This week's interesting finds

Fourth quarter commentaries are now live! 

This quarter Claire Thornhill takes us on a random walk that led to two big ideas ending up in the Global Portfolio, while Derek Skomorowski discusses the importance of dry powder – optionality and flexibility to aggressively pursue opportunities when the market presents them. 

This week in charts 

Manufacturing  

Gender politics 

 GDP  

 Housing 

U.S. treasuries

Sectors 

Equities

Why Americans Have Lost Faith in the Value of College 

Arthur Levine, president emeritus of Columbia Teachers College and author of “The Great Upheaval: Higher Education’s Past, Present and Uncertain Future,” compares this moment in post-secondary education to the seismic change that followed the Industrial Revolution. That 19th-century wave of disruption washed over schools designed to meet the needs of a sectarian, agricultural society and transformed higher education into a sprawling system of community colleges, land-grant universities and graduate schools. 

The dilemma faced by today’s high-school students is that while a similarly massive economic disruption has arrived, new educational alternatives have not. “Whatever comes next,” Levine says of Generation Z, “It’s not going to come soon enough for them.” 

The digital revolution demanded a nimble realignment of the academy so that students could learn a quickly emerging set of skills to meet changing labor-market demands. Instead of adapting, campus interest groups protected their turf. Decisions reached by consensus usually meant the adoption of modest reforms that were the least objectionable to the greatest number of people, said Brian Rosenberg, former president of Macalester College and author of “‘Whatever It Is, I’m Against It’: Resistance to Change in Higher Education.” 

As students abandoned the humanities and flooded fields like computer science, big data and engineering, schools failed to respond. The result was undersubscribed history and English departments and waiting lists for classes that led to well-paying jobs. New programs in emerging fields did not start because schools could not free up the resources. 

The misalignment between universities and the labor market is compounded by the failure of many schools to teach students to think critically. Many students arrive poorly prepared for college-level work, and the universities themselves are ill-equipped to provide intensive classroom instruction. 

A quarter of college graduates do not have basic skills in numeracy and one in five does not have basic skills in literacy, says Irwin Kirsch, who oversees large-scale assessments for ETS, the company that administers the SAT. 

Quality control for college degrees falls to accreditors, but they approve programs at hundreds of schools that fail to produce financial value for graduates, and have kept many schools in business with a single-digit graduation rate. About one in 40 U.S. workers draws a paycheck from a college or university, and in recent decades the powerful higher-education lobby in Washington has quashed dozens of proposals to measure the sector’s successes and failures. 

The pressure to place less emphasis on four-year degrees is growing, however. In what has been called the “degree reset,” the federal government and several states eliminated the degree requirements for many government jobs. Companies like IBM and the giant professional services firm Deloitte have too. Last year, a survey of 800 companies by Intelligent.com found that 45% intended to eliminate bachelor degree requirements for some positions in 2024. The Ad Council recently ran a campaign encouraging employers to get rid of the “paper ceiling.” 

In place of a degree, some employers are adopting skills-based hiring, looking at what students know as opposed to what credential they hold. The problem is that the signal sent by a college degree still matters more, in most cases, than the demonstration of skills. The result is something of a stand-off between old and new ideas of job readiness. A LinkedIn study published last August found that between 2019 and 2022 there was a 36% increase in job postings that omitted degree requirements—but the actual number of jobs filled with candidates who did not have a degree was much smaller. 

The $300 Trillion Question 

Ligaya Kelly worries her pet boarding facility on the outskirts of Los Angeles won’t survive the winter if loan costs keep rising. Economist Diana Mousina says she’ll have to sell her Sydney investment property if interest rates remain higher. John Stanyer has cut back plans for his holiday park in the north of England after his mortgage repayments almost tripled. 

Like millions of borrowers across the world, the aspirations of Kelly, Mousina and Stanyer have collided with the steepest monetary tightening campaign in a generation. They’ve done what they can to weather the storm – Kelly has cut workers, Mousina dines at home these days and Stanyer’s expansion plans are on hold -- but how long they can hold out will depend on factors beyond their control, such as deglobalization, aging and the cost of the energy transition. 

It’s arguably the biggest question in economics right now: Are these higher interest rates here to stay? In textbook jargon, it all comes down to R-Star (written as R* in economic models) -- the long-term neutral interest rate that keeps inflation steady at central bank’s preferred pace of around 2%. 

