FT Weekend thoughts Travel Bubble Burst?, Trump's lawsuits out?, China on climate and more


24 Nov

Breaking news
The Hong Kong /Singapore travel bubble has been delayed for two weeks
due to the surge on covid cases in Hong Kong. I did an interview piece for CNN on Friday which would have been part of their Monday coverage from Hong Kong airport; during that I mentioned not only the cost but also the fact that the scheme and any others could be suspected due to an increases in covid cases. A key for air travel is still I believe pre flight testing, which will give travellers more reassurance. I say that after my wife spent two weeks in quarantine because someone of her flight tested positive on arrival; something I doubt would have happened if everyone of the flight had been tested. That means that travel for everyone is going to be more expensive until we get efficient cheap testing; which no doubt a number of companies are working on currently.
The suspension of the travel bubble will no doubt hurt Cathay Pac and Singapore Airways on Monday.


FT online
Judge dismisses Trump campaign lawsuit in Pennsylvania. 
Scathing opinion is latest blow to president’s effort to overturn election defeat. The judge dismissed the lawsuit with prejudice (means it cannot be refiled) as 'shoddy without evidence and contrary to the US constitution’.
Prompting Pat Toomey, the GOP senator from Pennsylvania, to call on the president to concede in a Saturday evening statement. But Trump’s team is seeking to appeal the ruling to the third circuit Court of Appeals in order to try and get it to the Supreme Court. This follows the hand recount in Georgia which didn’t alter Biden’s margin of victory. As Trump’s team filed for a re-count, which will be done by machine and is unlikely therefore to change the result.
These actions as beginning to undermine Republican support for Trump. Other top Republicans have called on Trump to 'abide by his oath of office “by respecting the sanctity of our electoral process” and said he should produce any evidence of mass election fraud “immediately”.’
The judges opinion I think will give weight to Biden’s case. The fact that a judge, albeit appointed under Obama, has been so scathing of the holes in the case being brought will weigh with other judges who I presume will be keen to see that the legal system is not undermined by political shenanigan’s.

Trump deploys scorched earth tactics in post-election battle. President makes unprecedented claims of vast conspiracy and leans on officials to reject result. As with most of his tenure as President, Trump continues to set new distinctions which now includes trying to disenfranchise millions of voters. The judge noted that whilst some voters might have had reason to bring a suit but Trump’s team did not as they couldn’t show any harm to their campaign. His claims about 'a vast conspiracy unparalleled in American history’ but without giving any solid evidence. Yet these actions are undermining faith in the US electoral system.
This is part of the scorched earth tactics he is now employing. Other instances include not allowing Biden’s team access to the normal practise of handover co-operation and security briefings. We have seen it in Treasury Sec Mnuchin’s wanting to end Emergency Lending whilst the Fed wants them to continue. Trumps action against companies in China, with the prospect of more coming this week.
I think most people now feel that there will be a new administration. It is interesting to think what might happen to economy if Trump now turned over the election result having done so much to mess it up. It would be rather like when he won the election; If he manages to turn over the result I think he would be surprised. As an article in this week’s FT pointed out; Trump is at home in the courts and uses them and abuses them for his own ends; not for justice. That is the liability of such a free legal system. That a few people will abuse it and that the majority are likely to suffer as a result.


New Zealand’s top diplomat vows to speak truth to China. The first Maori woman appointed foreign minister faces fraught portfolio on geopolitics and climate. She says '“We need to be clear that as we respect opportunities that we have with China, we should also message out our beliefs around our values,” “That is really the message around Hong Kong. We want to ensure that there is a transition that respects the way in which people are treated there . . . I believe if we are very clear and respectful of each other’s views we can have difficult conversations.” But when Ms Mahuta was asked about allegations that Beijing was interfering in New Zealand’s domestic affairs and engaging in debt diplomacy in the Pacific by saddling vulnerable nations with loans they could not pay back, she declined to publicly criticise China.’
She faces a very difficult job as it is likely that China will increase the pressure on Asia Pac countries to side with either the US or China? New Zealand is one of the ‘Five Eyes intelligence network’ and so likely to come under more pressure than some. It is too early to say how successful she will be but the article notes that 'she has held several ministerial posts and most analysts said she was a hard-working and astute politician, who tended to avoid the limelight while getting things done.’ She also has an impressive Maori heritage. Only time will tell but she is starting from a good point.


