Putting Federal Debt In Perspective (Against Those Responsible For It In The Future)

Since 2007, US federal debt has risen 150% while annual US births (legal and otherwise) have fallen almost 14%.  Said otherwise, over the dozen years since 2007, federal debt has increased by $13.8 trillion while 5.2 million fewer births have occurred over the same period than the Census projected.  This is probably worth a little closer look.  Starting with...

US federal debt, split between publicly held debt and IG (Intra-Governmental holdings; aka Social Security trust fund, etc.).  Clearly, publicly held debt is skyrocketing since 2007 while IG growth is decelerating and will turn to net declines (as SS turns to a net seller) within the decade.  Relatively soon, all debt issued will be marketable and significantly more debt will be needed in order to pay for both the spiraling deficit alongside the declining IG holdings.

Next, looking at the annual issuance of federal debt, breaking out the annual issuance of publicly held marketable debt (red columns) versus IG (blue columns).  ***Noteworthy, since August 1st of 2019, the Treasury has issued $920 billion in net new debt through October 23rd.  The chart below is based on the assumption the Treasury will issue another $160 billion through the last two months plus the remainder of October (with a net issuance of $1.1 trillion for calendar year 2019).

Since debt is an obligation to be repaid or serviced in the future, I'll put this in context with federal debt continuously divided by the future, the quantity of annual births.  Below, annual births from 1950 through 2019 (blue columns) versus federal debt through 2019 (red line).  ***Yes, I'm making a great leap to note that births will continue to fall in 2019...as they have been falling at an accelerating rate through Q1 of 2019, as noted by the CDC (HERE).

Dividing federal debt by total annual births, from 1946 through 1975 (below).  As of 1946, coming out of a world war with debt at record levels, every child born had the future liability of $100,000 in federal debt.  By 1957, births had risen and federal debt had declined, meaning this responsibility per child born had declined by almost 40% to just $63,000.  Federal debt per child born wouldn't be back to the 1946 highwater mark until 1970.  But there would be no looking back after the abandonment of Bretton Woods and the foundation of the gold back dollar in 1971.

The then present generation (baby boomers) made a deal with the past generation to sell out the future generation (Millennials).  This can be seen in the chart below, showing the debt each child is born shackled with.  From $100 thousand in 1970, to $300 thousand in 1980, to $800 thousand in 1990, $2.1 million in 2007...and as of 2019, every child born a citizen of the US (regardless their parents status) is liable for a ludicrous $6.2 million in federal debt.  And this is just a fraction of the actual liability that is owed, if even faster rising unfunded liabilities were included.

To repeat, since 2007, total births have declined almost 14% versus a 150% increase in federal debt.  But we continue piling exponential debt on a declining future population and deride those who question the morality of such an obligation?  And the growth of the US child bearing population is rapidly decelerating while tumbling fertility rates are overwhelming the larger child bearing population (detailed HERE).  Translation, federal debt will continue skyrocketing while present and future births are likely to continue tumbling.

Of course, there is no way the US could ever repay this mounting debt even with a rising population of young...let alone a declining population of young.  But it is the "servicing" of the mounting debt that is destroying the Millennials and future generations.  The ZIRP, QE, etc. are effectively pushing asset prices through the roof with the follow through of record rents, day care, insurance, student debt, etc. etc. rising far faster than young adults income.

These policies of Federal Reserve driven asset appreciation primarily benefit asset holders, corporations, and those deeply indebted (federal government).  As detailed (HERE), the 70+ year-old population will represent an unprecedented 75% of the US population growth over the next two decades.  These policies meant to "kick the can down the generational road" continue to suffocate the asset-poor young adults and restrict the creation of newborn.  The outcome of ever accelerating debt via perpetually lower rates (to zero and below)…is the resultant collapsing birth rates and the more the Fed and central banks will suggest even more of what is making the patient sick in the first place

Japan’s new investment rules risk scaring off foreign investors

Analysts suspect activist investors may be their real target

BUY MY ABENOMICS!”, Shinzo Abe, Japan’s prime minister, pleaded to the New York Stock Exchange in 2013. As he lowered the drawbridge to foreign investors, that pitch seemed to work. Today overseas owners hold 30% of Japan’s TOPIX index of stocks and account for about 70% of the daily turnover on the Tokyo Stock Exchange (TSE). But new rules threaten to reverse these trends.

