role,” Oliver Bullough, a former Russia correspondent, suggests that it did find a role, as a no-questions-asked service provider to the crooked élite, offering access to capital markets, prime real estate, shopping at Harrods, and illustrious private schools, along with accountants for tax tricks, attorneys for legal squabbles, and “reputation managers” for inconvenient backstories. It starts with visas; any foreigner with adequate funds can buy one, by investing two million pounds in the U.K. (Ten million can buy you permanent residency.)...

for moneyed arrivistes in the U.K., a glamorous new home is the first step on a well-established pathway for laundering reputations. Next up: hire a P.R. firm. “The PR agency puts them in touch with biddable members of parliament,” Bullough says, “who are prepared to put their names to the billionaire’s charitable foundation. The foundation then launches itself at a fashionable London event space—a gallery is ideal.” Ultimately, the smart billionaire will “get his name on an institution, or become so closely associated with one that it may as well be.” Major gifts to universities are popular. So are football clubs. What’s most apt about Bullough’s butler analogy is the appearance of gray-flannel propriety, which can impart an aura of respectability to even the most disreputable fortune... in the former Soviet Union the “skill prized above all others” was the ability to obfuscate the origins of stolen money... Here, the professional facilitators of London’s butler class come in handy. There is a booming industry in financial dissimulation: the creation of shell companies, tax shelters, offshore trusts.

12. Germany energy dependence on Russia facts of the day

Last year, Russia supplied more than half of the natural gas and about a third of all the oil that Germany burned to heat homes, power factories and fuel cars, buses and trucks. Roughly half of Germany’s coal imports, which are essential to its steel manufacturing, came from Russia. Russian gas, oil and coal are embedded in the German economy and way of life... Nearly half of all German homes are heated with natural gas, which is also used to generate power in heavy industry... Germany relies on gas for 27 percent of its energy needs...
More than a third of all oil refined in Germany comes from Russia, much of it flowing directly to facilities in the country’s former Eastern states through Cold War-era pipelines... Germany has started to diversify its oil supply, bringing the Russian share down to 25 percent from 35 percent in the first three months of this year... Over the past six weeks, Germany has been able to shift delivery chains and sign new agreements, to cut its dependency in half, the economy ministry said. Now 25 percent of the country’s coal needs are being met by Russia. It plans to halt imports of the fuel altogether by the end of summer.

After resisting energy sanctions till now, the Germans have now agreed to ban imports of German coal. It has also initiated far reaching measures to substitute away from Russian energy sources. In fact, in a virtual expropriation, the German government has placed Gazprom Germania, Gazprom's main subsidiary in Germany, under state control until at least September. So far, Germany has reduced its dependence on German gas by 15 percentage points, bringing it down to 40%.  

13. Business Standard has an article on the redevelopment of the 39-Acre Kamathipura slum in south-central Mumbai which houses around 8000 tenants and 800 landlords. It has 16 lanes with 500 buildings, 3858 rooms, and 778 shops. The tenants and landlords each get 4 m sqft and 400,000 soft of redeveloped area respectively. It will have a rehabilitated area and a sale component. The rehabilitated units will be a two bed room unit of 508 sq ft. 

Mumbai has had several aborted attempts at redevelopment of its chawls and slums, including the famous Dharavi. It's important that this one be done in time and released to those being rehabilitated so that the credibility of future initiatives are not compromised by a bad example from this effort.

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