Lack of cohesion in Europe

Italy’s lurch towards full-blown Euroscepticism threatens the bloc’s stability [Link]

In my view, Wolfgang Muenchau has written a thoughtful article, as he more often does, than does not. The attitudes of many Italians and the German youth towards China is bewildering.

He is also pointing out that Merkels’ ‘Hamilton moment’ – the joint Franco-German proposal to issue EU debt of EUR500.0bn to provide grants to some Southern European nations may not quite make a dent in their situations.

That said, at the margin, it is a step forward. Interesting that Bloomberg and FT have a different ‘take’ on the response of the four frugal states – Austria, Denmark, Sweden and the Netherlands. See here for Bloomberg’s coverage and here for FT’s reporting on the paper that the ‘Frugal Four’ put out over the weekend.

Covid switches crops and other links

This story appeared in ‘The Indian Express’ a while ago and it shows the positive effect of the law of unintended consequences. Punjab farmers were growing a lot of rice and wheat. The deleterious effects of them on Delhi haze, on groundwater, etc., were well documented by Mridula Ramesh in this article published in ‘First Post’ in November 2019.

The law of unintended consequences operating in its usual not-so-happy ways is documented here. It is about how America’s ‘Cares Act benefits for those who lost their jobs pays them more than what they earned while employed. I have no personal quibble here but down the road it will have repercussions on getting people back int jobs, especially if no vaccine is found.

Warren Buffett selling down his Goldman Sachs and also exiting airline stocks sends a big message. See here and here.

But, stock investors are not listening. Quite what makes them deaf to such messages is beyond me. Myopia, Fed liquidity, years of ignoring and forgetting how to price risk…? Two good warning messages here and here, for what they are worth.

Pompeo calls WHO decision not to invite Taiwan to the World Health Assembly deliberations spiteful. He is right. Taiwan has done very well in controlling the spread of the virus. The world is the loser because of WHO decision that, in turn, was influenced by China.

In the meantime, Japan calls Taiwan an “extremely important partner”.

America moves to cut the supply of important chips to Huawei. The tensions between the two nations have risen several notches for many reasons.

We are all Japan now

By now, enough has been written about the shifting global supply chain dynamics that readers should not expect to take away anything new from this post. If they do, that would be as much due to their creativity as to the content of this post. I am putting this up here just to remember the origins of this discussion about two months ago, nearly.

Noah Smith wrote on March 24th that offshoring left the United States unprepared for the virus:

Economics predicts that businesses decide what to produce based on what makes a little bit more profit. The siren song of marginal profit drew the U.S. relentlessly away from mask production….

… If businesses will always make decisions on the margin, then it’s government’s job to insure the country against big shocks such as pandemics and wars….

The U.S. could have used trade barriers and government support to make sure that the entire supply chain for medical equipment stayed in the country….

… The coronavirus crisis should cause advocates of unrestricted free trade to rethink their blanket opposition to protectionism. [Link]

The Chief Economist of EBRD echoes Noah Smith here:

… almost three-quarters of blood thinners imported by Italy come from China. The same is true for 60 per cent of antibiotics imported by Japan and 40 per cent imported by Germany, Italy and France. …

… This means building in redundancy and perhaps even moving away from the practice of holding near-zero inventories. Costs will certainly rise but, in the post-Covid world, concerns about supply chain fragility will come right after those over cost. Firms will be expected to assess resilience of their second and third-tier suppliers, too. [Link]

This ‘Wall Street Journal’ article on supply-chain financing suggests that there is more to it than what meets the eye. It is not simply a question of borrowing from a bank to pay your supplier. These borrowings are securitised. Buyers – i.e., companies who borrow to pay suppliers – report them differently, etc. What a tangled web, we weave when we financialise things?! A slightly more detailed explanation of supply chain financing is here.

In the end, the accent on margins and wafer-thin inventory that put profitability ahead of safety depended on an inter-dependent and smoothly functioning world. Geopolitics was beginning to change that partly in response to rising domestic inequality and worker insecurity. Voters had to be heeded.

The virus, by putting lives on the line, has lent a huge dose of legitimacy to the moves to re-shore production. In the end, as this article puts it well, “we are all Japan”:

Japan has always consciously viewed its economy as the sum of its companies, their tangible assets and intellectual property, says a retired official from the Ministry of Economy, Trade and Industry. But it has tended, to the intense frustration of investors, to take a much broader view than other countries of which ones needed to be protected to keep that economy intact.

Japan, says the senior executive of one of the country’s largest companies, has long built its policy around the anxieties of an island: coronavirus is now requiring everyone else to do the same. [Link]

The journalist who wrote the above piece has anticipated well:

Manfred Weber, a senior German conservative and head of the centre-right EPP grouping in the EU Parliament, told Germany’s Welt am Sonntag newspaper that he was in favour of declaring a twelve-month ban for Chinese investors who want to buy European firms. [Link]

China rumbles

As countries re-open their economies, that it would be a while before the economy gets back its full mojo is the message of this story from China. Of course, some would argue whether economies ought to get back their full mojo. That is a different issue. Parenthetically, this story with an optimistic header hides a cautious message inside. It is about shoppers returning to shop in Seoul.

I briefly discuss the trade-off between environmental considerations and economic growth in my forthcoming column for Mint on Tuesday. This story in Bloombergquint talks of Delhi air feeling like mountain air. That must have been a great feeling, I must admit.

