This week in charts
Gas demand
Consumer Price Indexes
December CPI breakdown (year-over-year change)
Asset classes
Market caps
Nuclear energy
Why economists love “Robinson Crusoe”
After spending 28 years, two months and 19 days marooned on an island, Robinson Crusoe does not lose his nose for adventure or his “native propensity to rambling”. He crosses the Pyrenees, stalked by “hellish wolves”, witnesses the “pomp and poverty” of China and battles Tartars on the Russian steppe.
The character’s strangest adventure, however, is none of these. It is surely his centuries-long ramble through the literature of economics. Crusoe has appeared in Karl Marx’s “Das Kapital”, John Maynard Keynes’s “General Theory” and Milton Friedman’s Chicago lectures on “Price Theory”. He has an entry in the New Palgrave Dictionary of Economics. And he often washes up in economics textbooks.
Crusoe’s economic appeal is unsurprising. The sailor spends a few pages escaping pirates and shooting cannibals. But his real battle is against scarcity, which he defeats through careful deployment of the resources at his disposal, including his own labour.
Scarcity also stalked Daniel Defoe, the novelist who created Crusoe in 1719. Over a chequered career he traded in bricks, wines, pickles, tobacco and the glands of civet cats. He dabbled in horse-trading. Literally. He defaulted on his debts. Twice. “No man has tasted differing fortunes more,” he wrote. “And thirteen times I have been rich and poor.”
He wrote allegories that turned dry economic variables into colourful characters like “Count Tariff”, an English nobleman dressed in domestically manufactured cloth, and “Lady Credit” (“if she be once Disoblig’d; no Entreaties will bring her back again). His publication “The Compleat English Tradesman” has been described as the first business textbook.
Economists are eager to find behavioural laws that apply anywhere. Crusoe’s isolation thus provides a useful thought experiment. Principles that hold true on his island must be elemental, not socially incidental.
Most economists have turned to the tale not to corroborate a theory but merely to illustrate it. Textbook authors, for example, want to introduce the principles of supply and demand in the simplest possible case, and nothing is simpler than a one-person “Robinson Crusoe” economy.
Textbooks present Crusoe’s one-man economy as a kind of benchmark, against which more sophisticated economies can be judged. Can its harmony be replicated, even when decision-making is divided up and dispersed—even when consumers and producers do not share the same mind?
Hedge funds take on private equity in battle for distressed companies
Hedge funds are challenging private equity firms over restrictions that dictate who can lend to or buy the debt of buyout-backed companies, weighing legal action to capitalise on a surge in corporate distress.
Private equity portfolio companies can be particularly exposed to interest rate rises because of buyout firms’ reliance on debt to buy businesses. The firms draw up “whitelists” of approved lenders to stop potentially troublesome credit investors from using a position in the companies’ debt to steer the business’s strategy.
Although whitelists have been a feature of the buyout market for the past decade, the system is increasingly being tested as higher interest rates cause lenders to retrench, leaving companies searching for new sources of finance.
Law firm Pallas, which counts some of the hedge fund industry’s best-known names among its clients, told the Financial Times that it was exploring a legal challenge to the practice.
“The use of whitelists, which prevent financial institutions who are not listed from acquiring the debt, damages market liquidity and often results in a sponsor-friendly restructuring instead of one that is in the best interests of the company,” said Natasha Harrison, managing partner at Pallas.
Many large private equity firms use whitelists. The system not only helps them to prevent combative investors from buying the debt of their portfolio companies if they get into difficulty, but also to cement relationships with friendly lenders.
But companies need to refinance more than $1tn of debt in the coming four years, according to figures from rating agency Moody’s, at a time when interest rate rises have made borrowing more expensive.
Some whitelisted lenders have been reluctant to lend more to troubled companies when their investment is already under pressure. Without existing lenders putting in new cash, portfolio companies need their private equity sponsors to permit them to take money from new sources.
“The problem becomes that you need new money and the sponsor does not want to give up [some or all of their ownership in the company] and the company is paralysed for a longer period,” a hedge fund executive said.