A proposed change to the Foreign Exchange and Foreign Trade Act, unveiled on October 8th, will lower the minimum stake foreigners can buy in many listed Japanese companies without prior government approval, from 10% to 1%. Other changes include requiring foreign directors to seek official permission before they sit on the boards of Japanese firms.

The finance ministry says it wants to protect sensitive sectors such as energy and weapons manufacturing. But analysts warned that the rules could choke off investment. Akira Kiyota, the head of the TSE told the Financial Times they were “absolutely idiotic”. Under fire, the finance ministry clarified on October 18th that foreign “portfolio investors” (such as banks, insurance firms and asset managers) would not need to seek prior approval, as long as they could prove they had no intention “to influence management”. The tweaked legislation was approved by the cabinet and is expected to be passed in parliament by early December.

But concerns linger. One is the law’s broad scope. In addition to nuclear power and aeronautics, its purview includes agriculture, transport, shipping, software and internet services. Nor is it clear what counts as infringement. Would a letter from a foreign investor to the board of a Japanese firm, say, be considered an attempt to influence management? The upshot is that investing becomes more convoluted and time-consuming. One analysis concludes that the new rules mean an eight-fold increase in applications to the government.

Officials say they are just playing catch-up. The European Union tightened its screening of inward investment in April. America has expanded its regime, and even prodded Japan to reduce Chinese access to sensitive technology. But a foreign banker in Tokyo says the real target is activist investors. “The wording in Japanese is very specific about targeting investors who want a say on boards.”

Activists have long fought for Japanese companies to sell non-core assets and stop hoarding cash. In recent years they have clashed with some of the nation’s corporate giants. They have been leaning on Nissan to sack its managers and draw a line under the era of Carlos Ghosn, the carmaker’s former boss. Earlier in the year a New York investment fund tried to force Kyushu Railway, a regional transport firm, to boost stingy returns to shareholders.

Ironically, Mr Abe can take some credit for this flurry of activism. By badgering bosses to change crusty boardroom practices, he has emboldened investors. The number of big listed firms with two or more external directors, for instance, has tripled since a corporate-governance code was introduced in 2015.

But many foreign investors already seem to be questioning the sincerity of the government’s reforms. Last year they dumped ¥5trn ($48bn) of Japanese stocks. Overseas investors once bought Abenomics. Now they want to sell.

What kind of bank will Wells Fargo be?

Other big lenders have already adopted new personalities

Wells fargo has reinvented itself before. In a vault beneath the bank’s headquarters in San Francisco is an archive of papers and objects from the 1860s, when the company’s stagecoaches criss-crossed America delivering packages. Advertising posters tout the security of their wagons, thanks to the sharp-shooting skills of the marksmen that accompanied them. As first the railroads, then the telegram and later a government-run delivery service threatened the survival of the firm its bosses adapted, using customers’ trust in their brand to expand their banking business.

Charlie Scharf, who took over as the bank’s chief executive on October 21st, must transform Wells once again. He comes from bny Mellon, a smaller bank based in New York. It is rare for a giant lender to pick an outsider to run it. The bosses of America’s other largest banks—JPMorgan Chase, Bank of America, Citigroup, Morgan Stanley and Goldman Sachs—are seasoned insiders.

But these are unusual times for Wells. The bank has spent three years trying to cleanse itself of scandal. In 2016 it was revealed that millions of spoof accounts had been opened by more than 5,000 employees. Further infractions involving home and auto loans have since come to light. Regulators have slapped penalties on the bank, the most onerous of which was capping its assets at $1.95trn, their level in 2017. Perry Pelos, Wells’s head of commercial banking, says the cap has not crimped growth so far because the bank has scaled back unprofitable lines of business. But, he admits, it will eventually begin to bite.

Mr Scharf has much to do. Investors say working with regulators to lift the consent order is their priority. But the harder task is working out what comes after that.

In 2016 America’s largest banks could mostly be split into two groups. The full-service banks—Bank of America (boa), JPMorgan and Citigroup—did everything, from underwriting initial public offerings to lending to corporate and retail clients. The specialists, Goldman Sachs and Morgan Stanley, offered investment banking and wealth- or asset-management services. Wells, with its giant retail bank and limited exposure to risky investment banking, was the odd one out. That helped it sail through the financial crisis and become the world’s most valuable bank.

