The Vexing Relationship Between Gold, Bitcoin And The Dollar

Let’s tie two topics we have treated, one in exhaustive depth and the other in an ongoing series. They are bitcoin and capital consumption. By now, everyone knows that the price of bitcoin crashed. Barrels of electrons are being spilled discussing and debating why, and if/when the price will go back to what it oughtto be ($1,000,000 we are told).

As an aside, in what other market is there a sense of entitlement of what the price ought to be, and a sense of anger at the only conceivable cause for why the price is not what it ought?

Bitcoin, Postmodern Money

Anyways, during the incredible run up in price, we wrote a series of articles, entitled Bitcoin, Postmodern Money. We were not focused on the price of the thing, other than to discuss the problems of unstable price, and even rising price. We did not say the price will come down, or when. We said a rising price makes it unusable as money.

In an online forum, some folks insisted that bitcoin is a store of value (in contrast to the dollar). We said that even if you don’t think it will crash, a skyrocket is not a store. Here is the graph through Friday.

Obviously, the skyrocket is just Phase I. There is another phase afterwards. Will there be another skyrocket phase? Will it get higher than the last peak around $20,000? We don’t know, and obviously those who were calling for $1,000,000 when it hit $20,000 don’t know either—gold and silver is not the only market in which fools promote higher prices to credulous audiences. Our point is something else.

When the price crashes, as it has from $20,000 to $7,000—a loss of 65 percent by the way—everyone knows that dreadful losses have been incurred. It’s just that most people think the losses occurred when the price went down. If you take this idea to its logical conclusion, you’d have the central banking thesis in a nutshell: just prevent price from going down!

We disagree. The losses actually occurred on the way up.

Back in December, when you gave your $20,000 to someone to buy his bitcoin, that is where your capital was consumed. Let’s drill down in this.

The seller bought 15 bitcoin years ago, when they were selling for $50. So he forked over $750 to someone who had bought them previously. That guy took his profits, and ran all the way to the wireless store to buy the latest smart phone. His profit was the buyer’s capital. But it was only $750 so who noticed. Chump change.

But that buyer waited for the right moment (as we know in retrospect). He sold at $20,000. You bought one, and 14 more, for a total of 15. His total proceeds are $300,000. Even if he subtracts his original capital of $750, he still has a profit of $299,250. He ran to the Ferrari dealer.

To buy the Ferrari, he spends your capital. It was converted to an automobile. This, right here, is where the loss was incurred. Your capital is no more, and instead there is a consumer good which is happily being consumed by the bitcoin seller. At the end of 100,000 miles, the car will be all used up. Your capital will all be used up.

Suppose bitcoin had gone on to $120,000 and you sold out then. In that case, your capital was still consumed by the Ferrari guy. The difference is that someone else gave you $1,800,000 of his capital. So you feel whole. Not only whole, but you feel like you have made a profit. You can buy not just a Ferrari, but a yacht too.

And suppose the price went on from $120,000 to $240,000. And then to $520,000. And then to $1,000,000 and beyond. Nothing fundamental changes, only the number of participants in the scheme, and the total amount of capital converted to consumer goods.

We spell it out this way to illustrate that this process is both destructive and unsustainable. There is only so much capital to be consumed, and once all of it is (or all of it that people are willing to fork over to be consumed) is gone, then the skyrocket phase ends. It must, necessarily, end.

The skyrocket phase is unsustainable.

We have said all of the above already in part and in whole, and in several different ways. We have a new point to make, and we believe it is a very important one.

Defining Investment

There is something wrong with defining an investment to be when you hand off your capital to someone and wait for someone else to hand over more of his capital. This is his wealth accumulated over a lifetime of hard work, or his family estate accumulated over centuries. It is coming to you as a gain on your speculation, to be consumed as you will. This is nothing more than a conversion of one man’s wealth into another’s income.

It is unsustainable.

If you define investment this way, you are arguing that an important process of capitalism—arguably the key process—is unsustainable. You are saying that investment enriches the investor while impoverishing everyone else, via a process of consumption of capital. Or at least that capitalism includes such a destructive process.

This gives fuel to moralizers and power-lusters everywhere. It supports their feeling that capitalism is destructive, and that it’s socialism which properly stewards capital. But that is the exact opposite of the truth. Socialism is the system of capital destruction.

The truth is that in capitalism, there is not an ongoing process of wealth destruction. Sure, in a free market, people are free to bid up the price of anything as much as they want. However, there are no perverse incentives to push them to do so.

Investment is the financing of productive activity. The profit to the investor comes from the new production enabled by the investment. This is not only sustainable, but it enriches everyone. The investor makes a return on his investment, the entrepreneur makes a profit, his employees earn wages, and everyone else has access to more and better goods and services. Investment is win-win.

