Weekend reading links

1. Larry Summers is Exhibit A of how the Democratic Party has been captured by the elite interests, both Wall Street and Big Tech. His views about Open AI is representative.

OpenAI board member Larry Summers says the recursive self-improvement aspect of AI will have a "transcendent" impact and any attempt to slow or stop development will play into the hands of America's enemies.

It's the unqualified embrace of AI (and specifically as a spokesperson of a private company with several questionable corporate governance concerns) that's a matter of deep concern. 

2. Good primer that describes India's entry into the JP Morgan Emerging Markets Bond Index (EMBI) from June 28.

India will gain a 10 per cent weight in the GBI-EM Global Diversified Index in phases, with 1 per cent added each month, reaching the limit by March 2025... Launched in June 2005 as the first comprehensive global local emerging markets index, GBI-EM tracks local currency bonds issued by emerging market governments. It took a long time for India’s $1.3 trillion government bond market, the largest among emerging economies after China and Brazil, to enter the global index... the trigger for the inclusion is more to do with Russia’s exclusion from the index... Russia had around an 8 per cent weight in the GBI-EM index. After its exclusion, Indonesia, Mexico, China, Malaysia, and Brazil – five of the 18 countries in the index – each have a 10 per cent weight. India, the 19th nation with access to the index, will be the fifth member of the 10 per cent-club by March 2025. India will eat into the shares of Malaysia and Brazil, apart from Thailand, South Africa, Poland, Czech Republic, Colombia, and others. Serbia, Uruguay, and the Dominican Republic have the least share – less than 1 per cent each... 

In 2020, the RBI removed limits on foreign ownership in certain bonds by introducing the Fully Accessible Route (FAR). Eligible bonds for JP Morgan indices must have a notional outstanding amount of at least $1 billion and two-and-a-half years to mature. So, only those government bonds that are designated FAR and maturing after December 31, 2026, will be eligible to enter the GBI-EM global index suite. There are currently 29 such bonds... Along with the GBI-EM Global Diversified Index, India is also expected to enter other JPMorgan bond indices such as the Asia (ex-Japan) local currency bond index called JADE Global Diversified Index, Jade Broad Diversified Index, and other aggregate suite of local currency indices. In these indices, India’s weight will be close to 15-20 per cent over the 10-month period until March 2025. Overall, JPMorgan government bond indices for emerging markets have $236 billion in assets under management (AUM)... foreign investors have used just 14.17 per cent of their allowed limit in the general category. Their investment in state development loans (SDLs) is 2.41 per cent of the limit. The aggregate holding of foreign investors in the FAR category is also very low – around Rs 1.86 trillion out of an outstanding portfolio of Rs 40.56 trillion...

One can expect $23-24 billion in foreign funds to flow in over the next 10 months – around Rs 17,000 crore a month. Once Bloomberg and FTSE Russell follow JPMorgan, the flow will increase. The inclusion will also facilitate passive flow to the Indian bond market, similar to index fund investment in Nifty, where every stock of a particular index gets investment according to its weight in the index.

3. Indonesia's EV industrial policy on the back of its vast nickel reserves is starting to bear results. FT reports that Hyundai and LG Energy Solutions have opened a $1.1 bn battery cell plant in Indonesia, the country's first, and with an annual production capacity of 10 GW hours. China's BYD and Vietnam's VinFast have already announced that they will begin making EVs in the country, and China's CATL, the world's largest EV battery maker, has already started construction of a battery plant. 

Hyundai and LG will invest a total of Rp160tn ($9.8bn) in Indonesia’s EV ecosystem in stages, he added. Investment minister Bahlil Lahadalia said the South Korean companies would begin constructing the second phase of the battery cell factory, which will have an annual production capacity of 20 gigawatt hours, with an investment of $2bn. The battery cells from the Indonesian plant will be used in Hyundai and Kia’s EV models. Indonesian officials have also said about 90 per cent of the factory’s products will be exported to South Korea and India...

Widodo’s ban on nickel ore exports in 2020 forced foreign companies to invest onshore. The bulk of that investment has come from Chinese companies into the nickel processing sector. But Indonesia has been offering incentives such as tax breaks to woo nickel and EV-related investments from around the world. Hyundai said in 2021 that the Indonesian government had agreed “to offer various incentives and rewards to support the stable operation” of its battery cell plant.

This graphic captures Indonesia's nickel market dominance.

4. The staggering and disturbing rise of futures and options trading in India

Nithin Kamath, founder of stockbroking firm Zerodha, said on X: “We are in the middle of a period of excess in options trading. Volumes in index options have gone up from Rs 4.6 lakh crore (Rs 4.6 trillion) in 2018 to Rs 138 lakh crore (Rs 138 trillion) in 2024, and, more importantly, the share of retail has gone up from 2 per cent to 41 per cent.

5. Climate change is deeply impacting foodgrain yields and thereby leading to food price inflation.

Over the next decade, some of the world’s most globally important crops may be in short supply as rising temperatures and more frequent extreme weather events hamper harvests. Wheat yields, for example, are drastically reduced once spring temperatures exceed 27.8C, yet a recent study found that the major wheat-growing regions of China and the US were experiencing temperatures well in excess of this increasingly frequently. Heatwaves that were expected to occur once every hundred years in 1981 are now expected every six years in the Midwestern US and every 16 years in northeastern China, according to the research by the Friedman School of Nutrition Science and Policy at Tufts University. Rice, soyabeans, corn and potatoes are among other staples that could see yields plummet. For many crops, higher temperatures mean lower yields...

