Gravitas Spark CrowdFunding

Tag: China

  • Is The World Going Full Oligarch?

    Is The World Going Full Oligarch?

    The lettuces won’t be happy. It looks like the UK’s new Chancellor of The Exchequer, Rachel Reeves, and her Autumn Budget 2024 will survive a relatively benign financial market reaction. So far, government debt (Gilts) markets are stable and the domestic-focused FTSE 250 stock index has bounced slightly. Liz Truss will shake her head in delusion but the more understanding reality of today’s world is that the government of the world’s 5th biggest economy was brought down by international asset traders back in October 2022. It probably won’t be the last sovereign state to lose power to commercial interests and yes, money. Simply put, at exactly the wrong moment in time, many of the world’s governments’ ATM spending cards are about to be declined. Check out the following recent headlines:

     

    Interest payments on the national debt (US) top $1 trillion as deficit swells  –   CNBC

     

    IMF warns Japan of debt deterioration in the event of future shock   –   The Japan Times

     

    Why France’s fiscal freak out matters to the world  – Axios

     

    China’s Fiscal Package Aims To Ease Debt Woes, Property Crisis   –  Asia Financial

     

    There’s never a good time for fiscal capacity to be tight. But… literally the planet’s survival is at stake. The climate crisis is everyone’s crisis but governments are expected to lead. Indeed, according to the IEA, governments globally in 2023 spent $1.3 trillion or 1.2% of global GDP on clean energy investment. That bill will surely rise but there’s a big question mark over how the clean energy transition will be funded by stretched governments running record deficits and the highest debt burdens in history. For a clue to that question, let’s take a look at another spending race.

    This race depending on your perspective also has an existential angle. The race, of course, is AI and Packy McCormack’s excellent piece in his Not Boring newsletter has identified a shift in commercial goal – “companies are spending for capability as opposed to straightforward ROI”. Why the ditching of seeking returns on investment? Apparently, the first company to create the AI “Digital God” boils down to an existential pursuit. Loser companies die. Indeed, Larry Page of Google fame has reportedly said many times internally…..

     

    “I am willing to go bankrupt rather than lose this race”

     

    That feels like extremely high stakes thinking. It might explain another development in the world’s most advanced technology economy. It’s one thing for a government to depend on a private company, SpaceX, to conduct an international space rescue mission. But, it’s quite another to see SpaceX’s owner Elon Musk in the words of VP hopeful, Tim Walz, “skipping like a dipshit” at various Trump rallies. Musk may cause me involuntary eye-rolls every time I read him on X or see him on TV but he’s a super-successful builder of future technologies. In fact, he has feet in both existential races with Tesla (climate) and xAI (AI) which is about to raise funds at a $40 billion valuation. If the latter doesn’t feel like an existential race, maybe the monies will convince you. In 2023, just 4 companies – Facebook, Amazon, Google and Microsoft – spent $196 billion or 0.72% of US GDP on AI research and infrastructure. Remember, these companies are really only ‘getting ready’. Furthermore, they are arguably investing at levels which historically would have only been within the compass of sovereign governments.

    I remember reading first about social media companies becoming effectively supra-sovereign powers. At the time, Facebook had 2.5 billion people on its platform, multiples of any other country populations on the planet. Now social media steers business and moves elections, but tech money might be about to go one step further. Forget about tech companies currently rolling out nuclear power for their hyper-scaling data centres. What about a seat in government?  Well, Elon Musk is on the cusp of entering a Trump ministerial cabinet with a role brief focused on cost cutting. I will give you a clue; plenty of those cuts will be in the regulatory, business and tech governance areas. Musk is not alone. Racist rallies in Madison Square Garden or not, big business is keen to put on the Orange war paint for Trump chaos and……… commercial insurance or favour. Check out the latest Trump luvvies from the world of business:

     

    Winklevoss Twins donate $1m each to Trump as champion of cryptocurrency  – The Guardian

     

    Steve Schwarzmann says Trump would be “efficient and effective” president this time – Business Insider

     

    Silicon Valley’s Andreesson Horowitz give Millions to Trump  – Bloomberg

     

    Billionaire Ken Griffin says “expectation today is that Donald Trump will win the White House” –  Fortune

     

    Washington Post flooded by cancellations after Bezos non-endorsement decision  –  NPR

     

    Ooooohh what would Washington Post legends Katherine Graham or Ben Bradlee think in this “Fat Nixon” era? It would appear big tech and big money “broligarchs” see Trump support as commercial insurance at the very least, and possibly a route to unfettered, compliance-light opportunity. One could become dispirited about the overt involvement of big business in politics. But, in reality business was always there in the Washington background. However, it’s not just a US phenomenon.

    Europe has had its share of big business influence on policy. In the UK, they have had trade and Brexit. In Germany, it was the powerful industrial sector and its push for cheap(then) dependency on Russian energy. We will say no more on either policy disaster, except there might be an intellectual reason why US business leaders are in a different universe of wealth creation compared to their strategically inept European counterparts.

    On a final more serious note, perhaps the difference this time is that governments really do need the balance sheets, cash and spending power of big tech. Just six US technology companies – Apple, Amazon, Google, Meta, Microsoft and Nvidia – have a combined market value of $15 trillion. For context, that $15 trillion equates to the  GDP of China as recently as 2020. In this writer’s reluctant view, politicians have two options – tax these guys or become partners. It might seem distasteful but public-private partnership is now an existential fact of life….or death.

    Gotta dip with the dipshits.

     

  • Watch Out For Joyful Asset Shocks

    Watch Out For Joyful Asset Shocks

    Wow, what just happened! In the last 33 days we saw an incumbent US President forced out of his re-election campaign, financial markets take a battering, Japan’s Nikkei dropping 20% in just two days’ trading,  the Republican National Convention celebrate polls predicting the second-coming of their Cheesus, and a likely funds-deprived military capitulation of Ukraine to Agent Orange’s mate in the Kremlin. It was all rather scary and in the financial markets the ‘fear gauge’ measured by an options derivative, the VIX index, rocketed from its long-run median level of $17.6 to $60 on the 5th August. In fact, that was the largest single-day increase in the ‘fear index’ in history. Then, over the next 7 days it fell right back to its average $17 level. Incredible. But, not even the VIX could have foretold the emergence of the ‘joyful warrior’ Kamala Harris as the pollsters’ best current bet for the White House in the November election, nor the invasion of Russian territory for the first time since 1941 by Ukrainian soldiers (in German tanks!!). These are amazing geopolitical turnarounds but not necessarily the type of shocks to move financial markets. However, we’d like you to think about a few developments which really could shock….in a good way.