Speculation is win-lose. The losses occur during the skyrocket phase but are only realized during the crash phase.

Supply and Demand Fundamentals

This Report is issued on Tuesday, as yesterday was Easter Monday and a holiday in many parts of the world. Incidentally, Easter is approximately the time of year when the sun has moved to the midway point from its southerly and northerly extremes, as it revolves around Earth in its precessing orbit.

In the 11 times that the sun has revolved in its orbit around the Earth since our last Report, the yellow commodity went down $22 dollars, and the more-volatile white metal went down in money terms 22 cents.

By the time you are reading this, Las Vegas will have moved to Keith while Arizona moves away…

We all know that the sun does not revolved around Earth, and that travel does not mean that places on Earth move towards or away from you. The sun is the reference point for the Earth, and landmarks on Earth are the reference point for travel. Yet most still insist that the dollar is the reference point for gold. Though everyone knows that the dollar does down over long periods of time, thus there’s lots of discussion of 1990 vs 2000 vs 2018 dollars.

While most agree that gold must be measured in dollars, they measure the dollar in consumer prices. Or in euros, which are measured in consumer prices.

It’s enough to vex a monetary scientist!

Anyways, one thing is for sure. Gold becomes more abundant to the market at times, and scarcer at others. So let’s take a look at the only true picture of the supply and demand fundamentals for the metals, in light of the changes in their prices this week. But first, here is the chart of the prices of gold and silver.

(Click to enlarge)

Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio (see here for an explanation of bid and offer prices for the ratio). The ratio fell fractionally.

(Click to enlarge)

Here is the gold graph showing gold basis, cobasis and the price of the dollar in terms of gold price.

(Click to enlarge)

Look at that. The dollar goes up a bit (as reckoned objective, i.e. in gold, which is the inverse of reckoning gold in dollar terms, and saying that gold fell). And so does our measure of scarcity (i.e the cobasis, the red line).

The Monetary Metals Gold Fundamental Price rose $9 this week, to $1,449. Now let’s look at silver.

(Click to enlarge)

In silver, we see a nice little backwardation. That is, one could make a profit by decarrying silver. For the May contract, the return is close to 1 percent (annualized). Compare to the June gold contract, which is farther out, whose cobasis is below -1 percent. It’s not just the price of silver which is more volatile, so is its basis.

The basis of the near contract is especially volatile in silver, with its tendency to head for the moon (proving that banks are not naked short). Compare the near-expiry May silver cobasis to the Silver Basis Continuous (basis around +2 percent, cobasis around -2 percent).

From Switzerland To Singapore: The World’s Top Tax Havens

The UK-based Tax Justice Network’s new Financial Secrecy Index estimates that the ultra-wealthy are hiding up to $32 trillion in tax havens around the world, and while Switzerland gets the top spot on the new list, the U.S. is a not-so-distant second.

Not even major global scandals such as the Panama and Paradise papers have been able to slow the rise of the bigger and better tax havens, as global industry growth has billion-dollar asset owners looking for the ultimate haven to stow away gains. 

These are the top 10 tax havens in 2018, according to FSI:

#1 Switzerland

Switzerland, a global leader in asset management cornering 28 percent of the market share, is holding an estimated $6.5 trillion, more than half of which comes from abroad.

The attraction is a low tax base coupled with a top-notch banking system.

Switzerland is the ‘grandfather’ of global tax havens, and the world leader in cross-border asset management.

As FSI notes: “…the Swiss will exchange information with rich countries if they have to, but will continue offering citizens of poorer countries the opportunity to evade their taxpaying responsibilities.”

And it’s more secretive than the No 2 tax haven…

#2 The Unites States of America

(Click to enlarge)

The U.S. is on a tear on the competition for the top tax haven spot, rising for the third time in five years, and now capturing the number two slot. In 2015, the U.S. was in third place, and in 2013, it was in sixth.

Between 2015 and 2018, U.S. market share of global offshore financial services rose 14 percent, from 19.6 percent to 22.3 percent.

Delaware, Nevada and Wyoming are the most aggressive tax havens, often described as ‘captured states’.

When it comes specifically to offshore financial services, then, the U.S. now has the largest market share, rivalled only by the City of London, according to FSI, which notes that foreign country elites use the U.S. “as a bolt-hole for looted wealth”.

The baggage is piling up. Take the Delaware tax haven, for instance. It’s housing a company in “good standing” that is used for trafficking children for sex but can’t be shut down because it doesn’t have a physical presence in the state, according to Quartz.

#3 Cayman Islands

Third place go to this overseas territory of the United Kingdom, holding $1.4 trillion in assets managed through 200 banks. With more than 95,000 companies registered, this country is the world leader in terms of hosting investment funds. 

