FT Weekend thoughts. Jobs, Vaccines, Inflation, China's Wealth Connect, ETF's, Magic and Fake News

Cyber attack shuts major US pipeline system
Assault on Colonial Pipeline underscores vulnerabilities in critical US infrastructure.
China’s ambitions in space: national pride or taking on the Americans?
The big read A lack of international co-ordination could undermine Beijing’s bid to reap the rewards from becoming a space superpower
Every dogecoin has its day as Musk hosts Saturday Night Live'By the small hours of Sunday — an illiquid time in the world of finance — the dogecoin price had dropped by about a quarter to take its market capitalisation under $70bn, according to CoinMarketCap.'

Front Page
US jobs growth stalls despite brisk rebound
• April data dash analyst expectations
• Slowdown damps overheating fears
A surprising miss and makes the inflation debate more interesting; especially as we get inflation for the US on Wednesday. It eases some fears that the economy is overheating but highlighted the mixed nature of the recovery.
There were 331,000 hirings in the leisure and hospitality sector (tend to be lower paid jobs), but to be expected as inoculations continue and the economy opens up more. But there were losses in manufacturing (18,000), temporary help (110,000) couriers & messengers (77,000) and retail (15,000).
The rehiring in lower paid positions will eased some inflation worries and counters claims that Biden’s increasing of federal unemployment benefits is reducing incentives to work. But the lack of rehiring in better paid jobs will also be a concern for the strength of the recovery. It probably reflects the uncertainty in many businesses as to whether they are going to see increased demand as a result of the re-opening of the economy. Whilst many have talked about a spending boom I doubt it, most American’s have continued to spend on goods via on-line means throughout the pandemic. We are likely to see an increase in spending on F&B as pubs and restaurants re-open but the upside from that is limited and as mentioned above most of those jobs are in the lower pay spectrum. It will also be interesting to see how many establishments have survived.

WHO clears Sinopharm vaccine in big victory for state-run Chinese maker
Positive news for the Chinese vaccine makers and helpful for China’s vaccine diplomacy efforts. It could also help International travel if countries decide to decide to accept inoculations of vaccines approved by the WHO. Sinovac Biotech is due to hear this week if it too has got approval.

Macron plays down Biden waiver plan
France president says export barriers are more important issue to tackleWorth remembering that the WHO proposal that is supported by the US, UK and about 60 other countries has no legal backing. Marcon and others are highlighting the fact that it is a lack of ingredients or delays to their export that is the real issue. The CEO of Moderna said he wasn’t worried because there are no facilities out there capable of replicated their vaccine.

Global vaccination drive switches focus to children
Scientists weigh benefits of Covid inoculation for young people against need, parental fears and the strain on suppliesAn interesting read. Stresses that there are still huge number of adults to vaccinate but longer term inoculating Children makes sense.

VW eases inflation fears by talking down pay rise expectations
Says it is not under pressure to raise wages and echoing comments from the ECB’s chief economist; that labour markets are not yet strong enough to drive inflation. It says 'most economists think these inflationary pressures will fade in 2022 because labour markets will take time to recover from the pandemic, delaying any significant rise in wages. The ECB forecasts that eurozone inflation will fall back to 1.4 per cent by 2023.’
'Only one in 10 eurozone businesses in both the manufacturing and services sectors reported labour was a factor limiting production, according to the latest quarterly survey by the European Commission in April. In contrast, insufficient demand was a concern for more than one in three services providers and 27 per cent of eurozone factories.’
An interesting read; suggest that there isn’t pent up demand in the system.

FT BIG READ. CONSUMER GOODS.  Peas add froth to the milk market
Plant-based milk drinks have become a $17bn consumer market. Multinational companies are joining dozens of start-ups by investing in products that mix food science with shifting consumer tastes.An interesting read from health fad to a structural changed and now boasting sustainability credentials too.Plant milks now surpassing soya which 'has declined on concerns about allergies and its contribution to deforestation.’
'But increasingly plant milk sales have been driven by sustainability concerns as shoppers became more aware of climate change. Livestock produce 14.5 per cent of greenhouse gas emissions, when feed, transport and other factors are taken into account, according to the UN’s Food and Agriculture Organisation.’ The dairy industry is resisting the change and promote milk’s nutritional benefits but it is expected over time that the plant based milks will be able to match that too.
Currently attracting lots of capital but 'One venture capitalist in agricultural technology says margins will inevitably fall. “The barriers to entry are minimal and it’s incredibly competitive,” he says.But even if plant milk becomes less profitable, experts are convinced it has a role in curbing climate change.
“From a sustainability point of view it looks pretty good,” says Michael Clarke, a co-author of the landmark 2019 EAT-Lancet report on green diets. “I think it’s going to be one of the solutions to environmental issues we’re facing from our food systems.”
Worth a read. Over the longer term it looks as if large dairy herds are going to come under more pressure which will impact the agriculture sector and companies like Mengniu Dairy (2319 HK) and Inner Mongolia Yili Industrial and others.

