May 16 FT Weekend Thoughts: Inflation, Ransoms, Billionaires and death.

This and previous notes can be found at
and on substack
Check out  for your research needs

On line
China census reveals depth of demographic challenge
Easing of family planning policies not enough to reverse slowing population growth, analysts say.
Notes how ‘Many ministries and regions seek bigger population figures to justify higher budgets, but the People’s Bank of China has warned that a reckoning is coming. The central bank argued in a report issued last month — after the census data’s postponement — that birth rates had been consistently overestimated. “We must realise that China’s demographic picture has reversed,” it said.’
Looks at the problems that the hukou system imposes. The inconsistancies in the data but notes that a smaller China will have a dramatic impact on the environment, water resources and its limited land.

China lands rover on Mars for the first time
Beijing hails successful mission to red planet as first step in ‘planetary exploration of the solar system’

US banks could cut 200,000 jobs over next decade, top analyst says
Wells Fargo’s Mike Mayo predicts biggest reduction in industry’s headcount in its history
Mainly from branches and call centres. An interesting read.

The property developers still betting on London offices
The market is splitting in two, between modern, flexible spaces and older buildings whose value is likely to decline

Print Edition
Front Page

West Bank clashes threaten new front in Israel-Palestinian conflict
• Riots across Israeli towns • Death toll rises in Gaza • 1,800 rockets fired by Hamas
Escalating problems giving investors one more thing to worry about.
Read also
Israel changes from stability to internal conflict within a week

Narrative of peaceful coexistence challenged by communal violence
Iron Dome defence keeps Israeli toll in check

Sophisticated interception system is relatively cheap and has proved effective so far

Olympic athletes left high and dry as Japanese towns cancel hosting plans
Another problem for the for the staging of the Olympics which being pushed ahead despite wide spread opposition.
Personally I am amazed at the determination to continue and would have thought calling the event off would be more sensible. It would no doubt a great disappointment for the athletes’ who have trained so hard but other people have suffered more in the loss of loved ones.

ECB warns of upside risk to inflation
Minutes of last ECB meeting point to global rebound in demand, US stimulus and jab rollout. Which raises the question of when tapering of its bond buying policy should start. Something that is likely to be high on the agenda at the June 10 meeting. Assuming nothing dramatic happens between now and then, the expectation is that the ECB will raise its forecasts for growth and recovery.
It mentions Friday’s weak Michigan Sentiment reading in the US despite the recent stimulus cheques, inoculations and re-opening of the economy.
That could reflect that whilst markets may be back at pre pandemic levels people are realising that life is not. Many things have changed and are not going to the same. A lot of jobs have and will continue to disappear.

Ransomware hackers stay one step ahead
Experts and governments debate best way to fight back after victims pay out billions.
Just as tech has advanced and our reliance on it, so has criminal activity; ransomware attacks were +60% up last year to 305m with just over 25% of victims paying to get their systems unlocked. But it is estimated that there were around two dozen gangs dominating the market in 2020; earning at least $18bn in ransoms. The problem recent got worse with the growth of ‘ransomware-as-a-service, or Raas,’ effecting leasing out the required software programme for a cut of the ransom paid.
There seem to be two main questions; how to prevent the growth and how to strike back.
There is a debate about whether governments should make it illegal to pay ransoms; in an effort to take away the profit for gangs. But that risks huge infrastructure damage whilst the cost to the criminals would remain minimal. Other options include making it compulsory for companies to report cases. Interestingly it notes that companies don’t like the idea of having to come clean; fearing reputational damage along with legal and regulatory consequences amongst other things.
It says ‘The US Department of Justice last month launched a dedicated ransom-ware unit that aims to “disrupt and dismantle the criminal ecosystem”.
Some have even spoken about targeted ‘hack backs’ on those responsible. There has been a lot of talk historically about some government giving tacit support for the criminals with Russia, N Korea and China being highlighted. It is certainly something many in the US seem to favour. The article concludes
'With few options for prosecution, one expert familiar with the US government’s approach said he expected authorities would wait to go aggressively after the perpetrators of the Colonial hack. “It’s 10 or 15 young guys or girls who party a lot and want loads of money. You don’t go after them in Russia, you go after them when they go on vacation in Greece.”'
I think that as with regulation governments have been reactionary in their approach, but worse much of the problems lies with companies not fully appreciating the potential issues and not spending enough on security. We all love the benefits that modern tech but are generally glib about the security measures. Even the tech companies using ‘copied code’ for their programmes; we have all tried to get the benefits ‘cheaply’ with cost rather than security in mind and now so many base programmes are in place that may contain flaws that hackers can leverage we are facing the consequences.
Fighting back sounds like an option but it needs every country to agree and be on the same page; that is likely to prove difficult. Co-ordinated strikes back sound like a good idea to make the criminals and compliant governments aware that their are risks but like most actions it risks escalation.
For companies and really everybody the costs are going to rise, not just for better security but in the design and building of systems.
It could also have more implications for Bitcoin and other crypto currencies which seem to be the criminals choice.
You might also be interested to read a Control Risks article which high lights how kidnapping gangs have adapted to covid.
At the end of the day greater co-ordination between governments is required and until that happens the hackers will have a loop hole.
Also OPINION Colonial cyber attack is a warning of worse to come
A plague of ransomware will continue in every sector until the superpowers step in By Misha Glenny The author wrote ‘DarkMarket: How Hackers Became the New Mafia’

