David Fuller and Eoin Treacy's Comment of the Day
Category - General

    Bailey Says BOE Is Not Ruling Out Negative Interest Rates

    This article by David Goodman for Bloomberg may be of interest to subscribers. Here it is in full:

    The Bank of England is keeping the lower bound for interest rates under active review amid the coronavirus crisis and isn’t ruling out taking borrowing costs below zero, according to Governor Andrew Bailey.

    When asked about the prospect of negative rates by U.K. lawmakers, Bailey said the BOE wasn’t in the habit of ruling out any policy, but wouldn’t rule them in either. The key rate is currently at just 0.1%, and policy makers have previously indicated their lower bound for rates was close to zero.

    Andrew Bailey

    “Given what we’ve done in past few weeks, it should come as no surprise to learn that of course, we’re keeping the tools under active review in the current situation,” Bailey said.

    Bailey added the BOE was keen to observe the impact of its previous U.K. rate cuts, bearing in mind arguments that they become less effective the closely to zero they are. It’s also examining the experience of other central banks who have cut below zero, he said, adding the financial system in an economy, and officials’ communication, are both important.

    “We do not rule things out as a matter of principle. That would be a foolish thing to do,” he said. “That doesn’t mean we rule things in either.”

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    What Kind of Regime Does China Have?

    This article by Francis Fukuyama for the American Interest may be of interest to subscribers. Here is a section:

    Xi’s China is thus not the inevitable culmination of prior Chinese history. When he was elevated to head of the Party in 2012, many Chinese elites hoped that he would deal with mounting corruption—which he did, in a highly authoritarian fashion—but also lay the ground for a more liberal China that would permit more freedom to talk, think, interact, and even criticize their government. They were bitterly disappointed when he moved in the opposite direction, placing priority above all not on the welfare of the nation as a whole, but on the survival of the Chinese Communist Party. Why he did this was the result of his personal quirks and history; another leader may have gone in a very different direction. There was no historical inevitability to the present outcome.

    The dangers of a regime that seeks totalitarian control were laid bare in the early days of the COVID-19 crisis, when speaking honestly about the unfolding epidemic, as Dr. Li Wenliang did, was severely punished. For all we know, the flow of misinformation is continuing today. It is wrong to hold up the CCP’s totalitarian approach in dealing with the virus as a model to be emulated by other countries. Nearby South Korea and Taiwan, both healthy liberal democracies, achieved even better results in the pandemic without the draconian methods used by China. One of the great dangers today is that the world looks to Xi’s totalitarian model, rather than a broader East Asian model that combines strong state capacity with technocratic competence, as the winning formula in facing future crises.

    How then should the United States and other Western democracies deal with Xi’s China? The starting point is to recognize that we are dealing with an aspiring totalitarian country like the mid-20th century Soviet Union, and not with some kind of generic “authoritarian capitalist” regime. There is no true private sector in China. Although there are quasi-property rights and ambitious entrepreneurs there, the state can reach into and control any one of its supposedly “private sector” firms like Tencent or Alibaba at any point. Although the Trump administration’s campaign against Huawei has been clumsy and in many respects self-defeating, the goal is essentially correct: It would be crazy for any liberal democracy to allow this firm to build its basic information infrastructure, given the way it can be controlled by the Chinese state.

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    Musings from the Oil Patch May 2020

    Thanks to subscriber for this report by Allen Brooks for PPHB which may be of interest. Here is a section on battery metals supply:

    The potential for a change in battery chemistry from lithium-ion to lithium-sulfur could help.  A massive switch does not appear to be underway.  The big change in EV battery technology – a move to solid state lithium batteries – appears to have been pushed out to 2030 or beyond, versus the prior expectation that it would arrive in the early 2020s.  Now, battery research firms are focusing on how EV manufacturers may need to become involved in the procurement of battery raw materials, as well as completely revamping their supply chains to lower their cost.  

