FT Weekend China's Growth, US China policy, Bitcoin, Greenhill, Softbank and more

06 Mar

Front Page
Iran warms to fresh nuclear talks
• Presidential hopeful willing to engage with US • Call to unfreeze billions of dollarsAn indication that there could be a deal possible. It is something that European leaders have been seeking and would give Biden some leverage with Europe for more unified action regarding China.
Leisure and hospitality lead US jobs market recovery as Covid cases decline. A stronger than expected jobs report which triggered another spike in US Treasuries.  Of the 379,000 new hires the leisure and hospitality sector recorded an increase of 355,000 jobs, although it would probably be better to refer to them as reinstatements.  Still that does not make up for the 523,000 jobs the sector lost in December and January.  For other sectors manufacturing added 21,000, construction lost 61,000 (due to cold snap), Government lost 86,000.  The outlook is improving an the inoculation program get underway which should allow more states to loosen up in the coming months.It has prompted upgrades to economic forecasts which will probably be further upgraded on news that Biden’s stimulus bill got approval on Saturday morning after some last minute deal making.

From Friday’s FT;
FT BIG READ. US FOREIGN POLICY Building an alliance against China
Joe Biden’s stance on issues such as tariffs has sounded similar to his predecessor’s. But the administration believes it can develop a more effective strategy to deal with Beijing if it can work closely with old friends.
I was off yesterday but I thought this a good piece.
Biden, as promised is being tough on China. Last month he stated the US and its allies faced “long-term strategic competition” with China and had to “push back” against Beijing’s “economic abuses and coercion that undercut the foundations of the international economic system”.
“We are in the midst of a fundamental debate about the future and direction of our world,” he said, a choice between those who argue that “autocracy is the best way forward and those who understand that democracy is essential.”

But he is adopting a different strategy in dealing with Beijing from Trump. That of forging common ground with allies and other nations rather than going it alone. 'One senior official told reporters that Biden wants to create what Dean Acheson, postwar US secretary of state, called “situations of strength” where like-minded nations co-operated to tackle threats.’
The issue for Biden is getting the allies and partners to join in. Europe especially seems to have a different view on China and a reluctance to get drawn into a Cold War style confrontation.
At the same time there are issue that Biden wants to work with China; especially climate control, N Korea and Iran. But Biden has made it clear that talking to friends comes before talking to China.
'Biden on Wednesday issued his “interim national security strategic guidance”, which said China was “the only competitor potentially capable of combining its economic, diplomatic, military, and technological power to mount a sustained challenge to a stable and open international system”.’
Being aware of the threat he is keen to use available tools; like ‘Quad' and vaccines to show that the US is about aiding the region and countering China’s influence.
Europe is more problematic as some Europeans view China as less of a threat and more of an important target market. Europe seems to still think that by working with China it can change Chinese attitudes. Biden is about finding common ground on which to build. It notes that the US and Europe will hold talks 'in the coming weeks over everything from strategic approaches to specific issues such as how to work together to stop China from securing sensitive technologies.’
Biden has the benefit of bipartisan support within the US and with an eye on the mid term elections will not go soft anytime soon. But in Europe trade with China, especially for Germany is a key consideration. Covid and China’s unwillingness to allow an immediate investigation has prompted some within Europe to become more hawkish.
It notes that the EU signing an agreement with China just ahead of Biden’s inauguration was frustrating; especially as it turns out the EU was under no need to hurry in terms of the deal from China and in fact much of the deal was reported as ‘underwhelming’. But I think that was more about Germany wanting to be able to show a deal while it held the EU chair; so Merkel could play to the domestic players. The fact that many MEP’s have criticised the deal and it has a long way to go before ratification could still mean it comes to very little.
It quotes Susan Thornton, a former senior state department Asia official now at Yale Law School, adds that while Europeans share concerns about Chinese state capitalism and economic rule-breaking, they view the rise of China in a less threatening way than Americans. “European officials who work on Asia policy say they’re used to seeing powers rise and fall and are comfortable with China’s rise, and don’t see things as a Manichean struggle,” she says. “There’s a structural power shift that is driving a lot of the US narrative about China, and the US tends toward overconcern about decline.”
But the article notes that the Biden administration has yet to actually take action against China for all the rhetoric so far. Many see the appointment of Kurt Campbell to be his Indo-Pacific co-ordinator and Laura Rosenberger as his top NSC China official and Ely Ratner at the Pentagon as encouraging.
The litmus test could be Xinjiang which was raised in the first call between Biden and Xi, they also raised Hong Kong and Taiwan. The concerns for some is that Biden may not be as hawkish as his advisers.
It could be technology and future policy; quotes Sarah Bauerle Danzman, an expert on the security implications of investment decisions at Indiana University, who said “They’re going to have to think about the trade-offs in terms of when maximum pressure works and when it does not. A lot of this is about slowing the People’s Republic of China. Nobody thinks we can keep this technology from the PRC forever.”
Or the weaponising of investment money and not allowing Americans to invest in Chinese companies linked to the PLA.
Overall I agree with the view that Biden’s advisors want him to keep up the current pressure but with the support of allies and friends rather than just going it alone.
The article notes that China too is aware that change is afoot and being more open about the rivalry with the US.
For investors watching for developments in the next few weeks will be key; China changing Hong Kong’s electoral system to tighten it grip on control could further increase the tension. The arrest of the pro democracy campaigners has raised the issue; the bail hearings have put questions about the HK legal system; under the new security law the applicant has to show why he should be granted bail; which undermines the precept of innocence before being proven guilty. It will also be interesting to see it the tightening grip prompts more protests as Hong Kong sees easing covid restrictions. Around 1,000 people turned up to support those arrested; a sign that the protest movement is still present and active.

