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

    Email of the day - on the world after COVID:

    In today's article on the long-term consequences of Covid no mention was made on the long-term impact of robotisation. In the short-term there may well be a shortage of workers in some areas but in the long term this will probably be offset by more mechanisation.

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    Container Shipping Insights The 'mega' trend to continue

    Here is a section from a JPMorgan report focusing on shipping costs.

    Global liners are stepping up de-carbonization efforts and experimenting with alternative fuels
    To achieve the industry target, many global liners such as A.P. Moller Maersk (viewed an industry bellwether) are stepping up de-carbonization efforts, recently unveiled plans to fast-track its de-carbonization efforts, with a target to put the world’s first vessel powered by carbon-neutral fuel into operation in 2023, seven years ahead of its original schedule. Specifically, Maersk will install its smaller feeder vessels (capacity of around 2,000 TEUs) with dual fuel technology, power them using alternative fuels including methanol (produced from plant waste) while retaining the option to use VLSFO if necessary. Maersk is also currently experimenting with other alternative fuels including ammonia. Looking ahead, Maersk targets to operate more methanol-fueled vessels in the future and expects methanol and ammonia to emerge as more viable future fuel options.

    Adoption of new technology and alternative fuels will take time to achieve commercial feasibility. There are inherent limitations towards adopting alternative fuels. Referencing remarks made by Mr. Morten Bo Christiansen (Maersk head of de-carbonization), methanol has the potential to reduce CO2 emissions by up to 15% vs conventional marine fuels while enjoying other advantages including having well-established infrastructure and manageable vessel retrofitting cost. Having said that, methanol has inherent limitations including low energy density and certain safety-related challenges. With respect to ammonia, Maersk expects ammonia to be an ideal replacement from a net zero carbon perspective, but overall technology capability remains at a nascent stage and no vessels today are equipped to utilize this fuel type. Maersk also takes a contrarian view compared to its peers and does not view Liquefied Natural Gas (LNG) as a viable alternative, given its upstream and onboard emissions.

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    China Widens Internet Crackdown With Meituan Monopoly Probe

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

    China’s government has expanded its antitrust crackdown beyond Jack Ma’s technology empire, launching an investigation into suspected monopolistic practices by food-delivery behemoth Meituan.

    The State Administration for Market Regulation announced the investigation, which began recently, in a statement Monday. The antitrust watchdog is looking into alleged abuses including forced exclusivity arrangements known as “pick one of two.” The company said it will actively cooperate with the probe and step up efforts to comply with regulations. Its businesses are currently operating normally, it added in a statement.

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    Longer-Run Economic Consequences of Pandemics

    This report from the San Francisco Fed may be of interest to subscribers. Here is the conclusion:

    Summing up our findings, the great historical pandemics of the last millennium have typically been associated with subsequent low returns to assets, as far as the limited data allow us to conclude. These responses are huge. Smaller responses are found in real wages, but still statistically significant, and consistent with the baseline neoclassical model.

    Measured by deviations in a benchmark economic statistic, the real natural rate of interest, these responses indicate that pandemics are followed by sustained periods—over multiple decades—with depressed investment opportunities, possibly due to excess capital per unit of surviving labor, and/or heightened desires to save, possibly due to an increase in precautionary saving or a rebuilding of depleted wealth. Either way, if the trends play out similarly in the wake of COVID-19 then the global economic trajectory will be very different than was expected only a few months ago.

    Should we expect declines of 1.5%–2% in the real natural rate, however? There may be at least three factors that could possibly attenuate the decline of the natural rate predicted by our analysis, but their presence and magnitude is uncertain and unknowable until therapies to fight COVID-19 are more developed. First, the death toll of COVID-19 relative to the total population might be smaller than in the worst pandemics of the past, but we cannot know for sure at this point. Second, COVID-19 primarily affects the elderly, who are no longer in the labor force and tend to save relatively more than the young, so the demographic channels could be altered, although the recent pick up in infections is now affecting younger individuals. Third, aggressive counter-pandemic fiscal expansion will boost public debt further, reducing the national savings rate and this might put upward pressure on the natural rate, even though our analysis suggests that this expansion of public debt should be easier to sustain in the long-run.

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    A Chipmaker's Advice to the Auto Industry

    This interview with the head of automotive at Global Foundries (ahead of the company’s IPO) may be of interest to subscribers.

    Fixing The Chip Crisis
    It’s been almost five months since the global chip shortage surfaced as a serious problem for the auto industry. Some experts say it could take a year before automakers emerge from this expensive supply-chain hell.