     

    Productivity: The scary headlines would suggest recent ‘revisions’ of US jobs data revealed a less healthy US employment picture. The revisions showed that the statisticians over-counted the number of jobs created in the year to March 2024 by 818,000. However, before we go all wobbly-kneed about job creation moving at a pace of  ‘only’ 175,000 new jobs per month (vs previous estimate of 245,000) we need to consider that US GDP growth numbers have not changed. This means that labour productivity which has stalled for decades is picking up serious speed. Hmmm. Anyone tempted to ask ChatGPT what’s going on? Well, our AI boom might be beginning to pay dividends but in a more subtle way. Probably the best read of the week is a guest contribution by Brian Albrecht, Chief Economist at the International Centre for Law & Economics, on Noah Smith’s always excellent blog. Two snippets really hit home with me. First, the subtle impact of AI:

     

    To be clear, the progress isn’t about chatbots. Instead, it’s about small improvements across every sector of the economy. It’s the human resources manager using AI to sift through resumes more efficiently, the logistics planner optimizing delivery routes in real-time, or the data analyst automating report generation. These minor advances, multiplied across millions of workers and thousands of businesses, are what will ultimately drive significant productivity gains.

     

    Second, massive change in productivity could be already under way but is hidden by upfront costs like training, reorganizing workflows and designing new processes:

     

    The computer revolution offers a helpful parallel. In 1987, Nobel laureate Robert Solow famously quipped, “You can see the computer age everywhere but in the productivity statistics.” This “productivity paradox” persisted for years. It’s almost comical now to think of 1987—when the original Macintosh was brand new, and C++ was just gaining traction—as an era when “the computer age was everywhere.” Even then, the transformative potential of computers was clear to many observers. Despite the invention of the personal computer in the 1970s, we didn’t see significant productivity gains until the late 1990s. Why? It took time for businesses to figure out how to use computers effectively, redesign workflows, and develop complementary innovations.

     

    My own sense of things is that we are obsessing over generative AI (chat bots) and missing the integration of AI applications which have been around far longer than ChatGPT or Gemini; think machine learning, automation, robotics, virtual assistants etc. Of course, with far more powerful digital assistance available this has a potentially huge impact on the formation of new companies.

     

    New Business Formation: The US Census Bureau shows that 5.5 million businesses were started in 2023. This is the highest total ever and is a 57% increase on the numbers prior to Covid in 2019. Recent data from Ryan Decker and John Haltiwanger at the US Federal Reserve showed a surge in new business formation, particularly in hi-tech industries. But, there’s a pick-up in business formation in sectors like construction and building services too. These trends point to fresh ideas, innovation and pressure on incumbents to keep pace. It also points to higher productivity ahead. Our reference to ‘old economy’ activities like construction is deliberate because there is another forgotten sector beginning to stir.

     

    Critical Materials: This week the price of a gold bar reached $1 million for the first time ever. I’m no gold bug and I really don’t want to get into a philosophical debate about stores of wealth and inflation protection. But, I do know one thing. Gold tends to lead when the mining sector is due a recovery. Mining has been in the naughty corner for almost 15 years but I’m beginning to wonder whether sovereign anxiety over the supply of critical materials will lead to not just regulatory action (see the EU Critical Raw Materials Act) but actual sovereign/state investment in mining assets? If AI is now considered by nearly all experts as a sovereign-level risk race then the sector critical to industrial supply chains and decarbonising the planet could be about to receive its own positive sovereign attention.

     

    Electric Vehicles: Finally, on the theme of global decarbonisation, we could be on the cusp of a serious acceleration in electric vehicle (EV) adoption. Consider the following three developments:

     

    *For the first time ever in July, more than half of all vehicles sold in China were electric.

     

    *BMW pulled ahead of Tesla as the lead EV brand in Europe last month for the first time. Note to Elon Musk, Silicon Valley “broligarchs” and a few tech heads closer to home; funding a felon can be brand destructive.

     

    *Electric vehicles are now cheaper than combustion models in China.

     

    So, the competitive landscape is broadening out with Chinese and European players catching up with Tesla. This also means production of EVs is ramping up as market penetration of the total auto market approaches 20%. This production volume surge also has cost implications. According to Wright’s Law, used by MIT and proven in the wind and solar markets, when production of an item doubles the cost of producing that item falls by 20%. Critical to the EV revolution is the cost of lithium-ion batteries, and the cost of those batteries has fallen by 90% since 2010. Indeed, as the headline above suggested, China has reached a critical market penetration inflection point. Given the cost of batteries in China have fallen by 51% in just the last year, one can understand why EVs are racing past combustion models. Get ready for the virtuous circle of more production, lower costs and accelerated consumer adoption globally.

     

    All four developments above are capable of delivering significant positive shocks to the global economy and could be perfectly timed for a joyful new US President. Whoodathunk!

     

  • A Few Pictures Of Promise

    A Few Pictures Of Promise

    So, despite all the scary headlines and genuine bad-actor or bad-bot risks, artificial intelligence (AI) now officially rules the financial world. Nvidia, the AI chip superstar, is now worth a staggering $3.327 trillion and has overtaken Apple and Microsoft as the most valuable company on the planet. Or to put it in simple futuristic terms, investors are expecting greater returns from this company over time than from any other company operating today. To quantify the sheer scale and speed of the change in expectation from investors, let me paint a slightly different picture. Just over 3 years ago in March 2021 the market value of Nvidia was just $330 billion. So, in just over 3 years financial markets have changed their view of Nvidia’s future by $3 trillion. Wowzers. Now, in the spirit of changing views, allow me to present a few more pictures which promise better things than current headlines might suggest.

    The perception and headlines written post the recent European elections would suggest Green/climate candidates suffered setbacks and populist near-term promises won the day. Indeed, closer to home, Green Party leader, Eamonn Ryan, has decided to step down. A rushed analysis might suggest voters have decided that climate crisis policies have stunted growth and opportunity. However, the following chart from the Financial Times using World Bank data suggests reducing carbon emissions can be achieved, or can be ‘decoupled’, while countries’ growth trajectories diverge in a positive way:

     

     

    Another area perceived to be struggling with our ambition to decarbonise the global economy is electricity. In our last article we certainly identified a significant need, and worrying potential shortage, for critical metals like copper to assist the electrification of economic activity. However, a more encouraging perspective might emerge from an unusual source. China gets bad press on coal, pollution and environmental damage but its electricity story is a global leader. The excellent writer, Noah Smith, has pointed out that China is miles ahead of every other country and could arguably be described as the world’s “first major electrostate”.  The next chart or picture doesn’t lie and is based on data from sustainability research group, RMI:

     

     

    Perhaps, China is a good example of how countries or regions can gain a laggard reputation but can then become a leader. For example, Europe’s productivity growth has lagged the US for almost 2 decades. Incredibly, the GDPs of the US and EU were roughly the same size back in 2008. Today, the US economy is 44% larger than that of the EU. The productivity story in this Financial Times graphic is pretty stark and uses LSE Group data:

     

     

     

    Clearly, the digital revolution has been a big factor in that productivity divergence. However, it’s more nuanced than just digital adoption. Bluntly, US capital backed its entrepreneurs and its flagship digital leader companies in a big way, and in frustrating contrast to a more risk-averse European business and investment culture. It’s not just a finance thing. The US became the coding and software capital of the world. Software developer talent was paid extremely well, were encouraged to create more products and became the rock stars of the US economy. So, would you be surprised to know that the US now employs fewer software developers than it did in 2018? This chart from ADP Research might surprise….

