Random thoughts on Covid 19

The breakout of Covid-19 in South Korea, Iran and Italy raised more than eyebrows. They raised anxiety levels. I think the source of the outbreaks in Korea and Italy have been traced. They are still China connections. Don’t know about Iran. It is clear that the supply chain disruptions that the virus outbreak has caused could turn out to be permanent.

[An article in Global Times claims that China would maintain reasonable growth despite the virus. It will be interesting to watch the first quarter print.]

Vietnam and Bangladesh could be beneficiaries. Basically, countries that lost market share to China could gain or ones that have been winning market share from China because they are the lower cost substitutes now would win more.

Indian stock markets have seen inflows. But, can India win businesses? Lower tax rates are one thing. But, ease of doing business at the ground level – State and local governments – matters. A ‘World Economic Forum’ briefing note on India (from 2015) is still instructive. It has 19 charts. The chart on labour productivity and on India’s ‘inclusive growth performance’ are worth paying attention to. These issues define the limits of India’s attractiveness. A situation like this reminds us of the extent of our under or unpreparedness to cash in.

A story that appeared in ‘Business Standard’ today noting that the government might fast-track manufacture of technology goods is welcome. Some supply-chain disruptions and hence consequent realignments are inevitable. India will be a beneficiary. The question is how big and how durable will India’s gains be.

Sanctity of contracts is a key determinant of success in weaning businesses away from China and to India. In this regard, recent unilateral abrogation or renegotiation of contracts would not have sent reassuring signals. In November, there was a story in Mint that the Union govrnment was proposing a law to protect international investors. In December, the Economic Times reported that the Union government was coming up with an Ordinance to ensure that electricity purchase (power purchase agreements or PPA) agreements were honoured. As per the news-story, the scope of the Ordinance appeared wider and welcome:

The Centre plans to take a major initiative in the power sector with an ordinance to ensure sanctity of contracts, restrict cross-subsidisation of consumers and force utilities to pay their bills on time, a move that can go a long way in making electricity generation and distribution attractive for investors. [Link]

But, it has not happened yet, to the best of my knowledge.

Just ten days ago, the storyline changed. Now, it appears that the Union government is planning a tribunal that would adjudicate on such cancellation of contracts.

The Finance Minister, in her budget speech (Paragraph 85), mentioned the following:

A stable and predictable business environment is a key objective of this government.  There is also a strong argument for ensuring that contracts are honoured.  India has a sound framework related to Contracts Act. We shall deliberate upon strengthening it.

Perhaps, the tribunal is the practical manifestation of this promise. But, the Ordinance sounded more promising. I hope that happens independent of the proposal on the Tribunal.

Lastly, on the corona virus itself, there is plenty of anxiety to go around. Understandable. But, the Centre for Disease Control has a page on annual incidence of flu. Since 2010, the annual deaths from flu related illnesses have ranged from 12,000 to 61,000 in 2017-18. 2011-12 recorded the lowest number of deaths around 12,000 – according to this page. This is only for the United States.

Globally, the World Health Organisation provides the following information:

Worldwide, these annual epidemics are estimated to result in about 3 to 5 million cases of severe illness, and about 290 000 to 650 000 respiratory deaths. [Link]

So, we need to get a perspective. If anything, anxiety lowers immunity. Good hygiene (hand sanitisers, salt water gargling, nasal hygiene), alertness, awareness, minimising or eliminating travel to colder zones and to affected areas and some luck should suffice.

As we grow hyperanxious based on circulating rumours and even news on stories that have little relevance for us, we would do well to check out some of the biases that humans are prone to (ht: Rohit Rajendran). They may relieve anxiety, induce laughter and, I hope, some reflection.

STCMA 20th February 2020

In the longer term, eating a western-style diet contributes to obesity and diabetes, both of which have been linked to declines in brain performance and the risk of developing dementia. “The new thinking here is the realisation that a western-style diet may be generating initial and fairly subtle cognitive impairments, that undermine the control of appetite which gradually opens the way for all of these other effects down the track,” Stevenson said. [Link]

The header of the research paper on which the article is based is interestingly and cautiously worded:

Hippocampal-dependent appetitive control is impaired by experimental exposure to a Western-style diet [Link]

Katherine Pistor is right that limited liability might have outlived its usefulness and that its harmful effects are beginning to dominate. But, who is to bell the cat?

But the greater the number of countries adopting such statutes, the less successful these strong-arm tactics will be.

This is as critical as it is difficult. Regulatory arbitrage across nations will be the norm. On some issues, the world needs, well.. a world government.