It’s a lot more “upmarket” today than it used to be in its heyday as a hotspot for drug smuggling and money-laundering. Now it deals with some of the world’s biggest banks, corporations and hedge funds.

On the FSI secrecy index, it ranks a 71, right between Switzerland and the U.S.

#4 Hong Kong

While one of the newer tax haven’s—it’s already hit fourth place and is managing some $2.1 trillion in assets (as of the close of 2015), along with $470 billion in private banking assets. It helps that it’s home to the third-largest stock exchange in Asia.

And when it comes to ultra-high-net-worth individuals, Hong Kong leads the pack, with 15.3 per 100,000 households.

The attraction is that companies incorporated in Hong Kong pay tax only on profits sourced in Hong Kong and the tax rate is currently at 16.5 percent. So in all likelihood, they’re paying zero taxes.  

In terms of secrecy, it ranks 71 alongside Cayman.

#5 Singapore

This country is the favorite offshore center servicing Southeast Asia (as opposed to Hong Kong, which caters to China and North Asia).

As of the end of 2015, Singapore was estimated to be holding $1.8 trillion in assets under management, 80 percent of which originated outside of the country. 

It has a secrecy ranking of 67.

#6 Luxembourg

This is a tiny state in the European Union that packs a massive tax haven punch. Despite its size, it is said to control 12 percent of the global market share for offshore financial services. The FSI estimates that its 143 banks are managing assets of around $800 billion.

Luxembourg has a secrecy ranking of 58.

#7 Germany

Major tax loopholes and lax enforcement have bumped Germany to number seven on the FSI’s list, despite being one of the world’s biggest economies and not intentionally focusing on global financial services. It corners about 5 percentof market share in the sector, and ranks 59 in terms of secrecy. 

#8 Taiwan

This is the first year Taiwan has made the Top 10 list, bumping off Lebanon, which now sits in 8^th place.

Beijing’s “One China” policy is largely responsible for Taiwan’s ascendancy on the tax haven scene because it managed to fly under everyone’s radar, not participating in International Monetary Fund (IMF) statistics thanks to Chinese pressure.

And no one’s entirely sure how much offshore money is flowing through here.

#9 United Arab Emirate of Dubai

Dubai, servicing massive regional oil wealth, gets the highest secrecy rating of them all, at 84. Its offshore facilities are exceedingly complex and offers a low-tax environment and lax enforcement.

It’s also recently been the target of an EU tax haven blacklist.

#10 Guernsey

This small tax haven jurisdiction in the English Channel has risen seven places on the list since 2015, and accounts  for 0.5 percent of the global trade in offshore financial services. Essentially, this is nothing more than a ‘captured state’ with a high secrecy rating of 72.

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The next Japan is not China but Thailand

Once the wildest of emerging markets, Thailand is ageing fast. Its economic policymakers need to change course

TWENTY years ago Thailand was the most torrid of emerging markets. After a spell of overheated growth and wide current-account deficits, it had exhausted its foreign-exchange reserves and lost its currency’s peg to the dollar. In the aftermath, inflation approached 10% and the Bank of Thailand (BoT) struggled to restore confidence in the baht. In a widely cited paper by Romain Rancière of the University of Southern California and two co-authors, Thailand was used as a stark illustration that dynamism and danger, fast growth and occasional crises, went hand in hand.

A few of today’s emerging markets can still set the pulse racing—Turkey, for example, has combined breakneck growth with double-digit inflation and a worrying slide in the lira. But Thailand is not one of them. Private investment expanded by only 1.7% last year. Thailand’s sovereign bonds yield less than America’s. Inflation is once again a worry, not because it is too high, but because it is so stubbornly low. Consumer prices rose by only 0.8% in March, according to figures released this week. Inflation has remained below the BoT’s target range of 1-4% for 13 months in a row. Core inflation, excluding raw food and energy, has been below 1% for almost three years.

“It’s Japan,” says one veteran observer of Thailand’s economy. “It’s got Japan’s demographics from 25 years ago, [and] it’s on the Japanese path of zero inflation, very low interest rates and a big current-account surplus.” By 2022 Thailand will be the first developing country to become an “aged” society, according to the BoT, with more than 14% of its population over 65. The proportion of elderly is rising faster in Thailand than in China.

But a grey future is no excuse for a sedentary present. Thailand’s demography should instead impart a sense of economic urgency. The country should be investing in infrastructure and machinery to ensure that tomorrow’s smaller workforce is well equipped to provide for a large population of pensioners.

Unfortunately, Thailand’s economic policymakers also exhibit some of the macroeconomic passivity that once paralysed Japan. The BoT has not cut interest rates since April 2015. At the BoT’s most recent meeting one member even voted for an increase, lest people grow too accustomed to easy finance.