     

     

    Then I read an interesting piece from the excellent Angular Ventures VC newsletter this morning and started to think some more. The newsletter cited a recent post written by Chris Paik at Pace Capital which has raised eyebrows in the tech world. The title alone was provocative.. “ The End of Software”. He reckons AI and large-language-models (LLMs) are driving the cost of software downwards like content creation in the early 2000s. He concluded with the punchy view, “Majoring in computer science today will be like majoring in journalism in the late 90’s.” Ouch. Angular Ventures’ David Peterson can see some merit in Paik’s view on the direction of software travel and paints the picture succinctly:

     

    “It’s uncontroversial at this point to say that LLMs are surprisingly good at writing code. Is the code as elegant or performant as the code written by an experienced software developer? No. Could you ask an LLM to write a custom piece of enterprise-grade software? Also, no. But even today LLMs are good enough to empower non-technical people to write small snippets of code – tiny, trivial, seemingly insignificant lines – to solve problems which they previously thought impossible to solve by themselves. And that is more meaningful than it seems, because it has the potential to shift the clearing price of software itself.”

     

    My own thinking is still evolving but I do believe Europe and its productivity stagnation might now be an opportunity. That might seem a little bold but the AI talent race is looking good for Europe. In turn, innovative applications of AI in the European economy could close the software and productivity gap with the US. A recent report from VC Atomico on “The State of Tech” states that Europe has more AI talent than the US. Here’s the encouraging picture:

     

     

    Again, the headlines might suggest the US is leading in the AI race but the talent story will be a critical driver of future growth rates. So, lots to think about and, whether it’s electricity, carbon emissions, AI or productivity, readers should be keenly aware of the dangers of chasing rear-view mirror headlines. The data and charts can paint an opportunistic picture not seen by the headline writers. As a final thought, and an illustration of change, the Nvidia $3.3 trillion valuation mark prompted me to look at other historic charts and ‘beginnings’. So, here goes….. Nvidia’s current market value is roughly the same ($3.5 trillion) as China’s entire GDP as recently as 2007. China’s economy today is worth $18 trillion.

    Keep looking at the big picture…

  • Mr Copper To Sing Again?

    Mr Copper To Sing Again?

    I remember the original ‘Mr. Copper’, Yasuo Hamanaka, being a pretty decent karaoke singer. That’s a story for another day but there’s a risk-aware part of me saying that copper, as in the metal, needs to be sung from those Roppongi rooftops right now. Hamanaka’s claim to trading fame was cornering 5% of the copper market when discovered by US authorities 30 years ago, culminating in jail time for Mr Copper and a top 10 all-time trading loss of almost $3 billion for the mighty Sumitomo Corporation. The scandal dominated global financial headlines for weeks back then but I feel another copper story with big numbers is building. Let’s start with a selection of recent headlines…

     

    Massive copper shortage on the horizon –  The Week 

     

    Copper demand to boom as new technology drives power consumption Trafigura says – Reuters

     

    AI to add 1 million tons to copper demand by 2030 – Data Centre Dynamics

     

    Copper is the “new oil”, and prices could soar 50%   – Fortune

     

    Copper shortage threatens EV transition – DPA Magazine

     

    I think we get the picture. Copper is not just a battery/electric vehicle (EV) story – EVs actually use four times more copper than non-electric autos. Copper is also now a data centre and AI story. However, there’s an even bigger picture. McKinsey estimate the global shift away from fossil fuels to a decarbonised economy will require annual physical infrastructure spend of $9 trillion.  Yep, that’s every year until 2050. Or, the combined market value of Microsoft, Apple and Nvidia in capital expenditure……. every single year for the next 25 years. The critical detail in this decarbonisation move is electrification. Energy supply is one aspect; nuclear, natural or renewable. The transmission and storage of that converted power via electricity is the copper-critical bit. Let’s consider a few more numbers.

    *CRU Group estimate global copper demand to surge by 9.5 million tons in the next decade.

    *S&P Global go bigger – they see global copper demand doubling from current 25 million tons per year to 50 million tons by 2035.

    *For historical context, 700 million tons of copper has been produced over the course of human history. Net-Zero targets for 2050 demands that humanity produces 2x more  than it has ever produced, or 1.4 billion tons (Source: S&P Global).

    *However, the mining industry would like to have a word. Due to chronic underinvestment, planning delays, investment capital scarcity, genuine sustainability concerns, higher interest rates and shiny AI tech excitement the global mining sector is currently projected to increase production by just….. 20%.

    *Oh, and the world hasn’t made a major new copper discovery since 2014. This lack of copper discoveries also means existing mines going deeper, incurring greater costs while the grade (metal per ton of rock) falls alarmingly.

    We have a problem. Arguably, it starts with the investment maths. Consultants, PWC, reckon AI could add $15.7 trillion to the economy by 2030. But…. these technologies and their Big Tech owners require massive amounts of electricity. Both Google and Microsoft consume more electricity than small European countries. So, how about the USA, home of the original Silicon Valley? Right now, US data centre power usage accounts for 22GW, or 4.5% of the nation’s power consumption. However, according to SemiAnalysis research, that figure is projected to reach 100GW, or nearly 20% of nationwide consumption by 2030 due to AI buildout.

    To be absolutely clear, the expansion of grid infrastructure across generation, transmission and distribution is critically dependent on copper and its performance properties. Yet, there appears to be an enormous squeeze on grid capacity coming. That’s not just cheap commentariat opinion. As always, money really talks. So, can you name the electric power company that has outperformed the rocketing AI poster-child Nvidia this year? Well, that would be Vistra Corp which has clocked up a share price gain of 157% compared to Nvidia’s ‘slow-coach’ 121%.

    So, if electric power is spotted as a potential winner by canny investors ahead of a supply squeeze, where does that leave the mining sector and copper? There have been a few clues. For example, BHP Billiton in recent months unsuccessfully tried to buy Anglo-American (and its copper mines) in a massive $50 billion deal. Interestingly, the ultimate fossil fuel kingdom, Saudi Arabia, can also see the electric future. The Saudi mining company, Manara Minerals, is in talks with Pakistan on a potential $1-2 billion purchase of a 15% stake in its Reko Diq copper and gold mines.

    These numbers are big, but, in global terms, are ridiculously small compared to the $15 trillion excitement about AI. The ultimate reality check and irony is that one company, Nvidia, is currently valued at more than $3 trillion. In stark contrast, the entire global mining sector is valued at circa $2 trillion. Clearly, there will be no credible AI roll-out without a functional electricity grid and energy storage infrastructure. How long before tech investors start to scream for more mining and copper production investment?  Probably in less time than it took for Mr Copper’s illegal trading arrangements to be discovered. Meanwhile, we plan to sing the mining story before the screaming……

  • D-Day Lesson For These Roaring ’20s?

    D-Day Lesson For These Roaring ’20s?