FT Weekend
China’s recovery jeopardises climate vow, claims report.
A report that looks at China’s reliance on coal powered industry and suggests that in striving for economic recovery China is undermining its ability to hit new zero carbon emissions by 2060. It notes that China’s recovery to date has been led by the SoE Industrials; with increased construction projects increasing the demand and in turn production in October for steel (+13% YoY) aluminium (11% YoY) and cement (+10% YoY). It points out that China accounts for 60% of the global output in those sectors; an increase of 10% YoY. Most of the products being used domestically as exports of them have fallen in the past 5 months.
Such increases mean that China can’t phase out its dependance on fossil fuels. Plus the increased power demand (+5.8% YoY) is too much for new wind, solar or hydro to make up for. So China will be reliant on coal; it estimates that China will account for 53% of the global coal generated power this year. It also estimates that fossil fuel usage for power all drop 12%. It says that China is using the same playbook as it did after the financial crisis but really needs to change the playbook in the next five year plan to achieve the goals. The plan is due to be released in March and will studied in detail. It also mentions that coal power has lost market share to renewables this year; which is a positive trend.
Not mentioned but worth noting is that China said, at the Bloomberg sustainability conference this week, that whilst it is still building coal power stations; they are to replace older less efficient ones. Another issue that should also be taken into account is that China is still financing the building of coal powered power stations in other countries.

‘Insatiable’ China demand puts iron ore on track to average $100 a tonne in 2020. The best performing major commodity in 2020; +38% in 2020 vs 24% for gold. Key has been Chinese demand with the major beneficiaries 'Anglo, BHP and Vale as well as other big producers, including Rio Tinto and Fortescue Metals Group, which can dig the material out of the ground for less than $15 a tonne.’
The two main drivers have been Chinese demand (consumes circa 80% of the worlds seaborne supply) and supply disruptions in Brazil due to covid. Some had thought demand would slow in Q4 but data this week shows demand has actually driven prices higher, thought to be as a results of the vaccine announcement improving the global recovery outlook.
It notes that '“Production exceeded demand at the start of the year when China had its Covid-19 lockdown and inventories were built up, but now we’re seeing that reverse and we see inventory levels dropping,”’ . The recent Industrial production data and infrastructure investment out of China with has shown growth as China continues to restart and grow its economy. It notes that steel reinforcement bar prices have risen to Rmb400 from Rmb94 a month ago.
Two things come to mind the fact that is again reinforces the point that China is following the same recovery playbook as seen after the financial crisis as referred to in China’s recovery jeopardises climate vow, claims report. Which must raise concerns about how many new road, bridges, subways etc China needs and whether they will achieve investment returns for the economy. Also the current spate with Australia from whom it gets much of its Iron Ore, it is the one commodity that has not been affected. That I think reveals a key part of Chinese thinking. They have no problem with banning anything they see as non-essential but for all the shouting and rebukes they aren’t going to stop essentials being imported. Which suggests that if Australia wants better relations with China it should consider restricting exports of Iron Ore to China until its other exports receive approval too. Leverage can work both ways; its all about diplomacy and negotiation. Worth remembering too that relations started to deteriorate when Australia sought an independent investigation into the source of Covid. Not unreasonable considering it has now killed 1.38m people.