In the decade or so after the 2008 financial crisis, the neutral rate dropped across developed economies as inflation remained generally subdued even as central banks kept interest rates at historically low levels. Deepening globalization meant cheap TVs and clothes, while memories of the crisis kept consumers subdued and held businesses back from investments, putting a lid on demand. 

The post-Covid price spike shattered that calm, spurring a debate among economists, central bankers and bond traders about the future of inflation and interest rates – with very real implications for a world saddled with about $300 trillion in debt. If central banks conclude that R* is now higher, then they'll need to keep their benchmark rates more elevated too. 

Anna Wong, chief U.S. economist for Bloomberg Economics, recently ran the numbers on what varying estimates of the neutral interest rate would mean for policy settings of the Federal Reserve, which meets later this week. She found a higher neutral rate would result in fewer interest-rate cuts in the next couple of years. 

Some 2,300 miles east, at the austere Fed offices in Washington DC, officials aren’t ruling out more rates pain for Kelly and her kennel. In an August speech at the central bank's annual economic symposium in Jackson Hole, Wyoming, Chair Jerome Powell signaled that interest rates will likely stay high for some time, or even move higher, should inflation remain sticky. 

Seared by the failure in analysis and communication that led to erroneous calls that inflation would prove transitory as prices spiked in 2021, Fed officials these days aren’t giving much away when it comes to their longer-term rates view. Powell has led officials in saying it’s too early to tell exactly where inflation and rates will settle once the economy normalizes. 

Does China face a lost decade? 

In a healthy economy, corporations use funds provided by households and other savers, ploughing the money into expanding their businesses. In post-bubble Japan, things looked different. Instead of raising funds, the corporate sector began to repay debts and accumulate financial claims of its own. Its traditional financial deficit turned to a chronic financial surplus. Corporate inhibition robbed the economy of much-needed demand and entrepreneurial vigour, condemning it to a deflationary decade or two. 

So is China going the way of Japan? Chinese enterprises have accumulated even more debt, relative to the size of the country’s gdp, than Japan’s did in its bubble era. China’s house prices have begun to fall, damaging the balance-sheets of households and property firms. Credit growth has slowed sharply, despite cuts in interest rates. And flow-of-funds statistics show a narrowing in the financial deficit of China’s corporations in recent years. In Mr Koo’s judgment, China is already in a balance-sheet recession. Add to that a declining population and a hostile America and it is easy to be gloomy. Perhaps Japan is a best-case scenario. 

Look closer, though, and the case is less conclusive. Much of the debt incurred by China’s corporations is owed by state-owned enterprises that will continue to borrow and spend, with the support of state-owned banks, if required by China’s policymakers. Among private enterprises, debt is concentrated on the books of property developers. They are reducing their liabilities and cutting back on investment in new housing projects. But in the face of falling property prices and weak housing sales, even developers with robust balance-sheets would be doing the same.

The end of China’s property boom has made households less wealthy. This is presumably breeding conservatism in their spending. It is also true that households have repaid mortgages early in recent months, contributing to the sharp slowdown in credit growth. But surveys show that households’ debts are low relative to their assets. Their mortgage prepayments are a rational response to changing interest rates, not a sign of balance-sheet stress. When interest rates fall in China, households cannot easily refinance their mortgages at the lower rates. It therefore makes sense for them to repay old, relatively expensive mortgages, even if that means redeeming investments that now offer lower yields. 

What about the switch in corporate behaviour revealed by China’s flow-of-funds statistics, which show the corporate sector moving to a financial surplus? This narrowing is largely driven by the crackdown on shadow banks, point out Xiaoqing Pi and her colleagues at Bank of America. When financial institutions are excluded, the corporate sector is still demanding funds from the rest of the economy. Chinese businesses have not made the collectively self-defeating switch from maximising profits to minimising debts that condemned Japan to a deflationary decade.

Unfortunately, Chinese officials have so far been slow to react. The country’s budget deficit, broadly defined to include various kinds of local-government borrowing, has tightened this year, worsening the downturn. The central government has room to borrow more, but seems reluctant to do so, preferring to keep its powder dry. This is a mistake. If the government spends late, it will probably have to spend more. It is ironic that China risks slipping into a prolonged recession not because the private sector is intent on cleaning up its finances, but because the central government is unwilling to get its own balance-sheet dirty enough.   

This week’s fun finds 

The McDonald's McRib Is Coming Back. And That Could Boost Stocks. 

