While this week Boris Johnson and the pound have taken the headlines, the debate around the US-China future relationship grew louder. A number of prominent names from the academic and business world penned an open letter entitled ‘China is not an enemy’. Our first featured podcast discusses this and the Beijing response (not positive).
Staying with US politics, our second podcast reviews Democrat presidential hopeful Elizabeth Warren’s proposed wealth tax. It’s an attempt to fix the widening inequality gap. It is surprisingly well received by the many philanthropically-minded wealthy – until it jumps beyond the 2-3% proposed level, that is.
In our newsletters, we often talk about the perils of leverage, especially in China. This time we have a podcast that highlights it in India. Toxic assets in the banking sector and over-leveraged real-estate vanity projects are now followed by liquidity problems in the non-banking sector. Together with rising unemployment, Modi has plenty to keep him up at night.
Finally, we include two podcasts about how start-ups are shaking-up our daily lives. Goldman Sachs thinks you might soon ditch your car and switch to Uber (or by 2023, a flying taxi). Meanwhile, The Economist looks into the meat substitute industry’s popularity and soaring valuations.
And if you are currently on holiday or just enjoying the city outdoors, beware of pickpockets – learn how to best avoid them in my latest podcast.
Michael Swaine on the ‘China is Not an Enemy’ Open Letter (Sinica Podcast, 62 min listen) It’s evident that under Trump, US policy towards China has devolved into a singular dimension: one of extreme hostility. Any tolerance for strategic partnership and cooperation – the kind Obama favoured – is diminishing rapidly. Over 180 scholars, policy officials, and business leaders have signed an Open Letter addressed to the US President expressing worries about the growing deterioration of US relations with China. In this podcast, one of the authors, Michael Swaine, explains the content and motivations of the letter in detail. The overall sentiment is rather mild – while it does acknowledge China’s troubling domestic repression, state control over the private sector, and trade rules, it encourages a sober shift in the American mindset; China won’t overtake the US as the leading economic or military power, and playing enemies undermines the economic interests of all nations.
Why does this matter? When planning his re-election efforts in 2020, Trump will face growing waves of criticism against his extreme policy on China. However, a few days ago, Beijing slammed the letter, stating that it falsifies the truth, lacks any logic, and on the whole is completely groundless. It seems like both sides need to consider mutual accommodation, which for now seems unlikely, given trade wars still simmering.
Could A Wealth Tax Work? (Planet Money, 22 min listen) Last week, we discussed the severely widening gap in US inequality . The data we based this on, it seems, has caught Senator Elizabeth Warren’s eye and she is proposing a new measure of redistributing wealth – a policy taxing accumulated assets of the rich instead of their current income. For example, Jeff Bezos has a yearly salary of $100k, but is worth around $120bn, given his stock in Amazon, which is not taxed unless he acts upon it. Warren suggests a yearly 2% tax on wealth over $50mn and 3% for over a billion, claiming it would raise $2.75tn over 10 years. But put this into perspective: wealth grows at c.6-7% per year on average over the long-run, so this won’t stop the rich becoming richer. It would merely slow them down. She has pre-empted some of the critics and has designed the system to avoid the pitfalls that other countries faced historically, such as incentivizing tax evasion and hurting the marginal millionaires such as the elderly. Some of the ultra-rich are more philanthropic, however, and they signed a letter inviting the 2020 Presidential Candidates to consider taxing them more and using the cash for climate change and public health.
Why does this matter? With global trends in tax favouring investment and growth, lower top marginal income taxes, and lighter corporate burdens, Warren’s proposed policy might be tough to pass. There is also scarce evidence it works – from the 12 OECD countries that taxed wealth in the 1990s, only 4 remain. It’s something to watch out and potentially plan for in the 2020 incoming elections.
The Lurking Debt Disaster Behind India’s Tallest Tower (FT News in Focus, 7 min listen) Palais Royale. It was meant to be a luxury residential tower at the heart of India’s Capital. After ten years of sporadic construction, though, it has been left a decaying shell. In this short podcast, Benjamin Parkin from the FT in Mumbai discusses India’s ‘vanity’ real estate market ambitions – which were driven by a surging population – and why it all came crashing down. Financed by shadow banks that suffer from a balance sheet maturity mismatch, developers stacked up $37bn of debt and apartments that won’t sell, leaving $8bn worth of vacant housing in Mumbai. Further, in September 2018, IL&FS, India’s infrastructure finance giant defaulted, sparking a liquidity crunch across the economy and hitting real estate the hardest. When the government demonetized the Rupee and reformed the tax system, real estate money laundering halted.
Why does this matter? The troubles in the shadow banking system are rippling through India’s economy. Credit has dried up and India is suffering a liquidity squeeze – GDP growth has tanked to 5.8% in Q1 2019, the slowest in four years. The Government has now taken over IL&FS and is planning new regulations and sources of lending.
Ride Hailing, Electric Scooters, Even Flying Cars – What’s Next for the Mobility Market? (Exchanges at Goldman Sachs, 23 min listen) If you are anything like the average American, your car sits idle most of the time, depreciating in value. So, reconsider how you travel, advises Heath Terry, who leads TMT Research at Goldman Sachs. In this podcast he discusses the expected large scale transformations in macro- and micro-mobility. Ride hailing is still a luxury for most, but in the USA, if you drive less than 100mi/week, you are better off using Uber than your car. However, growing competition (Uber is now battling Lyft, Kapten, Grab, and Cabify, among others) and increasing driver costs and demands (they can continually switch the firm they drive for) are pressuring profits. It’s no surprise that Uber is diversifying into the food and self-driving sectors, as well as partnering with e-commerce companies on same-day delivery. Terry also sees flying and autonomous cars taking off (pardon the pun) by 2023, but for now he recommends a focus on the large-scale electric vehicle incentive regulation happening across Europe.
Why does this matter? Ride hailing firms largely operate a fluid portfolio of markets and adjust their country presence based on contribution margins and profitability. Whilst Uber thrives in Europe, Incumbents drove them out of China and are now challenging their second largest market, Brazil. In the meantime, regulation is accelerating – New York put a cap on number of vehicles per operator and Germany has severe restrictions on the sector a whole. Long-term, this could slow-down a large scale overtake.
The Secret History of the Future: Meat and Potatoes (The Economist Radio, 36 min listen) Mass production of meat is devastating the environment. It uses vast amounts of land and water and is a huge contributor to greenhouse emissions. We’ve heard this before, but meat is now sparking a renewed ethical discourse around animal slaughter and human health negatives. Given the number of meat alternatives that are nutrient dense and cheaper to produce, why not ditch eating animals all together? History tells us that it’s a lengthy and difficult process to change habits around food on a mass scale. For decades in Europe, the potato was considered an unappetizing and potentially poisonous crop, similar to the tomato in Italy. This insightful podcast touches upon all surfaces of the discussion, from lab grown cow meat in a petri dish, to start-ups encouraging insects as environmentally friendly and nutritious appetizers.
Why does this matter? A substitute meat industry is threatening conventional producers. Plant based start-ups like Beyond Meat, which saw its shares soar 800% since its IPO in May, have racked up multi-billion dollar valuations. They claim to be a much better choice health-wise and are riding the global wave of climate change outrage. But the market is still new and comparatively small, and it might take some time before the soy bean burgers become the new beef.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)
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