But Wells has been firefighting since. Meanwhile JPMorgan, its biggest rival, has bounded ahead. Its balance-sheet has grown by nearly 10% since the end of 2017 (see chart 1), while Wells has gone nowhere. As big banks are barred by regulators from acquiring smaller ones, growth has been organic. JPMorgan expanded its branch network, gaining market share in places that Wells has traditionally dominated, such as Denver in Colorado. It has become a “tech giant”, says Betsy Graseck, a bank analyst at Morgan Stanley; last year it spent $11bn on technology. Investors approve. Its share price has doubled since 2016, while that of Wells has floundered (see chart 2).

boa’s assets, deposits and market capitalisation have also leapfrogged those of Wells. It too is scaling up, but by expanding into areas of previous weakness, such as by lending to mid-size companies. It has also cut its cost-to-income ratio from a decent 51% to just 45% over the past year.

Specialist investment banks are also treading onto Wells’s turf. In 2016 Goldman Sachs launched Marcus, a consumer arm that has gathered $46bn-worth of deposits. The bank has partnered with Apple to launch a credit card. It is also drumming up commercial custom. “Goldman is used to doing business with the C-suite,” says Ms Graseck, “now they also want to do business with the treasurer.” Morgan Stanley, meanwhile, has doubled down on wealth management. In February the bank paid $900m for Solium, a firm that manages share-vesting programmes at technology companies. These customers are less wealthy than its usual well-heeled clientele, indicating that it too is expanding its customer base.

All this means a more fluid competitive landscape. Mr Scharf will soon need to decide what kind of bank Wells should be. His rivals’ strategies show that he has several options. Wells could try to go global, like Citi. It could shoot for a wealthier clientele, like Morgan Stanley, or bulk up in investment banking, like JPMorgan. But the most obvious approach for Mr Scharf is to double down and aspire to make Wells a leading tech-focused consumer bank.

He has form: at both the firms he has led before, bny Mellon and Visa, a payments giant, he invested heavily in technology and cut costs. Shortly after his appointment was announced, an analyst asked Mr Scharf whether compliance, efficiency or digitisation would be the priority. He said that all were, and that solving them together was a “virtuous circle”. Wells is already dominant in many parts of the country, especially the west coast. And while other banks are bolstering their technology, it has led the pack. It pushed for the creation of Zelle, a payments system that competes with Venmo, a popular platform. Wells’s banking app is one of the best rated by users, with only JPMorgan and Capital One doing better.

Other new ideas are bubbling. Wells wants to “tokenise” digital credit-cards so that there is a different number for each transaction, making them more secure. In a “digital lab” former tech workers research other futuristic prototypes. Shari Van Cleave, who runs the lab, says technology can help give customers more control.

The catch is that for Wells to become America’s leading tech-savvy bank for consumers would require it to have a high degree of trust from customers and regulators. Instead a deficit of both is Mr Scharf’s toxic inheritance. Wells’s bosses have changed its direction before. Mr Scharf must decide where the wagon goes next. 

Airbnb and Uber are chalk and cheese

As the home-rental firm prepares to go public, it is keen to point out how its business differs from ride-hailing

They are the two most prominent examples of what used to be called the “sharing economy”. Founded in 2008 and 2009, respectively, Airbnb and Uber pioneered asset-light platforms to bring together providers and consumers of particular services—accommodation for the first, transport for second. Both firms became bywords for entire categories: startups now claim to be Airbnb for dogs or Uber for doctors. But Uber’s stockmarket flotation in May did not go well. Its share price has fallen by nearly 35% since its listing (and that of its rival Lyft, which went public in March, by 50%). As Airbnb prepares to go public next year, its boss, Brian Chesky, has been making the case for his company, both to the press and behind closed doors. He is keen to get across that, sharing-economy heritage notwithstanding, Airbnb is no Uber.

Mr Chesky founded the firm with his friends Joe Gebbia and Nate Blecharczyk, after he and Mr Gebbia, both unemployed designers, began renting out an airbed in their San Francisco apartment to make extra money. He originally thought it would be a side-hustle while he started a social-media startup. As is often the way, the side-hustle turned out to be the better idea. After an initial focus on renting spare beds in cities during conferences, when hotel rooms were scarce, the startup expanded into rental of entire properties. In 2009 Airbed and Breakfast became Airbnb. Since then more than 500m stays have been booked through its platform, which now offers more than 7m properties (including 4,900 castles and 2,400 tree-houses) in over 100,000 cities. Each night, around 2m people around the world stay in an Airbnb.