    The events of D-Day 80 years ago this week usually feature in the closing chapters of World War II history texts. My own current curiosity lies elsewhere, more focused on change and beginnings. Not the Reichstag fire, not Sudetenland, not Kristallnacht, not Lebensraum, not Poland. These were all events in the 1930s which historians agree shaped the outbreak of a global war. However, that decade of economic distress and social anger, whipped up by populism and propaganda, was probably inevitable. Indeed, it’s possible the seeds of war were sown much earlier. The previous decade known as the “Roaring Twenties” introduced huge economic, cultural and technology advances, but the 1929 crash and Great Depression which followed were the key catalysts for the global horror ahead. That lesson from history should not be forgotten. In fact, we should be on our guard. Welcome to the new Roaring ‘20s….

    It’s not just Reddit influencer, Keith “Roaring Kitty” Gill, reportedly banking hundred million dollar profits trading ‘meme-stocks’ like GameStop in recent days. There’s more than just a sense of giddiness about. Recall the 1920’s witnessed the arrival of mass-production and mass-consumerism as automobiles, electricity, cinema, radio and aviation made technology affordable to the middle class. And, then it wasn’t. Financial collapse and the implosion of banking leverage has been a feature of global economic cycles ever since 1929. It wasn’t a once-off in 1929. The global credit crisis in 2008-2009 proved that point, and then some. The critical factors in these financial earthquakes are excessive confidence and over-estimation of demand. First let’s illustrate confidence….

     

    • The S&P 500 benchmark index for global stock markets has not experienced a daily decline of 2% or more in 325 days (Source: Reuters).
    • The market capitalisation of a media company whose key ‘product’ and biggest shareholder is a convicted felon with presidential ambitions is currently over $8 billion (Source: Truth Social – just kidding!).
    • The private credit (lending) market has grown from $250 billion in 2010 to a whopping $1.7 trillion today (Source: Prequin).
    • This week AI chip maker, Nvidia, became the second most valuable private company in the world with a $3 trillion market capitalisation (Source: Bloomberg)

     

    Regular readers will know my views fall mainly on the optimistic side of AI. However, the odd sanity-check does no harm. Nvidia is a semiconductor manufacturer. In 2023 revenues generated by the entire semiconductor manufacturing sector globally reached $526 billion. So, for context, Nvidia’s market value is now six times the entire industry’s global revenue. I know analysts will talk about future AI spend, cash rich Big Tech customers and real demand, but there’s one other aspect to this growth story which is a little bit different with historical lessons.

    Legendary tech investor, Marc Andreessen, penned his “Why software is eating the world” essay in the Wall Street Journal in 2011 and there is no doubt software has embedded itself in every phone and corporation on the planet. The lovely thing about software is that it is embedded in an activity, generates recurring (frequent and relatively small) revenues and user stickiness/dependency is high. At a basic level software is code. It’s digital, not physical. Sure enough, coding platform giants Microsoft, Google, Amazon, Meta, Baidu, Alibaba etc. have dominated the league tables of most valuable companies in the world since the Andreessen prophecy. But, there has been a subtle recent shift in the value hierarchy.

    Consider that two of the three largest capitalised companies in the world are now HARDWARE manufacturers (Nvidia and Apple). Hardware is physical and brings an entirely different business model and a myriad of challenges including supply chain risks, materials, energy, sustainability, customer credit, consumer fashion, inventory management and capex investment. We don’t have a crystal ball in forecasting ultimate demand for AI but the semiconductor industry used to be known for its vicious cyclicality. With my risk history hat on, I’d venture there’s every chance this manufacturing sector will experience mismatches between supply and demand.  Of course, the automobiles and radios of the 1920’s might not resonate with today’s AI and technology enthusiasts. However, I’d highlight three other numbers which perhaps add to the “Roaring ‘20s” feel right now:

    Sport: The breakthrough of sports like boxing and athletics on a global scale was a feature of the 1920s but fans mostly followed events by radio. Now, it’s TV (or streaming). So, when basketball’s NBA is about to treble its broadcasting deal from $25 billion to $76 billion you do wonder about excess, and the projections of Amazon, NBC and ESPN? Maybe it’s the constant circling of private equity (PE) around US sport….? Latest data from Pitchbook research shows 63 US professional sports franchises have a PE ownership connection where PE involvement is allowed (NBA, MLS, NHL and MLB). Funnily enough, basketball (NBA) leads the way with two thirds of all teams in the league connected to PE.

    Securities: The 1920s saw the banks and their celebrity brokers on Wall Street begin to sell stock and bond securities to main street for the first time. Then came the ‘shoe shine’ moment in 1929.  Fast forward to today’s celebrities of the private equity universe and a recent FT report on that exclusive world. The headline-grabbing data point(and possibly harsh) suggests that, in the period 2010-2023, private equity funds raised $820 billion more than they actually returned to investors (Source: Prequin).

    Prohibition: Alcohol and gambling was the government target in the 1920s. So, remember when Bitcoin and its cryptocurrency ecosystem was dismissed by the ‘puritanical’ zeal of high street banks, regulators and law enforcement? Today, Bitcoin is trading above $71,000 and the total value of the crypto universe is $2.8 trillion. In fact, there are now billions of dollars invested in funds owning cryptocurrencies (ETFs) which trade daily on highly regulated public exchanges. Now, that’s a morality tale with a twist.

    Of course, the reference to Prohibition conjures up images of organised crime, judicial corruption, entire city governments ‘on the take’, high profile mob trials and flagrant violations of the rule of law. Couldn’t possibly happen again, could it?  Take that question with just a pinch of orange. On a more serious note, the erosion of the US rule of law is possibly a bigger threat in our immediate future than cyclical excess. Hopefully, the remembrance of D-Day sacrifice will remind those in power of their duty to call out faux (or Fox) ‘patriotism’. And, perhaps a read of the final speech in Charlie Chaplin’s The Great Dictator would help. Ironically, Chaplin’s own patriotism was questioned during a later shameful period (with my surname!) in US Congressional history. The Little Tramp’s words seem timely once again…

    Let us fight to free the world – to do away with national barriers – to do away with greed, with hate and intolerance. Let us fight for a world of reason, a world where science and progress will lead to all men’s happiness. Soldiers! in the name of democracy, let us all unite!    –  The Great Dictator (1940)

  • Market Bulls Shopping in China?

    Market Bulls Shopping in China?

    Well, this is awkward. Perhaps the only fully bipartisan view in Washington these days is that China’s economic influence needs to be curtailed. The Biden administration has just announced further Chinese import tariffs and the push to decouple from Beijing’s giant manufacturing machine is in full swing. Thanks to the Bidenomics IRA and Chips Acts, a wave of multi-billion dollar projects in cleantech (EV batteries, renewable energy etc) and critical computing technology (AI chips, fab construction etc) have landed in the US. Arguably, Europe is on the homeshoring case too, particularly in the EV and cleantech areas. However, while the world focuses this week on the current ‘big shiny thing’ in the guise of AI – and pending results from its $2 trillion poster child Nvidia – the more significant global economic story right now is probably China.

    You might have read headlines about Chinese electric vehicles piling up at ports around the world but there’s much more going on. Chinese export surpluses are exploding as global markets are flooded with not just cars but steel, chips, solar panels, clothing, machinery and many other manufactured goods. It feels like the Beijing regime is compensating for a debt-slowed domestic economy by ramping up its manufacturing and export efforts. Check out the following data points:

     

    *Chinese steel exports in April amounted to 92 million tons, up 16%.