Coincidentally, the McRib comes back on January 30. 

The Ideal Vacation Length for Peak Relaxation, According to Experts 

One piece of advice that is especially pertinent at the top of a new year of vacation planning: We should take several shorter vacations throughout the year instead of blowing all of our leave on one epic trip. According to such experts as [Breda University Researcher Ondrej] Mitas and [University of Groningen professor Jessica] de Bloom, the multi-vacation plan can keep your spirits up. 

“We see relationships between frequency of vacation and happiness or well-being,” Mitas said. “So all else being equal, you should take more vacations.” 

Mary Helen Immordino-Yang, a professor of education, psychology and neuroscience at the University of Southern California in Los Angeles, explained that most people are conditioned to operate in seven-day increments. For those of us who faithfully work weekdays, a week-long vacation feels appropriate and acceptable. 

“We think in units, and a week is one of those units,” she said. “When you pick an eight-day vacation, you have replaced one unit of work with one unit of relaxation, plus a day to get there.”

When assembling trips for her clients, Denise Ambrusko-Maida, a travel adviser and founder of Travel Brilliant in Buffalo, focuses on the number five. She will recommend at least five days on the ground for trips that require no more than a day of travel on both ends. For long-haul trips, she suggests 10 days, plus travel days. 

“If truly feeling like you’ve been on a vacation is important, then the five-day rule of not transiting is right,” she said. “And, depending on the trip, that can stretch out to more days if you’re moving from location to location.” 

To make the most of your time away, tie up any loose ends before you depart. Immordino-Yang recommends a strategy often used to ensure restful sleep. She said to write down all of the projects and errands you need to complete before you leave.

This week's interesting finds

This week in charts 

Housing   

S&P 500   

Investor behaviour  

Market to be Short Oil From 2025 Onwards, Occidental CEO at Davos 

The oil market could be heading for a supply crunch from 2025 onwards as oil exploration fails to keep pace with demand, Occidental Petroleum Chief Executive Vicki Hollub said on Tuesday. 

Hollub, who spoke on the sidelines of the World Economic Forum in Davos, said U.S. WTI crude prices could trade in the $80-$85 a barrel range from 2025. Prices averaged about $78 a barrel last year. 

“In the near term, the markets are not balanced; supply, demand is not balanced,” Hollub said, adding that: “2025 and beyond is when the world is going to be short of oil”. 

Hollub said that from the mid-1950s to the late 1970s, oil companies were finding around five times as much oil as was used, a ratio that has steadily declined to about 25% in 2023. 

She said that from 2012, U.S. oil companies moved away from exploration and focused on tapping shale oil reserves, which have a much shorter lifespan than conventionally produced oil. 

She added that she expected energy transition scenarios will have to be adjusted to accommodate for more oil exploration. 

Gen Z vs. the Silver Tsunami 

Baby boomers dominate America's housing market. Members of the "Me" generation own nearly $19 trillion worth of US real estate — more than double the amount held by millennials and about $5 trillion more than Gen Xers. Their massive land grab has continued well into their twilight years as they've used their mountains of savings and accumulated equity to edge out younger buyers. 

But as the generation ages, its vast real-estate portfolio poses a question: What happens when boomers die? 

By 2040, the population of 80-plus-year-olds will have more than doubled from today, according to projections from the Census Bureau. In the years leading up to that, boomers will begin to leave their residences as they die, move into nursing homes, or shack up in granny flats. Some economists have predicted that a "silver tsunami" of aging Americans will leave millions of homes up for grabs, lowering prices and unlocking opportunities for younger generations used to fighting for table scraps. Others have likened the phenomenon to a glacial shift — slow, predictable, and unlikely to sway home prices as much as 20- and 30-somethings might hope. 

Regardless of the degree to which boomers' exit shakes up the market, the changing of the guard will leave one generation in the driver's seat: Gen Z. 

Most Gen Zers will be in their prime homebuying years at this crescendo — perfect timing to take advantage of the increase in supply. Since many boomers are downsizing later in life, their leftover inventory could include many of the kinds of starter homes that are perfect for younger households and scarce in today's new housing stock. 