Having been in roadshow mode for several months, Mr Chesky has polished answers for everything up his sleeve. Not that there is much room up the former bodybuilder’s sleeve: his rippling physique sometimes strains the buttons of his shirt. Oof! He cleanly dispatches a question in a television interview about safety and hidden cameras, then flips it around into an opportunity to talk up Airbnb Plus, a premium tier of properties that are even more closely vetted. Pow! He bats away the notion that he is worried about Marriott, a hotel giant that is launching a rival to Airbnb called “Homes & Villas”, instead seeing it as an endorsement of his model. Indeed, Airbnb is punching back, letting hotels list rooms on its site and investing in properties custom-built for Airbnb rental.

The firm has grand designs to move beyond accommodation, and provide the entire trip: where to go, what to do and how to get there, not just where to stay. It intends to team up with airlines to “elevate” the experience of air travel. As part of this effort earlier this year Airbnb hired Fred Reid, the founding chief executive of Virgin America, though Mr Chesky is cagey about details. Already, users of the Airbnb Luxe service (where those castles, and other fancy venues, are listed) are assigned a “trip designer” to help them arrange transport, restaurants and other perks. Indeed, Airbnb’s main growth plans hinge on offering users not just a bed but an experience, “designed and led by inspiring locals” to boot. Airbnb Experiences, launched in 2016, uses the Airbnb platform to link guests with locals who can provide things like guided tours or cooking workshops. In June it added Airbnb Adventures, which arranges trips for up to 12 people in exotic places. People don’t travel to sleep, Mr Chesky likes to say, but to have an experience.

So far, so Uber. The ride-hailing giant, too, has expanded into areas like food delivery and road freight. But here the similarities end, starting with money. Whereas Uber has yet to turn a profit (and, sceptics say, never will), Airbnb says it is already profitable (to be precise, ebitda-positive) and has been since 2017, when it is thought to have earned $93m on revenues of $2.6bn. That is not the only distinction. For ride-hailing firms like Uber and Lyft, supply and demand must be matched in the same city; a driver in Manhattan is no use to a rider in Mumbai. Airbnb’s listings, by contrast, are global. Any property anywhere can potentially appeal to any user; a Mumbaiker may want to stay in New York. A telltale sign of Airbnb’s superior “network effects” is that whereas drivers for Uber often drive for Lyft, and vice versa, doing their utmost to play the platforms off against each other, most of Airbnb’s listings do not appear on any other platform.

Unlike Uber drivers, few of whom were previously riders, Airbnb hosts typically start out as renters first. Since it is a middleman for property rather than labour, Airbnb has avoided the controversy about “gig economy” exploitation, and the vexed question of whether ride-hailing firms should treat drivers as employees.

An accommodation with regulators

More broadly, Airbnb decided earlier than Uber to work with regulators rather than fighting them. It has struck deals in more than 500 big cities around the world. It says it has collected more than $1bn in hotel and tourism taxes in America alone and is “on track to become the world’s largest single collector of these taxes”.

A few worries linger. One has to do with its long-running feud with regulators in New York, who in February demanded data about New Yorkers who are listing properties for short-term rental on the site, in violation of local laws. Another pertains to protests in cities, such as San Francisco, where residents gripe that renting properties to tourists leaves fewer for long-term renters, making already high prices unaffordable. Airbnb has also grappled with the problem of some hosts being racist towards guests.

These concerns pose the biggest threats to a smooth stockmarket debut (expected to be by the trendy mechanism of a direct listing) in 2020. Airbnb’s most recent funding round valued it at $31bn. In the meantime, Mr Chesky tirelessly talks up its growth potential. This month Airbnb launched Animal Experiences, a subcategory of experiences, from honeybee therapy to llama-trekking to elephant-spotting. It is a reminder, if one were needed, that although they are often lumped together, Airbnb is not at all like Uber and Lyft—but a different beast entirely

How stories can help explain booms and busts

Once a narrative takes hold, it can drive markets

everyone knows, or thinks they know, the story of the Wall Street shoeshine boy. In 1929 Joseph Kennedy, patriarch of the Boston-Irish political clan, had an epiphany while his shoes were being cleaned. When the boy who shined his shoes offered him stock tips, he realised the stockmarket was about to implode. Kennedy promptly sold all his shares and took a short position, betting that the market would fall. When it crashed that October he made a killing.