    *Chinese car exports reached 417,000 units in April, up 38%.

    *Chinese aluminum output hit all-time highs in recent weeks.

    *Chinese exports of key cleantech items – batteries, EV cars, solar panels – hit $150 billion in 2023 by growing 20%.  

     

    In fact, despite decoupling attempts in the US and official ‘dumping’ complaints from the EU, China’s current account surplus is at all-time highs powered by exports worth more than $3.5 trillion. One might presume the impact of flooding markets with cheap goods would be deflationary but that ignores the sheer scale of domestic Chinese consumption. It also ignores the reality right now in financial markets. I would highlight three markets in particular:

     

    1. Commodities markets: Copper, iron and zinc prices have jumped by 10% in the past 30 days. Copper has actually clocked up a 30% gain in 2024 alone.
    2. Chinese stocks: Despite US tariffs, banking debt issues and a moribund domestic economy the benchmark stock market, the Shanghai Composite Index, is up 7.6% this year after 3 years of negative returns. In Hong Kong, the news is even better with a 15% gain after 4 painful years of losses.
    3. German stocks: You’d think they’d learn but, fresh from a painful Russian energy dependency experience, Germany’s industrial base is perceived as heavily exposed to China’s economic activity.  That strategic risk is for another day’s discussion but, for now, investors are buying German shares and driving the DAX benchmark to all-time highs.  Arguably, a China ramp up of activity is helping investor sentiment towards German stocks.

     

    There’s a part of me wondering has China become too big and therefore nobody else can compete with the scale and unit costs of their manufacturing base? It’s probably too early to jump to conclusions and the domestic property debt unwind has a long way to go as Japan financial historians will attest. However, there is clearly a Beijing long-term strategy in play now. I would highly recommend the recent article from Noah Smith as to potential current Politburo thinking but these three thoughts stood out for me:

     

    *China wants to dominate and be the ‘world’s manufacturer’.

    *China is balancing overproduction and a weak consumer with a compensatory export ramp up.

    *China is preparing its manufacturing base for flexibility and the capacity to switch to war production mode.

     

    The final strategic explainer is more than slightly concerning. So, let’s not over-hype the significance of Nvidia’s results this week. The AI revolution and Nvidia, as barometer of that manic race to technological superiority, is almost irrelevant if China is putting itself on a war footing. On a more upbeat note, the upturn in Chinese economic activity could be the beginning of a significant global economic recovery and a rotation away from technology into ‘old economy’ assets. Regular readers will recognise that thought from previous writings here. Of course, that broadening out of investor confidence will help bulls, portfolios and pensions in the near term but not even the best generative AI model can really tell us what China wants to do in the long run. And remember, the Russian bear experience is that we should probably believe what we are seeing.

     

     

  • Trends Check: Keep Calm and Worry On …….

    Trends Check: Keep Calm and Worry On …….

    I just read an article referring to today’s date as “December 42nd 2020”. Do you blame them? The early days of 2021 still see Dryrobes, George Lee, lockdowns, NPHET and Brexit regularly flying up the Twitter trending charts. Sadly, Covid-19 remains omnipresent but, thankfully, the Donald has been cancelled by Twitter and replaced with our very own Don, or Donie O’Sullivan. Democracy almost failed last week on Capitol Hill but Cahirsiveen’s gift to CNN was on the spot to bring some sanity to the chaos. Now, it’s our turn.

    It would be easy to pinpoint Covid as the source of most of this chaos but that would be almost Fake News. In reality, there are a number of markets and geopolitical trends which have been around for a few years now, even decades. However, one of the better descriptions of the pandemic’s impact was that it had hugely accelerated established trends. For illustration we thought it no harm to re-visit 10 trends we identified in December 2019 PP (pre-plague) and monitor the development or death of same.  The link to the full 2019 article is at the end of this piece but for explanatory convenience we will show those early views in bold text followed by our current thoughts and potential new trends gathering momentum. We will review in the same order as last year so here goes…..

    Debt: Global debt has just topped the $250 trillion mark according to the International Institute of Finance (IIF). It’s rather scary to think that in the ten years since the credit crisis of 2008-2009 the world has piled on another $70 trillion of debt. This debt mountain is incredibly sensitive to rising interest rates. Hence, central banks led by the Fed have had to abandon attempts in 2018 to return interest rates to more normal levels. Central banks are now stuck in a Japan-style debt trap with additional credit creation achieving less and less stimulatory impact on economies. Now, frustrated and worried central banks are pressuring politicians to introduce fiscal policies to break out of this stagnation spiral. Unfortunately, politics at a global level is increasingly polarised.

    The same IIF is now saying global debt reached $277 trillion in 2020. Another $27 trillion…. Hoo boy. Of course, trapped central banks didn’t see Covid coming but have played a critical role in supporting the global economy. However, the pressure is now on governments to deliver fiscal stimulus themselves. Let’s just say that debt number could be $300 trillion by the end of 2021. The pandemic was a definite accelerant.

    Democracy: Levels of income inequality not seen since the 1930s presents the potential danger of history repeating itself. Democracy is under pressure. The Freedom House think tank published a report in 2018 highlighting that year as the 13th in succession where democratic freedoms were in decline. A total of 68 countries witnessed a tightening of civil liberties and political rights whereas only 50 countries registered progress in these areas. As 2019 comes to a close the strong-arm tactics of Trump, Putin, Xi, Orban, Erdogan and Prince MBS do not provide reassurance that authoritarian trends will reverse any time soon.

    Democracy had a bad year where most bad actors named above got away with further repression. The only bright spot was the repudiation of the Trump regime at the ballot box but not without the deadly events on Capitol Hill. Arguably, the pandemic cost Trump the presidency and halted a dangerous erosion of US democratic institutions.

    ESG: There is grounds for optimism that businesses and investors see “doing good” as a prerequisite for wealth creation. It almost sounds like common sense but the ESG investment framework covering Environment, Social and Governance factors is gaining traction rapidly with $30 trillion worth of investments now employing ESG metrics in their investment processes. That $30 trillion number will grow and standardised metrics to measure and audit ESG will be the next challenge for business and investor alike.

    2020 was a huge year for ESG. The value of funds now employing ESG investment frameworks has exceeded $40 trillion during 2020 and will no doubt attract more follower funds in 2021. However, we would be wary of attributing all this enthusiasm as a pandemic appreciation of the need to save our planet. It was extremely helpful that technology stocks which score well in ESG frameworks had fantastic share price performances. Despite global economic chaos, the technology-heavy Nasdaq index delivered 43% returns to investors in 2020. Profits, or performance, always helps trends find new friends…..

    Trade: President Trump is now saying phase 1 of the China-US trade negotiations might not conclude until after the 2020 US elections. Who knows what will come out of Trump’s mouth next but expect 2020 to again be dominated by trade tensions in the EU with Brexit, and in Asia-Pacific with China. The rise of populist politics and trade protectionism are the two sides of a no-win economic confidence trick. Closer to home, Boris Johnson’s bombastic certainty of concluding trade deals with Europe by the end of 2020 will be particularly painful to watch unravelling.

