Weekend reading links

1. Shein and Zara facts of the week

Shein launches almost 6,000 designs a day across the world; in contrast, Zara does 2,000 designs a year.

Some counter-intuitive lessons on e-commerce from Newme, India's equivalent of Shein,

The typical e-commerce wisdom is that more options will drive more sales. We had a similar hypothesis and were pushing in the same direction, but while interacting with our consumers, we realized Gen Z buyers need enough options, but don’t want to be bombarded with designs. They prefer curation with a healthy mix of designs. If you show them too many options, it confuses them, which leads to them not making a purchase. So, we reduced our styles from 50,000 to 5,000, but increased our curation.

Another conventional e-commerce belief is, the more reviews on a product, the more sales it can drive. But Gen Z don’t want to purchase products that have a very high number of reviews because it signals that many others have purchased the same style, which puts them off. They’re always looking for statement pieces at an affordable price.

2. Gillian Tett points to a 2020 paper by Lily Bailey and Gary Gensler in 2020 which highlights three stability risk concerns from generative artificial intelligence (AI).

One is opacity: AI tools are utterly mysterious to everyone except their creators. And while it might be possible, in theory, to rectify this by requiring AI creators and users to publish their internal guidelines in a standardised way (as the tech luminary Tim O’Reilly has sensibly proposed), this seems unlikely to happen soon. And many investors (and regulators) would struggle to understand such data, even if it did emerge. Thus there is a rising risk that “unexplainable results may lead to a decrease in the ability of developers, boardroom executives, and regulators to anticipate model vulnerabilities [in finance],” as the authors wrote. 

The second issue is concentration risk. Whoever wins the current battles between Microsoft and Google (or Facebook and Amazon) for market share in generative AI, it is likely that just a couple of players will dominate, along with a rival (or two) in China. Numerous services will then be built on that AI base. But the commonality of any base could create a “rise of monocultures in the financial system due to agents optimizing using the same metrics,” as the paper observed. That means that if a bug emerges in that base, it could poison the entire system. And even without this danger, monocultures tend to create digital herding, or computers all acting alike. This, in turn, will raise pro-cyclicality risks... The third issue revolves around “regulatory gaps”: a euphemism for the fact that financial regulators seem ill-equipped to understand AI, or even to know who should monitor it. Indeed, there has been remarkably little public debate about the issues since 2020 — even though Gensler says that the three he identified are now becoming more, not less, serious as generative AI proliferates, creating “real financial stability risks”.

3. The Bank of Japan under its new Governor Kazuo Ueda has started to take steps to normalise its monetary policy after decades of ultra-low rate accommodation. After the first BoJ Board meeting since taking over, Ueda forecast that inflation would drop from its 3.1% high of March 2023 and is likely to remain close to its 2% target for the next two fiscal years.

The BoJ held overnight interest rates at minus 0.1 per cent and maintained its yield curve control policy, saying it would continue to allow 10-year government bond yields to fluctuate by 0.5 percentage points above or below its target of zero. Following in the footsteps of the US Federal Reserve and the European Central Bank, the BoJ dropped a part of its forward guidance that previously said it “expects short- and long-term policy interest rates to remain at their present or lower levels”. The removal of this clause, which was originally aimed at supporting the economy after Covid-19, could make it easier for the BoJ to scrap yield curve control.

4. Andy Mukherjee raises a cautionary note on Reliance's green energy ambitions

Ambani might hit his goal of making blue hydrogen from syngas — a combination of hydrogen and carbon monoxide — at a competitively priced $1.2 to $1.5 per kilogram. But large-scale production of green hydrogen by using renewable energy to split water molecules, and realizing Ambani’s vision of “1:1:1,” a price of $1 for a kilo over a decade, looks like a tall order. Globally, green hydrogen costs between $6 and $7. That renders it uncompetitive as an industrial feedstock and fuel against both gray and blue variants. The only way it comes up ahead is with rising carbon prices in Europe — and then, too, by only 2035, according to the CRU Group, a commodity research firm. Reliance is aiming for 100 gigawatts of solar-power installations by 2030. That’s a big chunk of India’s overall goal of 450 gigawatts, a sevenfold increase from last year. It’s also investing in electrolyzer manufacturing, fuel cells and energy storage, including a sodium-ion technology that could work out cheaper than the lithium-ion batteries used in electric vehicles.

5. Ruchir Sharma argues that the rising gold prices as also arising from increased demand from emerging market central banks to diversify away from dollar. 