As many private credit groups rely on buyout shops for business — the bulk of their lending is often to finance private equity deals — they may have an incentive to avoid rocking the boat even if a company’s strategy is failing.
“How are you going to negotiate with a sponsor during a debt restructuring knowing that you will go to the naughty list if you don’t roll over and play dead,” said Allan Schweitzer, portfolio manager at credit hedge fund Beach Point.
Some industry figures suggest that the system should be modified. One compromise would be to make it easier for lenders who are not on the whitelist to get involved earlier in the refinancing process, for example if there were a credit downgrade or a drop in the company’s earnings.
“There could be a middle road where PE firms still keep the whitelists in place but there are more triggers that allow for opening the whitelists than there are now,” said Eric Larsson, portfolio manager for Alcentra’s special situations funds.
An influx of Chinese cars is terrifying the West
Just five years ago China shipped only a quarter as many cars as Japan, then the world’s biggest exporter. This week the Chinese industry claimed to have exported over 5m cars in 2023, exceeding the Japanese total. China’s biggest carmaker, byd, sold 0.5m electric vehicles (evs) in the fourth quarter, leaving Tesla in the dust. Chinese evs are so snazzy, whizzy and—most important—cheap that the constraint on their export today is the scarcity of vessels for shipping them. As the world decarbonises, demand will rise further. By 2030 China could double its share of the global market, to a third, ending the dominance of the West’s national champions, especially in Europe.
This time it will be even easier for politicians to pin the blame for any Western job losses on Chinese foul play. A frosty geopolitical climate will feed the sentiment that subsidised production unfairly puts Western workers on the scrapheap. And there have certainly been subsidies. Since the launch of its “Made in China” agenda in 2014, China has brazenly disregarded global trading rules, showering handouts on its carmakers. It is hard to be precise about the value of the underpriced loans, equity injections, purchase subsidies and government contracts Chinese firms enjoy. But by one estimate, total public spending on the industry was in the region of a third of ev sales at the end of the 2010s. These subsidies come on top of the ransacking of technology from joint ventures with Western carmakers and Western and South Korean battery-makers.
One reason is that the market for cars is going to be upended, regardless of trade with China. In 2022, 16-18% of new cars sold around the world were electric; in 2035 the eu will ban the sale of new cars with internal-combustion engines. Though firms are retaining their workers as they switch to making evs, the process is less labour-intensive. Much as the first China shock was responsible for less than a fifth of total manufacturing job losses occurring at the time—many of which were attributable to welcome technological advances—so too there is a danger of confusing disruption caused by the shift to evs with that caused by Chinese production of them.
Next consider the gains from letting trade flow. Vehicles are among people’s biggest purchases, accounting for about 7% of American consumption. Cheaper cars mean more money to spend on other things, at a time when real wages have been squeezed by inflation. And Chinese cars are not only cheap; they are better-quality, particularly with respect to the smart features in evs that are made possible by internet connectivity. Nor does the existence of a carmaking industry determine a country’s economic growth. Denmark has among the world’s highest living standards without a carmaker to speak of. Even as cars roll off Chinese assembly lines, the economy is spluttering—in part because it has been so distorted by subsidies and state control.
Last, consider the benefits to the environment. Politicians around the world are realising just what a tall order it is to ask consumers to go green, as a backlash against costly emissions-reductions policies builds. evs, too, are currently more expensive than gas-guzzling cars (even if their running costs are lower). Embracing Chinese cars with lower prices could therefore ease the transition to net-zero emissions. The cheapest ev sold in China by byd costs around $12,000, compared with $39,000 for the cheapest Tesla in America.
What about the risks? The threat to industry from cheap imports is usually overblown. The lesson from the rise of Japanese and South Korean carmakers in the 1980s is that competition spurs local firms to shift up a gear, while the entrants eventually move production closer to consumers. Already, byd is opening a factory in Hungary and many Chinese carmakers are scouting for sites in North America. Meanwhile the likes of Ford and Volkswagen are racing to catch Chinese firms. Last year Toyota said a breakthrough in its “solid state” technology would let it slash the weight and cost of its batteries.