In his new book, “Narrative Economics”, Robert Shiller, a Nobel laureate, offers this tale as an example of a contagious narrative that becomes part of folk wisdom. A story need not be accurate to spread. Mr Shiller searched archives of newspapers from the period, and could find no record of it. But he did find a similar kind of story in the Minneapolis Morning Tribune. The stockmarket, it said, could not yet have peaked because “we do not hear of the chamber maids and bootblacks who have cleaned up fortunes by lucky plays.” That story was published in 1915.

Whatever their provenance, says Mr Shiller, it matters which kinds of narratives are contagious and why. The ones that catch on have the power to influence behaviour. Stories sway decisions to hire or fire; to buy or sell; to spend or save. These individual choices, writ large, move markets and drive the business cycle. Fundamentals such as prices and profits are just one part of the reckoning. The stories that people tell themselves and each other matter at least as much.

To wield such influence, economic narratives must first become popular. Epidemiology offers a model for how they take hold. Disease epidemics are hump-shaped when plotted on a graph. In the rising phase, the rate of increase of newly infected people (the contagion rate) is faster than the recovery rate plus the death rate. When the recovery rate exceeds the contagion rate, the epidemic falls off. It is the same with stories. A growing number of “infected” people spread the narrative; later on comes a period of lost interest and forgetting.

The most contagious economic narratives drive boom-and-bust cycles. Such narratives have common features. They tend to be oversimplified models of reality and thus catchy. Their success may owe to a “super-spreader”, perhaps a celebrity, capable of infecting many people. And they are often part of a narrative cluster, which adds weight to their plausibility. The stockmarket boom of the 1990s was powered by an array of stories: the triumph of capitalism; the rise of the internet; the decline of inflation; and so on.

Some of the most contagious narratives are newer, more resistant variants of old ones. Behind every property boom is a mutation of the eternal narrative about the scarcity value of land. “Who could think of tilling or being contented with a hundred acres of land, when thousands of acres in the broad west were waiting for occupants,” says a tract documenting the follies of America’s land boom of the 1830s. The global housing boom that led up to the Great Recession of 2007-09 was driven by narratives that persuaded people to think of their homes as speculative investments in scarce land.

A science of economic narratives, of the kind Mr Shiller calls for, would require high-quality data. It would need regular surveys designed to draw out people’s justifications for their economic decisions. But interpreting even good data would be tricky. Narratives tend to be ignored by economists because their links to events are complex and variable—as Mr Shiller himself notes. Any official data on narratives would, once published, surely become part of the narrative itself.

The most prominent economic narratives today are not cheery. A monthly survey conducted by Bank of America finds that two-fifths of fund managers expect a recession in the next year. The same proportion thinks the trade dispute between America and China will never be resolved. Besides the trade war, fund managers list the impotence of central banks and a bubble in bond markets as their biggest worries.

Take these messages, add to them bleak surveys of business confidence worldwide, and you might decide to batten down the hatches for a coming storm. If so, you may still be troubled by a nagging doubt, a sense that the story does not quite add up. The usual end-of-cycle euphoria, which causes companies to make unwise investments and draws greenhorns into speculative assets, is not there. The chambermaids and bootblacks have gone missing.

Chinese firms are taking a different route to driverless cars

The path to a world of self-driving remains long and winding

The self-driving cars that cruise around South Ronghua Road look just like their American counterparts: chunky sedans with a rack of sensors bolted to the roof and a supercomputer in the boot. Beijing’s government has dubbed this south-eastern patch of the city Beijing-e-Town. It is one of a growing number of urban spaces across China designated for testing autonomous vehicles (avs). Digital lane markers can switch parts of the road to av-only on demand. Signs announce “National Test Roads”. Cars bear the decals of China’s leading av companies: Baidu, Pony.ai, WeRide.

For years Western carmakers have promised a world awash with avs by now, making roads safer and less congested (see table). That it is not shows just how tough a computational and regulatory nut self-driving is to crack. It increasingly seems that if avs are to become widespread, it may happen first not in the West but in China. A fleet of Chinese firms hope to profit handsomely in the process.

That may seem counterintuitive. Technologically, the West appears streets ahead. “Everybody is behind Waymo and Cruise,” concedes a senior Chinese av executive, referring, respectively, to a subsidiary of Alphabet (Google’s holding company), and of General Motors (gm), a giant carmaker. Waymo’s cars alone have self-driven more miles than all Chinese avs put together. Cruise has attracted $6.2bn of investment since gm bought the startup for $1bn in 2016. cb Insights, a research firm, estimates that $11.9bn has been invested in American av firms since 2014, compared with $4.4bn in China.