Despite the numerous efforts to forecast its moves, the real-estate industry is wildly unpredictable; good luck guessing where mortgage rates will be in 10 years or how many new homes will hit the market. Demographic patterns, on the other hand, follow a more certain path — it's much easier to estimate when generations will start to fade away. Historical data tells us we can expect boomers to begin aging out of their homes after they reach 80, Odeta Kushi, the deputy chief economist for the title company First American, told me. Given that boomers are currently between 60 and 78, Kushi said, we should see a rise in the number of boomers leaving their homes around 2030. Gary Engelhardt, a professor of economics at Syracuse University who has studied the fate of boomers' homes, told me he expects the bulk of the boomer generation to age out of the market between 2030 and 2040. 

Millennials, born between 1981 and 1996, have had a pretty rough go in the housing market. They started their careers in the wake of the Great Recession, took on far more student debt than their predecessors did, and were left to contend with a housing crunch caused by a slowdown in homebuilding. They faced competition not just from their peers but from baby boomers, who've been far more active buyers later in life than previous generations were. Left to dream of better days ahead, millennials have hoped that boomers' eventual exit will unleash an onslaught of vacant homes and lower prices enough for them to hop on the ladder. But once again, the timing looks like it won't work out in their favor. 

Boomers' passing won't have a simple trickle-down effect. Not all members of subsequent generations will want to live where baby boomers have settled down, and a lot of these homes will require updates to appeal to younger buyers. 

S.Korea to scrap capital gains taxes on financial products 

In a new year's policy report to President Yoon Suk Yeol, the Financial Services Commission (FSC) said that all capital gains derived from securities and derivative products will be exempt from taxes, pending revisions to the relevant laws. 

The government had planned to tax 20-25% of capital gains from stocks amounting to 50 million won ($37,000) or more. The tax was also supposed to apply to investment income of more than 2.5 million won from other financial products such as bonds, funds and derivatives. 

Currently, the taxes apply only to top shareholders. The regulation was scheduled to begin in 2023, but was postponed by two years to start in 2025. 

The Yoon administration will cut taxes on securities transactions made on the Kospi and Kosdaq markets to 0.18% this year and 0.15% next year, compared to 0.20% in 2023. 

The Ministry of Economy and Finance estimated the tax cuts for securities trading will reduce the country’s tax revenue by about 200 billion-300 billion won. 

To expand the base of retail stock investors, the government will also boost tax benefits for individual savings accounts (ISAs) and raise the limits on the amount of money they can put in the accounts per year. 

To enhance shareholder value, the government is pushing board directors to take more responsibility for the damage they may cause by misappropriating the company’s business opportunities. 

It will also introduce electronic voting systems to help minority investors more actively participate in shareholder meetings and amend regulations to ensure that the interests of minority shareholders are properly reflected in the company’s decision-making process. 

To prevent top shareholders from securing undue control of a company to be spun off, the government will revise laws to ban the spun-off unit from placing them with new shares. 

They will also be subject to stricter public disclosure rules: they must announce shareholding changes and reveal the purpose of their share sales when they occur. 

Coinbase Compares Buying Crypto to Collecting Beanie Babies 

The biggest US crypto exchange made the comparison Wednesday in a New York federal court hearing. Coinbase was arguing for the dismissal of a Securities and Exchange Commission lawsuit accusing it of selling unregistered securities. 

William Savitt, a lawyer for Coinbase, told US District Judge Katherine Polk Failla that tokens trading on the exchange aren’t securities subject to SEC jurisdiction because buyers don’t gain any rights as a part of their purchases, as they do with stocks or bonds. 

“It’s the difference between buying Beanie Babies Inc. and buying Beanie Babies,” Savitt said. 

The question of whether digital tokens are securities has divided courts. Another Manhattan federal judge ruled in July that exchange sales of Ripple Labs XRP token weren’t subject to SEC jurisdiction, while yet another judge that same month reached the opposite conclusion in the regulator’s case against Terraform Labs Pte. 

Coinbase is asking Failla to follow the Ripple decision in dismissing the SEC’s suit. The judge ended the hearing without ruling. 

Beanie Babies, which were the subject of a 1990s collecting boom and bust that some have likened to crypto, had come up earlier in the hearing when Failla expressed concern that the SEC’s position might lead to the regulation of collectibles. Lawyers for the government responded that buying an item like a baseball card or a figurine doesn’t mean that someone is buying a stake in the enterprise that makes such items. 

But they said that wasn’t the case with tokens sold on Coinbase. 

“When they buy this token, they are investing into the network behind it,” SEC lawyer Patrick Costello said. “One cannot be separated from the other.” 

