Logistical Sandpiles

By John Mauldin 


At the risk of overusing a favorite metaphor, today we’ll talk about sandpiles. 

My past sandpile stories focused on financial crises. 

The same principle holds in any complex system, though. 

Everything works until suddenly it doesn’t. 

As Minsky said, stability breeds instability. 

Then one additional grain of sand triggers a collapse.

Today’s financial system is complex but our logistical systems are, too. 

The modern economy that brings us so many wonderful goods and services is a breathtakingly complicated web of production, transportation, and storage capacity… and most important, the marvelously complex division of labor among millions of people around the world. 

When it all works, we (at least in the developed countries) have on-demand access to luxuries unimaginable even a few generations ago, and we regard it as normal.

The problem is complex systems are inherently fragile

The optimization that makes them cost-effective also removes the redundancies that make them resilient. 

Things can fall apart quickly when some unforeseen event occurs. 

Or an unforeseen sequence of events, which is what’s happened.

The ongoing, intensifying supply chain problems are raising costs in ways that add broad inflation pressure everyone will feel. 

And the zeitgeist in the workplace is literally changing before our eyes. 

Patterns that have held since the Industrial Revolution are changing. 

If you’re an employer, it is frightening. 

If you’re a researcher, it is fascinating. 

And when you are a consumer, it becomes frustrating. 

Whether you feel it directly or not, you’re going to feel the downstream effects.

System Failure

Remember those first weeks in January/February 2020 when the virus emerged in China? 

Many in the West initially (and optimistically, it turned out) thought it would stay there. 

News focused on the closure of much of the Chinese economy, and the spillover effects on the rest of the world missing its shipments.

Now, with vaccines helping on the medical side, the economic and supply chain effects are again top of mind. 

Increasingly they are personal experiences, not just news stories. 

You’ve probably been unable to find favorite products, suffered shipping delays or otherwise had to modify once-routine plans. 

Sometimes these are minor annoyances. 

But for a business depending on a steady flow of inventory or components, it can be a catastrophe.

Why is all this happening? 

It’s not any one cause. 

Remember, we are talking about not just a complex system, but multiple complex systems interacting with other complex systems. 

Getting even a simple device manufactured at scale is a ballet dance in itself. 

Then it has to get packed, loaded, shipped across the continent or the sea, unloaded and delivered to the place you buy it. 

Every step in the process is a chance for something to go wrong. 

And, this all being a giant sandpile, it’s vulnerable to collapse.

Last week George Friedman, being a geopolitics expert, noted these shipping and production problems are what you expect in wartime, when countries are shooting at each other. 

They aren’t normal in a growing global economy. 

Everyone has incentive to avoid them. 

So why are they happening?

George sees “many systems failing and interacting at the same time,” the key one being a global reduction in labor supply. 

But what’s causing that? 

You can point to COVID restrictions, government benefits, inadequate child care, etc., but they still don’t explain the magnitude of what we are seeing. 

This lack of clarity is troubling.

This is what is most frightening about this development. 

Many agree that a labor shortage is a key driver of the supply chain problem. 

Yet the dominant theories of what happened, while not refuted, have many weaknesses. 

That means that there must at least be additional explanations. 

So, we are facing a depression, originating not in financial events but in the displacement of people, transport and other elements. 

Facing a system failure with a known cause is one thing. 

Facing one for which you have no model is another.

To be clear, George knows “depression” is a strong word. 

He’s not saying we are there yet. 

He thinks we could get there if these problems continue and intensify—and it’s hard to argue they won’t, given our inability to explain them, much less solve them. 

A logistics system collapse would be unlike a financial system collapse, but maybe even more harmful. 

That’s why early signs of it should concern us.

Limited Control

We can get a hint of where the US may be headed from events in Britain, where a severe fuel shortage recently hampered activity. 

The problem wasn’t the petrol itself, but a shortage of truck drivers to deliver it. 

But that didn’t especially matter to people lined up at gas stations. 

The crisis is now easing somewhat with help from military drivers.

The causes are murky. 

Many point fingers at Brexit-related immigration changes, but visas are available. 

The drivers weren’t on strike. 

No natural disasters occurred. 

The country had dropped most COVID restrictions months earlier, so people weren’t suddenly driving more. 

We just don’t know and, as George noted, that’s the frightening part.

As for the US, I’m not aware of any widespread fuel shortages but there are scattered reports. 

Here’s one from the Dallas area.


Source: Twitter

I don’t know how common this is, but if it’s really persisted for a month then it could get worse. 