French revolution awaits diners as haute cuisine falls off menu
A good read about how a top restaurant is looking to adapt as France looks at re-opening. Accepting the fact that its previous staple clientele are not likely to rush back.
I think the same will be true of a lot of sectors and it underlines the truth that even as social distancing eases we are not going back to the pre pandemic normal.

US turns creative to encourage jabs
MetroCards and lottery tickets among rewards being offered to fight vaccine hesitancy.
As the covid virus seems to be coming under control more people are becoming hesitant to being vaccinated and so governments will need to find news ways to encourage people.

Scientists urge probe of virus lab-leak theory
The theory that coronavirus was released accidentally from a laboratory in the Chinese city of Wuhan “remains viable” and must be investigated further, a group of senior scientists has said.'
Worth a read and key I think is that because China has not allowed a transparent, objective and totally independent investigation doubts will remain. The WHO has admitted that its report failed to address the issue sufficiently. As these scientists are saying ‘“Knowing how Covid-19 emerged is critical for informing global strategies to mitigate the risk of future outbreaks.”’
The scientists are from the US, UK, Canada and Switzerland which no doubt removes a concern that it is just the US but I doubt it will change China’s stance and more worrying the longer the delay the less chance of finding the truth.
It still leaves that lurking question, as with Xinjiang, ‘if you have nothing to hide why not?’

The summer of inflation
Central banks say rising prices are a temporary phenomenon and insist they will not rush to unwind stimulus measures. But new consumer figures give investors a signal of the risks that could lie ahead.
Many, who is the past have been sceptical about people saying inflation is coming back, are this time accepting that it might be and possibly in a way not seen before. There were expectations of some inflation in the summery as lockdown measures eased but the acceptance that it will be temporary as forecast by the Fed is being questioned.
The key worry being that the Fed and other Central banks are forced or feel it prudent to raise rates which as seen this week, could have major implications on equities and other investments.
As it notes this week’s CPI was just one data point but it showed inflation was real and hitting consumers. There are also a number of other pointers; iron ore, copper, lumber, grains, semiconductor chips; to mention a few. With regard to chips it notes that the second hand auto market has seen prices rise 10% MoM in April as the new market saw production hits.
It also notes that it is not just commodities but labour too.
It quotes Sonal Desai, chief investment officer at Franklin Templeton’s fixed income group. “There is an entire generation of traders who have grown up investing in the post-global financial crisis world of no inflation,” she adds. “People shouldn’t underestimate how uncertain things will look if we are entering a new paradigm.”
It is not just traders but portfolio & wealth managers and analysts too.
The article references that since Paul Volcker raised US interest rates to 20% in the early 1980’s controlling inflation is part of central bankers DNA. Historically they tend to act swiftly and divisively to prevent inflation as they see the first hints. But Powell is looking to to set a new direction; allowing inflation to rise. Said to be in recognition of how ‘fiscal austerity iscal austerity had prolonged the previous recovery.’
So far he is alone but no doubt other Central banks are watching closely.
It says ‘Few would argue this monetary largesse on its own should fire up prices, especially with deflationary impulses such as ageing demographics and technological innovation in play. Rather, it is how governments have responded to this crisis that has been transformative. Borrowing levels have exploded throughout the developed world, and the spending taps are still open.’
Key being that now the Democrat’s have theoretical control of the US spending, the previous impact of cautious spending, austerity, will not now be present and hence the threat of inflation is greater.
The Fed and the ECB thinks that the current indicators are merely temporary bottlenecks and that in time they will be resolved and inflation will ease back down again. A number of market indicators agree with that view like Eurodollar futures.
But this is all new territory for the Fed and investors, there is no playbook and many worry about the lack of clarity and the potential for mis-communication. Nice quote ‘“The committee is diverse and inflection points are tough,” he says. “Jay Powell is essentially saying, ‘we are going to be driving at top speed into the turn, but trust me, we know when to start turning the wheel’.”’
It concludes by looking at this week’s reaction; which many are saying was complacent and probably reflected that a lot of investors just don’t know what to expect. I think that could then lead of one of the things that Powell worries about; that inflation expectations take off. From complacency to panic.
'“The last few years have been great for investors because everything went up — you gained on your equities and your bonds,” says Mohamed El-Erian, chief economic adviser at Allianz and former co-investment chief at bond group Pimco.
“Now you risk losing money on both sides. It’s a horrible environment, and I’m glad I’m not managing money.”'

