Weekend reading links

1. From an FT long read about how Germany's search for profits and efficiency had led to outsourcing of core national interests

Constanze Stelzenmüller, director of the Center on the US and Europe at the Brookings Institution, has said Germany is a case study of a western state that made a “strategic bet” on globalisation and interdependence — and was now suffering the consequences. “It outsourced its security to the US, its export-led growth to China, and its energy needs to Russia,” she wrote in June. “It is now finding itself excruciatingly vulnerable in an early 21st century characterised by great power competition and an increasing weaponisation of interdependence by allies and adversaries alike.”

And things have changed sharply,

“The German business model has to change,” Christian Lindner, the country’s finance minister, tells the Financial Times. “It was based on low energy prices . . . on an abundance of skilled workers, and open markets for Germany’s high-tech products.” But “this model doesn’t really work any more because many of the core elements have changed.”

2. Is a spate of sovereign debt restructuring around the corner?

The World Bank projected this year that about a dozen countries could face default in the next year, and the I.M.F. calculated that 60 percent of low-income developing countries were in debt distress or at high risk of it... The Council on Foreign Relations said this past week that 12 countries now had its highest default rating, up from three 18 months ago... Brad Setser, a senior fellow at council, estimates that $200 billion of sovereign debt in emerging markets needs to be restructured... Restructuring debt can include providing grace periods for repayment, lowering interest rates and forgiving some of the principal amount that is owed... However, the emergence of commercial creditors that lend at high rates and prolific loans from China — which has been loath to take losses — has complicated international debt relief efforts.

3. On the faculty shortages in India's premier higher education institutions

Over 11,000 faculty positions are vacant in central universities, IITs and IIMs across the country, according to Ministry of Education (MoE) statistics... In 45 Central Universities, a total of 6,180 posts of Professor, Associate Professor and Assistant Professor, out of 18,956 sanctioned posts are vacant. Similarly, in Indian Institutes of Technology (IITs), a total of 4,502 posts out of 11,170 sanctioned posts are vacant. In Indian Institutes of Management (IIMs), 493 posts out of 1,566 faculty posts are vacant.  

The idea of establishing too many higher education institutions with the objective of enabling geographical access is only limiting access to quality, since these new institutions are unlikely to be able to attract high quality academics.   

4. The ongoing chaos in airports is a teachable moment. The opeds and opinion makers have predictably lost no time to lay the blame on the doors of the government. 

On the contrary, I believe this is a classic problem of private sector failure. In the aftermath of the pandemic, the airport operators immediately cut down their staff in response to reduced demand. Now that demand has recovered and spiked with holiday season, the operators, true to their style, have been slow in expanding their services manpower. And governments and regulators get the blame. 

5. Physicists at the US Government's Lawrence Livermore National Laboratory in California announce a major breakthrough in fusion reaction. The breakthrough is that of producing more energy in the reaction than was use to trigger the reaction, or net energy gain. 

... uses a process called inertial confinement fusion that involves bombarding a tiny pellet of hydrogen plasma with the world’s biggest laser, had achieved net energy gain in a fusion experiment in the past two weeks... Although many scientists believe fusion power stations are still decades away, the technology’s potential is hard to ignore. Fusion reactions emit no carbon, produce no long-lived radioactive waste and a small cup of the hydrogen fuel could theoretically power a house for hundreds of years... The fusion reaction at the US government facility produced about 2.5 megajoules of energy, which was about 120 per cent of the 2.1 megajoules of energy in the lasers, the people with knowledge of the results said, adding that the data was still being analysed.

6. Russia copes with its international trade isolation. As imports decline a lower quality Soviet-era import substitution regime is emerging, coupled with an active illegal trade system. 

7. Ruchir Sharma has some sobering observations about the private markets,

The rage for private investing began in the early 2000s, after the success of the Yale University endowment fund led by David Swensen, who embraced private investments to diversify away from stock and bond markets and stabilise returns in the long run. Swensen’s definition of “long” was decades... Unlike Swensen and other pioneers of private investing, who bought low in private markets and sold high in public markets, private managers — flush with an overabundance of new funds — are chasing deals, buying high and hoping to sell even higher and running up record debt in the process. The typical company owned by a private equity firm has debts of more than five times its earnings, versus one to three times for publicly traded companies. Today, nearly 100 per cent of the loans private funds use to finance buyouts are “covenant lite”— condition free — up from about zero per cent a decade ago. Investors are piling into private deals which the doors are closing on, as the market for initial public offerings evaporates... Since 2000, the assets managed by private markets have risen elevenfold — over four times faster than stock markets. That gap has widened particularly fast since 2018, when a period of market volatility ended with the Fed abandoning a turn to tighter monetary policy. 

Though many investors are drawn to private funds due to their superior reported returns, those returns are juiced by heavy leverage and the valuations are often based not on market prices but on guesstimates by private firms of what the companies they own will be worth years from now. These calculations are drawing scepticism for both overstating and “smoothing out” results. Private equity firms reported gains of about 3 per cent this year, when public markets were down 20 per cent or more and tighter money battered all markets similarly. Use realistic returns, subtract fees, and private funds may end up returning less than public funds. Yet private equity funds raised more than $1tn last year, up a record 20 per cent, according to the most recent data. Investor Cliff Asness wrote recently of the “mind blowing” possibility that investors now knowingly accept lower returns “for the privilege of not being told the prices”. Hiding from reality creates an illusion that private investments are less risky than their debts clearly demonstrate, which draws in more money, raising risk further. The moment of reckoning likely comes when and if the downturn drags on, and private markets have to finally reveal losses in a down market. 

8. Japan ramps up defence spending

On Friday, Prime Minister Fumio Kishida’s cabinet also approved a record budget totalling ¥114.4tn ($862bn) for the next fiscal year from April as Japan significantly increased its defence spending to counter China’s military rise. As part of an ambitious five-year plan to expand its military capabilities, the government will increase its defence spending by 26 per cent from a year earlier to ¥6.82tn in fiscal 2023. The spending plan includes ¥211.3bn to buy Tomahawk cruise missiles from the US, ¥250bn to buy 16 of Lockheed Martin’s F-35 stealth fighters and ¥105bn for a new fighter jet programme with the UK and Italy.

9. Fascinating Virtual Reality site that tries to reconstruct Rome.