The SEC sued Coinbase in June, alleging that the exchange skirted its rules for years by allowing users to trade numerous crypto tokens that were actually unregistered securities. The regulator points to a 1946 Supreme Court decision defining a security as an “investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.”   

This week’s fun finds 

Hot sauce reviews – an Apollo mission with some foreign content 

This week the EdgePoint hot sauce reviewers tried a bottle of MonoLoco (Crazy Monkey) that Frank brought us from Costa Rica. The label warned that one drop is sufficient for 9.5 people. 

We also tried the second-hottest iteration of Hot Ones Last Dab – Apollo, named after its primary pepper ingredient. 

Reviews – Monoloco 

• “It just tastes like pepper.”
• “Why are there seeds in it?”
• “Luke, NOOOOOO.”
• (30 minutes later): It’s still burning 

Notably, one person just stared into the distance and didn’t say anything for a while after trying it.

Reviews – Last Dab – Apollo 

• “It’s not bad as I thought it would be. But maybe because I can only taste the other one still.”
• “I think the other Last Dab was hotter.”
• “Mostly just spice, not a lot of flavour.” 

The tyranny of the algorithm: why every coffee shop looks the same 

In 2016, I wrote an essay titled Welcome to AirSpace, describing my first impressions of this phenomenon of sameness. “AirSpace” was my coinage for the strangely frictionless geography created by digital platforms, in which you could move between places without straying beyond the boundaries of an app, or leaving the bubble of the generic aesthetic. The word was partly a riff on Airbnb, but it was also inspired by the sense of vaporousness and unreality that these places gave me. They seemed so disconnected from geography that they could float away and land anywhere else. When you were in one, you could be anywhere. 

My theory was that all the physical places interconnected by apps had a way of resembling one another. In the case of the cafes, the growth of Instagram gave international cafe owners and baristas a way to follow one another in real time and gradually, via algorithmic recommendations, begin consuming the same kinds of content. One cafe owner’s personal taste would drift toward what the rest of them liked, too, eventually coalescing. On the customer side, Yelp, Foursquare and Google Maps drove people like me – who could also follow the popular coffee aesthetics on Instagram – toward cafes that conformed with what they wanted to see by putting them at the top of searches or highlighting them on a map. 

To court the large demographic of customers moulded by the internet, more cafes adopted the aesthetics that already dominated on the platforms. Adapting to the norm wasn’t just following trends but making a business decision, one that the consumers rewarded. When a cafe was visually pleasing enough, customers felt encouraged to post it on their own Instagram in turn as a lifestyle brag, which provided free social media advertising and attracted new customers. Thus the cycle of aesthetic optimisation and homogenisation continued. 

As years passed, however, I came to realise that AirSpace was less of a specific style than a condition that we existed in, something beyond a single aesthetic trend. Like all fashions, the visual style of that moment in the mid-2010s decayed. The white subway tiles that were once cool began to look too cliched, and they were replaced by brightly coloured or more textured ceramic tiles. The financial crisis-era, rough-hewn style of high Brooklyn lumberjack, with its repurposed industrial furniture, gave way to careful, Scandinavian-ish mid-century modernism, with spindly-legged chairs and wood joinery. In the late 2010s, the dominant aesthetic grew colder and more minimal, with cement countertops and harsh geometric boxes in place of chairs. Accoutrements such as lights made from rusty plumbing fixtures were left behind in favour of houseplants (succulents especially) and highly textured fibre art, evoking west coast bohemia more than hardscrabble New York City. The association with Brooklyn gradually faded out – after the pandemic, Brooklyn itself was seen as less desirable than downtown Manhattan – and the generic style was less associated with a place than with digital platforms such as Instagram and the insurgent TikTok. In a 2020 essay, the writer Molly Fischer labelled it “the millennial aesthetic”; it was also embraced by startup companies such as the mattress seller Casper and the coworking space chains WeWork and The Wing. Fischer asked: “Will the millennial aesthetic ever end?”

This week's interesting finds

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.”

This week's interesting finds

This week in charts 

National elections

E.U. industrials

U.S. equities 

Over the last decade, the excess-of-cash return on the S&P 500 averaged 11.9% per year. Relative to history, this is an exceptional outcome—well above the 90th percentile of rolling ten-year performance across global developed equity markets since January 1, 1950. 