A good read I still think the Fed is focused on wage inflation and happy to seen nominal inflation rise along with growth. The worry is that Powell says he isn’t worried about an overrun in inflation and that the Fed has the tools to deal with it. But he hasn’t said what those tools are, basically I think because he doesn’t want to worry the general public. The key is that the Fed doesn’t have any new tool’s to deal with inflation; it’s still interest rates. That is still a crude tool to use and as we have seen in the past they have dramatic impact. Today the impact could be even more dramatic because of the amount of money companies have borrowed. Much of it in bonds at low rates but in time it will need to be refinanced; especially as companies are not looking to pay down debt but carry out share buybacks. buying back shares at high levels with the prospect of higher interest rates ahead, which is likely to see share prices fall makes no sense long term. Especially is you then have to refinance at a higher rate when your shares are worth less.
Investors should be watching for companies that are reasonably geared and seeing real demand for their products; which suggests that the likes of TSMC and Samsung are going to remain solid candidates. With regard to the FAANG names investors will be more selective. Some have made great moves in building their business and are well positioned to do well in even inflationary times; like Amazon moving into food. Even if its not certain its logical and has a good chance. Whereas others like Facebook face more regulatory oversight and the possibility that there advertising model is not as good as had been previously thought, similar with the Apple Store.
Things are changing, older investors have some insights but today’s environment is so different than when we last had inflation we are really pretty much all in the same boat.
Keeping alert and nimble will be key.

Read also Inflation regime change remains an unsettling wild card
Michael Mackenzie.
Says ‘But muddying the waters for investors is that the outlook for inflation is still difficult to judge at this stage.
“There is so much dislocation in the economy from the reopening and base effects from a year ago that it will take at least six to 12 months before we get a clear view of the underlying inflation trend,” said Jason Bloom, head of fixed income and alternatives ETF strategies at Invesco.
Investors who are now worried about an inflation shock face a dilemma. Some assets seen as traditional hedges against such a risk, such as inflation protected bonds and commodities, have already risen appreciably. Effectively a period of inflation running hot has been priced in to some degree.’
So buying protection now is expensive and history shows that post and the GFC of 2008 inflation worries can be overdone. ‘After a mercifully brief pandemic recession, the powerful and well entrenched disinflationary trends of ageing populations and falling costs associated with technological innovation are by no means in retreat.’
That is certainly the Feds thinking but there is still the ‘immense scale of the monetary and fiscal stimulus of the past year.’
It notes that many now expect inflation but at a moderate level but not at a dangerous level. Moderate inflation with good growth is positive for equities, especially companies influenced by the economic cycle that have the ability to pass on costs and squeeze margins.
But a short period of elevated inflation is possible, especially if the labour markets remain inbalanced due to location or skills. But the bond markets should herald that and have already started moving in the five to ten year period. That change in expectations is likely to be key. ‘Assessing nearly 50 years of data, a portfolio holding equities and bonds underperforms during bouts of elevated inflation, while real assets including inflation-linked bonds and commodities prosper, according to the asset manager.’
He concludes ‘“Most investors have not experienced a period where inflation surprised to the upside,” says Johnson. Clients are asking more questions about insulating their portfolios, but their present exposure to commodities and other assets shows that in broad terms investors are “not paying much of an inflation premium”.
That can change and the prospect of inflation regime change remains a wild card for investors.’