China’s pull in sovereign debt universe risks throwing ‘framework’ out of kilter. Looks at what is happen in sovereign debt restructuring. On the plus side the pandemic has lead to more transparency and co-operation from the IMF and World Bank and official lenders 'such as export guarantee agencies, and private lenders, including banks and bondholders.’ The intention being to reduced the secret deals and queue jumping. But it is being complicated by China. Much of China’s lending has not been along the historically accepted guidelines. It notes 'You had two gravitational centres: official creditors, led by the IMF, and private creditors, initially led by commercial bankers, and then by bondholders’ groups. The distressed sovereigns orbited around these double stars of the dollar system.’ But now you have three body’s with China. That is making things much more complicated. It defines China as 'Chinese state, Chinese financial institutions and Chinese companies’. It also notes that 'Official China is, of course, a leading member of the IMF-World Bank group and, at least notionally, is committed to international financial co-operation. Except when it is not. China, unlike other rising countries, is close to being an alternative world to the dollar system.’ China is pushing the RMB alternative and dealing with countries that do not have access to the USD system. Additionally a lot of the Chinese loans are made with non disclosure clauses further hampering the established lenders ability to know the true picture. Also China’s use of debt for equity swaps, which originated in the US sponsored Brady deals of the 1980’s and 90’s, has raised concerns. As seen in the Sri Lankan port deal in 2017 and despite the growing political reaction China continued to build its loan book as the global economy expanded much of it in association with its Belt and Road plans. So today things are complicated, China has made concessions and extensions but the detail are rarely fully know and hence the other parties like the IMF, World Bank etc etc are reluctant to offer terms which could see China benefiting. That is going to be bad for the global recovery. THE article note in conclusion 'China has, to a degree, internally consolidated its international financial negotiating authority within its Ministry of Finance and development bank. That makes it easier for its counterparts to strike global deals.
China shares a fundamental interest with legacy financiers. Both sides are threatened by populists demanding a reversion to capital and trade controls. Remember how that worked out in the 1930s? Three-body systems are inherently chaotic.’This is another example of the two world systems that has been developing over recent years, the West’s and the Chinese. With China looking to set its own path and not recognise the establish world order. That is likely to hinder the global recovery especially for those third world countries that really need the most help. It could also hurt China if it can’t reschedule the loans and faces political back lash as seen in Malaysia with projects being cancelled and loan terms being questioned.

Bullish tide leaves investors with a dilemma. Looks at the recent Bank of America survey that showed an spike in the rotation into equity, small caps and emerging markets. Hitting the highest levels since 2018 as increasingly fund managers believe the new ‘early cycle’ phases has dawned. At the same time as would be expected the cash levels fell to 4.1%; back to January levels (although it doesn’t say how high the cash levels got; which be interesting to know). Michael Hartnett, chief investment strategist at BofA, says that shows the ‘investor exuberance’. Actually I think it shows fund manager exuberance and not wanting to miss out as they no longer expect high redemptions from investors.
But it notes that given that most markets are currently around their highs the returns maybe limited.
It also points out that 'Past new economic cycles were accompanied by financial markets nursing deep lasting scars in the form of high yields on risky types of debt and low equity valuations.’ This time due to the Central banks and Government action the equity and bond markets have brought forward a lot of their future performance. Seen in the average interest rate on junk bonds falling below 4.8% this week, an all time low for the lowest quality of corporate credit. Small caps and industrials the barometers of future economic expectations also exceeded previous peaks set in 2018 and earlier this year.
The speed of the turnaround is remarkable a matter of weeks vs previously years. But the fact remains that saving or investing for retirement or pension obligations is much harder than before because of where bond yields are along with equity valuations. Previous bong/equity splits are not working. The MSCI All Country World Index is returning just 5%, about 50% of its performance over the past decade. Hence the move to try and find returns in alternative investments by many; with private equity, property and infrastructure all seemingly attractive options. But it notes 'One downside is a far greater dispersion of performance in funds holding illiquid private assets than what investors experience in public markets.’ The other option being to hold more equities.
That means investors will have to consider which sectors and companies have the potential to expand in the 2020’s. UBS Wealth Management suggests fintech and green tech, driven by the roll out of 5G which will boost robotics, autonomous vehicles, AI , bid data and cyber security. It also likes healthcare due to ageing populations being a lucrative sector. Healthcare being driven by demand and profits rather than just rising valuations. In the Euro Stoxx 600 group healthcare tops the charts with 15.6% share, in the US Russell 2000 it has nearly 20% and in the S&P 500 its been about 14% for years. As the article says 'If healthcare expands further from here, then it in itself might help share markets beat the current low ball estimates of future returns.’
It will still require good due diligence on those companies that are able to scale up and have the right product mix.