AVS with Chinese characteristics

Yet in the absence of driving software which can handle chaotic city streets, some Chinese firms are adopting an alternative strategy. They are turning the streets themselves into something that software can handle. The approach involves installing sensors to guide cars, writing and enforcing rules about how humans move around, designing (or redesigning) urban landscapes to be av-friendly and, critically, limiting av firms’ legal liability in the event of inevitable accidents. All this is easier in authoritarian China than in the West’s unruly, litigious democracies.

It also requires input from companies beyond dedicated av-makers. Mobile-network operators, such as China Mobile, and telecoms-equipment manufacturers, like Huawei, are building technology into their systems which may in time help cars along the road. Huawei wants its zippy 5g mobile antennas to take on a large part of the processing required to run an av—and a chunk of av profits. That leaves a smaller share of the pie for av companies. But the pie itself should grow more quickly. Lowering the cost of infrastructure per av deployed should accelerate its roll-out, notes Feng Hao of Bosch, a German engineering conglomerate which supplies high-tech components to Chinese carmakers.

In a recent speech China’s minister of industry and information technology, Miao Wei, said that the market for connected vehicles is projected to be worth 100bn yuan ($14bn) by next year. And as with just about anything, the potential demand for avs among 1.4bn Chinese is huge—$2trn by 2040, reckon consultants at McKinsey.

Chinese firms may prosper well before the eventual arrival of all-out avs. They already benefit from the leapfrog effect, says Wei Zhou, boss of China Creation Ventures, a venture-capital fund. Cowa Robot, one of his firm’s investments, has sold autonomous street-sweeping robots to authorities in Changsha, the capital of Hunan province. Horizon Robotics, which is valued at $3bn, furnishes specialised av computers for companies like Cowa.

The ability to make money now by automating simpler tasks keeps the firms going on the way to fuller autonomy—a luxury few American rivals, up against powerful incumbents like municipal-services companies, enjoy. At the same time, they are shielded from foreign competition by rules that limit overseas av companies to minority stakes in Chinese-led joint-ventures.

Chinese av companies have one final advantage over their Western peers: explicit support from the Chinese state. “There’s a lot of fuel coming from the government planning,” says an executive of one Chinese firm. The government wants companies like his to succeed, and is willing to use its autocratic muscle to build infrastructure, promote new technology and rewrite policy. It will spend up to $220bn on 5g by 2025, according to state media, and plans to install av infrastructure throughout the 2020s, including telecoms networks to capture data from vehicles and their surroundings, cloud-computing capacity to process these data and map services to guide the cars.

In addition, the authorities promote av-friendly standards and regulations. They can stitch “National Test Roads” into the urban fabric without the fuss Western authorities can expect from local residents. In one-party states like China “you have single-focus government that can make things happen”, sums up Amer Akhtar of DeepMap, a Californian maker of software for maps which avs need to navigate.

The road is not all smooth for China’s av industry. Together with the rest of Chinese tech, it is caught up in the Sino-American economic war. In May America’s government barred its companies from supplying Huawei, on the ground that its kit might allow Chinese eavesdropping. On October 7th another eight Chinese companies were added to the blacklist, including those working on things useful to avs, like computer vision .

The prospect of losing access to American technology is particularly worrisome for av companies, because the Chinese car industry relies heavily on foreign suppliers for the electronics that power modern vehicles. Last year Chinese imports of integrated circuits totalled $312bn, ten times the value of imported car parts. Chinese entrepreneurs eyeing the Chinese av market have founded plenty of promising startups—but many of them in Silicon Valley, subject to American law. Efforts to make more cutting-edge gubbins at home are moving slowly.

Nor are Chinese av developers immune from the biggest problem which afflicts their Western rivals. Like them, Pony.ai, WeRide and others continue to lose money. This may not change soon. The desire of motorists to own self-driving cars has yet to be tested. The business model of ride-hailing, where future profitability is in part predicated on the eventual removal of costly human drivers, looks shaky. Investors are growing impatient with loss-making firms such as Uber, which has shed a third of its stockmarket value since going public in May. It may take longer for software to become competitive with Homo sapiens in China, where labour remains relatively cheap. As one global car executive puts it, “If drivers are abundant but space on the road is not, the problems you should be solving first are not about taking the driver out of the car.”