Corporate profits

Visualizing 150 Years of S&P 500 Returns

 

Population

China Is Pressing Women to Have More Babies. Many Are Saying No.

Fed up with government harassment and wary of the sacrifices of child-rearing, many young women are putting themselves ahead of what Beijing and their families want. Their refusal has set off a crisis for the Communist Party, which desperately needs more babies to rejuvenate China’s aging population. 

With the number of babies in free fall—fewer than 10 million were born in 2022, compared with around 16 million in 2012—China is headed toward a demographic collapse. China’s population, now around 1.4 billion, is likely to drop to just around half a billion by 2100, according to some projections. Women are taking the blame. 

In October, Chinese leader Xi Jinping urged the state-backed All-China Women’s Federation to “prevent and resolve risks in the women’s field,” according to an official account of the speech. 

Party lectures on “family values” are having little effect, even in rural parts of China. 

When Beijing said it would abolish its 35-year-old one-child policy in 2015, officials expected a baby boom. Instead, they got a baby bust. 

Demographers and researchers predict that data will show Chinese births dipping below 9 million in 2023. The United Nations forecasts 23 million births in India, which in 2023 passed China as the world’s most populous country. The U.S. will have around 3.7 million babies born in 2023, the U.N. estimated. 

The one-child policy brought much of China’s demographic gloom: There are fewer young people than in the past, including millions fewer women of childbearing age every year. Those women are increasingly reluctant to marry and have children, accelerating the population decline. 

How Supply-Chain Snarls Made Everyone Wrong on Inflation 

When U.S. inflation first began to heat up in 2021, it was written off by many economists as largely a temporary thing. The interaction of reopening economies with the supply-chain snarls the pandemic had set off caused a burst higher in prices that wouldn’t last. Or, as Federal Reserve policymakers put it when they left rates on hold near zero in November 2021, “Inflation is elevated, largely reflecting factors that are expected to be transitory.” 

As 2022 got under way, the New York Fed’s Global Supply Chain Pressure Index, a widely followed measure based on freight costs and manufacturing surveys, showed the shipping snarls that had beset the economy were getting untangled. By September 2022, it was back to prepandemic levels. But inflation kept running hot: That same month, the Commerce Department measure that the Fed prefers showed that prices excluding food and energy were up 5.5% from a year earlier, just shy of the 39-year high it hit that February. By then some economists were advancing a new narrative—one in which inflation was getting driven by a tight labor market, and where the economy would need to endure a spate of high unemployment to bring prices under control. 

Since then, however, inflation has cooled markedly even though unemployment stayed low. How could this happen? At least a partial explanation might be that those supply-chain problems really were transitory, but were also in place longer than most economists realized. 

Overseas container shipping accounts for a major portion of international trade, and containerships carry transceivers that broadcast positional information, including their headings and speed. Economists Xiwen Bai, Jesús Fernández-Villaverde, Yiliang Li and Francesco Zanetti used this data to determine how bad congestion problems at container ports worldwide were in any given month. If, for instance, ships’ headings show that they are quickly arriving at berth, where they can load and unload cargo, a port probably isn’t experiencing congestion problems. If, on the other hand, ships spend time moored in an anchorage, the port is more likely to be dealing with congestion problems. They used this to create an average congestion rate measure, which shows globally the share of containerships that experienced delays loading or unloading after arriving at port. 

The measure shows delays increasing in late 2020, and by the start of 2022 showed that 35% of ships were getting delayed versus an average of 26% in 2019. Unlike the New York Fed’s index, it shows congestion problems at global ports stayed elevated through July 2022 before falling. Because these congestion problems are representative of costs to businesses beyond the prices they paid to ship goods, they help explain why inflation was so persistent. 

“What really kills you is when they tell you it will arrive on Monday but it arrives on Friday,” says Fernández-Villaverde. 

Starting in August 2022, average congestion rates started falling, and shortly after that core inflation turned lower, too. According to the Commerce Department, core prices were up 3.2% from a year earlier in November. Compared with six months earlier, they were up just 1.9% at an annual rate. 

But the broader takeaway is this: If supply-chain problems lasted longer than economists recognized, neither inflation’s persistence through much of 2022, nor its cooling in 2023, is as surprising as it seemed.   