Another worry is national security. Depending entirely on China for batteries, whose importance to electrified economies will go far beyond cars, would be risky. It is also possible that evs, which are filled with chips, sensors and cameras could be used for surveillance. (China has banned even locally made Teslas from some government properties.) But so long as presidents and spooks can travel in vehicles made in the West or by its allies, there is little reason to fear consumers sporting Chinese wheels; they can adjudicate personal-privacy concerns themselves and locally made cars will be easier to inspect.
Policymakers should therefore curb their protectionist instincts and worry only in the unlikely event that Western carmakers implode altogether. A hefty market share for Chinese carmakers that invigorates wider competition, however, is not to be feared. If China wants to spend taxpayers’ money subsidising global consumers and speeding up the energy transition, the best response is to welcome it.
Dim Sum Loans Rebound on Cheaper Costs, Corporate Appetite
Corporate loans denominated in offshore yuan are making a comeback after a decade-long hiatus.
Dim sum loans, which emerged around 2010 but were largely dormant since, roared back in 2023 as lenders offer more flexible terms. A spike in US interest rates has also encouraged firms to borrow in yuan instead of dollars.
There were at least 12 dim sum loan deals cut in the offshore yuan (CNH), totaling about $2.5 billion-equivalent, that closed during 2023, up from just $112 million a year earlier, according to Bloomberg-compiled data. The actual tally may be higher as some of the borrowings are either club or bilateral deals where details are kept confidential.
The blooming of the dim sum loan market — stymied in the past by a lack of liquidity in the offshore yuan — means more options for Chinese companies trying to refinance dollar or other currency debt without incurring higher rates. Borrowing costs may be more than 200 basis points cheaper, with lenders keen to utilize a growing pile of offshore yuan.
The Federal Reserve’s aggressive rate hikes while China’s central bank eased monetary policy have led to a noticeable divergence in key loan benchmarks. The US secured overnight financing rate rose to 5.3% as of Jan. 4 from 4.3% a year ago. In contrast, the three-month CNH Interbank Offered Rate, which is often used as a dim sum loan reference, was at 3.08%, up from 2.41%. It was at 3.2% on Monday.
Beijing has undertaken a years-long campaign to internationalize its currency, leading to a growing pool of offshore yuan in Hong Kong, Singapore and London. In Hong Kong, deposits grew to 979.5 billion yuan ($137 billion) as of Dec. 29, 2023, up from 615 billion yuan at the end of 2018.
Banks can generally structure dim sum loans more cheaply because they can offer a lower interest rate for offshore yuan deposits than the Hong Kong dollar or US dollar deposits, said Francis Chen, a banking and finance partner at Mayer Brown.
This week’s fun finds
We hope no one’s resolution was to eat healthier…
Mike L.’s moai (our version of bringing EdgePointers together for a meal) was a selection of shawarma, kofta and falafel that left everyone stuffed!
Italy divided over new pineapple pizza
Anyone who’s set foot in Italy knows there are unwritten rules that one must abide by – and the most important of all revolve around food. Cappuccino after 11 a.m.? Only for tourists. Spaghetti bolognese? A horrifying thought. Pineapple on your pizza? Heresy – at least, it was until now.
But 2024 might just be the year that pineapple pizza cracks Italy, thanks to Gino Sorbillo, the renowned Naples pizzaiolo (pizza maestro) who has added the dreaded “ananas” to his menu in Via dei Tribunali, the best known pizza street in the world capital of pizza.
Sorbillo’s creation, called “Margherita con Ananas” costs 7 euros ($7.70). But this isn’t your regular Hawaiian: it is a pizza bianca, denuded of its tomato layer, sprinkled with no fewer than three types of cheese, with the pineapple cooked twice for a caramelized feel.
“Sadly people follow the crowd and condition themselves according to other people’s views, or what they hear,” he said.
“I’ve noticed in the last few years that lots of people were condemning ingredients or ways of preparing food purely because in the past most people didn’t know them, so I wanted to put these disputed ingredients – that are treated like they’re poison – onto a Neapolitan pizza, making them tasty.”