Jump for Joyy after contesting short-seller’s fraud claim. Looks at the rebound in Joyy shares after the company denied the accusations of fraud set out in a Muddy Waters report.
The company said 'it was “open to cash verification and diligence to be conducted by competent third-party advisers”. It also pointed to a $300m dividend announced in August — of which it said $25m had already been paid — as evidence of its confidence in its ability to generate cash.’ It also said the report was “full of ignorance” and “unclear logic”.
Muddy Water is alleging that a lot of Joyy ‘paying fans’ were bots from YY’s internal platform. It comes as GSX Techedu is being investigated but the US regulator and the US is tightening up on accountancy practices and other issues.
Key for investors is being able to properly research some of these Chinese firms and actually get to grips with how they operate a there is very little independent verification.
Also worth noting that not everyone thinks Baidu’s purchase of the company is a good idea with something it is late to the game and lacks the ability to become a dominant player. See Lex 19 November Joyy/Baidu: fake it till you make it to quote the FT 'Muddy Waters’ accusations may prove a blessing in disguise for Baidu and its shareholders. Baidu has already lost out in the fashion for live streaming. It should save the cash set aside for YY and use it to buy into the next new trend instead.'

Mnuchin opposes Fed on crisis fund. Mnuchin’s plan to wind down lending by end of year but Powell says the economy remains vulnerable. The public spate has already done much to undermine investor confidence. It has also raised concerns that Trump is looking to try and cause trouble for the incoming administration. Although Mnuchin said the move was not a political one and that there was plenty of money available for those who needed it. He said ‘These are emergency tools, and when the emergency is over let’s put them away’,” he said. “Well, the medical emergency may not be over but . . . financial conditions are in great shape,” he added, citing the strong performance recently of corporate and municipal debt as well as equities. The Fed replied that they would prefer the full suite of tools which continued to be an important role as a backstop to public confidence.
Mnuchin also came under criticism from Larry Summers who said that Sec Mnuchin had sided with Mr Trump’s ‘burn the house down’ approach and that the Treasury officials should consider resigning.
'“We cannot predict when or if a panicky cascade will happen in credit markets,” Mr Summers wrote in a tweet. “Aftershocks after financial crises (and earthquakes) are not uncommon. Removing a capacity to respond as Steven Mnuchin has sought to is wrong.”
The bigger concern much be about what else Trump will instigate in the final days of his presidency. He has continued to prevent co-operation with the income administration. Furthermore there will concerns about further actions against China in the coming weeks.
See also Party figures call on president to concede. Senators urge Trump to end legal fight but Giuliani vows battle will continue. In the light of the failure to show fraud or conspiracy the Republican Party is now pushing the president, who is still refusing to accept the election results and refusing to provide the Biden administration with access to any of the transition facilities that an outgoing administration usually would to ensure a smooth transition of power. But it seems that Rudy Giuliani is committed to continuing the legal challenges and dismissing call to provide evidence for their claims that the Democrats stole the election. He says they will provide substantive evidence but hasn’t send when. FT quotes 'Ben Sasse, the Republican senator from Nebraska, said: “What matters most at this stage is not the latest press conference or tweet, but what the president’s lawyers are actually saying in court.” He added that “wild press conferences erode public trust . . . we are a nation of laws, not tweets”.’
It notes that on Friday Georgia said it would certify that Biden had won the state by a margin or more than 13,000 votes, following an audit and hand recount of 5m votes.

Holiday migration risks becoming virus superspreader. Concerns that thanksgiving this week could test the US medical system as people rush to get covid tests ahead of Thanksgiving. But that may not be enough as many who are tested negative could still pick up the virus from others at transit centres and then pass it onto others. The US Centers for Disease Control and Prevention recommended people remain in place during the break rather than travelling. It also recommended those that travel take meals outside or open windows and wear masks even indoors and guests are given a separate bathroom where possible. Many think the guidance has come too late as many have already made their plans. A further concern is that Thanksgiving could just be a prelude to what could happen over Christmas and New Year.

Europe’s retailers fret over threatened shopping boom as lockdowns bite. No real surprises considering the resurgence in covid cases in Europe but does make the good point that many supplier to the Christmas markets are likely to go bust in early 2021 as they fail to get orders from retailers for Christmas 2021. Notes that the vaccine news is encouraging but it is a matter of whether there is enough investment and cash to keep businesses going in the meantime. An interesting read.

Orban holds out hope of end to impasse over EU funding. The Hungarian PM still saying a solution could be found despite the current standoff. But both sides are playing the same game. Key European leaders are trying to find a solution but the conditionality of respect for judiciary independence is a big sticking point and in reality unless Hungary and Poland are prepared to compromise then an agreement seems very unlikely to me.

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