FT Weekend Inside
China targets 6 per cent growth after reining in coronavirus (Page 4)
Lower than most were expecting but could signal a wish for higher quality growth. Also announced were a 6.8% increase in the military budget, an intention to alter the Hong Kong electoral system and a new five year plan to focus on self reliance in critical industries.
The 6% target will also also planners some flexibility for areas of the economy that are still struggling as well as giving scope to dealing with China’s growing debt problems.
Also announced was the intention to create 11m urban jobs. That reflects the governments need to find jobs for the youth, very aware that unemployed university graduates could become a tinderbox for protests. The problem I think they will have is that the SOE’s are, for the most part, unable to create jobs but the lack of support for SME’s in the past year and the impact of covid has crimped the ability for private companies to grow and generate new jobs.

Big Tech critic hired to advise Biden on competition policy (Page 4)
Tim Wu a critic of big tech has been hired to advise Biden on competition policy. A move that is likely to concern some within the Big Tech that future policy is likely to be tougher on them. Tim Wu has written a number fo books and held various roles. He has compared Facebook, Google and Amazon to the early 20th-century era of US railroad-building and “robber barons”. He has also said that his “life mission” is to “fight bullies”.
It could mean that past big acquisitions; like Facebook buying Instagram and WhatsApp are still at risk of being unwound. It will add pressure on stocks that are also facing anti trust actions in the US and abroad.
For investors it is another reason to be reviewing the valuations of these companies within terms of the cashflow discounts and the regulatory risks.

Notebook Bitcoin 1.0 was the ancient stone money of Yap (Page 8) by Gillian Tett
Notes this recent weeks have seen dramatic news items for Bitcoin and this week Citi told its clients that Bitcoin could become the currency of choice for international trade. She compares its progress with research on the ancient stone money system that existed on the Micronesian island of Yap. Basically saying that Finance systems all rely on trust but that can change.
I think Citi is probably right that Bitcoin is at a tipping point and is becoming more widely accepted and by some is being viewed as a replacement to Gold as an inflation hedge. My concern is that we have no experience of how Bitcoin will react to significantly rising inflation.

