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Thursday 5 August 2021

Weekend Reading



1. Ray Dalio on Chinese state capitalism

To understand what’s going on you need to understand that China is a state capitalist system which means that the state runs capitalism to serve the interests of most people and that policy makers won’t let the sensitivities of those in the capital markets and rich capitalists stand in the way of doing what they believe is best for the most people of the country. Rather, those in the capital markets and capitalists have to understand their subordinate places in the system or they will suffer the consequences of their mistakes. For example, they need to not mistake their having riches for having power for determining how things will go.

Also, you need to understand that the global geopolitical environment changing leads to some changes. You can see that reflected in the U.S. governments’ policy shifts such as a) changing its policies about Chinese companies’ listings in the United States and b) threats to prohibit American pension funds from investing in China.

Assume such things will happen in the future and invest accordingly. But don’t misinterpret these wiggles as changes in trends, and don’t expect this Chinese state-run capitalism to be exactly like Western capitalism.


2. Are high valuations here to stay?

For about 120 years from the 1870s to the 1980s, the U.S. stock market reliably reverted to its long-term average valuation, and just as important, it spent roughly equal time above and below that average. Investors could therefore expect an expensive market to become cheaper and a cheap market to become more expensive, a useful assumption when estimating future stock returns. Change in valuation is one of three key components of returns, along with dividends and earnings growth.

Since 1990, however, the market has rarely dipped below its long-term average valuation, the notable exception being the period around the 2008 financial crisis. Neither the dot-com bust in the early 2000s nor the Covid-induced sell-off last spring managed to subdue it.

The difference between the two periods is striking. From 1871 to 1989, the market traded below its long-term average valuation 47% of the time, as measured by price-to-earnings ratio using 12-month trailing earnings and counted monthly. Since 1990, that percentage has dropped to 10%.

As the years go by and the market maintains its elevated valuations, it becomes easier to suspect that something has indeed changed for good. And of course, many things have. Financial markets are accessible to more people than ever before, and it’s much easier and cheaper to buy stocks today than it was three decades ago. Investors are allocating more of their savings to stocks, much of it in index funds that track the broad market, and they appear to be getting better at hanging on to them. Retirement plans also steer billions of dollars to the market every year. It’s not hard to imagine that an increased demand for stocks and a decline in the number of panicky investors has lifted the market’s average valuation.  

That doesn’t mean the market won’t crater occasionally, as it did during the financial crisis. But there’s a growing chance that the past 30 years haven’t been an anomaly and that forecasting models need to lift their valuation targets.



3. Rainfall in the desert - geoengineering to the fore

Cloud seeding has traditionally been done by releasing compounds like silver iodide into clouds. The chemicals function as a sort of scaffold that water molecules latch onto, becoming heavy enough to drop to the ground as rain. Despite its lack of naturally-occurring rain, the UAE does have plenty of clouds, which are generated by moisture and evaporation from the Gulf of Oman, the Persian Gulf, and the Arabian Sea.

Amid concern that pumping silver iodide and other chemicals into clouds could cause invisible but harmful pollution on the ground, scientists started to look for new ways to catalyze rainfall. The UAE funded research at the University of Reading in the UK, where meteorologists developed a cloud seeding technology based on electricity. They discovered that when cloud droplets have a positive or negative electrical charge, the smaller droplets will combine and form raindrops.

Custom-built drones with a six-foot wingspan fly at low altitudes, with sensors measuring temperature, charge, and humidity. Charge emitters on the drones deliver electric charges to the molecules in clouds. Videos from the last few weeks show it not only raining in Dubai and surrounding areas, but raining so much that some streets started to flood, a rare if not unheard of occurrence there.



4. Battling the obesity epidemic through the gut

The global obesity epidemic is striking for its prevalence and persistence. Despite mounting attention from the media and governments, obesity rates have risen in every region of the world in recent years. Deeply entrenched attributes of contemporary lifestyles, from the worldwide availability of unhealthy processed food to the sedentary nature of urbanised lives, are often thought responsible. That helps explain why reducing obesity has proved so difficult.

The linkages between the food we consume and the ways in which we make decisions go beyond how much we eat. An evolving body of research explores how bacteria composition and hormonal activity in the gut communicate with the brain and vice versa, possibly helping to determine our overall health and well-being.

Viewed through the gut-brain framework, food choice is less an independent calculation than the outcome of a feedback loop in which what we eat today implants, at a biological level, the seeds of future meals. On one level, this carries the discouraging implication that existing obesity sufferers – barring serious surgery – will have to battle their own biology to better their metabolic state.

In another sense, though, the gut-brain connection is rife with positive possibilities. It points to numerous areas of intervention beyond appeals to willpower. This includes synbiotics to target the gut microbiota composition or supplements that raise serotonin levels, tracking of metabolic base rates and stress levels etc. Further research and experimentation may refine these methods such that they become viable alternatives to invasive weight loss interventions such as surgery for some.



5. The business tycoons who fell foul with the law (read the linked article)

The post-global financial crisis growth in Indian economy and the rush of corporate expansion activity burned many. Companies. Promoters. Chief Executives. Bankers.

For the first time in India’s post-liberalisation economic history, many who once led storied enterprises have gone to jail for alleged improprieties.

From Avantha Group’s Gautam Thapar to the Singh brothers of Ranbaxy, Fortis and Religare fame. From Yes Bank Ltd.’s Rana Kapoor to the Wadhawans of Dewan Housing Finance Corp. and Ravi Parthasarthy of IL&FS. Each was influential. Each connected in the corridors of power. Each built business at scale but fell afoul of rules. Each now incarcerated.


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