Driving a fuel tanker is hazardous work requiring specialized skills and training. 

Now, with many other jobs available at competitive pay, it’s no wonder drivers are scarce.

Delivering fuel (or anything else) requires an entire chain, each link of which is vulnerable. 

Break any one of them and nothing moves. 

It doesn’t matter if the US has plenty of gasoline if it can’t reach your vehicle.

Heartland Express, a major medium- to short-haul trucker, said in its earnings report yesterday:

“We also believe that hiring and retention of employees has reached levels of unprecedented challenge across our industry for both carriers and shippers. 

We continue to partner with our customers who have had to navigate their own employment-related disruptions in order to deliver our strong operating results during the quarter. 

We believe that this shared challenge of hiring and retaining both drivers and other supply chain critical employees will continue in the year ahead. 

To address that challenge, we have increased wages and enhanced the compensation features for our drivers multiple times in the last 12 months.

Major shipping company JB Hunt echoed the same theme. 

Labor is clearly a big part of the problem, so let’s go deeper.

An Extraordinarily Tight Labor Market

Unemployment is officially a 4.8%. 

The St. Louis Fed’s FRED database tells us there are 7,674,000 officially unemployed workers. 

There are another almost 6 million workers who are technically not in the labor force who would like a job. 

The chart below shows over 6 million jobs available right now.


Source: FRED


But something interesting is happening. 

We just came off a recession, barely recovering in a Stumble-Through Economy

But in the last 12 months, 15 million people have quit their jobs.

Back out the “quitters” and you actually get a 1.8% unemployment rate, which is incredibly tight. 

Now, many of the quitters will find other jobs (or already have). 

The Atlanta Fed tells us that the average “quitter” gets a 5.4% wage increase in the next job.

But no matter how you look at it, not only is the labor market tight, something is clearly happening underneath the topline data. 

Look at the chart on quitters below. 

We’ve never seen anything like this, and the same is happening around the world.


Source: FRED


McKinsey has a fabulous new report on what workers really want. 

I’ll try to summarize but it is worth your time to read it, especially if you’re an employer.

If the past 18 months have taught us anything, it’s that employees crave investment in the human aspects of work. 

Employees are tired, and many are grieving. 

They want a renewed and revised sense of purpose in their work. 

They want social and interpersonal connections with their colleagues and managers. 

They want to feel a sense of shared identity. 

Yes, they want pay, benefits, and perks, but more than that they want to feel valued by their organizations and managers. 

They want meaningful—though not necessarily in-person—interactions, not just transactions.

In studying Australia, Canada, Singapore, the United Kingdom, and the US, McKinsey found 40% of surveyed workers said they are likely to quit within the next six months. 

Wow!


Source: McKinsey & Co.


Employers expect this to continue:


Source: McKinsey & Co.


The fascinating thing to me is the numbers of people willing to quit their job without having another job lined up:


Source: McKinsey & Co.


I recently talked to one hospital executive. 

If they mandated all their nurses to have vaccines, they might lose up to 20% of the nurses. 

You can’t replace a nurse with the National Guard or an untrained civilian. 

Some airlines are finding out you can’t replace pilots. 

I have a friend in New Orleans who is a major construction and real estate developer. 

He is being asked to take on more projects than ever but he can’t find workers at any price.

Remote work opportunities are attracting some employees to change jobs even for companies in other states.

And this is the killer chart. 

While employees still value money, there are other things higher on the list.


Source: McKinsey & Co.


Not surprisingly, what workers find important is not necessarily what employers think they want. 

There is truly a clash of cultures. 

And of generations, too.


Source: Twitter

A couple of points. 

First, this frustration with work has been building for decades. 

It has to do partly with income and wealth disparity, and partly with the frustration of life. 

People see others seemingly benefiting while they’re working their asses off (that’s a technical economic term). 

It’s like the Burt Bacharach song from Alfie.

What's it all about, Alfie?
Is it just for the moment we live?
What's it all about when you sort it out, Alfie?


In the COVID recession, people were forced to not work, or to work in very difficult situations. 

This made them rethink age-old questions. 

What do you want out of life? 

Long-haul truck driving is lonely and difficult, and from the data unhealthy. 

Most of my readers are retired or hold jobs they find fulfilling. 

But if you work in the lower levels of the hospitality industry or other dangerous jobs, if you don’t feel appreciated, maybe you start thinking about changing careers even if you make good money. 

The McKinsey data clearly shows that’s what is happening.

Second, COVID has introduced pressures into life that weren’t there before. 