This week’s fun finds 

2024 predictions 

How Bird, the High-flying Scooter Company, Went Broke 

It was a mere four years ago that Bird, the rent-a-scooter company, was rewarded with a $2.5 billion valuation for clogging up the sidewalks of America with its electric devices. Different times. Back then, it was plausible this Silicon Valley–ish company, flush with cash from venture capitalists and, later, SPAC financing, would capitalize on the very real movement to make cities less reliant on cars and take advantage of the hundreds of miles of bike lanes that New York and other megalopolises were building. People needed to get around, so why not scoot? The thesis, however, didn’t work out exactly the way they thought it would. Now, crushed under the weight of personal injury lawsuits and inflation, the company is worth about $1.3 million and falling and has filed for bankruptcy protection. 

To understand why Bird has failed, it’s important to disentangle it from its lofty marketing. The scooter company has a lot in common with another recent crash-and-burn from that era: WeWork. Where WeWork infamously aimed to “elevate the world’s consciousness,” Bird’s wildly ambitious goal was “to make cities more livable by reducing car usage, lowering carbon emissions, and improving the safety of all road users,” according to its securities filings. Its tagline, plastered over the New York Stock Exchange, was “Cleaner Air. Less Traffic. More Joy.” It said it was “actively reducing the hundreds of billions of trips under five miles made by gas-powered cars every year.” The buzzword here was micromobility. Not quite as lofty as Neumann’s cult-y hype machine, but come on: They were renting scooters for $3.90 a mile in some cities. Their goal was to make bazillions of dollars. Even their claim to tamp down our reliance on cars was, putting it generously, a stretch. 

To be fair to the company, it’s possible that its descent into bankruptcy could help turn it around. Personal injury lawsuits are a nuisance for Bird, but it probably should have thought harder about how to avoid dumping tripping hazards onto busy sidewalks if it didn’t want to get sued. The company had hundreds of millions of dollars in debt, much of which got more expensive as interest rates rose. Bird is clearly a product of the heady, pre-pandemic era of the VC-backed tech world. In that way, it’s possible to see Bird as a victim of timing — the right idea with the wrong era of leaders, making the wrong decisions for a market that wasn’t as big as they thought. But there’s still a strong argument to make that people need more ways to get around. Congestion pricing is finally coming to New York, and other cities are likely to follow suit. Subway ridership is up, but the MTA is still plagued by delays. Whether or not Bird can actually emerge from bankruptcy is an open question. What’s more likely is that its vision of the future will live on without it.

This week's interesting finds

We hope everyone enjoys the holidays and we look forward to seeing you in the new year. 

This week in charts

Large caps versus bonds

Household debt

Canadian population

Canadian housing

Retail 

Asset classes 

The 4% rule could be true in 2024

Retirees can now draw 4% per year from a U.S.-based investment portfolio that is between 20% and 40% equities and still have a 90% probability that there will be money left after 30 years, according to a November Morningstar study.

This is the highest safe-withdrawal rate since the research began in 2021. Based on similar assumptions, the rates were 3.3% in 2021 and 3.8% last year.

The results came from researchers who sought the highest withdrawal rate for each combination of time horizon and asset class, where at least 900 of 1,000 computer simulations showed a positive balance at the end of the period.

The higher withdrawal rate was made possible by more attractive bond yields and a lower inflation forecast, allowing for a more conservative asset allocation.

In the 20th century, stocks averaged about a 7.5% real return rate a year, but it has dropped since then, and Morningstar predicts it will go to 4.5% in the current era, said John Rekenthaler, Morningstar’s research director.

“If we thought history was going to repeat itself, we would recommend more equity-heavy portfolios. We don’t think that’s realistic,” he said. “Prospective stock returns are relatively low.”

With equity returns looking less favourable, an all-equity portfolio would only allow for a 3.3% safe withdrawal rate compared to 4% for a 40% equity portfolio. However, with the all-equity option, a $1 million investment is expected to yield a median remaining balance of $4.5 million at the end of the 30-year period, compared to just $1.5 million for the conservative approach.

“We’re testing for a 90% success rate. So, the number that we’re focusing on is not the median result,” Rekenthaler said. “You only get one shot at retirement; you don’t get to roll the dice again if it’s a bad number. We think [retirees] should take a relatively conservative approach in terms of the odds.”

He said retirees may be able to take a chance on a higher-equity portfolio if they are willing to cut back on their spending during difficult years. The report shows that the safe-withdrawal rate falls only slightly — to 3.8% — when a portfolio consists of 70% equities.