China’s approach to self-driving reflects its attitude to development more broadly: heavy on infrastructure and government oversight, lighter on cutting-edge technology and civil liberties. It may one day prevail over the Western path to autonomy. Whether Chinese av companies will stand on their own four wheels as profitable businesses is another matter.

A sickly tale of price distortions

The sugar market is being rigged for social and political reasons

Oceans of cloying chai; coils of sticky jalebi—Indians cannot get enough of the sweet stuff. Already the world’s largest consumer of sugar (though with relatively low consumption per person, at 19kg per year, against a global average of 23kg), last year India pipped Brazil to become the world’s biggest producer. On September 30th its sugar industry’s book-keeping year ends. A reckoning is due.

A production bonanza, spurred by the brief scare of a shortfall in 2016-17 and by higher-yielding sugar-cane varieties, has driven India’s output to record levels. This year it is expected to hit 33m tonnes of crystalline sugar, compared with domestic demand of about 26m tonnes. The cumulative build-up of sugar means that the mills crushing fresh-cut cane could end up sitting on as much as 14.5m tonnes. That is thought to be the most sugar any country has stockpiled, ever.

India has long granted sugar-cane farmers special perks. It forces mills to pay sky-high prices for sugar cane and makes it hard for them to import it. Uttar Pradesh, the state with the greatest acreage of cane, sets an extra-generous “state-advised price”, which guarantees farmers a huge return on their basic costs and labour. Thanks to such artificial pricing, processing sugar anywhere in the country is more expensive than in other big producing nations. Mills often don’t pay their bills. This month some farmers in Uttar Pradesh are burning their crops in protest at the mills’ arrears. Abinash Verma of the Indian Sugar Mills Association notes wistfully that Australian and Brazilian mills buy cane at a price linked to what they can get for the juice, meaning they have healthy margins.

India rigs the sugar market for social and political reasons. The industry is a colossal employer of poor people, in particular in two politically weighty states, Uttar Pradesh and Maharashtra. The average farmer of sugar cane grows it on just 1-2 hectares and so must—the thinking goes—be protected from volatile world prices. Some 35m-50m people are directly employed in sugar-cane cultivation; 7.5% of the rural population depends upon the crop. Complicating things further, sugar barons often become politicians, and vice versa. A survey of 183 sugar mills in Maharashtra between 1993 and 2005 found that most had chairmen who had run for office.

World sugar prices are close to a ten-year low. Despite this India has sold 3.4m tonnes abroad this year (though that fell short of a target of 5m tonnes). Indonesia has promised to take more, though talk of shipping sugar-laden barges down riverways to Bangladesh was inconclusive. On August 28th India said it would pay mills a bonus of 10.5 rupees (15 cents) per kilo exported, adding up to 63bn rupees ($877m).

India thus supports farmers to grow sugar, and then subsidises its export. Far better to follow Brazil’s lead and help the industry diversify by using sugar-cane juice to distil ethanol, an alternative fuel. Tarun Sawhney of Triveni Engineering & Industries, which owns seven mills, says investors might be keener on the ethanol industry if the government set out a transparent framework for prices, rather than simply announcing them each year. Mr Verma believes that officials make sure that the price of ethanol tracks that of sugar cane. At which point the logic of price controls—such as it is—reaches a limit. Ethanol is a fuel for cars, not for people.

The Cheapest Oil Ever Sold

An elite government-appointed group called the National Conservation Commission is charged with taking a comprehensive inventory of natural resources in the United States and discover where resources are being inefficiently handled and even squandered. They come back to the United States Congress with an alarming report that the national supply of oil will be entirely used by within just 25 or 30 years more at the rate that the country is currently burning through the precious and decidedly finite fuel source.

The year is 1909. 

What sounds like the story of a dystopian future is, in fact, a now laughable gaff from our past. We now know that the National Conservation Commission’s findings reported back to Congress under the administration of Teddy Roosevelt, got a few things wrong. The domestic oil supply did not, in fact, dry up by 1939. And even though we are now using about 7 billion barrels of oil per year (as compared to just 750 million barrels annually in 1927) the U.S. oil production industry is still going strong. In fact, we are in the middle of a shale revolution and oil from both the United States and abroad continues to fuel the world and to a large degree control international markets and global economies.