And if you don’t feel comfortable going out in public, it’s difficult to say “I want a job” where you would be working in public. 

Throw in the political divide of mandates versus non-mandates, the finger-pointing, the politicization of the virus, the mis- and disinformation about vaccines and the virus, and you have a witch’s brew of reluctant workers.

Wages are important but less than many employers think. 

They are treating the problem as if it is a transaction. 

If I offer you more money, you should want to work here. 

But potential employees are obviously looking for something more than a mere transaction (money) to be the center and focus of their own personal lives. 

It is truly a clash of cultures, kind of like Baby Boomers not understanding Gen X or Y.

Everything Shortage

Worker shortages plus logistical difficulties plus rising demand add up to big economic problems. 

Shortages are becoming common in all manner of goods. 

Louis Gave listed three reasons in a recent note.

The first is the big data revolution. 

The newfound ability to measure everything has given companies and governments an incentive to eliminate redundancies and “optimize” the delivery of products and services. 

Unfortunately, systems with no redundancies are inherently fragile. 

When challenges appear, prices surge.

The second factor is previous policy interventions. 

If three years ago Donald Trump had not announced that China would no longer be allowed to import semiconductors built with US technology, would the world be facing the same chip shortages today? 

And if governments had not been so vocal about transitioning from carbon to renewables, would the world be seeing the current surge in energy prices?

The third, and most important, factor is today’s lack of workers. 

This was clear in the release Friday of disappointing US job numbers for September. 

Payrolls came in significantly below expectations. 

Yet the unemployment rate still fell, implying that US labor participation continues to deteriorate.

The real problem is we have very limited control over all these factors. 

Adding more redundancies might help but would take time and add costs, as Louis notes. 

It wouldn’t solve the near-term problem.

These kinds of nagging problems generate higher price inflation, but often in ways our data misses. 

If you can get what you need at the same price as a year ago, but you have to wait six extra weeks for delivery, you are not receiving the same benefit even though your cash outlay didn’t rise.

Much depends on how discretionary the item is. 

If you’re a chef and you can’t get your favorite sauces, you’ll just get creative and use something else. 

The restaurant customers may never know. 

If you want to paint your house and can’t get paint, then it may look a little shabby for a while. 

Annoying but not the end of the world.

But some goods aren’t discretionary. Energy shortages hurt because everyone needs fuel and electricity. The stress level shoots from zero to infinity overnight in situations like last winter’s Texas blackout. As do wholesale power prices, which eventually get passed on to consumers.

The same systemic complexity that generates some of these problems also diffuses and disguises their impact on inflation. 

Producers have many ways to deliver less value without raising prices. 

Here in Puerto Rico, Costco didn’t raise the price of lamb chops. 

They just put fewer lamb chops in the package. 

The government’s “hedonic adjustments” are supposed to capture this. 

Maybe they do, but I have my doubts.

As the old saying goes, the solution to high prices is high prices. 

People stop buying and producers have to find ways to charge less. 

At the macro level, the solution to inflation is recession—or if not outright recession, at least lower growth.

This may be happening. 

Many forecasters, including those at Goldman Sachs and the IMF, are cutting their 2021 full-year GDP forecasts as it becomes clear the recovery won’t continue at this pace. 

Mainstream forecasters are projecting little or no growth in China for the last half of this year. 

Coming off 6 to 8% growth, that will feel like a recession. 

Slower growth should reduce the demand driving these supply chain snarls.

Earlier this year I was confident that would happen, that our high debt load would suppress economic activity enough to keep inflation transitory. 

Lately I’m rethinking that, and the logistics issue is a key reason. 

As my friend Brent Donnelly quipped, “I’m wondering what the return policy on my Team Transitory T-shirt is?”

As aggravating as all this is, consumers and businesses are still showing unexpected patience and finding ways to cope. 

If we’re mostly willing to live with these conditions, then they’ll probably continue. 

Growth may diminish but not too much.

The jury is out, but I want to leave you with a positive thought. 

Problems like this spark creativity that makes things better for everyone. 

In researching this letter, I read an excellent article in The Atlantic covering similar themes. 

The author, Derek Thompson, called it the “Everything Shortage.” 

He had a hopeful conclusion about where it could lead.

Our dearth of manufactured parts and containers is part of a broader crisis of manufactured scarcity in America. 

A protectionist and anti-growth instinct runs through government, yielding not only a flat-footed CDC and a tardy FDA but also sharp restrictions on housing construction, immigration, and the licensing of new professionals and tradespeople. 