This conservatism runs deep. The BoT was founded in 1942, shortly before wartime hyperinflation that left a lasting impression on Thai policymakers. The central bank’s first governor liked to cite Weimar Germany as an example of what could go wrong if price stability were neglected. The bank’s longest-serving boss, Puey Ungphakorn, believed that the money supply should not, as a rule, grow more than two to three percentage points faster than GDP. “In his view, economic stability was more desirable than rapid growth,” write Peter Warr and Bhanupong Nidhiprabha in “Thailand’s Macroeconomic Miracle”, published in 1996.

Thailand might be worried about America’s response to further monetary easing, which would help reverse the baht’s recent strength. America will decide this month whether to label any of its trading partners “currency manipulators”. Thailand is the only country in Asia that meets all three of its criteria (a $20bn trade surplus with America, a big current-account surplus overall and sizeable reserve accumulation), points out Capital Economics, a consultancy. But Thailand is probably too small to attract much interest, let alone ire, from Washington.

In the absence of monetary easing, Thailand must rely on more expansive fiscal policy. Unfortunately public investment, which shrank by 1.2% last year, has been beset by backtracking and delays. Only in December did workers break ground on a long-awaited high-speed rail project linking Thailand, Laos and China.

Thailand is also moving a little closer to Japan in its growing antipathy to immigration. The government last year imposed tough penalties on illegal migrants, many of them from Vietnam and Myanmar, who are viewed as stealing jobs, not rejuvenating an ageing workforce.

Thailand is keener to import spenders. Receipts from foreign tourists rose by 11.7% in 2017, boosting growth against a backdrop of weak domestic demand. The country is justly famous for sparkling beaches, pulsating nightlife and beguiling culture. Now the tourism authority wants visitors to discover its “new shades”. In economics, Thailand’s new shades are rather drab.

Is Bitcoin Mining Still Profitable?

Bitcoin has been badly hammered in 2018, losing about 70 percent of its value in the first 3 months of the year. There's no doubt that bitcoin investors who took a ‘HODL’ approach when the currency was approaching 20k in late 2017 are deeply in the red and probably wondering when the nightmare will finally come to an end.

But if they’re feeling the heat, bitcoin miners are feeling it, too.

Investing in bitcoin for a speculator return is a pretty straight-forward business --you simply buy the digital coins then hope or pray that prices will shoot up at that you have enough time amid the crazy volatility to sell them before that changes.

Solving those fiendish algorithms that increase the size of the bitcoin pie for everyone, aka bitcoin mining, is not as easy, though.

Cryptocurrency miners use high-end, power-guzzling GPU hardware to solve equations within a block and receive block rewards in the form of digital tokens of the currency that's being validated.

Bitcoin mining is a business like any other, and needs to turn a profit to be worthwhile.

The profitability of a mining operation is not only determined by the price of the currency but also by the cost of the mining hardware, power consumption, efficiency of the hardware (how much power it consumes to perform a specific number of hashes) and fees charged by mining pools (if you are using one). Large mining hardware dissipate a lot of heat and therefore also incurs substantial cooling costs.

So, are bitcoin miners still making money? Not really.

Most bitcoin mining costs are fairly stable and not too hard to determine. The big wild card here is the price of bitcoin, since miners enter the red zone whenever prices fall dip below the break-even level.

Luckily for us, Wall Street has taken the trouble to work out bitcoin's break-even level.

According to Tom Lee of Fundstrat Global Advisors, bitcoin's breakeven mining costs clock in at $8,038, implying that miners are currently losing ~$1,190 for every bitcoin mined, based on 1 April prices.

If you have set-up a mining rig at home, there are several online calculators available to work out your profits.

Let's assume you own the most powerful and efficient mining rig-- the AntMiner S9 --at a cost of $2,000, capable of performing 13.5 Tera-hashes/second, consumes 0.098 Watts/Gigahash(~1,400W at full power) and your mining pool charges you 2.5 percent.

Using this 99Bitcoin calculator and assuming a power cost of $0.06/kWh, you will lose ~$380 after one year of mining at current bitcoin prices.

Losses get worse as you lower the mining period due to high hardware costs. Your breakeven costs would be $7,842--all else remaining constant, implying again that you would be losing a ton of money at current bitcoin prices.

Last man standing

However, it’s important to note that these breakeven costs only apply to small mining operations. Power costs have a large bearing on mining costs, and miners with access to cheap power can continue mining profitably at much lower prices. Assuming everything else remains constant, you would need to lower your power costs to $0.028 just to breakeven at current prices.

That’s why Chinese miners are likely to be the last men standing after everybody else calls it quits.

Miners in the country have access to cheap hydropower and also a big incentive to send money overseas to evade restrictive government controls. Bitcoin prices would probably have to plunge as low as $3,000-$4,000 before Chinese operators decided to throw in the crypto towel.