FT BIG READ. INTERNATIONAL FINANCE.  The rise and fall of Lex Greensill
The Australian banker became a billionaire by building a business in a former backwater of the financial sector. But its potential collapse could put many small companies and tens of thousands of jobs at risk.
Looks in more detail at the rise and fall of Greensill. Of note to investors should be the fact that Softbank’s vision fund put $1.5bn into the company in 2019 and is now expected to have written off its investment. It also notes that some in the Insurance sector are watching nervously due to the complexity of the products with some likening to what happened when AIG blew up in 2008.
See also in Companies & FInance Decision to drop insurance proves Greensill’s undoing by Tom Braithwaite.
Which highlights that is was the lack of insurance covering the scheme that was its undoing. With insurance 'covering the credit, which had allowed investors to treat the fund as almost risk-free — almost as safe as cash in the bank but with a slightly better return.'
At the heart seems to be an underwriter 'had been found to be insuring amounts to Greensill “in excess of his delegated authority”, with the total exceeding A$10bn ($7.7bn).’
Of interest was the fact that many good companies used the facility and so will be slightly inconvenienced by its demise but less reputable companies will face considerably more difficulty; notably Gupta’s companies..
See also Credit Suisse winds down $10bn of Greensill funds. It will make initial repayments equivalent to 80% of the roughly $3.7bn in available cash and easily sellable assets from next week, it said yesterday. It is not clear what losses Credit Suisse and its investors might take across the four affected funds.
It notes 'Of the four Credit Suisse funds, the amount held in “cash or cash equivalents” ranges from 69.5 per cent in the safest investment grade fund to 17.9 per cent in the riskiest “high-income fund”. The high-income fund is the only one of the four without insurance cover.'

Companies & Finance
SoftBank loses potential Son heir as strategy chief Sago quits
• Tech investor suffers string of departures • Executive was left with little to do
After less than 3 years and he follows some other high level departures. That should raise investor concerns; he was the second person that had been hired as a potential successor to founder Masayoshi Son. Which would suggest that Son doesn’t want a successor and certainly doesn’t want someone in the company that could take his place and to whom he could be compared.
Sago seems to originally have been brought in to rein in the company’s bloated balance sheet and with his lieutenants find better financing options for Vision companies using Softbank’s credit and equity. But after initial success they have found themselves under utilised.
An interesting quote “[His departure is] not a surprise for me,” said one person close to Sago. “He does not have much to do — he had been doing nothing for the last 18 months. He is good so he wasn’t losing money but he was watching people in the company losing money and he started looking for other positions elsewhere. He knew that he wasn’t going to become Son’s successor.”
The fact that a senior executive there are people within the organisation losing money and not being fired suggests that some groups are still trading like we heard of last year. That should be a worry. As the article concludes 'In recent months, Michael Ronen, another former Goldman Sachs banker and a top US executive at the Vision Fund, left the group after expressing concerns about “issues”. Last year, Chad Fentress, the group’s chief compliance officer, resigned due to concerns about its governance measures.'

Investors recoil at high cost to LSE of bedding in Refinitiv. 
Interesting because many other exchanges are also looking at building up their businesses by becoming service and data providers or as the LSE did acquiring companies that enable them to do that. The fact that the LSE is going to have to spend a lot of money ’to improve the resilience of the legacy Refinitiv tech platform’ indicates the different standards of tech involved and the huge cost of change. LSE’s shares were -14% Friday and a number of brokers downgraded the stock.

EMs knocked by first outflows since October on yields jump
Worries over another ‘taper tantrum’ end the honeymoon period of vaccine approvals.
A knock on effect of rising US yields but what is surprising is the speed of change. Robin Brooks, the IIF’s chief economist thinks that was are in a repeat of the 2013 taper tantrum.
Others agree with that but note that 'the external balances and debt profiles of many emerging economies were in better shape today than in 2013.
“This does not mean EM FX should be fully immune now but it does help to explain why depreciation pressures are not as intense . . . so far.”’
Others are looking for more guidance from the Fed, especially with regards to the medium term where the growth outlook is more murky.