Focusing on the redistribution of income and goods is natural for today’s progressives, who tend to emphasize the virtue of equality. 

One lesson of the Everything Shortage is: You cannot redistribute what isn’t created in the first place. 

The best equality agenda begins with an abundance agenda.

Today’s crisis is an opportunity to emphasize a new philosophy of what The New York Times’ Ezra Klein calls “supply-side progressivism,” which sees value in this across-the-board abundance. 

This approach might start by prioritizing policies that reduce the cost of housing and health care, and reshoring the production of materials that we deem essential to national security during a pandemic or an unrelated supply-chain calamity. 

Decades from now, we might look at the legacy of the pandemic, and see that it took a global crisis of choke points to teach us that real progress begins by removing the choke points at home.

That thought should resonate for those of all political stripes. Progressives who want equality should want equality at the highest possible level. 

Conservatives who value opportunity should recognize we will all have more opportunity if we remove the barriers that block it. 

In the balance between those are some helpful policies we can all agree on.

It’s time to hit the send button, and there’s another whole letter which we will do next week on why Federal Reserve monetary policy can’t fix this problem, and in fact the current policy may be the exact wrong prescription. 

Not to mention some of the proposed legislation and regulatory fixes. 

Not all, but some. 

But that’s for next week

Hedging Opportunity

I talk a lot about the economic quagmire we find ourselves in, but let me present a solution: physical gold. 

You don’t need to be a history buff to figure out that gold has been a highly effective inflation and crisis hedge throughout the centuries.

For many years, I’ve been buying a little gold every month for my grandchildren—so they’ll have a safety net that maintains its value when the road gets rocky. 

I believe everyone should have some gold in their portfolio.

New York, New York, and Dallas

I’m still heading to New York in two weeks, but not staying the weekend, as Halloween in New York sounds lonely. I will return to NYC two weeks later for a book launch party and more meetings before Thanksgiving in Dallas.

This letter is already too many words so I will just hit the send button, wish you a great week, and remind you to follow me on Twitter. I really do have some fun there.

Your happy to be a writer in paradise analyst,



John Mauldin
Co-Founder, Mauldin Economics

The coronavirus

Millions of lives depend on how the pandemic ends

The world can see the end of the covid-19 emergency, but some daunting tasks lie ahead



All pandemics end eventually. 

Covid-19 has started down that path, but it will not be eradicated. 

Instead, it will gradually become endemic. 

In that state, circulating and mutating from year to year, the coronavirus will remain a threat to the elderly and infirm. 

But having settled down, it is highly unlikely to kill on the monstrous scale of the past 20 months. 

Covid will then be a familiar, manageable enemy, like the flu.

Although the destination is fixed, the route to endemicity is not. 

The difference between a well-planned journey and a chaotic one could be measured in millions of lives. 

The end of the pandemic is therefore a last chance for governments to show they have learned from the mistakes they made at its start.

As the pandemic fades, weekly recorded cases and deaths have been falling globally, including in America, since the end of August. 

Britain is one country where cases are high and rising, but it has had a lot of disease and has run a successful vaccination campaign. 

Because 93% of Britons have antibodies, roughly 250,000 cases a week are leading to hundreds of deaths instead of thousands. 

That is the path to endemicity.


Nobody knows how many people around the world enjoy such protection, but you can hazard a very rough guess. 

About 3.8bn people have had at least one dose of the vaccine. 

The Economist estimates that during the pandemic excess deaths lie between 10m and 19m, with a central estimate of 16.2m. 

Working backwards, using assumptions about the share of fatal infections, this suggests that 1.4bn-3.6bn people have had the disease, amounting to 6-15 times the official count. 

There is an overlap, as many have been both vaccinated and infected.

The reservoir of people with immunity makes covid less dangerous. 

However, in bringing the pandemic to an end, the world is likely to face several tests.

One is the wave of winter infections in the northern hemisphere. 

Covid thrives when people spend their time indoors. 

If cases start to overwhelm hospitals, governments will need to intervene. 

One line of defence is treatments, including promising new antiviral drugs such as molnupiravir, which cuts rates of serious illness by half if administered early, but is still awaiting approval. 

Another is measures such as mask-wearing, shielding care homes and closing hotspots, including clubs and bars. 

The question is whether governments have learned to act promptly, but proportionately.

A second test is mutation. 

The genetic sampling of infections serves as an early warning if the Delta variant is displaced, yet poorer, unvaccinated parts of the world still go unmonitored. 

A new variant may require vaccines to be redesigned. 