    One of the few areas where there is bi-partisan agreement in US politics is trade with China. Ironically, despite the Orange Toddler’s tariff tantrums, China’s global trade surplus hit $460 billion in November. The surplus with the US alone was up 52% in November!! In this instance, China’s faster economic recovery from pandemic than the West has accelerated this sensitive surplus. Needless to say, trade tensions will continue into 2021, as will Brexit chaos but we will spare you the Johnson narrative.

    China: The most important macro story apart from debt in the world today is China. It’s arguably the engine of growth which services the planet’s debt. By the end of this year Chinese consumers will have purchased goods worth more than $5 trillion, exceeding that of the original consumption super power, the US. So, financial markets will now have to pay much closer attention to the role of Chinese consumer confidence in the global economy. Think of how many decades financial research and trading teams have agonised every first Friday of the month for the US Non-Farm Payrolls. Get ready for Sunday night China economic reports but before that keep an eye on bond default newsflow. There have been four or five relatively significant blow ups in recent weeks, even involving State Owned Enterprises (SOEs). Do not underestimate the potential impact on consumer confidence if the all powerful state can’t save its own.

    Our fears on debt defaults were unfounded so far. Debt defaults in the first 9 months of 2020 actually fell 20% to $13 billion according to Bloomberg data. The pandemic, in this case, may have stalled the trend rather than accelerated things .  China remains the biggest structural macro story in the world apart from global debt levels.

    Tech Tension: Technology has been a dominant driver of markets since the credit crisis. Some companies now have user bases which would be in the top 3 populations of the world if they were sovereign states. Think Facebook and Alipay with 2.5 billion and 1 billion users respectively. As Microsoft and Apple’s combined market value now exceeds that of Germany’s entire stock market at $2.25 trillion it is tempting to think this is a high water mark for tech valuations. Two developing stories/trends suggest the tech sector could meet some growth challenges. First, Facebook’s power and abdication of responsibility on publishing false information to huge numbers of people is moving towards a 1911 moment. That date is neither a typo nor hyperbolic. For the historians, that’s the year when the Standard Oil refinery monopoly was broken up. Second, the rise of ESG is ultimately not compatible with corporate deference and fear of China’s wrath. The recent China anger incidents involving the NBA, Apple and Google suggest corporates may have to decouple from Chinese internet and broadcasting platforms. Yes, the internet could splinter and anyone following the Huawei case with fears over 5G security might be forgiven for thinking a “net split” is not just a possibility but inevitable.

    Covid has possibly diverted attention away from the China tech/security threat but the 9/11 moment for democracy in America last week has possibly accelerated the 1911(Standard Oil monopoly) moment for Big Tech. Google and Facebook now face anti-trust litigation from the Federal government. But, these cases were announced months before the Senate run-off races in Georgia. If you are wondering why Google, Facebook, Amazon and Twitter have moved rapidly to neuter far-right conspiracy personalities and channels just think how many future Senate Committee heads(Democrats) were hiding under their desks in Washington last week. The role of social media disinformation in the awful pandemic death tolls in the US will also focus executive minds but it might be too late for Facebook.

    Content is King: Even with a potential internet split, original content continues to be the critical asset for every media platform on the planet. We mentioned monopolies earlier but has anyone noticed that Disney has quietly assembled a portfolio of content assets with enormous power? Even before Star Wars opens in cinemas, Disney has accounted for $1 in every $3 spent in cinemas in 2019! The battle for content has exploded to unsustainable levels with almost 500 originally scripted TV shows produced this year. In 2012 that number was less than 300. And the costs are rocketing. One statistic we read recently was that for each $1 of a Netflix subscription the user was receiving $1 billion of content. It’s not just entertainment content. Think about the $5 billion valuation of Manchester City implied by the recent private equity investment made by Silver Lake Partners from Silicon Valley. Live sport is hot but $5 billion for a franchise which can’t fill its home ground…?

    Production of content clearly suffered in 2020 but the uncertainty facing cinenas has accelerated the adoption of streaming services.  Remarkably, Warner Bros. have said they will debut ALL its movies in 2021 in cinemas and on its HBO Max streaming service on the same day! And check out Disney Plus. The ‘House of  Mouse’ only launched its streaming service, Disney Plus, just over a year ago but has reached subscriber numbers of 86 million already. For context, Disney planned to hit the 90 million subscriber mark by year FOUR in its initial communications.

    Energy: Climate change is for some top hedge funds now a critical factor in every investment selection. The climate crisis headlines multiply each week and this means continued pain for fossil fuel investors. Apple’s valuation is now bigger than the entire US Energy sector. Furthermore, for fossil fuel dependent economies like Saudi Arabia and Russia it is striking that their levels of sovereign interference have increased in recent years in the likes of Yemen, Syria and Ukraine. There is a suspicion that this projection of international power is an attempt to disguise significant structural weakness.

    Irrespective of pandemic hits to economic activity and energy consumption, the climate/ESG trends look set to continue to keep energy in the ‘unloved’ corner of the market. It is staggering to think that Tesla’s market value now exceeds the market cap of the entire US energy sector! However, it is worth bearing in mind how well “unloved” tobacco served its investors over the last three decades. Debt levels and long-term capital investment required do not make the tobacco and energy sectors comparable but there will be pockets of excitement along the way. Note LNG prices are rocketing in Asia to all time highs as unusually cold weather bites.

    AI: We have been inclined to highlight the risks/areas to avoid but Accenture tells us there is a $14 trillion opportunity in AI across 16 industries in the years out to 2035. Health, finance, logistics and agriculture all look particularly suited to AI innovation and it is striking to see an out-of-favour sector like finance now attracting the largest chunk of venture capital money via European fintech.

    We were told a pandemic vaccine was years away. It was delivered in 9 months. If ever the population of the planet was given a striking lesson on the power of AI this was it. The ability of AI to crunch huge numbers of varaiables and predict results in delivering a life or death solution for humanity will massively accelerate further AI investment in healthcare, education and finance.

    Inflating Value: And that leaves us finally with another potential positive albeit it is difficult to argue this trend is established just yet. However, we can include this in our list with a speculative health warning! For years, value investing has been clobbered in performance terms by growth and momentum investing strategies. Yes, it might be difficult for oil to make a come back but other commodities could bounce back sharply if inflation picks up. Whisper it very gently but there is data/evidence to support wage inflation picking up in Europe. Wages are growing at the fastest pace in a decade and Europe remains the largest trading bloc in the world. A stronger Europe would be a very positive development. No doubt, investors stuck in value strategies will be watching hopefully for an end to their performance misery. The rest of the world should hope for the same too.