Andrew Batson’s blog post, ‘The theater of state power’ is worth a read. It is about China’s heavyhanded response to the Coronavirus outbreak.

Brad Setser’s blog post on tax-avoidance and tax evasion practices of American pharma and tech. companies and their contribution to the American trade deficit is very instructive.

IMF advice on capital flows

Kristalina Georgieva, Managing Director of the International Monetary Fund, has written an article for FT on providing sound policy advice to emerging economies. It is conceptual in nature. Nothing wrong with the piece. To the extent it signals intellectual openness on the part of the Fund, it is welcome. 

The elephant in the room is the monetary policy pursued by the developed world. That has become a big and sizeable fetter on the policy options available to developing countries, with their spillover effects. IMF is unable to do much about them, if at all.

For the countries pursuing such policies, their efficacy – taking into consideration the impact on asset markets, real economy and the society at large – is in doubt. At the minimum, a honest evaluation is needed. But, central banks are resistant. Further, governments in those countries are not paying due regard to the long-term effects of such policies – a well-known ‘time inconsistency’ problem.

See this article on the housing bubble in Ireland and its impact on the Irish elections. The role played by QE pursued by the European Central Bank is highlighted.

Unless this is addressed, whatever advice IMF offers emerging economies will be band-aids. Well, band-aids have their uses too.

STCMA – 15th February 2020

German politics thrown into turmoil and debate over the embrace of the Far-Right and Far-Left parties. Should it be done or not? I can understand why it is not an easy decision for German politicians. In other words, I can understand the principled stand that some CDU politicians have taken on this matter, given the country’s history. [Link]

Sinn Fein, known for this earlier violent struggle to get Britain out of Northern Ireland now makes its mark in Ireland. Interesting development. [Link]

Did McKinsey destroy the American middle class? Tempting to say ‘yes’ but that sounds too absolutist. McKinsey might hvae symbolised the trends that took hold since the Sixties in America. Slowly at first and rapidly later. But, did it destroy the middle class single-handedly? Academics from U. Chicago (and similar schools) played a role. Wall Street played a role. To be sure, McKinsey might have recruited from these Universities and these academics would hve also worked for McKinsey. Also, politicians would have also hired McKinsey alumni as their campaign advisors/managers, etc. Their role is formidabe, no doubt. But, the only force? I still have my doubts much as it is tempting to make the firm the lightning rod. This article (ht: Rohit Rajendran) is more about dismissing Buttigieg’s claims to represent the country than anything else, in the end.

Interesting fact:

a mid-century study of General Motors published in the Harvard Business Review—completed, in a portent of what was to come, by McKinsey’s Arch Patton—found that from 1939 to 1950, hourly workers’ wages rose roughly three times faster than elite executives’ pay.  [Link]

‘Brazil’s credit revolution in six charts’ screams a header from FT. It sounds more like an unsustainable credit boom as one purveys the six charts. I doubt if it would last. Does not feel like it. I could be wrong. Lots of unsustainable trends in financial markets are still sustaining.

The header of this article in ‘The Economist’ tells the tale well – that analysts’ recommendations reflect their cultural biases. Who knew?! Well, not to be cynical. Once told, it appears self-evident and it is also good to document it systematically as the paper, on which the article is based, does. Useful to remember in case you are still a believer in ‘sell-side’ research.

This Morgan Housel blog post (ht: Rohit Rajendran) on 7th February 2020 is a very good read for the painstaking compilation of headlines from the decade of the Twenties from the United States. ‘Nothing is inevitable’, says he. Is that so?

Ross Douthat’s ‘The Age of Decadence’ in New York Times is extracted (ht: Rohit Rajendran) from his forthcoming  book, ‘The Decadent society’. The prose is good and the arguments appear compelling but it leaves one with a sense of incompleteness. He thinks that the current age of decadence in the West (the definition of ‘decadence’ is interesting) could be worse and that there is nothing inherently abhorrent or objectionable or negative about it. All comfortably prosperous societies eventually arrive there. Attempts to fix it through Leftist- revolutions (Sanders and Warren?) might make the situation more dangerous is a point that the author appears to be making. Apparently, the Roman Empire was in a state of decadence for nearly four centuries. So, at the end, not sure what the point of it is all. 

Gratifying

Journal of Economic Perspectives is published by the American Economic Association. Its latest issue has a ‘Symposium on India’. See here. There are three interesting essays.

Scroll down and you will see this. Download the PDF from here. (ht: Amol Agrawal of ‘Mostly Economics’ fame).
 