92 Percent Of Blockchain Projects Are Doomed To Fail

Cryptocurrencies have been getting massacred, with the crypto market losing 70 percent of its value since the beginning of 2018. But Blockchain, the cryptographically secure digital ledger technology at the core of cryptos such as bitcoin and ether, is still going strong.

With seemingly endless potential applications outside the cryptocurrency sphere, Blockchain is threatening to disrupt everything from real estate to logistics, cloud storage and healthcare. It’s even narrowing in on voting.

The general consensus though has been that the finance industry stands to benefit the most from the technology by helping to cut out middlemen, speed up transactions and lower costs in capital markets.

It therefore comes as a surprise that some of the biggest and most promising fintech projects have lately hit the skids as hype finally meets reality.

The projects have been grounded for various reasons, top among them being high costs and lack of industry readiness. The biggest casualties so far include projects by global financial icons-- BNP Paribas, Depository Trust and Clearing Corp.(DTCC) and SIX Group.

Getting past the starting line

in 2016, French bank BNP Paribas announced that its securities division had partnered with startup SmartAngels to build a blockchain-based platform that private businesses can use to manage their securities. But the project wasn’t well thought-out. BNP has shelved it in favor of 'an enterprise-wide platform where the entire post-trade ecosystem can co-operate.'

DTCC, aka the Wall Street book-keeper, says it has slammed the brakes on a blockchain project for repo agreement transactions 'because the same results can be achieved more cheaply using non-blockchain technology.'

Meanwhile, post-trade services provider SIX has simply stated that it has discontinued its securities management blockchain solution because it 'wants to move in a different direction.'

Although these organizations say they are still pursuing other blockchain projects, the spectacular failure of their pilots clearly demonstrates how hard it is to get past the starting line with a blockchain project.

And, they are not alone.

Financial consulting firm Deloitte has tracked more than 86,000 blockchain projects on GitHub since 2009. Only 8 percent of the projects have been successful with the vast majority barely limping past their first birthday.

Many more could bite the dust

Unfortunately, the very high attrition rate is probably par for the course in the blockchain development industry.

A common theme for many failed blockchain projects is that they have become solutions in search of problems rather than the other way around. In short, developers have been falling in love with their solutions even before they have identified the problems they are going to solve and found validation of the problem-solution fit with actual users.

They say everything looks like a nail when the only tool you have is a hammer. Developers are acting likewise by throwing blockchain at every problem without taking time to pick projects that are likely to provide the greatest utility.

In fact, blockchain sits smack in the middle of 'peak of inflated expectations' in the 2017 Gartner's Hype Cycle below.

If Gartner's estimates are right, it will take another 5-10 years before blockchain reaches a plateau of productivity. Lots of blockchain projects are likely to fall along the way before developers hit a trough of disillusionment and finally come to terms with what they can, and cannot do, with blockchain technology.

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Wakandanomics

“Black Panther” resists one economic myth but perpetuates another

“THIS will require a quick lesson in global economics…bear with me,” says Erik Killmonger, the muscular villain in “Black Panther”, a long-running Marvel Comics series. In that saga and the recent film it inspired, Killmonger and the Black Panther vie for the throne of Wakanda, a fictional African kingdom little known to the outside world. A land of great wealth and technological sophistication, it lends itself to several quick lessons in economics. Bear with us.

The source of Wakanda’s riches is its “great mound” of vibranium, a versatile ore left behind by a meteor strike, which can absorb sound and motion. Like other deposits of natural treasure, Wakanda’s vibranium attracts some vicious intruders. But unlike some other resource-rich countries, Wakanda has never succumbed to outside foes.

That has helped it escape the “resource curse”, in which natural riches keep a country poor by crowding out manufacturing or ushering in predatory government. The curse is greatly feared. But Wakanda’s success in eluding it is not as fantastical as widely believed. Many resource-rich economies, including Botswana and Norway, have prospered without superheroic help. According to an article in 2015 by Brock Smith of Montana State University, the 17 countries that discovered big oil, gas or diamond deposits after 1950 achieved GDP per person 40% higher on average than if they had continued to evolve in line with their peers.

Belief in the resource curse may partly rest on a statistical illusion. Countries that use natural riches well tend to enjoy vibrant economies of which resources are a diminishing share. As their GDP grows, the size of their mining, drilling or logging sector relative to their GDP falls. They may then appear less “resource-rich” than stagnant economies that depend heavily on natural bounty. Though vibranium is woven into Wakanda’s flourishing economy, mining it is probably now a small part of GDP, especially as its near-inexhaustible supply has presumably driven down its price, giving it a smaller weight in the national accounts.