That is far easier than starting from scratch, but it would require the production and approval of new jabs and perhaps jettisoning the stocks of old ones. 

It could trigger a replay of the fights over supply that marred the start of 2021.

The greatest test is how to protect the billion or more people without immunity. 

China’s answer is to try to shut the virus out with harsh and costly quarantines and lockdowns. 

This allows time for vaccination and stockpiling medicines. 

The Communist Party has used the country’s tiny number of cases as proof its system is better than democracy, so abandoning its zero-covid strategy is politically awkward. 

However, as places including New Zealand have accepted, the coronavirus is not going away. 

One day China will have to relent.

Ultimately, people will gain immunity either through infection or vaccination. 

Because vaccination is so much safer, governments must get as many needles into arms as possible. 

According to Airfinity, a data firm, 11.3bn doses should have been produced before the end of the year and 25bn by June 2022. 

If so, global supply will soon no longer be a constraint—how soon, depends on the demand for boosters. 

Not all vaccines are equally effective, but all of them are far better than being infected.

This approaching vaccine glut means that exporters should already be shipping doses wholesale. 

Instead many are holding back supplies for boosters and to vaccinate children, who very rarely die from covid. 

Doses are promised for next year, but they are needed now.

The last barriers to vaccination will be hesitancy and the capacity of local health care. 

The World Health Organisation has set a target of 40% of every country to be jabbed by the end of the year. 

A global vaccine summit set a target of 70% by September 2022. 

But different countries have different needs for vaccines depending on their demography, their ability to administer jabs, and the threat of covid compared with other diseases like malaria and measles. 

Blanket targets risk turning sensible priorities into failures.

It is a daunting to-do list. 

Will governments rise to the challenge? 

Therein lies the last test. 

As covid fades into the background, rich countries may start to lose interest in the coronavirus. 

The disease it causes risks becoming a poor-country killer, like so many of the rest. 

Traders take up derivatives tied to Libor replacement

Sofr-linked futures and swaps gather volume despite lenders’ hesitation over new benchmark

Kate Duguid in New York and Philip Stafford in London 

Last week $240bn of US dollar interest rate swaps based on Sofr were traded, according to ISDA © Bloomberg

Lenders have been slow to adopt the official substitute for the scandal-tarred Libor interest-rate benchmark, but derivatives traders are now giving it an enthusiastic welcome. 

Action in futures, options and swaps markets tied to the new secured overnight financing rate — Sofr — has shot up since the summer. 

These derivatives enable users to hedge against fluctuations in interest rates. 

Industry representatives picked Sofr in 2017 as an alternative to the London interbank offered rate, or Libor, the borrowing benchmark that was tarnished by a rate collusion scheme. 

Banks will be barred from underwriting new loans using Libor starting in 2022. 

Shifting market participants off US dollar Libor, the biggest and most important Libor rate, has been slow in part because Sofr had not been market-tested. 

The first Sofr-backed leveraged loan was not offered until earlier this month, more than three years after the Federal Reserve Bank of New York began to publish the rate. 

By comparison, the use of Sofr-linked derivatives is perking up. 

Last week $240bn of US dollar interest rate swaps based on Sofr were traded, equivalent to about 13.5 per cent of the total dollar Libor and Sofr market, according to data from the International Swaps and Derivatives Association. 

In June, Sofr-linked swaps accounted for only about 3 per cent of the market.

Volumes increased in part because of a regulatory initiative from the US Commodity Futures Trading Commission in July called Sofr First, aimed at the derivatives market. 

The programme switched derivatives pricing on some traders’ screens from Libor to Sofr.

“[Sofr First] was a big deal in terms of driving Sofr volumes across the Street. 

It’s more specific to swaps but it no doubt has also generated more hedging activity in futures,” said Mark Cabana, head of US rates strategy at Bank of America. 

At CME Group, the biggest US futures exchange operator, the number of outstanding contracts in listed derivatives based on Sofr has risen 90 per cent since the start of the year.


“The market has made far more progress in adopting Sofr and is much larger than we appreciate,” said Sean Tully, CME’s head of financial and over-the-counter products. 

“In the lending and the cash markets it is taking a bit longer. 

But in the derivatives markets, much more has happened.”

Libor is based on the interest rate at which banks say they would lend to other banks. 

Sofr is based on market transactions and represents the overnight cost to borrow cash backed by US Treasury debt. 

While Sofr may become popular in derivatives markets, its uptake in the loan market is not assured. 

Cabana said that bank lenders, as well as some companies, had indicated they didn’t believe Sofr was well suited for them. 