    The consequences will last much longer as the pandemic forces car companies to rethink how they manage their supply chains. Lead times for automotive chips already were lengthening before Covid-19 lockdowns, as the auto industry became a bigger semiconductor customer than ever before. That's because systems that alert drivers when they drift out of a lane and better harness an EV battery require more data processing than yesterday’s power windows and car radios.

    I recently spoke with Mike Hogan, the head of automotive at Global Foundries, a chipmaker that has plants in the U.S., Europe, and Asia. Since autos consume just 10% of global chip production, car companies usually buy consumer electronics chips off the shelf. Hogan says that with electrification and autonomy transforming vehicles, automakers have to look more deeply into their supplier networks.

    Here are excerpts from our discussion, edited for length and clarity:
    Where are we now, is this going to get worse? When will the shortage ease?
    The first wave of help [for automakers] is probably a third-quarter thing.

    It’s very hard to tell if there’s a shortage hiding behind a worse shortage. Because auto is so diverse, there are so many different kinds of semiconductors that go in there — if the auto guys don’t know what they need, how do they know they don’t need something else that they don’t see yet? That’s the real concern.

    So I think it could be very lumpy trying to get out of this. Is that unique to the auto guys — versus someone who makes a smartphone or an iPad?

    The folks who make smartphones, they don’t outsource the design to a bunch of people. They tightly control everything that goes in that smartphone. Even to the point where they say, ‘Look, Global Foundries, I want to make sure it’s there, so I’ll prepay for it, I will reserve the capacity. If I don’t take it on the day, you thought I was showing up, it doesn’t go anywhere because we’ve already pre-paid.’
    People often talk about how making cars is such a low-margin business, it has to be done this way.

    Do you think that’s true?
    If you can’t build a $50,000 car and ship it and put all those people to work because you don’t have $15 worth of semiconductors...I think it’s time to shift that and say, ‘No, we’re the auto market, we have very unique needs, we need an architectural approach to building our cars, we don’t need to
    buy retail off-the-shelf stuff.’ Then you have the real conversation ahead of time, versus, ‘Hey you don’t know me but I’m out of chips and it’s your fault buddy.’

    Is that starting to happen?
    There are a lot of good, smart people in auto that have seen this. This is the moment that gives that cohort within those companies the voice to say, ‘This is exactly why we needed to think different.’ I think you’ll see more of this direct relationship between autos and semiconductors.

    Can chip factories in the U.S. compete with lower-cost producers in Asia?
    We built a factory from the ground up in upstate New York. It cost billions, but there’s over 3,000 people working there. Are those 3,000 people getting paid a little more than the 3,000 people in Korea? Yeah, probably. But if you build enough wafers, it’s still very competitive. Part of this might be tilting some advantage for folks to use the domestic supply that we create, but that’s how it is everywhere in the world.

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    Bitcoin's Big Selloff Was a Long Time Coming

    This article for Bloomberg may be of interest. Here is a section:

    Felix Dian, founder of crypto investment fund MVPQ Capital
    “Looking at the previous bull cycle (2016/17), there have been quite a few occurrences when Bitcoin loses momentum and dips below the 100-day moving average. This one was overdue.

    “We are actually seeing record subscriptions into our fund this month, from institutional family offices, with many willing to use this as an opportunity to add. Ultimately, strong hands buying will meet the lack of available liquid supply of Bitcoin, triggering a squeeze and further down the road a new retail FOMO wave.”

    Jeffrey Halley, senior market analyst for Asia Pacific at OANDA
    “The threat of regulation, either directly in developed markets or indirectly via the taxman, has always been crypto’s Achilles’s heel.

    “Hopefully, we will hear as many ‘experts’ saying this is a sign of Bitcoin becoming a ‘maturing mainstream asset’ if it falls 10% this weekend, as we do when it rises, or a crypto-exchange chooses to IPO. In the meantime, don’t hate me for being bearish Bitcoin in the near term.”

    Nikolaos Panitgirtzoglou, strategist at JPMorgan Chase & Co
    “Institutional demand has indeed slowed. I’m not sure what could trigger a re-acceleration of institutional demand. You either need a big announcement like Tesla or simply a correction and clearing of retail froth to incentivise institutional investors to re-enter the market.”

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    Stocks Drop on Biden Plan to Lift Capital-Gain Tax

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

    “Sticker shock over some of these tax figures will be hard to shake off for some investors,” Edward Moya, senior market analyst at Oanda Corp, wrote in a note. “Some traders are looking for an excuse to lock in profits and they might choose to use this tax story as their catalyst.”

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