There is also Kinks in supply chains risk shackling the world to an era of boom and bust By John Dizard
Looks at the history of logistics and the development of supply chain mangement over the past 25 years or so. How computers and algo’s refined the process but now we have gone from three or four layers in supply chains to so many more that the processes is now potentially adding more bottlenecks and chaos. Cites the work of “Paddy” Padmanabhan, of the Insead Emerging Market Institute in Singapore,
Whilst current specific issues will be sorted it leads to the question of intensifying cycles of shortages and restocking which can lead to speculation and recessions due to overstocked inventories being liquidated.
Cites shipping, 90% of goods go via sea. Many crews are from India, so the lack of vaccinations impacts not just Indian trade but global.
So whilst we have better visibility in some regards the ability of ship operators to forecast is still limited (worth bearing in mind when reading the quantim computing article).
So whilst ‘post-second world war period, gradual computerisation made it possible for operations management algorithms to co-ordinate flows of goods across companies and their suppliers. Even monetary economists give the microeconomics of supply chain management much of the credit for the moderation of recessions in recent decades.’ It’s not working so well now.
That leads John Dizard to think that the claims by the Fed that the current inflation issues are transitory less convincing. ‘The problem with putting our trust in the capacity of scientific solutions to manage supply and production is the limit of human rationality. As John Sterman, an MIT professor and supply chain expert, says: “In real life there is no evidence of learning. People’s mental models are oversimplified and they don’t handle time delay well.”’
I agree with much of the article and other studies have shown that despite the computer models the human instinct is to over order just in case. Fine when there is only one layer; but with multi layers the chance of multiple occurances of ‘just in case’ causes a problem. In making supply chains longer and multi layered, even with computers there is still the human factor.
In passing he mentions ‘Indeed. Anyone who has seen the mountains of unused equipment left in the wake of foreign military operations that used excellent supply chain management would have the sense that maybe logistics does not solve all our problems.’
I think an unfair comparision in war there is usually little scope for a second chance; taking equipement to war is a balance you rarely have the opportuity to take everything so you plan as best you can. Often your enemy inflicts damage and at the end of a conflict there is little interest in taking damamged equipment home. Add to that in war few keep track of what was damaged or destroyed. Plus on the otherside of the coin its worth notinghow quickly the military can go to war because they are ready for almost everything but it comes at a cost. A cost that businesses are not prepared to pay.

I think inflation will surprise to the upside.

How radical transparency can help vaccinate the world
by Gillian Tett
An interesting read about how David Malpass World Bank President is building a public data base; which shows which countries had bought how much vaccine and at what price. The intention to help policy makers make better decisions.
It goes on to look at how information can help people make better decisions as in covid monitoring apps. It also mentions how Carrier the air con people have a app to allow track real time the air quality in buildings. Its not clear if its all buildings or those using its equipment but it makes the point that it empowers people to make better decisions.
She concludes
'But on some occasions, transparency can spark change. Consumers who are empowered with digital data can make savvier risk assessments, without relying on governments. Citizens who can track vaccines may use their political muscle. And if more voters in rich countries understood the need to send vaccines to the developing world, there might be pressure to start supplies flowing more freely.
So I hope that Malpass’s suggestion is heeded — and a compulsory database of the vaccine contracts is made readily visible. I also hope that Big Pharma might be persuaded to back this radical transparency, and that countries such as China will get involved too.'

Companies & Markets
Watchdog probes Gupta’s GFG as talks on rescue deal collapse
• Trading fraud suspected • White Oak pulls plug • Metals empire in crisis.
Makes it increasingly likely that a significant player in the steel sector is likely to exit the stage. Whilst commodities are currently seeing a boom it is difficult to imagine anyone looking to step in to buy the business. So worth watching closely.