Wakanda’s stewardship of its natural resources is, however, unusual in another respect. The country not only mines vibranium but designs and builds a dazzling variety of downstream applications. They include a nano-tech panthersuit that absorbs blows and bullets, then echoes the energy back against its source. The suit is matched by sneakers that silence the king’s footsteps, replacing sandals that his sister mocks (“What are those?”). The applications extend to weaponry and transport, such as the royal talon fighter that zips from Wakanda to Oakland, California, and the vibranium rail above which high-tech chariots levitate.

“Wakanda’s upstream, midstream and downstream mineral sector are entirely controlled by Wakanda itself,” points out Nicola Woodroffe of the Natural Resource Governance Institute, a think-tank in London. It is as if Botswana not only mined, cut and polished diamonds, but also designed and produced the world’s diamond necklaces, drills and bearings. It is as if Norway had a monopoly on oil, petrochemicals and plastics.

Comics deal in fantasy and wish fulfilment. And it is the economic wish of many resource-dependent countries to master the more refined products that lie further along the value chain. In the minds of many policymakers, this is “a logical, natural progression”, said Ricardo Hausmann, Bailey Klinger and Robert Lawrence of Harvard University in a paper in 2008. In pursuit of “beneficiation”, as it is called, policymakers often impose heavy taxes or even bans on the export of raw, unprocessed minerals.

In the film Wakanda goes further still, barring the export even of finished, manufactured items. Its economy prospers in seclusion and autarky. The sole supplier of vibranium and its applications, it is practically the sole buyer as well. It is as if Norwegians were the only consumers of petrochemicals, or the people of Botswana the only wearers of diamond necklaces.

In reality, rather than Marvel, forced beneficiation is rarely beneficial. Countries blessed with natural resources are not always blessed with the combination of labour, capital, skill and infrastructure required to succeed further down the same production chain. The best place to cut and polish diamonds is not Botswana, with its population of 2.3m, but coastal India, which can bring many more hands to bear.

Countries often find it easier to move diagonally, rather than vertically, graduating into products that belong to different value chains but require similar mixes of labour, capital and knowhow. According to Mr Hausmann and his co-authors, only a third of raw-sugar exporters also export confectionery. But two-thirds export clothing. Only a third of raw gold and silver exporters also export jewellery and silverware. But over half export fish.

Erikonomics

Not every Wakandan supports the country’s economic isolation. Indeed, the comic-book version of Killmonger (unlike his on-screen counterpart) reveals a rival economic creed of his own. Boasting an MBA, he has turned his Wakandan birthplace into a corporate playground, including what look like a Burger King and a McDonald’s. After he lays his hands on Wakanda’s sacred heart-shaped herb, which enhances strength, speed and the senses, his first thought is to find a way to market it. When the Black Panther tries to thwart his economic schemes by expropriating all foreign companies, Killmonger foresees the result: financial panic, retaliatory sanctions and economic chaos.

Fortunately for Wakanda’s economy, the Black Panther soon reverses course. After battling zombies, aliens, rogue bodyguards and the Hulk, he turns his might to restoring market confidence. What superpower or mystical rite allows him to pull off this heroic feat? A peg to the American dollar.

India’s economy is back on track. Can it pick up speed?

Narendra Modi needs to pass further reforms if India is to fulfil its potential

IT IS easy to be awed by the Indian railway network. The 23m passengers it carries daily travel, in total, over ten times the distance to the sun and back. It is just as easy to find it unimpressive. Delays are frequent and trains antiquated. It takes 14 hours to get from India’s capital, Delhi, to its commercial hub, Mumbai. The equivalent trip in China—from Beijing to Shanghai, a similar distance—takes just over four hours.

Similarly, India’s economy can be seen in two lights. Its long-term growth rate of 7% a year has proved far more dependable than the rail timetable. GDP has doubled twice in the past two decades. Yet deep poverty still lingers and jobs are scarce. And Indian growth has been left in the dust by the Chinese express (see chart).

After slow running for much of 2017, India is now near to full throttle. Growth of 7.2% in the three months to December put it ahead of China (which grew at a relatively leisurely 6.8%) and made it once again the world’s fastest-expanding big economy. Expectations for the rest of 2018 are similar.

Fans of Narendra Modi, India’s prime minister, credit structural reforms he has made over the past four years. The more plausible explanation is that Indian growth has returned to trend after a bout of political meddling. “Demonetisation” in late 2016, when most banknotes ceased to be legal tender overnight, squeezed growth to 5.7% in the first half of last year. New notes were printed, but last July, even as life was returning to normal, a new goods and services tax replaced hundreds of local and nationwide taxes, once again throwing the economy into confusion.

At least the tax overhaul, which knits India into a single market for the first time, will eventually increase growth. Boosters speak of annual GDP gains of 8-10% in the years ahead. That would not be far short of China in its boom years.