Unlike Sofr, credit risks are incorporated into Libor. 

When the risk associated with lending money increases during bouts of market volatility, Libor rises while Sofr moves less. 

Banks could therefore face the prospect of lending money at a steady Sofr rate while their own funding costs, which are linked to credit risk, are rising. 

“We believe we are going to be in a multi-reference rate environment where Sofr will initially be dominant, but the persistence of that dominance is unclear to me,” Cabana said.

Xi Jinping undeterred from structural shifts despite China’s economic slowdown

Weak third-quarter GDP growth will not divert president from long-term changes, analysts say

Tom Mitchell in Singapore and Thomas Hale in Hong Kong 

President Xi Jinping and Chinese policymakers believe they have an opportunity to re-engineer the economy’s reliance on debt-fuelled property investment © REUTERS


China’s economy grew 4.9 per cent in the third quarter compared with the same period in 2020 and an anaemic 0.2 per cent compared with the three months ending in June — one of its weakest performances in more than a decade.

But none of that was bad enough to deter President Xi Jinping from a range of policies that have prioritised longer-term structural changes over short-term growth as he enters the final year of his second term in power.

Chinese policymakers were instead heartened by the fact that the world’s second-largest economy has expanded 9.8 per cent over the first three quarters of 2021 compared with the same period last year — well above their full-year target of 6 per cent growth. 

As a result, they feel they have a “window of opportunity” to re-engineer what they see as the Chinese economy’s over-reliance on debt-fuelled property investment to generate growth, according to analysts.

“The Chinese economy has maintained recovery momentum in the first three quarters with progress in structural adjustment and high quality development,” said Fu Linghui, a spokesman for the National Bureau of Statistics.

Paras Anand, chief investment officer for Asia Pacific investments at Fidelity International, said: “The only surprise in China’s GDP figures is that they have not come in lower.

“The economy has experienced a wave of monetary, fiscal and regulatory tightening . . . to cool a buoyant recovery since the easing of Covid-related restrictions last year and reduce longer-term risks.”


Xi’s determination to stay the course was signalled twice on Friday, the last trading day before the NBS released the economic data on Monday.

The first signal came from China’s central bank, which finally addressed the debt crisis at Evergrande, one of the country’s largest property developers.

The second was sent by Xi himself as Qiushi, the Chinese Communist party’s flagship journal, released an extended version of his August policy address on the need to achieve “common prosperity”, an agenda designed to encourage wealth redistribution. 

Xi’s comments, which shook China’s political and business establishment two months ago, had previously only been summarised by state media reports.

“The rich and the poor in some countries are polarised with the collapse of the middle class [leading] to social disintegration, political polarisation and rampant populism — the lessons are profound!” Xi said, according to the Qiushi article. “Our country must resolutely guard against polarisation, drive common prosperity and maintain social harmony and stability.”

Reining in property speculation is a crucial part of Xi’s vision of a more equal society. He also highlighted the need to redouble the government’s long-delayed efforts to enact a nationwide property tax, which would have dramatic implications for China’s economic model.

Eswar Prasad, a China finance expert at Cornell University, said that this and other signals indicated the Xi administration’s “determination, at least so far, to avoid invoking its traditional playbook of a credit-fuelled binge in investment to counter slowing growth”.

Residents cycle through a district built by Evergrande, one of China’s biggest property groups. The company’s failure to make a series of payments to investors and bondholders has raised concerns about the wider economic fallout from its financial troubles © Getty Images

While the People’s Bank of China had publicly chastised Evergrande’s management in August, it had remained silent ever since the heavily indebted developer missed a series of payments to retail investors and bondholders beginning in mid-September. 

That had raised hopes among some investors that the central bank would organise a bailout of Evergrande, for fear of the wider economic damage if it is unable to meet more obligations across its $300bn of liabilities.

Zou Lan, head of the PBoC’s financial markets department, put paid to such optimism by blaming Evergrande for its predicament and arguing that the company’s decline and fall would be easily absorbed by China’s financial system.

“[Evergrande] had poor management, failed to run its businesses cautiously according to changes in market conditions and expanded blindly,” Zou said, without dwelling on the role government-mandated borrowing limits implemented last year had played in its demise. 

He added that “Evergrande’s creditors are scattered and individual banks’ exposure is small — the risk of spillover to the financial industry is controllable”.


Zou also expressed confidence that a combination of asset disposals and financial support from local governments could help complete stalled Evergrande developments, many of which were funded by prepayments from homebuyers.

“Policymakers have not yet blinked in the face of the Evergrande saga,” said Larry Hu, chief China economist at Macquarie. 

