Weekend reading links

1. The  yield curve represented by the gap between the two- and ten-year US Treasury yields has been inverted since July 2022. 

At the deepest point of inversion in July last year, 10-year notes offered 3.9 per cent, against almost 5 per cent for two-year debt. This week the gap shrank as low as 0.15 percentage points but still remains inverted. And regardless of the precise curve being measured, this current inversion over 19 months and counting is the longest since the early 1980s... An inversion has preceded every recession in the past 60 years and only sent a wrong signal through inverting once, in 1965, according to a 2018 paper by economists for the Chicago Federal Reserve.

2. Good summary of democracy's Greek beginnings. It's as relevant today as it was then.

Before Athens acquired the form of government that its founders called demokratia in 507BC, the main political faultline wasn’t tyranny vs the people; it was the ever-wealthier rich vs the vulnerable poor. Wealthy landowners leased property to the poor, who worked it for a living. Every so often, the owners would increase their rents. If tenants couldn’t afford to pay, the rich offered them loans at high rates of interest. The wealth gap widened. Tenants struggled, defaulted on their debts. Athens’s plutocracy-friendly laws allowed creditors to force debtors into slavery, until poorer Athenians revolted. In the early sixth century BC, terrified plutocrats asked a man called Solon to fix things before they got worse. He made it illegal to enslave debtors, created stimuli for a range of new trades and abolished hereditary political privileges. This wasn’t yet full democracy, and Solon’s new deal soon failed. The plutocrats went back to exploiting their compatriots, who did what the vulnerable always do: turned to a tyrant who promised to fight their corner. Though Peisistratos confiscated some of the nobility’s lands and gave them to the poor, this didn’t lead to democracy, since the tyrant monopolised political power for himself and his family.

When a group of well-born Athenians deposed Peisistratos’s son, they realised two things. First, that very unequal societies are less stable, productive and humane than those where inequalities are held in check. Second, that you can’t trust a single class or party to do the checking in a way that seems fair to all. The reformers put all free Athenian men on a more equal footing than ever before and redesigned government into units where rich, poor and middling citizens were forced to sit together in assemblies, arguing, compromising and rotating positions by lot... According to the Solon story, democracy was designed as a realistic solution to a concrete problem: how to stop the endless civil strife that came from gaps in personal and social security between richer and the rest. This was common democratic sense for centuries before the modern era introduced a sharp ideological divide — initially within a broad liberal tradition — between weakly and strongly regulated markets. Democratic freedom isn’t a condition where my private wishes can roam unchecked and acquire as much power or wealth as I can without considering how this affects others. It’s a key part of a power-sharing scheme called democracy. What makes democratic freedom democratic is precisely that it sets limits on my personal freedoms within this scheme, leaving opportunities and decent options for everyone else. 

3. The impact of Houthi attacks at the entrance to the Red Sea is staggering

Hundreds of ships are avoiding the Suez Canal and sailing an extra 4,000 miles around Africa, burning fuel, inflating costs and adding 10 days of travel or more in each direction... About 150 ships passed through the Suez Canal, which lies at the northwest end of the Red Sea, during the first two weeks of this January. That was down from over 400 at the same time last year, according to Marine Traffic, a maritime data platform... Shipping companies have tripled the prices they charge to take a container from Asia to Europe, partly to cover the extra cost of sailing around Africa. Shipowners that still use the Red Sea, mainly tanker owners, face rising insurance premiums.

4. The wisdom of owning the market

Despite that fierce bear market — and six others, including the pandemic bear market that began on Jan. 3, 2022 — these are the returns of the S&P 500 over the long haul from Aug. 31, 1976, through November, according to Bloomberg: Based on price alone, the S&P 500 rose 8.4 percent, annualized, or a cumulative 4,338.6 percent. Including dividends reinvested regularly in the index, the total return of the S&P 500 was 11.4 percent annualized, or a cumulative 16,145.4 percent.

5.  Infrastructure has been the hottest asset class in 2024. First came the purchases of Global Infrastructure Partners by BlackRock for $12.5 bn, making it the third biggest infrastructure asset manager after Macquarie and Brookfield. This was followed by the acquisition of UK infrastructure fund Actis by General Atlantic. And now Macquarie has announced that it had raised a record €8bn for its new European infrastructure fund. This is the firms seventh European infrastructure fund and the largest ever. 

The prospects of increased investments in combating climate change, re-alignment of global supply chains, increased investments in chips, investments in data centres to power the AI revolution etc is driving the momentum on infrastructure. Macquarie has about €170 bn in real assets under management.   

The latest fund is targeting a low double-digit net internal rate of return. Investors are mainly pension funds and insurance companies but the group includes sovereign wealth funds and family offices. Macquarie is also working to bring on wealthy individuals as backers in its infrastructure funds. About half the fund’s investors are based in Europe, the Middle East and Africa, with about a third in the Asia-Pacific region and the remainder in the Americas. The target for the fund was €7bn- €8bn.