Associated Press story on the six days that lapsed before China took action on the virus outbreak is an important one. The key portions are these:

The documents show that the head of China’s National Health Commission, Ma Xiaowei, laid out a grim assessment of the situation on Jan. 14 in a confidential teleconference with provincial health officials. A memo states that the teleconference was held to convey instructions on the coronavirus from President Xi Jinping, Premier Li Keqiang and Vice Premier Sun Chunlan, but does not specify what those instructions were….

….On Jan. 20, President Xi issued his first public comments on the virus, saying the outbreak “must be taken seriously” and every possible measure pursued. A leading Chinese epidemiologist, Zhong Nanshan, announced for the first time that the virus was transmissible from person to person on national television.

Right on cue after President Trump mentioned in his press conference that China would face consequences if it was shown to have deliberately lied about the virus outbreak, Australia wanted an enquiry as well.

This, from the UK Foreign Secretary Dominic Raab:

Asked whether relations with China could change, Mr Raab said: “We ought to look at all sides of this and do it in a balanced way, but there is no doubt we can’t have business as usual after this crisis.” [Link]

In this opinion piece by Vijay Gokhale, India’s former foreign secretary, writes about the rumbles inside China. Fascinating.

On Huawei,

Under the proposed rule change, foreign companies that use U.S. chipmaking equipment would be required to obtain a U.S. license before supplying certain chips to Huawei. [Link]

Further on hi-tech exports to China from the United States being diverted for military applications:

Three measures agreed to by senior U.S. officials in a meeting last Wednesday, but not finalized, would introduce hurdles that could be used to stop Chinese companies from buying certain optical materials, radar equipment and semiconductors, among other things, from the United States. [Link]

The road to Japan from Wuhan

Former President Jiang Zemin was scheduled to visit Japan in September 1998.

But heavy rain in China caused massive floods and widespread damage, including in areas around Wuhan along the Yangtze River and Harbin, Heilongjiang Province, along the Songhua River.

To spearhead the response to the national emergency, Jiang made an announcement on Aug. 21 that he would put off his visit to Japan. The death toll from the floods eventually exceeded 3,600.

In October, during the two-month delay, South Korea’s then-President Kim Dae-jung visited Japan. A joint declaration issued after Kim talked with Japanese Prime Minister Keizo Obuchi included a mention of Japan’s “deep remorse and heartfelt apology” over its past “colonial rule.”

This caught Jiang by surprise. As China’s leader, he had to have a similar apology from Japan. But Japan rejected the demand.

According to a Japanese government explanation, South Korea had promised Japan that with this apology, Seoul would never again raise history issues. China had not committed to such a promise and therefore could not be given the same treatment.

Jiang was offended and felt that Japan’s less favorable treatment of China was an insult.

At an Imperial Palace banquet hosted by Emperor Akihito, Jiang, clad in a black Mao suit, went on a barrage criticizing Japan’s military past.

Jiang’s behavior at the Imperial Palace banquet drew a strong backlash from many in Japan, triggering a subsequent deterioration of Sino-Japanese relations that lasted for years. By any account, it was a failed visit. [Link]

This is from a story in the Nikkei Asia Review in the context of President Xi Jinping postponing his visit to Japan.

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 8th December 2019

It has been two weeks since I blogged here. I have not lived off suitcases before but that has happened since late October or at least since mid-November. While I have been reading reasonably widely, I have not been able to translate them into posts. I did finish reading ‘The road less travelled’ by Scott M. Peck. A very good book. A good recommendation by my friend Balaji Ethirajan, Head of Human Resources at TVS Supply Chain Solutions. I have been wanting to post some key extracts from the book. But, have not found sit-down time to do so.

Anyway, here goes some key readings:

This long story in Nikkei Asia Review about Softbank’s investments in India and their mixed performance is a good reminder of how chasing growth at all costs always comes a cropper and yet investors keep repeating the same mistakes.

Raghuram Rajan’s long article in ‘India Today’ on the prescriptions for the Indian economy is about as objective and as balanced as he could be, considering his recent presentations and op.-eds., on this matter.

The story about how the keyword, ‘Mike’ in Bloomberg Terminals took terminal users to the campaign page of Michael Bloomberg is delightful.

A tongue-in-cheek story about riots boosting GDP in France is short and useful too because the riots caused France to increase public spending and the country’s Purchasing Managers’ index is doing better than that of the rest of the Eurozone.

On November 22, China’s National Bureau of Statistics quietly revised the GDP for 2018 upward by 2.1%. That it makes it easier for the country to achieve its goal of doubling GDP in a decade from 2010 to 2010 is incidental, I suppose.

Blackstone’s Private Wealth Management Division calls negative yields on sovereign debt the mother of all bubbles. Quite.

Amundi Asset Management’s Survey of pension managers on the impact of QE on their pension assets is featured in FT here. For those who want the full story, it is available in Amundi website. A few keystrokes would help you find it.

On California Forest Fires and risks of flooding in the US, check this link. The article also says that the Netherlands has addressed flooding risks well. The FT story on Sydney bushfires is worth a read. Delhi feels like a anti-haze haven! Actually, when I landed in Delhi on 3rd December evening, I was very pleasantly surprised to see how clear Delhi was from the sky. I had not experienced such a sight in several years.

If you want to see photos of the damage wrought by Australian bushfires, click this link. Apparently, Australia is experiencing one of its worst droughts in decades.

The White House has opposed a USD1 bn bank loan to China. Should not be surprised.

Martin Sandbu’s long read on how the Euro is taking on the US dollar is more a story of hope than promise or substantive reality. American Treasury officials would not spend sleepless night after reading this story.

I must learn this practice of how not to have to read books in full.