He noted that the PBoC tolerated record low year-on-year credit growth of 10 per cent in September, and believes Chinese financial officials will set a full-year growth target of 5 per cent for 2022.

There are, however, other ways for the central bank to stabilise growth while only moderately loosening its overall squeeze on the property sector.

In July, the PBoC cut the reserve requirement ratio for banks, unleashing liquidity into the financial system that it then tried to direct to the “real economy” such as manufacturing. 

Since 2016, the real estate sector’s share of new loans has fallen from more than 50 per cent to about 15 per cent.

But Prasad said containing the fallout from the Evergrande crisis while maintaining growth would be a challenge.

“Beijing seems determined to tamp down debt accumulation and property market speculation. 

Infusing stimulus into the economy while keeping these risks contained poses a difficult test for the government,” he said.


SOURCE: Xi Jinping undeterred from structural shifts despite China’s economic slowdown | Financial Times

Xi Jinping’s Evergrande dilemma has repercussions far beyond China

Beijing could let the property behemoth go bankrupt, but that risks shockwaves both at home and abroad

Kevin Rudd 

© Ewan White


Since coming to power, Chinese president Xi Jinping has had to deal with three overriding priorities. 

First, a domestic economy that is both slowing and increasingly unequal. 

Second, an adversarial geopolitical environment, resulting largely from Xi’s own quest to change the regional and global status quo. 

And, finally and most importantly, making sure he secures a third term at the Chinese Communist party’s key 20th Party Congress next year.

Enter Evergrande and its growing list of missed bond payments. 

This behemoth, with $300bn in leverage, lies at the centre of a property sector that represents 29 per cent of Chinese gross domestic product and is more than $5tn in debt. 

Some 41 per cent of the Chinese banking system’s assets are associated with the property sector, and 78 per cent of the invested wealth of urban Chinese is in housing. 

Given the millions of creditors, shareholders, bondholders and (unbuilt) apartment owners, Evergrande has become a problem for Xi politically, economically and globally.

On the domestic front, an increasingly redistributionist approach to economic policy means that neither billionaires nor housing market speculation are tolerated as they used to be. 

Moves to prop up Evergrande fit uneasily within Xi’s “common prosperity” campaign. 

Internationally, Xi wishes to avoid any perception of economic weakness or political distraction, let alone the idea that China could be heading towards a situation similar to that which crippled the US housing market during the 2008 financial crisis. 

The Communist party has sought to enhance its domestic credibility by claiming that China has a more sophisticated system for dealing with crises, whether pandemic or economic, than the west.

So what is China now likely to do? 

Beijing’s policy options are threefold: bankrupting Evergrande to send a message to the rest of the sector; propping it up because it is simply “too big to fail”; or facilitating an orderly distribution of assets.

Xi’s political instincts may well be to allow Evergrande to face the music. 

He sees all forms of speculative investment, particularly in property, in Marxist terms: namely as belonging to the “fictitious economy” which crowds out investment in the “real economy” of manufacturing, technology and infrastructure — sectors that will seal China’s global economic dominance. 

“Houses are for people to live in, not to speculate on,” he told the 19th Party Congress in 2017.

This view is counterbalanced by an anxiety that allowing Evergrande to fail may trigger a cascading effect across not only the property sector but the banking institutions that currently finance its gargantuan levels of debt.

Fortunately, China has institutional experience in dealing with such crises. 

In 2018, the private insurance group Anbang was brought under state control and restructured after its collapse with more than $320bn in liabilities. 

The regional lending bank Baoshang was allowed to go bankrupt last year after racking up $32bn in debts; $26bn in public funds was used to help rescue creditors at an average repayment rate of under 60 per cent.

Earlier this year, HNA — one of China’s largest global asset buyers with $77bn in debts — was taken over by state bankruptcy regulators and split into four separate entities. 

And most recently, Huarong, a state-owned asset manager with $15.9bn in losses, was partially bailed out by state-owned investor groups after its chair, Lai Xiaomin, was executed for corruption in January.

Based on these precedents, the most likely outcome for Evergrande is an orderly distribution of assets to a mix of state and private buyers. This would ensure that people get the houses they have made a deposit for, creditors are paid, and domestic bondholders skate through with just a minor haircut, while international bondholders are likely to see a comparatively bigger loss.

That may deal with the immediacy of the Evergrande problem. But if the party continues forcefully to deleverage the property and finance sectors, it could be just the beginning. Already, we’ve seen another midsize real estate developer, Fantasia Holdings, fail to make a $206m bond payment. Yet another, Modern Land, has asked to defer a $250m payment. Evergrande’s failure could already be spreading.