The prime example right now is gold, up 20 per cent in six months. Surging demand is not led by the usual suspects — investors large and small, seeking a hedge against inflation and low real interest rates. Instead, the heavy buyers are central banks, which are sharply reducing their dollar holdings and seeking a safe alternative. Central banks are buying more tons of gold now than at any time since data begins in 1950 and currently account for a record 33 per cent of monthly global demand for gold. This buying boom has helped push the price of gold to near-record levels and more than 50 per cent higher than what models based on real interest rates would suggest. Clearly, something new is driving gold prices. Look closer at the central bank buyers, and nine of the top 10 are in the developing world, including Russia, India and China. Not coincidentally, these three countries are in talks with Brazil and South Africa about creating a new currency to challenge the dollar. Their immediate goal: to trade with one another directly, in their own coin...

Thus the oldest and most traditional of assets, gold, is now a vehicle of central bank revolt against the dollar. Often in the past both the dollar and gold have been seen as havens, but now gold is seen as much safer... why are emerging nations rebelling now, when global trade has been based on the dollar since the end of the second world war? Because the US and its allies have increasingly turned to financial sanctions as a weapon. Astonishingly, 30 per cent of all countries now face sanctions from the US, the EU, Japan and the UK — up from 10 per cent in the early 90s. Until recently, most of the targets were small. Then this group launched an all-out sanctions attack on Russia for its invasion of Ukraine, cutting off Russian banks from the dollar-based global payment system. Suddenly, it was clear that any nation could be a target. Too confident in the indomitable dollar, the US saw sanctions as a cost-free way to fight Russia without risking troops. But it is paying the price in lost currency allegiances. Nations cutting deals to trade without the dollar now include old US allies such as the Philippines and Thailand.

6. The Federal Reserve Board, in an internal investigation, has finally confirmed what everyone knew as the reasons for the SVB crisis

Silicon Valley Bank’s failure last month stemmed from weakened regulations during the Trump administration and mis-steps by internal supervisors who were too slow to correct management blunders, the US Federal Reserve said in a scathing review of the lender’s implosion. The long-awaited report, released on Friday, had harsh words for the California bank’s management but also pinned the blame directly on changes stemming from bipartisan legislation in 2018, which eased restrictions and oversight for all but the biggest lenders. SVB would have been subject to more stringent standards and more intense scrutiny had it not been for efforts to scale back or “tailor” the rules in 2019 under Randal Quarles, the Fed’s former vice-chair for supervision, according to the central bank. 

That ultimately undermined supervisors’ ability to do their jobs, the Fed said. “Regulatory standards for SVB were too low, the supervision of SVB did not work with sufficient force and urgency, and contagion from the firm’s failure posed systemic consequences not contemplated by the Federal Reserve’s tailoring framework,” Michael Barr, the Fed’s vice-chair for supervision who led the postmortem, said in a letter on Friday. More specifically, the Trump-era changes that led to a “shift in the stance of supervisory policy impeded effective supervision by reducing standards, increasing complexity, and promoting a less assertive supervisory approach”, he said... “The Federal Reserve did not appreciate the seriousness of critical deficiencies in the firm’s governance, liquidity, and interest rate risk management,” the review said. Part of the problem was “a shift in culture and expectations” under Quarles, the Fed found. Citing interviews with staff, supervisors reported “pressure to reduce [the] burden on firms, meet a higher burden of proof for a supervisory conclusion, and demonstrate due process when considering supervisory actions”.

This is a good report of how bad management, poor supervision, and dominant culture derailed the Silicon Valley Bank, and the problems were hiding in plain sight but was overlooked by everyone concerned. 

The crisis that brought down the bank had been hiding in plain sight. More than a year before the bank failed, outside watchdogs and some of the bank’s own advisers had identified the dangers lurking in the bank’s balance sheet. Yet none of them — not the rating agencies, nor the examiners from the US Federal Reserve, nor the outside consultants that SVB hired from BlackRock — was able to coax the bank’s management on to a safer path.

7. Charles Kenny has some interesting numbers on the size of Africa's private sector

In all of Sub Saharan Africa outside of South Africa there are only approximately 183 firms with revenues greater than $500 million and about 87 with revenues greater than $1 billion (in the US there are about 7,000 firms with revenues over $500 million and 3,908 with revenues over $1 billion). An ‘Enterprise Map’ by John Sutton suggests Ethiopia only has 43 firms which employ more than 500 employees. In Tanzania, the Enterprise Survey sample frame suggests there were just 244 firms countrywide with more than 100 employees. For comparison, the US has 19,000 firms with over 500 employees and 107,000 with over 100 employees. There are even fewer internationally competitive firms. Sutton suggests that just 13 firms account for three quarters of Mozambique’s exports, 22 firms for about one half of Tanzania’s, 27 firms for 62 percent of Ghana’s exports, and 31 firms for about half of Ethiopia’s.

The challenge of catalysing private sector led growth in Africa is immense.