6. Interesting point about how food prices in India appears to have decoupled from the global price trends.

India has become self-sufficient and even an exporter in all food products other than edible oils and pulses. 

7. The protests by EU farmers this week is an illustration of the political economy challenges in fighting climate change. Despite its small share of the output, agriculture forms a major share of the EU's budget,

Agriculture contributed 1.4 per cent to the EU’s gross domestic product in 2022, according to the commission, but it employs some 8.7mn people, many of which are in eastern and southern Europe. The EU’s €387bn flagship Common Agricultural Policy, a framework of subsidies for farmers, accounts for around a third of the bloc’s 2021-27 joint budget.

The protest are being driven by discontent at EU regulations on agriculture

The protests are in large part driven by dissatisfaction with policymakers who prioritise cutting carbon emissions and preserving biodiversity over supplying consumers with homegrown food. Farmers are particularly angry with the bloc’s “farm-to-fork” strategy and other regulations they say damage their competitiveness against imports, even as they struggle with inflation and more extreme weather... The German government’s attempts to scrap an agricultural diesel subsidy, an edict to cull cattle herds in Ireland and an influx of Ukrainian grain into neighbouring EU countries has further infuriated the sector... 

Edwige Diaz, an MP from the RN in the French parliament from the Gironde region of south-west France, said their message of defending farmers from the excesses of Brussels regulation and unbridled globalisation was hitting home. “We want to cancel the EU’s farm-to-fork strategy, which would drastically cut farm yields in the name of preserving nature and the planet, yet make us more reliant on imports that do not respect any such rules,” she said. “Farmers will have little hope of things changing unless those in government are replaced.”

The discontent has provided fertile ground for far-right political parties to tap into. 

8. More signatures of "soft landing" for the US economy.

The US economy grew at a 3.3 per cent annualised rate during the final quarter of last year, capping off a strong 2023... For the year as a whole, the US economy expanded by 3.1 per cent, confirming it was the world’s fastest-growing advanced economy in 2023... Separate data released on Thursday showed consumer prices rose at an annual rate of 1.7 per cent in the fourth quarter, down from 2.6 per cent three months earlier... While the pace of growth in the fourth quarter cooled from the breakneck 4.9 per cent rate set in the previous three months, it was far higher than economists had expected. The 3.1 per cent expansion for the year as a whole also beat forecasts.

The US personal consumption expenditure index, the key measure of inflation that Fed uses in its rate setting decisions has been on continuous decline.

In the meantime more evidence that the ongoing decline in inflation has mostly been due to restoration of supply than actions of the Fed.

The CEA calculates, using research by Janet Yellen before she became Treasury secretary, that 80 per cent of recent disinflation was due to supply swings. Which, of course, lie outside the Fed’s control — and its models. 

See also this about how economists got it all wrong again about predicting the economy. 

9. Japan's labour force challenge in a graphic - 11 million workers short by 2040.

10. Fascinating contrast between the characteristics of two industries which are among India's largest exports - petroleum products and software.

India boasts of vast production capacity in one industry. The country is the world’s third largest exporter of its industrial products... Over 90% of the value generated in this sector accrues to capital owners. Thus, the positive wealth effect of these exports is limited. As it is one of the least labour-intensive industries, it employs only around 300,000 people. Almost all its raw material is imported, resulting in the highest foreign value-added content in Indian exports among all industries, and low employment generation via backward linkages... This is India’s refined petroleum industry, which contributes more than 20% to our merchandise exports in value terms. Contrast this with India’s leading services export: information technology (IT). Today, its exports in value terms are 1.5 times that of petroleum exports. Back in 2012-13, both were at nearly similar levels. The domestic value-added content of IT exports is among the highest. The labour share of value addition is only a bit less than 50%, compared to under 10% in refined petroleum. Close to 60% of employment in the sector is related to exports. Direct employment by IT services in India is estimated at 5.1 million, so about 3 million jobs are export-related. IT services have backward and forward linkages in sectors like transport, hospitality, security and housekeeping services, personal services, apart from the demand their employees generate for real estate, consumer durables, etc.

11. Finally, Andy Mukherjee points to the very poor returns from India's IPO market.

Analysts at Mumbai- and London-based YK2 considered all the 300-plus mainboard issuances since January 2004 with a 10-year trading history. The average IPO in this set has returned -3.5 per cent a year, according to their calculations, turning a Rs 100 ($1.2) investment into Rs 70 a decade later. It doesn’t matter whether they listed in 2004 or 2013, or any year in between. Indian IPOs have failed miserably at generating additional returns for investors over what they would have earned passively from just owning a broad benchmark. About 77 per cent have underperformed the NSE500 Index over a 10-year period, with average underperformance of more than 14 per cent annually. In other words, the Rs 100 not invested in debutants could have, with very little effort, become Rs 280.

Clearly investors are attracted to IPOs by the lure of the listing gains. One suggestion made is to have a mandatory one year lock-in period for all IPO investors.