When it comes to inflation, how much fortitude does the Fed have?   By Sebastian Mallaby is the Paul A Volcker senior fellow for international economics at the Council on Foreign Relations
An interesting read. Notes that US citizens are sitting a hoard of cash which could trigger inflation. There is also the worry about the fact that some businesses have shut down and so 'compromising the economy’s ability to satisfy surging demand’. Also that trade tensions, trade unions and improved laws to support gig economy workers could all push costs higher. Acknowledges that unemployment is elevated so in theory, employers can scale up production. But many of those workers are in the wrong location or do not have the right skills. 'The Philadelphia Fed reports that 45 per cent of manufacturing companies have vacancies that have gone unfilled for three months or more. According to iCIMS, a recruitment agency, job openings were up 22 per cent in the first quarter, but applications were down 23 per cent.’
'In sum, an inflation breakout is not inevitable — the slight rise in unemployment reported yesterday supports the doves’ view on labour-market slack. But the risks are significant. A lot hangs on whether the Fed is ready to react firmly if prices do surge. And this brings us to the second part of the discussion. The Fed’s critics advance three reasons why it may lack the fortitude to respond.’
1. It has muddled its commitment to its inflation target by allowing overshoots; 'Since monetary policy works with a lag, this wait-and-see attitude could mean rate rises come too late to damp price increases before they develop momentum.’
2. the Fed may judge an inflation surge to be temporary — a blip that will correct once workers shift into new sectors and companies adjust. If this is wrong, inflation will have space to entrench itself further.
3. Despite the misleading precision of their forecasts, central bankers make decisions under uncertainty, and they are inevitably political.
He concludes 'It’s an enduring parlour game because neither side can know the answer in advance. The enthusiasm for cryptocurrencies testifies to the suspicion that the Fed will let inflation rip. But the last time the sceptics were proved right was in the 1970s, and the cautionary tale of that decade is seared into the memory of every central banker. Perhaps, half a century later, we should embrace the possibility that certain American institutions really are dependable. The past, at least sometimes, can serve as guide to the future. An inflation surge seems all too likely. A supine Fed does not.’
Worth a read.

Companies & Markets

China edges closer to wealth link with Hong Kong in boost for liberalisation 

Looks at the Wealth Connect programme and sees it as means to allow Chinese mainland money to flow into Hong Kong. Viewed as an effort to integrate the country’s financial system into global markets.
'The Wealth Connect programme will allow up to Rmb150bn ($23bn) to be invested in either direction between Hong Kong and mainland China, with a limit on individuals of Rmb1m ($155,000).’
It says 'The scheme is set to be a milestone in the liberalisation of China’s strictly controlled financial system, as it would make it much easier for part of the country’s vast pool of savings to be invested outside its borders.’
BUT is should be noted that just like the existing connect schemes the money does not enable mainland investors to get their money offshore as the assets are held by the exchange and when sold the money is repatriated back to China.
For China its a boost as it gives the citizens in the Greater Bay Area access to more stocks and products whilst allowing China to retain control on capital outflows. It is important because Hong Kong offers a bigger range of products. Another boost for HK. Exchange too as a key beneficiary. More of a boost for diversification than liberalism in my view.

BA owner calls for easing of travel curbs to stem losses
I would expect more airlines to be exerting pressure as inoculations continue. The key for most European airlines is a resumption of long haul routes. Linked with that will be the conditions that have to be met by travellers and governments view on quarantine requirements.

The Yale pioneer who remodelled investing
Tributes flow for Swensen, who has died aged 67 after a life masterminding a revolution in money management.A good read about a man who contributed so much.

Watchdogs get to grips with crypto incursions
German and US regulators forced to turn attention to fast-growing industry that renders old rule book redundant.'At present neither the SEC nor the CFTC has powers to supervise cryptocurrency market activity because, in legal terms, bitcoin and its peers are neither a commodity nor a currency. After the 100 per cent rally in bitcoin so far this year, and a related 12,500 per cent ascent in jocular copycats like dogecoin, the heightened response from rulemakers suggests the industry’s fast-growing scale is demanding a response.’
An interesting read which highlights a number of areas of potential concern and risk. The hope is that law makers and regulators can quickly come up with an enforceable and reasonable framework before there is a big blow up that puts the wider financial system at risk. The amount of money and the availability of leverage is a worry.