Ride-hailing groups taken to task in China’s tech crackdown.
China’s regulators last week called a number of the sector’s key players in for a chat. Eight Government departments were involved (State Administration for Market Regulation, the transport ministry and the ministry of public security amongst others). It says ‘Ride-hailing platforms were told to address several issues including overly high costs for drivers, opaque mechanisms for sharing profits, and arbitrary changes to pricing. The freight platforms were scolded for monopolising transport data, forcing down industry prices and charging additional member fees at random.’
E commerce names look set to continue to struggle in China as the government tries to stimulate the economy and create better paid jobs that will support its goal of greater domestic consumption. Businesses which were once seen as entrepreneurial are now under pressure because the whole of China’s model is under pressure.
Exports for the past year have been driven by personal protection equipment (PPE) and electronics making up for the depressed state of its more normal exports. Now with chip shortages and the rolling out of inoculations reducing the global demand for PPE; China is facing increased problems. It also has a credit problem and increasing environmental issues. All raising the spectre of social unrest; something this year more than any other China does not want. So when ride hailing hit the headlines on social media for the wrong reasons the government has leapt into action to show it is on the 'citizen’s' side.

Fears of China crackdown halt iron ore’s record run
Iron ore contracts fell significantly on concerns that Beijing would introduce measures to curb speculative activity in China as ‘the local government in Tangshan, China’s main steel-making city, said it would examine illegal behaviour and suspend production at mills found to be manipulating market prices by spreading rumours and hoarding material, according to reports from Reuters and Bloomberg.’
That follows comments and measures from Beijing, which have been slow to have effect. The announced measures in Tangshan have also prompted mills in other areas to boost their output to make for the restricted supply out of Tangshan.
It quotes Tom Price, head of commodities strategy at Liberum; “What the Chinese government is trying to do is incrementally contain the steel market, mindful of the fact they have spent a fortune resurrecting their economy over the past 12 months and they don’t want to kill the recovery.”
China is also very mindful of keeping inflation in check whilst domestic consumption remains fragile. It also has environmental goals to consider too.
On Monday we get a raft of data from China which will give more insight on the recovery like Retail sales, Industrial Production and unemployment along with China House Prices, NBS Press Conference and Fixed Asset Investment.
I think inflation and debt default issues are just a couple of the issues facing China and not helping is an increase in the reported number of new covid cases in China.

Australia coal mining sector warns of ‘dire’ risk from ESG insurance barrier
‘A contractor on a controversial Australian coal mine said it had failed to obtain insurance for the project due to environmental concerns, underscoring how financing for the fuel in the country has dried up.
BMD Group, which is working on Adani Enterprises’ Carmichael mine, said in an appeal at a parliamentary inquiry that it may have to ask the government for insurance.’
The project has had issues for a number of years and Adani has spent time an effort resolving each issue over the years but it appears that each time it resolves one issue another pops up.
The impact here though is slightly wider than coal.
‘Keith Pitt, minister for resources, accused banks and pension funds of “corporate activism”.
“This is precisely why I have asked for this inquiry and I look forward to the outcome,” Pitt said of BMD’s submission. “How is it possible that the company constructing a railway track that could carry cattle, grain, people or any number of other items is being denied insurance because it carries coal. The product being moved doesn’t affect the construction risk whatsoever.”’
He makes a good point in theory, although I would suspect that the rail line is just between the coal mine and the port.

US day trading frenzy wanes as pandemic curbs ease
Retail investor activity in stocks and options ebbs after surging during the lockdown.
As many of us expected retail day trading has waned in part as people return to work and can no longer remain glued to their monitors watching the daily movements. ‘In April, total trading volumes across the retail brokerage sector were down 26 per cent compared with March, according to a Piper Sandler analysis.’
It also notes that despite more stimulus cheques retail volumes were dropping. But there has been a rise in crypto trading although there is no sign of a direct correlation.
It also mentioned this weeks sell off as a wake up call to many investors that markets don’t rise forever and the impact of margin calls. The key thing about margin agreements are that they give the broker the option to sell any of the clients’ holdings and so they tend to sell the most blue chip first. Or as the article mentions other assets to fund their equity position. But as equities tend to be one of the most liquid sources they are usually amongst the first to go.
It will also be interesting to see the trading data as to how much ETF selling took place because that selling index trackers is likely to have a bigger impact on market moves.