    We are whispering again. However, for most of 2020, investing using value factors was a disaster. The FT was reporting at the end of October that value stocks were having their worst run in two centuries. Of course, economically sensitive stocks tend to sit at the value end of the investment spectrum so Covid allowed tech share prices to literally ‘Zoom’ while economies went into deep freeze and cheap stocks became even cheaper. Fast forward to today, and an earlier than expected vaccination, super low interest rates and fiscal spending from governments has thrown huge amounts of money into the system. There’s even chat of another ‘Roaring ‘20s”. Ireland borrowed €5 billion for 10 years last week at a negative interest rate, Tesla is racing towards a $1 trillion valuation and Bitcoin has just hit the $1 trillion mark too. Go back to that $27 trillion of new global debt in our first comments and then think about lots of capital chasing an unchanged number of opportuities and assets. We watch, we worry. But first, value investors could ride that inflation comeback extremely profitably.

    So, it would seem almost every trend has survived the pandemic, in many cases accelerated. However, did Covid kick start any new trends worth watching? We think three are worth keeping an eye on:

    1. The pandemic has shone a tragic light on income inequality and poor education. The death rates in the poorer sections of society are significantly higher than average. Governments will act. The next version of The Donald could be far more competent and dangerous.

     

    1. Hong Kong has attracted geopolitical attention for some time but there’s a far more critical flashpoint developing in the Sino-sphere: Taiwan. More critically for the global economy, Taiwan is the epicentre of global semiconductor production. These chips are the real “oil” of the global economy. Watch and worry as tensions rise over China’s inevitable plans to control Taiwan.

     

    1. Work-from-home is now accepted as the future. Expect more strategic decisions by companies to facilitate that shift. However, we might also expect to find in the coming years that early hopes of similar or superior worker productivity were unfounded. After all, we are only human, and the pandemic has surely shown us that we do crave social contact not just screen contact.

     

    Yes, we are human. We can’t forecast the future as there is always change around the corner. So, know the trends, keep calm and know some of your worst worries may never materialise.

    Our original December 2019 article is here: https://gravitas.sparkcrowdfunding.com/top-10-trends-to-watch-for-2020/

  • China Syndrome: Supply Chain Reaction?

    China Syndrome: Supply Chain Reaction?

    Anyone remember the China Syndrome movie? Showing my age here but that 1979 nuclear disaster thriller starring Jane Fonda and Michael Douglas did spring to mind this week. Yes, we are currently enduring our own global pandemic disaster but it was the developing story of a potential vaccine which prompted the movie tangent and China reference. By now we are all aware of the encouraging efficacy of various vaccines in development by Pfizer, AstraZeneca, Moderna and other pharma players. However, this week we were reminded of the practical obstacles to delivering billions of delicate vaccine doses for the world’s population.

    Forget the logistics of getting the vaccine to the vulnerable. How about just making enough vaccine? Pfizer just told us that the volume of vaccine produced by year end will be half what they originally expected. The unexpected hurdle was the inability of Pfizer’s supply chain to meet the rapid scale up in demand for raw materials in the manufacturing process. This will be resolved but is a potent reminder of the critical role supply chains play in the global economy. Yes, a pandemic vaccine is a crucial story in the near term but merely reflects a sudden spike in demand. However, two other stories in recent weeks have potentially far greater impact on global supply chains in the coming years.

    First, let’s talk semi-conductors. These tiny building blocks for electric circuits are the brains of almost every smart device and data centre on the planet. Now Apple has just launched Mac laptops with new proprietary, M1, chips. We won’t bore you with the technology battles between the chip giants Intel, Samsung, AMD and ARM but, upon further industry reading, one market share number jumped right off the page. It didn’t even feature any of the companies listed earlier. Rather, it was one company and one country.

    Taiwan Semiconductor(TSMC) of the same island nation is the critical company in the supply chain for semiconductors. TSMC is known as a foundry – the manufacturer(not designer) of semiconductors in fabrication plants, or fabs, for almost every major player in the global economy. But here’s the jaw dropper; TSMC has just reached 54% global market share and will probably grow after Intel’s controversial July decision to place a monster 2021 order with TSMC. You might have read that data is the new oil. We are not so sure. The supply of semiconductors appears to be economic power in its purest form. And Taiwan is the new Middle-East. Now think about that and the last 70 years of peace and harmony in the cradle of civilization, if only.

    Then think about current US-China tensions and extreme Sino-sensitivities over Taiwan’s independence. Apple has already asked its manufacturing partner, Foxconn, to shift product assembly from China to Vietnam. The problem for Taiwan is that China leans heavily on the island’s chip manufacturing capacity too but recent Huawei limits/sanctions complicates things. China’s leaders are unlikely to tolerate increased US influence in its back yard, and the worry is that Taiwan is a political challenge to Beijing’s authority in the region.

    Ben Smith at EpsilonTheory.com puts it well – “there is no future where China can both maintain its existential interests and allow the world’s principal supplier of semiconductors to remain outside its direct political control.” Smith goes so far as to say that Taiwan is “the most important country on earth”. This is not exactly music to the ears of supply chain risk managers. What are the chances of a 2023 “chip shock” in the South China Sea fifty years after the 1973 Yom Kippur oil shock? Place your chips now.

    On a less speculative note, there is another massive structural story developing in supply chain management. ESG and sustainabilty risk compliance is gathering momentum. Nasdaq has just announced it will require all companies listed on its exchange to have at least one woman and one diversity/minority representative on company boards, or face delisting. That may feel like a relative slow-burner as Nasdaq is allowing a multi-year transition phase. Elsewhere, the drum beat of ESG, environmental and sustainability compliance grows louder with more immediate pressures.

    BMW has already publicised its efforts to pressure companies in its supply chain to demonstrate high standards of ESG compliance. Furthermore, Covid-19 has focused minds on supply chain vulnerability with a recent HSBC survey in Canada flagging that just 8% of Canadian listed companies(issuers) currently rate their suppliers on ESG.

    The sustainability/ESG revolution might not provide the shock headlines of a potential South China Sea conflict but there will be some high profile corporate casualties on this journey. Indeed, the collapse of Sir Philip Green’s Arcadia retail group this week rightly focused on the huge job losses and the spectacular riches distributed to Green’s family while Arcadia’s pension fund struggled. However, behind the headlines there lies a tale of retail failure largely fueled by strategic short-termism and a glaring miss of sustainability and ESG issues in its supply chain. Now back to China.

    China’s positioning in the global supply chain was estimated at 28% of global manufacturing output back in 2018. Given it’s the only major economy to actually grow in 2020, one can expect that share to move towards almost one third of global activity. Sadly, headlines on Hong Kong, Uighur repression and environmental pollution have also grown. The likelihood of a collision between ESG and Chinese supply chain sustainability compliance is almost inevitable but it might begin with a relatively innocuous headline. Watch carefully.

    All who watched China Syndrome knew it was a fictional “near miss” for the nuclear industry. However, just 12 days after the movie’s release there was a real-life nuclear accident at Three Mile Island, Pennsylvania. Just saying.

  • A Big Jack Needed For Punctured Economics

    A Big Jack Needed For Punctured Economics

    Jack Charlton saved my Dad’s business. The economic text books won’t make the specific connection but my Dad remains convinced. Back in the early ’80s Ireland was crippled with terrorism, perma-recession, huge government deficits, whopping interest rates, rampant inflation, political chaos and misguided currency policies. The Emerald Isle was not exactly an investment capital paradise. Every day my Dad dropped me to school on his way to a small food factory on Distillery Road in the shadow of Croke Park, and one day I was particularly troubled in the car.