For interest
Convertible debt issuance nears $34bn this year as businesses lock in low rates
It's a record amount and reflects companies looking to lock in low current rates. Key is that many are paying no interest on the debt due to a high conversion premium.
'For companies, a higher premium means less dilution for existing shareholders if the debt converts; for investors, it means the option to convert is more likely to prove worthless. “We’ve never seen pricing like this ever in the convertible market,” said Michael Voris, head of convertible bond financing at Goldman Sachs.’
'The low interest rate environment, coupled with high equity valuations and high volatility in markets amounts to a “triumvirate” that leads to “very attractive convertible pricing”, he said.'
But it notes that time is running out for such sweet deals as share prices retrench.

Optimism grows as corporate America bounces back
Q4 earnings over, more stimulus on the way and an ability gain some insight of the benefits to some large companies from the working from home trend. Added to the concept that households and companies have cash stocked up that they don’t know what to do with. Plus now inoculations are being rolled out the expectation is that the small cyclical companies will also start performing, Resulting in analysts are raising their earnings forecasts.
For investors the recent sell off has left them flat. They have punished companies that missed estimates and not rewarded positive surprises.
Nice quote 'The stock market is a voting machine in the near term and a weighing machine in the long run, value investor Benjamin Graham famously remarked.’
It quotes Steve Barry, chief investment officer of equities at Goldman Sachs Asset Management, who said: “Right now, there is a lot of hope and expectation for what this recovery will look like and that’s the voting machine taking over”. Over time though, actual earnings and cash flows will be reflected “and that’s the weighing machine”.
Growth expectations are rising and evidently Credit Suisse estimates that every 1 percentage point change in nominal GDP growth results in an approximately 2.5 to 3 percentage point change in S&P 500 revenues and every 1 percentage point change in revenues creates an even larger change in EPS.
So investors will be watching big sectors and especially tech for any signs of a correction; key being the ability to pass on increased costs to the consumer as well as coping with inflation. It expects Hotels and airlines to be able to take advantage of pent up demand and push through higher prices. Cruise operators are, it notes already seeing future price rises. 3M expects to be able to raise its prices.
But concludes by saying
'But do not be surprised if investors initially shrug off the results even if corporate America beats expectations as the prospect of interest rate rises weighs on sentiment. Bill McMahon, chief investment officer for active trading strategies at Charles Schwab, said the market has become a lot less sensitive to fundamental factors such as earnings than it used to be’
That last statement probably reflects the increased presence and activity of retail day traders in the markets who are creating a lot of noise. It will be interesting to watch and see if, as America returns to more normal working life whether their presence remains. Equally now that results are over I think we will see the market taking more interest in the fundamentals, as day traders latch onto the data as a reason to trade.

Beer Distribution Game shows what went wrong with malfunctioning supply chains by John Dizard.  
Notes the recent ISM data showed disruption to supply chains. Links that to the recent surge in net non-commercial long positions in Comex copper contracts and talk of a super cycle. Part of which is linked to news about China increasing imports of basic materials. But correctly notes the recent surge will not be continued through the year; especially if China is only targeting 6% growth.
So why has it happened?
He illustrates that by reference to the 'The Beer Distribution Game is a classroom exercise invented by Jay Forrester of MIT’s Sloan School in the late 1950s to simulate the dynamics of a production-distribution system using (conceptual) cases of beer as the product. The standard version of the game was codified by another Sloan School professor, John Sterman, in a 1989 paper on “Misperceptions in Dynamic Decision Making”.’
Key point is that most people are myopic and do not consider the whole system, that leads to over ordering: 'People are uncomfortable with delay and do not sufficiently take into account time delays and their own prior orders,” he added. At each stage, the back orders and lags compound in what operations research formally calls “oscillation, amplification and phase lag”. It is sometimes called the “bullwhip effect”.’
That has recently been more pronounced because pre-pandemic a lot of supply chains were ‘just in time’ and so now the reaction is to overstock.
It notes the recent ISM data showed that 19 per cent of respondents reported inventories as too high, up from 10 per cent in December.
In conclusion it quotes David Rosenberg, financial economist and president of Toronto’s Rosenberg Research, he asked: “Where is the wage boom and full employment? Once the stimulus runs out in two quarters, we are facing a fiscal cliff unless private demand is up by 10 per cent next year. This is all temporary.”
'If so, one should not buy “supercycle” commodities but Treasury yield while it is still there.’