Renewed economic vim would be welcomed by the government in the run-up to elections due by early 2019. Even at 7% growth, too few jobs are created to absorb roughly 1m new entrants into the workforce every month. More than 20m people recently applied for 100,000 railway jobs, as train drivers, technicians and porters. A third of 15- to 29-year-olds are not in school, training or jobs. Mr Modi’s opponents have found that the theme of scarce employment opportunities has played well with voters. Faster expansion would help.

But predictions of Chinese-style growth seem over-optimistic in the absence of deeper economic reforms. Doing business in India has become easier in some ways, such as getting permits or bringing in foreign capital. But the labour market is as gummed up as ever. Private businesses find securing land for new factories near-impossible. Whole swathes of the economy, from coal and steel to banking and condom-making, remain at least partly under state control.

The hangover from a bout of over-exuberance dating from before the global financial crisis has left companies financially stretched and with enough production capacity to be able to delay capital expenditure. A few sectors are now contemplating investment—only to find that banks may be unable to provide finance. Loans written off or considered likely to turn sour are near a fifth of the loan book at state-owned lenders, which have about 70% of market share. The resulting losses have left banks short of capital for fresh loans, though a planned bail-out and new bankruptcy code should, belatedly, help clear up the mess. Worse, a recently discovered fraud at a state lender, where rogue employees allegedly facilitated $2bn of loans to a diamond merchant who is now nowhere to be found, has highlighted their weak governance.

Early in Mr Modi’s premiership growth was helped by the tumbling price of oil, which India imports in vast quantities. But the price of crude, which fell from $110 to $30 a barrel during his first two years, has since rebounded to $65. Any higher and some familiar problems, namely current-account deficits, budget shortfalls and high inflation, will make an unwelcome return. Yields on Indian government bonds have risen from 6.4% last summer to around 7.5%, indicating some increase in investor concern.

Although India’s growth has depended less than, say, China’s on exports, it has benefited from a buoyant global economy and an open trade environment. The latter may be changing. Indian IT firms are facing restrictions on their employees working in America, challenging their business model. And India itself has taken a protectionist turn, recently imposing tariffs on a wide range of products, from mobile phones to perfume, in an ill-conceived bid to encourage domestic production.

“India is a country that disappoints both optimists and pessimists,” notes Ruchir Sharma of Morgan Stanley, a bank. Naysayers who expected political meddling to hit the economy hard underestimated its resilience. Like commuters whose train has finally pulled in, optimists feel their time has come. All aboard?

Nifty

Modify stoploss to 10150

China wants to reshape the global oil market

But talk of a petroyuan is premature

TRADITIONALLY, to count as an oil power a country had to be a big producer of the black stuff. China is the world’s biggest importer but still wants to break into that exclusive club. On March 26th it launched a crude futures contract in a bid to gain more clout in the global market. Some think that, if successful, the yuan could start to displace the dollar in oil trading. For now, though, that is fanciful.

A previous attempt by China to introduce oil futures, in the early 1990s, failed because of unstable pricing. This time regulators prepared methodically. To ward off speculators, notorious in Chinese markets, they made the storage of oil very expensive. Volumes were light in the first few days of trading—less than a tenth of the averages for similar contracts in New York and London. But all went smoothly. It was a good, if modest, start.

China has two goals. The basic one is to help its companies hedge against volatility. Chinese refiners and traders have struggled to manage currency risks because of capital controls. An onshore contract that lets them lock in the future price of oil in yuan is thus appealing, says Michal Meidan of Energy Aspects, a research firm.

More ambitiously, China hopes to create a standard for oil pricing as a rival to Brent in Europe and West Texas Intermediate in America—a standard that reflects its own supply and demand. For that to happen it needs to attract overseas participation. So, in a first for commodities in China, the contract, hosted on the Shanghai International Energy Exchange, is open to foreigners. Trading runs until 2.30am Chinese time, to overlap with daytime in America and Europe. Glencore and Trafigura, two of the world’s biggest commodity traders, got into the action on the contract’s debut.

Nevertheless, the same restrictions that make it hard for domestic firms to trade abroad will deter foreigners from going deeply into China’s market. To gain access to it they must open special onshore bank accounts. And they cannot use their profits for any other investment in China.

One group of producers who might in theory be tempted are those under American sanctions. For Iran, Russia and Venezuela, trading oil in yuan would wean them off dollar-based earnings and so help them steer clear of American banks. But they chafe under sanctions precisely because they want to be free to spend their cash as they see fit. So long as China quarantines its financial system from the rest of the world, talk of a petroyuan replacing the petrodollar will be premature.

What if China corners the cobalt market?