     The real challenge will be in the battery raw material procurement.  A chart from Benchmark’s webinar shows what the limitation is for EVs.  It is raw materials.  In the firm’s forecast for 34 million EVs in 2030, it is expected that there will be sufficient lithium-ion battery manufacturing capacity to produce 43 million EVs.  The challenge is that lithium supply will only meet the needs of 19 million EVs, while cobalt will only be able to supply 17.9 million EVs.  Those limitations equate to roughly a 45% supply shortage.  

    One can certainly ask many questions about how investors will perceive EV manufacturers getting involved in mining operations to ensure adequate availability of raw materials for batteries.  Or, will the EV manufacturers figure they will just leave this endeavor to battery suppliers?  Who has the capital available for such new ventures?  What are the geopolitical risks, depending on where new supply sources are found?  Will the new supplies improve, or complicate the existing raw materials supply chains?  Will we be held hostage to foreign suppliers?  What are the ESG issues associated with mining rare earth minerals?  There is the possibility of another potential supply source, that being recycling old EV batteries, although such efforts are currently uneconomic.  

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    Central Bank Leans on QE to Anchor Rupiah

    This article by Tamara Mast Henderson for Bloomberg may be of interest to subscribers. Here is a section:

    Bank Indonesia is using bond purchases to support the rupiah and help fund the government’s Covid-19 response. Too much quantitative easing, though, could backfire and fuel worries about the accommodation of unfettered government spending.

    Critical for reassuring investors, in our view, is that the central bank stick to its pledge to cap bond purchases in the primary market at 25% and intervene only as a last resort. If these promises are broken, QE could weigh on the rupiah like a pair of cement shoes.

    Emerging market central banks embarking on QE might already be skating on thinner ice than peers in developed markets. Bank Indonesia, for one, has a shorter track record for demonstrating independence from political interference.

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    Chips and Geopolitics

    This article by Ben Thompson may be of interest to subscribers. Here is a section:

    First, while we learned in 2016 that technology was inseparable from domestic politics, the lesson in 2020 should be that technology is inseparable from geopolitics. It is chips that gave Silicon Valley its name, and everything about this chip decision is about geopolitics, not economics.

    Second, at some point every tech company is going to have to make a choice between the U.S. and China. It is tempting to blame the tension between the two countries on Trump, but the truth is that China, particularly under Xi Jinping, has been significantly hardening its rhetoric and actions since before Trump was elected, and has been committed to not just catching but surpassing the U.S. in technology for years. There is a fundamental clash of values between the West and China, and it is clear that China is interested in exporting theirs. At some point everyone will be stuck in the middle, like TSMC, and Switzerland won’t be an option.

    Third, Intel, much like Compaq, is an allegory for where the U.S. seems to have lost its way. Locked in an endless pursuit of efficiency and shareholder value, the U.S. gave up its flexibility and resiliency in favor of top-end performance. Intel is one of the most advanced chip makers in the world, but it turns out that capability is far too constrained to its own needs to be of general applicability. Worse, to the extent Intel was willing to become a contract manufacturer, it wanted the federal government to pay for it, the better to satisfy shareholders. The government, rightly, in my mind, chose an operator that was actually used to operating in the world as it is, not once was.

    At the same time, TSMC’s justifiable carefulness in building a U.S. fab gives Intel an opportunity. Back in 2013, in one of the first Stratechery articles, I urged the company to embrace manufacturing and give up its integration, margins be damned. Intel specifically, and the U.S. generally, would be in far better shape had they acted then. As the saying goes, though, the second best time to start is now — and that applies not only to Intel, which should spend the money to get into contract manufacturing on its own, but also to the U.S. The world has changed, and it’s time to act accordingly.

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    Europe's Breakthrough Recovery Plan Faces Immediate Obstacles

    This article by Richard Bravo, Marek Strzelecki and Rafaela Lindeberg for Bloomberg may be of interest to subscribers. Here is a section:  

    Less than 24 hours after Angela Merkel and Emmanuel Macronlaid out a radical plan that would see the European Union collectively finance its response to a virus-induced recession, countries were already expressing disapproval, threatening to doom the nascent proposal.