Turn to page 3 and see this:
 
Venkatraman Anantha Nageswaran and Gulzar Natarajan explore “India’s Quest for Jobs: A Policy Agenda” (Carnegie India, September 2019, https://carnegieindia.org/2019/10/03/india-
s-quest-for-jobs-policy-agenda-pub-79967).
 
“By 2020, India is expected to be the youngest country in the world, with a  median age of twenty-nine, compared to thirty- seven for the most populous country, China. …The burgeoning youth population has led to an estimated 10–12 million people entering the workforce each year. In addition, the rapidly growing economy is transitioning away from the agricultural sector, with many workers moving into secondary and tertiary sectors. Employing this massive supply of labor is, perhaps, the biggest challenge facing India.
 
…India is often considered one of the most difficult places to start and run a business. …One of the biggest hurdles that potential enterprises in India face is the complexity of the registration system—all enterprises must register separately with multiple entities of the state and central governments. …
 
Further, there are registrations specific to sector or occupational categories—for example, manufacturing enterprises with more than ten employees must register with the labor department under the Factories Act. …
 
According to current labor laws, service enterprises and factories must maintain twenty- five and forty- five registers, respectively, and file semi-annual and annual returns in duplicate and in hard copy. Furthermore, regular paperwork tends to be convoluted; salary and attendance documents should be simple but instead require tens of entries. …All these requirements add up to impose prohibitive costs that reduce the success of these businesses.”
 
This paper can be read as a complement to the three- paper “Symposium on India” in this issue.

Readings related to the coronavirus

WHO has called it COVID-19. Much of what passes through our WhatsApp is useless, noisy, distracting and disturbing. We can avoid crowded places and keep washing our hands or keep using sanitisers. We can be conscious about not taking our hands to our faces, if it is voluntary, that is. Beyond that, there is precious little we can do about it.

BofA thinks that the virus may have peaked. They are not sure though. It might be wishful thinking too although I hope they are right. Chris Wood of Jeffries thinks that it may have peaked in China but he is not sure of other places.

In the meantime, this story in WSJ is for those who are news-junkies and want to know as much as there is there to know about the virus, without being able to do much about it.

Some 66.67% of China’s airlines are grounded, says this story in FT.

China’s small companies are in trouble because of businesses being forced to shut down as provinces shut down and that means, in turn, banks are in trouble. Amidst all this, it will be interesting to see how much of a slowdown in the economy that official statistics reveal and for how many quarters.

Interesting:

In a twist of history, Wuhan was where the first shots were fired in the 1911 revolution that toppled the last emperor of the Qing dynasty. Today it is the source of a terrifying plague that has already spread across China and around the world and has prompted the biggest ever attempted quarantine of a population — some 60m people. [Link]

There is always something interesting to learn from Jamil Anderlini, who writes for FT.

A ‘pushback’ letter in FT from a fund manager (unsurprising) to Jamil’s article.

The story of how the virus is directing enquiries on apparels get diverted to India does not sound that encouraging for India. It does not look like India is in a position to take advantage of it.

STCMA- 5th February 2020

A long story in FT on how the Dutch have tried to protect themselves from flooding, after some major disasters in the 19th century. The contrast with the American approach (reliance on private and individual solutions) is interesting. The latter might not work for problems such as these. Collective approach might be needed.

John Cassidy writes about the need for ‘green growth’ or ‘degrowth’ (not for all countries) and the pros and cons of them.

As though on cue, some of the models that were used to forecast global warming have started giving us less time. Scientists hope that the answers are wrong!

European commercial bankers make the argument against negative rates. These are well-known. But, central bankers – especially the Swiss Natonal Bank – do not seem to be in a mood to listen. Surprising.

Douglas Irwin has a frustrating story (ht: Gulzar) on how Private Equity investors might have contributed to the bankruptcy of ‘Payless’ shoes. This is similar to the story (report, rather) by Joe Nocera on a New York grocery chain that filed for bankruptcy, after having paid a lot in terms of dividends to the PE investor.

Read this in conjunction with the remark in the story on Euroepan commercial bankers asking for reconsideration of negative rates:

David Solomon, chief executive of Goldman Sachs, cited the impact of negative rates in the eurozone and low rates in most other developed economies as a factor in the inflated, multibillion-dollar valuations that private companies such as WeWork have been able to attain. “In an environment where for a long, sustainable period of time interest rates have been zero, and money has basically been free, it pushes people out [along] the risk curve,” he said. “One of the consequences of that is people chase growth, and people start to overvalue growth.”

Last item on ‘Stuff that caught my attention’ edition of 5th February 2020 is the report in print.in on the new chief of IBM and his connection and that of IBM’s connection to IIT Kanpur.