Nickel could make a good substitute—provided car batteries don’t catch fire

COBALT derives its name from Kobold, a mischievous German goblin who, according to legend, lurks underground. For centuries it vexed medieval miners by looking like a valuable ore that subsequently turned into worthless—and sometimes noxious—rubble. Once again it is threatening to cause trouble, this time in the growing market for batteries for electric vehicles (EVs), each of which uses about 10kg of cobalt. The source of mischief is no longer in Germany, though, but in China.

It is widely known that more than half of the world’s cobalt reserves and production are in one dangerously unstable country, the Democratic Republic of Congo. What is less well known is that four-fifths of the cobalt sulphates and oxides used to make the all-important cathodes for lithium-ion batteries are refined in China. (Much of the other 20% is processed in Finland, but its raw material, too, comes from a mine in Congo, majority-owned by a Chinese firm, China Molybdenum.)

On March 14th concerns about China’s grip on Congo’s cobalt production deepened when GEM, a Chinese battery maker, said it would acquire a third of the cobalt shipped by Glencore, the world’s biggest producer of the metal, between 2018 and 2020—equivalent to almost half of the world’s 110,000-tonne production in 2017. This is likely to add momentum to a rally that has pushed the price of cobalt up from an average of $26,500 a tonne in 2016 to above $90,000 a tonne.

It is not known whether non-Chinese battery, EV or consumer-electronics manufacturers have done similar, unannounced deals with Glencore. But Sam Jaffe of Cairn Energy Research Advisors, a consultancy, says it will be a severe blow to some firms. He likens the outcome of the deal to a game of musical chairs in which Chinese battery manufacturers have taken all but one of the seats. “Everybody else is frantically looking for that last empty chair.”

Mr Jaffe doubts the cobalt grab is an effort by Chinese firms to corner or manipulate the market for speculative ends. Instead, he says, they are likely to be driven by a “desperate need” to fulfil China’s ambitious plans to step up production of EVs.

Others see it more ominously. George Heppel of CRU, a consultancy, says that, in addition to GEM sweeping up such a sizeable chunk of Glencore’s output, China Moly may eventually ship its Congo cobalt home rather than to Finland, giving China as much as 95% of the cobalt-chemicals market. “A lot of our clients are South Korean and Japanese tech firms and it’s a big concern of theirs that so much of the world’s cobalt sulphate comes from China.” Memories are still fresh of a maritime squabble in 2010, during which China restricted exports of rare-earth metals vital to Japanese tech firms. China produces about 85% of the world’s rare earths.

Few analysts expect the cobalt market to soften soon. Production in Congo is likely to increase in the next few years, but some investment may be deterred by a recent five-fold leap in royalties on cobalt. Investment elsewhere is limited because cobalt is almost always mined alongside copper or nickel. Even at current prices, the quantities needed are not enough to justify production for cobalt alone.

The resulting higher prices would eventually unlock new sources of supply. But already non-Chinese battery manufacturers are looking for ways to protect themselves from potential shortages. Their best answer to date is the other “goblin metal” closely associated with cobalt, nickel, whose name comes from a German spirit closely related to Old Nick.But demand could explode if EVs surge in popularity. Mr Heppel says that, though most cobalt is currently mined for batteries in smartphones and for superalloys inside jet engines (see chart), its use for EVs could jump from 9,000 tonnes in 2017 to 107,000 tonnes in 2026.

The materials most commonly used for cathodes in EV batteries are a combination of nickel, manganese and cobalt known as NMC, and one of nickel, cobalt and aluminium known as NCA. As cobalt has become pricier and scarcer, some battery makers have produced cobalt-lite cathodes by raising the nickel content—to as much as eight times the amount of cobalt. This allows the battery to run longer on a single charge, but makes it harder to manufacture and more prone to burst into flames. The trick is to get the balance right.

Strangely, nickel has not had anything like cobalt’s price rise. Nor do the Chinese appear to covet it. Oliver Ramsbottom of McKinsey, a consultancy, says the reason for this relative indifference dates back to the commodities supercycle in 2000-12, when Indonesia and the Philippines ramped up production of class-2 nickel—in particular nickel pig iron, a lower-cost ingredient of stainless steel—until the bubble burst. The subsequent excess capacity and stock build-up caused nickel prices to plummet from $29,000 a tonne in 2011 to below $10,000 a tonne last year.

As yet, the demand for high-quality nickel suitable for EVs has not boosted production. Output of Class-1 nickel for EVs was only 35,000 tonnes last year, out of total nickel production of 2.1m tonnes. But by 2025 McKinsey expects EV-related nickel demand to rise 16-fold to 550,000 tonnes.

In theory, the best way to ensure sufficient supplies of both nickel and cobalt would be for prices to rise enough to make mining them together more profitable. But that would mean more expensive batteries, and thus electric vehicles. Only a goblin would relish such a conundrum.