Copper jumps to record level ahead of expected worldwide surge in demand
Now above its 2011 high with huge demand from China and increasing global demand due to clean energy, electric cars and the general global recovery. Some expect it to reach US$15,000 by 2025 although most put the data further out. A big issue is that there are few new large scale projects at present because most of the easy mining has already been done. New projects are likely to be in more remote locations and bringing on a new mine can easily take 6 years or more.Also notes that Iron ore prices are rising too and that is despite production cuts in China. Tin, corn, coffee, lumber and other commodities are also shooting higher.
The short term outlook for all these commodities remains good as bringing on new production will be difficult.
For HK Jiangxi Copper closed Friday at HK$28.03 vs its HK$45.17 high in 2011 which would suggest there is scope for further upside still; similarly with Chalco.Zijin Mining however is already testing new highs but Zhaojin Mining is off its Nov 2020 high. So as ever its a mixed picture but the trend seems to be more positive.

The measuring of credit risk is up for debate
Opens with 'One of the primary measures of risk in debt markets is flashing red as global corporate borrowings mount in the wake of the Covid-19 pandemic.Yet some analysts and investors appear nonplussed, instead questioning whether the traditional benchmark for indebtedness — or leverage — really matters any more.’
Makes the point that refinancing older more expensive debt at cheaper rates makes debt more manageable because the repayments are cheaper. But if the amount of debt has been increased then that advantage is lost. Also as companies are generally only paying interest an important element is the future direction of interest rates.
An interesting read that suggests whilst tradition methods are still useful they are less relevant and so additional research is required too.
Nice quote 'As one debt investor said, arguing that leverage is no longer as important is what people say when they need to convince themselves that what they are invested in is not as risky as it looks.’
Worth a read.

Realistic investors broaden out market bets with ETFs
Looks at retail money flowing into ETF’s as investors become more confident in the recovery.But how much is already priced in?
'The share market has discounted a strong recovery in corporate earnings this year. It means the answer to the question will rest with how sustainable the expansion looks in 2022 and whether inflation stays relatively constrained.’
Notes the current high valuations 'highlighted by the Federal Reserve’s latest Financial Stability Report this week, which noted some assets “may be vulnerable to significant declines should risk appetite fall”.’
Interestingly says 'the prospect of a sizeable pullback has risen, with selling potentially exacerbated by investors quickly exiting via ETFs.
Typically, a 5 per cent equity sell-off occurs three times a year, but that has not been seen in the past six months.
The absence of a 10 per cent correction for the past 14 months jars with a pattern of at least one occurrence per year, according to Bank of America. A backdrop of very supportive fiscal and monetary stimulus is likely to have played a part in stemming selling pressure to date.
But in their rush for broad exposure and for ETFs that track emerging markets, international shares and so-called value stocks, there are signs that investors are aware of the risks.’
Diversification has been taking place and the inflows may also reflect a move away from bonds.
He concludes
'Investors climbing on the equity ETF bandwagon are realistic to some degree: money needs to find a home and many areas of fixed income lack appeal. So they are spreading their exposure across different equity styles and are also looking at cheaper valuations outside US share markets. But a pronounced shift in flows to equities at lofty levels and away from bonds depends on a profound change in the macro narrative.Namely, that the pace of the economic expansion into 2022 proves a lot more robust and enduring than the moderate growth and disinflationary winds that defined the decade after the financial crisis.’
An interesting read and underlines the rising risk for a significant pull back in the near future.

Lessons in investing from John Maynard Keynes. By Tim Harford
Worth a read.
'I am not sure that studying biographies of Keynes has made me a better investor. He was a man of contradictions, typified by the quip: “When my information changes, I change my course of action. What do you do?” Keynes, of course, never said those words. He does, however, seem to have lived them.
Being willing to change your mind is an invaluable virtue. Then again, at times, so is having the courage of your convictions. At the art auction in Paris, Keynes couldn’t persuade Holmes to spend all the funds that the Treasury had provided, despite the quality of the pictures and the low prices.
So Keynes himself picked up Cézanne’s still life “Apples”. The National Gallery missed out, and today “Apples” hangs in the Fitzwilliam Museum in Cambridge.'

What magic tricks teach us about fake news
Book review Tim Harford’s ‘How to Make the World Add Up’ is published in paperback this week
Misdirection and misinformation have more in common than you might think.
An interesting read.
Why do we do we spread fake news?
'The first is that we are incapable of telling the difference between truth and lies. In this view, politicians and other opinion-formers are such skilled deceivers that we are helpless,’
'The second explanation is that we know the difference and we don’t care.’
A third reason is that 'we fail to distinguish truth from lies not because we can’t or won’t, but because we are simply not giving the matter our focus.’
A good read he concludes 'But if you decide to think carefully about the headlines, or the data visualisations that adorn news websites, or the statistics that circulate on social media, you may be surprised: statistics aren’t actually stage magic. Many of them are telling us important truths about the world, and those that are lies are usually lies that we can spot without too much trouble. Pay attention; get some context; ask questions; stop and think.
Misinformation doesn’t thrive because we can’t spot the tricks. It thrives because, all too often, we don’t try. We don’t try, because we are confident that we already did.'