In previous years, Morningstar calculated all withdrawal percentages assuming the retiree would spend the same amount of money each month. However, some financial advisors suggest clients use a variable withdrawal rate and retirees may adjust spending to reflect inflation.

This year, Morningstar added a new methodology that assumes retirees increase spending by 1% less than the annual inflation rate. Under this method, people could take out 5% in early retirement with a lifetime withdrawal rate of 3.9%.

Regulator Urges Chinese Companies to Boost Dividends, Buybacks

China’s securities regulator is asking publicly traded companies to boost dividends to reward investors and said it will increase supervision of those that don’t pay.

China Securities Regulatory Commission said on Friday it will strengthen disclosure requirements for companies that aren’t paying dividends. It also encouraged listed firms to increase the frequency of their dividend payouts and streamline interim distribution processes.

China has taken a tougher stance on firms that refuse to issue dividends to investors over the years. In 2017, then-CSRC Chairman Liu Shiyu said the regulator would take steps against “those iron roosters which have the ability to offer cash dividends but never plucked a feather.”

CSRC issued rules to ease conditions for companies’ share buybacks. It also warned it would crackdown on using buybacks for illegal activities including insider trading and market manipulation.

Japan Plans 10% Reduction in Debt Issuance Next Fiscal Year

Japan plans to reduce debt sales by about 10% in the fiscal year starting April 1 as the government tries to lower the world’s biggest debt load for a developed nation.

The finance ministry aims to issue ¥171 trillion ($1.2 trillion) of debt to the market, marking a fourth straight year of planned decreases in sales, with 20-year bonds and shorter notes seeing the big cuts.

Japan has been trying to reduce general government debt that has soared to a size equivalent to 255% of its economy, according to the International Monetary Fund. Bond issuance jumped in 2020 to finance stimulus measures during the pandemic, and the government has been cutting sales in the following years. But next fiscal year’s planned issuance still remains above pre-2020 levels.

Expectations that the Bank of Japan will end its negative interest rate policy next year has weighed on demand for bonds as investors anticipate increases in yields.

This week’s fun finds

Nike staff memo from 1977

Why Gift-Giving Makes You Anxious

Gifts are so meaningful that some people identify “receiving gifts” as their primary “love language.” Many believe that gifts from their romantic partner are a big way they can understand how much their partner loves them. Indeed, on the surface, gift-giving occasions seem like wonderful opportunities to experience and create delight. But according to a 2023 survey by Preply, gift-giving and receiving is actually the least popular love language overall.

Part of the problem is that occasions that involve gift giving are steeped in uncertainty. If it’s an occasion like Christmas, where people are simultaneously shopping for each other, people might be nervous about whether the gift they give will be in the same category as the gift they will also receive. For instance, you don’t want to give someone a gag gift when they’re giving you a sincere, heartfelt gift—or vice versa. It’s what game theorists call a “coordination game”: your main objective is simply to use whatever strategy you think your partner is using. Mismatched approaches to gift-giving are a recipe for awkwardness. Fans of The Office might recall how Michael’s outlandish Yankee Swap gift—an iPod (highly coveted at the time)—made the entire event uncomfortable for everyone.

There can also be tremendous uncertainty around how your gift will be experienced by the recipient. For example, imagine that someone you’re close to is showing some signs of Seasonal Affective Disorder, and you’re considering giving them a light therapy lamp as a holiday gift. Indeed, the recipient of such a gift may very well be appreciative, indicating that this is “just what they needed.” At least, that’s how it’s all likely to unfold in the hopeful imagination of the lamp-giver. But what if the lamp-recipient interprets the gift as an unwelcome piece of commentary on their affective state? One could imagine a reaction along the lines of “Gosh, I’m sorry I’ve been so unpleasant to be around. Thanks for the feedback.” The message we send with gifts (or emails, texts, or just about any form of communication) is not necessarily the same as the message received.

Worst of all, there’s the anxiety that comes with receiving gifts. If you’re anything like me, you may have, on occasion, found yourself in a setting where you expect that a lot of well-meaning but disappointing gifts are headed your way. There can be some dread that comes with knowing that you’ll soon need to perform joy and appreciation. Even worse, you might worry that the gift-giver will detect your insincerity, wounding them in the process.

It’s not all bad, of course. When done carefully, gift-giving can be a wonderful way to communicate to loved ones that we appreciate and understand them. Gifts can absolutely draw people closer together, in a lasting way.