I am not sure that we are seeing a super cycle in commodities but certainly in some areas like copper and aluminium needed for transporting power and in every increasing reliance on electricity there could be a super cycle. For others the outlook is less certain.

The Long View
Fear levels among bond investors jump after Buffett warning

He said in his annual letter last Saturday that “bonds are not the place to be these days”.
Many agree with good reason; uncertainty about the future of the global and US economy is becoming resolved. Vaccines mean we have a means of coping with covid and governments are ‘spending big’ to get things going. Biden says the US will have enough vaccines to inoculate everyone by the end of May; raising the prospect a a huge Memorial Day resumption of ‘normal America’.
Meaning that bond investors have raise their expectations for growth, inflation and reduce their exposure to the risk of a pronounced rise in market interest rates. Despite the recent moves 10 year benchmarks are still at historically low levels, which is a point of vulnerability. It notes that 'Already, broad baskets of US and global government debt have declined more than 3 per cent in value since the start of January. That may not sound like much of a decline. However, the main US Treasury index has escaped recording a negative year of performance since 2013 when the famed “taper tantrum” sparked a surge in 10-year interest rates that resulted in a total return of minus 2.75 per cent. This year’s abrupt slide in bond prices highlights a nasty aspect to long-maturity paper beyond 10 years — their prices can fall quickly when the starting point of interest rates is historically low.’
It notes the iShares exchange traded fund of US Treasury bonds with a maturity of more than 20 years has registered a loss beyond 11.4 per cent so far this year, eroding a chunk of its 18 per cent gain in 2020. With moves like that it is easy to see why people are worried. So far it has not extended to trigger a drop across equities, credit and in currencies against the dollar that is of the scale to concern US Federal Reserve policy officials; at least that is what Powell inferred in his comments on Thursday. But it is worrying the bond markets and Tech shareholders.
He says the Fed’s action and comment is understandable as they are pushing for the economy to improve and a natural by product of that is rising rates as capital is demanded. For the Fed to move could stymie that. Furthermore allowing the T10 to raise and take some of the heat out of stretched valuations for equities and other assets is no bad thing, the T10 is still below the 1.8% is was prior to the pandemic.
So now everyone is faced with watching and waiting to see how the recovery will shape up, investors will be looking out for indicators; one it suggests is inflation-adjusted interest rates. 'At minus 0.7 per cent, the 10-year real yield remains at its lowest since 2013 and well inside an average of plus 0.30 per cent since the start of 2010.’
Whilst the market tries to establish what fair value is in the light of new growth and inflation it is likely to be tense time for investors. Watching the macro economic story and how inflation develops relative to the Feds 2% target will be key. The impact of stimulus and how much more stimulus is forthcoming will impact the situation but 'Ashish Shah, co-chief investment officer of fixed income at Goldman Sachs Asset Management However, he says there are “natural limits” in how far interest rates will rise, as “the debt overhang will also prevent economic growth from sustaining a pick-up”.’
Since 2009 it notes 'the bond market has teased investors with bouts of rising interest rates, only for pressure to ease because subsequent economic growth was modest and accompanied by benign inflation pressure.While the bond market is feeling the heat at present, the temperature will cool should the economic story emulate the pattern of the prior decade.’
A key element to me is that the situation presented post pandemic is very different from anything seen before and the impact of covid has not been uniform over society. The amount of stimulus and the amount of money that has been printed is extraordinary too.Bond investors are right to be cautious.

Why Japan turned from TV to online
Tech world The once unrivalled power of the country’s networks is being systematically dismantled by social media, finds Leo Lewis.
Key being that the TV companies in trying to please the advertisers that are crucial to their survival are being force by them to be ever more conservative but that is not what the audiences want. Equally 'Comedians and singers in particular have realised that TV no longer holds their fate so tightly in its hands. They can now generate significant income from online channels with the kind of young audiences advertisers are desperate to target.’
A good reason to invest in the social media companies in Japan.

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