ISS piles on pressure for Exxon board overhaul
In recommending voting for board members nominated by activist investor fund Engine No 1 the existing management will be under more pressure for change; ‘on climate, capital allocation and executive pay.’
It would appear that institutions are becoming more active in the management of the companies they invest in, the key swing is the likes of Blackrock and Vanguard where they hold large stakes and will be aware that their brand image is at risk depending on how they vote, and these days abstaining is not an option.

Netflix upstaged by old-time players Disney, HBO and ViacomCBS
Disrupter turns defensive incumbent as rivals put in a compelling performance.
An interesting read because there are a lot of companies in the space that are not making money but making big bets. It sounds similar to the delivery space and many other sectors. The thing they have in common I think is the availability of cheap money and investors seeking a good return. It strikes me that a lot of these start up companies are going to find business much harder as interest rates rise. For investors again it underlines finding companies with business models that work well; so many of these haven’t been tested with rising interest rates.

For interest
The billionaire boom

The pandemic stimulus has made the world’s wealthiest even wealthier.
Ruchir Sharma charts the rise and rise of ‘good’ and ‘bad’ billionaires around the world — and asks if a backlash against the super-rich is brewing
Worth reading for its assesment of China’s attitude to billionaires.
'In China, as in the US, most of the new billionaires are rising in dynamic, highly productive industries, led by technology and manufacturing. Among the 10 top emerging economies on my list, China is in a virtual tie with Taiwan and South Korea for the leading share of billionaire wealth that comes from “good” industries, at a bit more than 40 per cent. That is nearly twice the emerging country average.
China seems conflicted about how to square vast fortunes with what’s left of Maoist values. Before the 2010s, Beijing seemed to be enforcing an unwritten rule that no fortune should surpass $10bn. Tycoons whose net worth approached that mark tended to find themselves cut down suddenly by government investigators. As big internet companies took off, the net worth of their founders shot up and, perhaps before authorities could react, surpassed $10bn for the first time in 2014.
Just seven years later there are more than 50 Chinese deca-billionaires. In their recent efforts to rein in leading internet tycoons, such as Jack Ma of Ant Group (net worth $48bn), Beijing appears to be reasserting control. But since China’s aim of replacing the US as the world’s leading economy depends on its tech prowess, it may be loath to push too hard.'

‘Man of mystery’ takes Spac spotlight
Investor’s networking talent has led to a boom in innovative listings
Looks at Ian Osborne who spends his time split between London and Hong Kong and has investors like Michael Bloomberg, Li Ka-Shing Jack Ma and others. An interesting read.

Musk U-turn raises hopes of bitcoin rivals
Tesla boss is firmly in the crypto driving seat but has yet to give a steer on which digital token will win his favour
Effectively summarising what a number of other articles have been saying this week. There is a clash between Bitcoin and the environment. Also that Musk is inconsistent in a lot of his commentary but he is a social influencer for the sector.

Quantum computing raises prospect of more Biff for traders
Looks at what might happen when we get quatum computers working and whether they will be able to predict the future with any greater certainty than we currently have. I remain sceptical because whilst quatum computing will be able to introduce more variables I don’t see how it will ever remove chance or an irrational human decision. They will be able to give a better best guess but as with its refereces to ‘Back to the future’ seeing the future and time travel are still the domain of science fiction for now.
She mentions how quatum computers also pose a threat to heavily encrypted data and cryptocurrencies; that I think is more of an issue. She concludes
‘But the financial sector seems to be waking up to this quantum computing issue. Many banks and institutions are introducing teams to think exclusively about how it will affect their business.

How far ahead they are on making their systems quantum secure is harder to say. For now, most agree, the threat level is low, not least because — as the hacking of Colonial Pipeline shows — system security is low enough to ensure far cheaper and simpler ways to hijack digital systems.’

How mRNA became a vaccine game-changer
It’s the ‘messenger’ molecule of the moment that made the Pfizer and Moderna jabs so effective against Covid-19 — yet mRNA was ignored for decades. Can it now revolutionise medicine? David Crow reports

The hunt for North Korea’s missing
After decades in which thousands have disappeared, activists are attempting to shine a spotlight on the victims’ plight. Edward White and Kang Buseong report.
A sad reality.

Fourth Estate
With my father at the end by Robert Armstrong
A touching view on death and always worth remembering that we all die in the end.