    The German and French leaders on Monday threw their weight behind a plan to allow the EU’s executive arm issue 500 billion euros ($548 billion) of bonds, with the proceeds going to help member states affected most by the pandemic. Controversially, recipients of the funds won’t need to pay the EU back and the securities would be financed collectively. That means richer countries, like Germany, would be bankrolling poorer ones.

    Angela Merkel arrives to address a joint press conference with Emmanuel Macron, attending via video link, in Berlin, on May 18.The plan represents a remarkable about-face for Germany, and the proposal, which needs unanimous approval by all 27 members of the EU, faces stiff headwinds from the bloc’s more frugal members.

    “We still have to convince other member states, four in particular: Austria, Denmark, Sweden and the Netherlands,” French Finance Minister Bruno Le Mairesaid on Tuesday. “And we mustn’t hide the fact that it will be difficult.”

    Austrian Chancellor Sebastian Kurz immediately threw cold water on the Franco-German plan, saying that he had consulted with his Danish, Dutch and Swedish counterparts, and that they remained opposed to any money being given to fellow countries in the form of grants. Any funds would have to be repaid by the beneficiaries, he said.

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    On Target May 2020

    Thanks to Martin Spring for this edition of his ever-interesting letter. He quotes me in this one but don’t hold that against him. Here is a section on the lockdowns:

    Rather than destroy $4 trillion of economic activity via lockdowns it would have made much more sense to spend much less – say $25 billion to start with – on Medicare/Medicaid and state public health agencies “to zero-in on protecting, isolating and treating nursing home residents.” Rather than trying to force all Americans into a one-size-fits-all regime of state control, policy ought to have been divided into three categories according to age:

    The Kids Nation of those younger than 15, where to April 28 there were only five deaths where Covid-19 was involved. By comparison, children suffered 44,000 deaths from all causes last year. “In no sane world would it be a reason for shutting down the schools.”

    The Parents/Workers Nation of those aged 15 to 64. They account for the overwhelming share of commerce, jobs and economic activity. They experienced just 8,267 Covid-linked deaths. Their normal mortality rate – annual deaths from all causes – is 335 per 100,000. The Covid rate to date has been just 3.6. “So, we are talking about shutting down the entire economy owing to a death rate to date which amounts to 1.1 per cent of normal mortality.”

    The Grandparents/Great Grandparents Nation of 52 million. They accounted for 32,000 or nearly 80 per cent of all Covid-associated deaths, with 15,000 of them being among those 85 years and older. Their Covid mortality rate has been 61 per 100,000 to date. It has not taken “a catastrophic experiment with Lockdown Nation” to figure out that their risk of death from Covid-19 has been 7,600 times greater for them than for children; 29,000 times greater for the several million great-grandparents afflicted with severe comorbidity, and probably in the care of a nursing home. These realities were already known from China and the history of other coronaviruses. Although Stockman’s analysis is limited to America, it is clear that much of it applies to other countries. Policies could have been focused almost exclusively on the shielding and treating the elderly.

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    China Considers More Economic Pain for Australia on Virus Spat

    This article from Bloomberg News may be of interest to subscribers. Here is a section:

    The office of Australian Trade Minister Simon Birmingham declined to comment. When asked about the list, China’s foreign ministry didn’t address the specifics but said the government “has always sought to find common ground while putting differences aside, cooperate to achieve win-win results and will not harm others to benefit oneself.”

    “We hope the Australian and Chinese side can meet in the middle, take more measures to improve bilateral relations and deepen mutual trust, and provide favorable conditions and atmosphere for practical cooperation in various areas,” the ministry said.

    Australia’s China Addiction Leaves It Vulnerable to Trade Spat

    Speaking earlier at a briefing in Beijing on Tuesday, Chinese foreign ministry spokesman Zhao Lijian said China would back a resolution at the World Health Assembly later Tuesday that calls for a “comprehensive assessment” of the pandemic that differs from “Australia’s earlier proposal of a so-called independent global review.”

    “We suggest the Australia side to go through the text carefully,” Zhao said. “If Australia is willing to change its course and give up the political manipulation of the pandemic, we will welcome that.”

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