    The Irish Times headlines and sport were the daily balance of conversational fare but no sporting story could offset that day’s assault of gloomy economic and political news. The concerned eleven year old asked, “How will Ireland get better Dad?” The response took a while and was initially downbeat, “The country has gone sour”. There was a further pause, and then a more upbeat prediction, “There is great talent here but the country needs to see and feel what success looks like. Confidence is everything for countries and economies. Ireland will find it.” Confidence. So true. So powerful.

    Fast forward 10 years and Jackie’s Army had visited Germany in ’88 and surprised all in Italia ’90. Dreams literally happened. My Dad’s business survived the 80’s and Ireland cranked up the international investment welcome message with an army of goodwill ambassadors following a Geordie’s football team. A strange combination, impossible to predict a decade earlier. Even Irish food factories attacted US multi-national attention by 1990. Confidence is everything. Fast forward to today.

    Jack Charlton’s funeral is this week and the global economy is gripped by a pandemic, huge human death tolls, massive job losses, soaring debt and increasing geopolitical tensions. Plenty of sour. However, this is not the ‘80s. Cynicism and pessimism are, of course, to be found. But….. confidence remains. The data does not lie. Here are a few things which caught my eye in recent days.

    • China: Yes, China faces a more challenging trade environment as tensions develop with the other economic and technology superpower, the US. But check out the most exposed major export economy to China. The DAX share index in Germany has just turned positive for the year. Clearly, markets are discounting a less chaotic future for China than headlines would suggest.

    • Europe: The agreement by EU nations on a pandemic economic recovery deal was tortuous but remarkable in one respect. For the first time ever EU governments have agreed to share the credit risks of the rescue funds required for countries with weaker balance sheets. This sends an important signal of confidence in those challenged economies of Spain, Italy etc.

    • Investment: Typically, investment capital is scarce in recessionary times and provided only by the very large institutions. Not so right now. An army of retail investors is driving share prices of hot stocks like Tesla and the mega-technology names to new highs on an almost daily basis. Yes, there is cyncism that this will end badly. In one trading session this week the combined value of Facebook, Apple, Alphabet, Netflix, Tesla, Amazon and Microsoft increased by $291 billion. News did not drive this. Confidence in the future did. One can only hope the FAANTAM confidence continues and does not become the ‘FAANTAM Menace’ for private investors’ trading accounts.

    • Valuation: Valuations of companies can be calculated using lots of different multiples of profits, cash flows and sales but all are doing the same thing; discounting the future. Currently, there are 500 companies in the US with valuations even higher than the FAANTAM club. The median multiple of sales in this group of 500 is 13x and on average net income is currently negative. Now that’s confidence; investor belief that current losses will turn into profits.

    So despite, a challenging global economic environment it is clear there remains encouraging levels of confidence out there. That is a much better starting point than early ‘80s Ireland but one suspects there will be tough days ahead. Inspirational leadership will help. The Tangerine Tyrant in Washington will not. As we say good-bye to Jack we should remember the transformative powers of confidence. One image always stays with me of how confidence can just grow.

    My Dad didn’t live to see Ireland play the mighty Italy in the Giants Stadium in 1994 but 80% of the crowd that day were Irish. It was magical and unexpected. They must have been confident. They were right. So was my Dad. Thanks Jack.

  • Global Trade On The Rocks Or Blocks?

    It is strange to see a tiny fishing village in East Cork provide a global image for a media world currently dominated by Coronavirus cruises, Apple warnings, Love Island tragedies and a Bloomberg presidential charge. Ironically, the ghost freighter ship washed up on the rocks of Ballycotton might represent the watershed event that will endure as the world inevitably moves on to other news stories. Yes, air travel to and from China has collapsed by up to 90% but it will recover. However, the information vacuum surrounding the current state of the Chinese economy and critical supply chains in global trade is certain to raise more fundamental questions about the latter.

    Global trade is not just under attack from a mystery virus. The rise of populism (or anti-globalism), 5G cybersecurity fears and the ESG revolution in investment will find China at the epicentre of all three developments.

    Global trade is critically dependent on China and that may not be sustainable as these three trends develop. The US Chamber of Commerce has stated that more than 60% of its member firms with Chinese manufacturing facilities have no contingency plans for a prolonged shut down of their operations in the Middle Kingdom. This should prompt a serious strategic re-think on concentration risks in supply chains. However, not all the news on trade is gloomy. China, in fact, might be the leading light on the future of trade.

    Think of trade and blocks, not rocks. Specifically, blockchains. Blockchain technology has been associated with crypto-currencies and understandably conjures up images of complexity, volatility and significant risk. However, blockchain technology can deliver significant benefits to global trade in terms of finance and security without ever touching currency units. Blockchain type solutions involve some form of private/secure digital channel to execute a transfer of goods/services in exchange for payment. The slightly more ‘techno-speak’ term is distributed ledger technologies (DLT). Note no mention of currencies or crypto!

    As you can see in the language used above, technology is in effect digitizing a contract. In the context of trade, the creation of a digital contract can be enhanced further by adding additional automated/ functions customized for the contracting parties. Remember Nokia mobile phones. Now think Android or iOS powered smartphones. The former is now “a ghost”, the latter two now control 99% of the market. Step forward “smart contracts” and watch the world of trade transformed. Not yet transformed, but the Chinese are once again blazing a trail on trade. Research firm, IDC, believes 85% of China’s container shipping will be contracted and tracked using blockchain by 2024.  A staggering 50% of these contracts will utilize blockchain-powered cross-border payments.   The key benefits of smart contracts can be summarized as follows:

    • Privacy: Blockchain technology facilitates coded privacy exclusive to the contracting parties.
    • Security: The elimination of 3rd parties reduces cyber-security risks and the irreversible nature of the multi-ledger(evidenced) code in the digital contract prevents fraud/alterations.
    • Environment: The elimination of mountains of paperwork is an obvious digital dividend.
    • Personnel: Staff retention and engagement in higher-value activities deliver financial benefits in their own right as repetitive administration workloads are reduced.
    • Funding: Trade requires funding. Banks are enthusiastic promoters of trade growth as they can earn fees on facilitating funding that growth.
    • Timely Payments: We said the contracts would be smart. Not only are the contracts digitally recording the agreement, but they are also coded to execute performance ie when goods/services are verified as received, payment is triggered automatically. For smaller businesses, this is seriously good news on the cash flow front. Also, it should, in an ESG world, improve the behaviour of larger corporates who have been guilty of delayed payments to fund their own activities. In a more monitored future, it could be considered “suspicious” if a firm was unwilling to sign up to a smart contract…..

    Global trade is temporarily on the rocks but it will bounce back and then face other structural challenges associated with China. Change is inevitable, as is risk and opportunity. For trade sceptics, it might surprise to read this writer’s view that companies who embrace change and smart solutions can still profit from following China. Then again, the view from Ballycotton’s cliffs has always been uplifting.