The changes in climate and weather patterns are also altering growing seasons and creating new pressures from pests and diseases. In Ghana and Ivory Coast, which produce two-thirds of the world’s cocoa beans, heavy rainfall last summer created the humid conditions perfect for black pod disease — a fungal infection which rots cocoa pods — to thrive. This, coupled with other diseases and poor weather, knocked yields and led to a global crop more than 10 per cent smaller than the year before... The ECB researchers, for example, found that temperature increases prompted a sharp decline in productivity and rise in inflation once they exceeded a certain threshold. Depending on the crop, a temperature increase of 5C, from 20C to 25C, might have less impact on yields and inflation than one of 2C, from 34C to 36C, for example.

6. The new-found love for stock market investing among Indians shows no signs of letting up.

7. Shein and Temu the low-cost Chinese clothing and home items retailers who have built their e-commerce business models by selling cheap Chinese imports to households in the US and elsewhere and have captured a rapidly expanding market share may be staring at an end-game. 

Consider this about the customs duty risk.

Temu and Shein are able to charge low prices partly by shipping items in small packages direct to consumers, thereby avoiding customs duties. The EU, US, and UK apply “de minimis” rules which set a monetary threshold below which imported items are able to avoid duties. The allowances are designed to avoid placing onerous costs on small businesses and households for low-value consignments. Customs procedures for such items are often uneconomical. The European Commission is now exploring scrapping its €150 threshold. American politicians have been considering lowering or removing its generous $800 ceiling too... The strategy gives consumers — especially at a time when they are stretched by a cost of living crisis — access to cheaper products and wider choice... Indeed, while the Chinese retailers compete well on price, deliveries take longer, and the products are not always the most durable... A European toy industry body recently found that 18 out of 19 toys it test-bought from Temu posed a real safety risk for children. “De minimis” rules should not be a back door for unethically sourced items to enter western markets. Shein has faced allegations of forced labour in its supply chain, which the company denies.

And this about sustainability. 

Shipping $10 dresses from China to the US for free adds up. One estimate puts Temu’s cost of shipping and handling per package at around $11. Between that and the billions spent on marketing, Bernstein thinks Temu made an operating loss of $4.6bn last year. This does not look sustainable.

Instead of letting the two companies burn themselves out, Amazon has announced plans to compete with them by launching its own direct from China retail service.  

8. The UK elections once again highlighted a wildly problematic issue with first-past-the-post voting systems.

Four and a half years ago, Jeremy Corbyn’s Labour party received just over 10mn votes in the UK’s 2019 general election — a third of all that were cast. This performance resulted in Labour winning 202 seats in the House of Commons, its lowest tally since the 1930s. Wind forward to yesterday and Sir Keir Starmer’s Labour party received half a million fewer votes than in 2019, again a third of the popular vote. This performance has been rewarded under our first-past-the-post electoral system with a huge majority and 412 seats so far, the second-highest tally in the party’s history.

As John Burn-Murdoch writes, Labour's sweep should not be mistaken as a conclusive verdict for Labour.

A huge 48 per cent of those who intended to vote for Starmer’s party said the main reason was to get rid of the Tories, with far fewer giving a positive motivation relating to Labour and its policies. Seat counts have dominated the narrative of this election more than any before it, facilitating comparisons to Tony Blair’s 1997 landslide. Look deeper, though, and the similarities with 1997 fade. Starmer has much less public goodwill than the incoming Blair, and is inheriting a country in a far worse state.

This is an apt conclusion.

Labour’s towering majority is capturing attention for now, but it is built on weak foundations. As James Kanagasooriam, chief research officer at polling firm Focaldata puts it, the coalition of voters that has put Starmer in 10 Downing Street is better understood not as a skyscraper but a sandcastle. As the tide comes in over the next few years, it could well be washed away, just as the Conservative party’s has been this week.

9. Very interesting view point about the rising role of geo-political risks in investment decisions.

“Over the past 20 or 30 years, [geopolitics] has been deflationary, created lower risk and made it easier to invest,” says Ali Dibadj, chief executive of Janus Henderson, the British-American investment group that manages about $280bn in assets. “Going forward it is the complete opposite: it is probably inflationary; it is probably going to create more risk; and it is going to make it harder to invest.” An industry that over the past two decades has been hoovering up mathematicians to devise new trading strategies is now leaning on political scientists for guidance... Last year BlackRock, the world’s largest asset manager, added “geopolitical fragmentation” to its list of the most important trends impacting on global growth and markets, putting it on a par with new technology, global demographic shifts and climate change. When Optiver, the market making firm, kicked off 2024 with a list of “top tail risks” for financial markets, more than half were focused on politics, from a contested US presidential election result to escalation in the war between Russia and Ukraine... Theodore Bunzel, head of geopolitical advisory at Lazard, says the firm set up a dedicated political unit in 2022 as clients were increasingly demanding advice on how to navigate investments in regions such as China... Goldman Sachs followed suit last year with a geopolitical advisory unit.

As to why investors seem to shrug off geopolitical risks and keep pouring money, blame it on the industry's incentive structure.

If the entire market tanks in response to a sudden event, an individual portfolio manager probably would not suffer reputational damage for missing a risk that few people noticed. But if their caution causes the fund to miss out on a marketwide rally, they will be blamed. 

10. Interesting factoid about the rise of manufacturing and women's labour force participation rate

In many Asian economies over the last half-century, the rise of manufacturing has been a powerful force of upward mobility. Incomes rose, poverty lessened and working opportunities opened. Women were at the center of this transformation. In Vietnam, where a factory boom has been especially momentous, more than 68 percent of women and girls over 15 are working for some form of pay, according to data compiled by the World Bank. In China, the rate is 63 percent; in Thailand, 59 percent; and in Indonesia, 53 percent. Yet in India, less than 33 percent of women are engaged in paid work in jobs counted in official surveys.