Although it’s hard to believe now, there was a time not so long ago that drilling for oil was a completely novel concept. In fact, when the first commercial oil well was drilled in Titusville, Pennsylvania where natural oil deposits were so close to the surface that they were found floating on local waterways, oil had not even been drilled anywhere in the modern-day Middle East.

“America’s first commercial oil well was created at Titusville, Pennsylvania when a new technique was pioneered using a pipeline to line the boreholes to allow deeper drilling,” the BBC elaborates.

“The success of the well, plus a demand for kerosene, triggered an oil rush and began a major new industry.”

The Bowie-Gavin process of extracting oil (June 1927 issue of Science and Invention magazine)

The discovery and utilization of oil did not originate with the United States, however. According to a timeline put together by the BBC, “some of the earliest civilisations relied heavily on oil.” The ancient Babylonians, living in what is now modern-day Iraq, lived on such oil-rich lands that crude oil would bubble to the surface, where the locals would utilize it to waterproof their boats and mix into their mortar for construction. China also began utilizing oil at least as early as 600 BC, when they already transported the resource via pipeline--although these ones were crafted from bamboo instead of steel and plastic.

That being said, the United States certainly made its mark on the history of oil by quickly industrializing the resource that was now more valuable than ever in an age of rapid mechanization. It didn’t take long after that initial commercial operation In Pennsylvania for oil to become big business across the nation. It also didn’t take long before the first major oil price shock rocked the market.

After the Titusville discovery, more oil wells and oil companies quickly sprouted up around the region, catching the attention of a young entrepreneur named John D. Rockefeller, who founded the first iteration of what would become Standard Oil in 1867. Thanks to the rapid expansion in the production of oil and the introduction of pipelines, with Cleveland emerging as the center of oil refining, production and transportation of oil soon became extremely cheap, leading to a price shock and market panic. While the very first barrel of oil sold for $16 in 1859, according to figures from the U.S. Energy Information Administration, prices plummeted to less than 50 cents a barrel by 1861.

“When product prices declined,” reports History, “the ensuing panic led to the beginning of a Standard Oil alliance in 1871. Within eleven years the company became partially integrated horizontally and vertically and ranked as one of the world’s great corporations.”

As we well know, this was not to be the last of oil price volatility in domestic or foreign markets (or the end of major and supermajor oil company conglomerates, for that matter). In fact, 50 years later, oil would receive the shock of its commercial lifetime when the price of crude dropped to the unthinkable price of just over 10 cents a barrel.

Yes, you read that right. While you can see from the chart above that oil prices have had quite a bumpy ride throughout the less-than 200 years-long existence of the oil industry, the absolute rock bottom occurred during a perfect storm of unfortunate events, “when the opening of giant oil fields in the United States coincided with the Great Depression to create an enormous glut and sent prices tumbling to just 13 cents per barrel,” according to reporting by Reuters. 

While this now seems both far away and unthinkable, comfortably confined to the annals of history, think again--because this quote comes from an article terrifyingly titled “U.S. crude oil stocks return to 1930s crisis levels: Kemp” from just a few years ago, in 2015. Based on more data from our friends at the EIA, Reuters revealed that “commercial crude stocks at refineries and tank farms across the country rose to almost 407 million barrels on Jan 23, up from 398 million the week before [...] the highest since the agency started collecting weekly data in 1982.” The article goes on to qualify these findings, saying that “the parallels are not exact because production and consumption are so much higher now than in the 1930s. In 1931, stocks of 407 million barrels were equivalent to 160 days of nationwide production, while in 2015, the same stocks are just 44 days of production. But monthly records stretching to 1920 show inventories have returned to levels briefly neared in April 1981 but otherwise not seen since the years between 1924 and 1931.”

The United States oil industry has always been marked by volatility and a struggle between the desire for energy independence and the need to cooperate with global markets that are heavily swayed by powerful foreign interests like OPEC. the future of oil has never been murkier, while the U.S. shale revolution slowing but still producing a tidal wave of cheap oil while global communities and organizations like the UN, the IPCC, and millions of disenchanted youth around the globe call for an end to carbon emissions and a tough stance against climate change. What’s more, if the world carries on business as usual, we are going to keep growing closer and closer to a time when warnings of drying up oil reserves turn out to actually be true. If the history of the oil industry teaches us anything, it’s to expect the unexpected...and to diversify your portfolio.