It would be difficult to replicate an orderly redistribution of assets across the entire property sector for every struggling firm. If the sector significantly slows or contracts, the implications for overall economic growth would be serious. It comes on top of already declining levels of business confidence in China produced by Xi’s tightening of regulatory and ideological controls on the private sector — and his parallel pivot towards the state.

The implications for the global economy from such a scenario are very real. China represented 28 per cent of all global growth between 2013 and 2018 — twice that of the US. A significantly slowing Chinese property market would mean slower global growth, with a particular impact on commodities that service construction. This is why the world should have a profound interest in how Beijing handles the deleveraging of its property and finance sectors. It represents far more than a contest between Xi’s ideology and China’s economic reality.


The writer, a former prime minister of Australia, is the global president of the Asia Society in New York

Georgieva data scandal heightens IMF identity crisis

Two major shareholders are at loggerheads, it barely serves as lender of last resort and now its credibility is in jeopardy

Jonathan Wheatley 

Kristalina Georgieva has denied allegations she directed efforts to boost China’s ranking in a World Bank report © Andrew Harrer/Bloomberg


The IMF has an identity crisis. Its traditional role as lender of last resort has been usurped by the central banks that have pumped trillions into financial markets. 

Two of its biggest shareholders — the US and China — are at loggerheads. 

And the fund’s reputation for scrupulous data is jeopardised by a scandal that has engulfed its managing director, Kristalina Georgieva, from when she previously headed the World Bank. 

In fact, the fund may never be the same again.

For most rich and middle-income countries, the IMF had already long lost its importance — thanks, in part, to the quantitative easing programmes in place since the 2008 financial crisis. 

Why sign up to IMF loans with stiff conditions when investors starved of yield are eager to lend just as much, almost as cheaply, with no strings attached? 

As one senior IMF insider puts it: “Central banks have put us out of business.”

Covid-19 money-printing only accelerated this trend. During the pandemic, the IMF delivered emergency assistance to 100 countries. 

While the aid was effective, it was for minor amounts as all the recipients ranked among the world’s smallest and poorest economies.

Still, a more developmental role for the IMF may well suit Georgieva’s skill set. 

As the World Bank’s former chief executive, she is regarded as a progressive economist compared with some of her more hair-shirted predecessors at the fund. 

“Spend all you can and keep the receipts,” has been her pandemic mantra. 

But this represents a major change from the IMF’s usual role of providing emergency liquidity support.

Illustrating the change was the creation last month of $650bn of special drawing rights. 

The fund distributed these SDRs, a quasi-currency, to all its members as free money, for whatever purpose they saw fit. 

For some, the pandemic demanded such a response. 

For others, rules were bent to distribute a fiscal boost by the back door — including to unsavoury authoritarians such as Alexander Lukashenko, president of Belarus.

The SDR programme also marked an end, critics say, to the IMF’s usual country programmes, worked out within a careful framework that includes a path to recovery, detailed debt analyses and other aspects of public policy. 

Disbursements to Ukraine under a $5bn IMF programme, for example, have been repeatedly delayed by its failure to address corruption.

Instead, there is now risk of a dangerous spending free-for-all. 

As World Bank chief economist Carmen Reinhart has said of some of the IMF’s latest loan recipients: “In some cases, the evidence will be overwhelming that this is not a liquidity problem but a solvency issue.”

Into the middle of this identity crisis has now landed a scandal that threatens to destroy one of the fund’s most valuable remaining assets: credibility. 

According to an independent probe, while World Bank chief executive, Georgieva allegedly directed efforts to artificially boost China’s ranking in the lender’s influential annual Doing Business report. 

Worse, she was seeking to raise capital for the bank from China and others at the time.

The IMF board is conducting an inquiry. 

Meanwhile, staff say the scandal has jeopardised the IMF’s ability to speak truth to power. 

If Georgieva manipulated data at China’s behest at the World Bank, might not the IMF under her stewardship now bend to other governments too?

In the end, it may be neither allegedly dodgy data nor the IMF’s change of direction that determines her fate. 

If Georgieva goes, it probably will be because she got on the wrong side of the battle between the US and China, the fund’s biggest and third-biggest shareholders respectively.

It is significant that, last week, both US Democrats and Republicans on the House financial services committee cited the World Bank probe and questioned her suitability to lead the IMF. 

Georgieva has denied the allegations and has come out fighting. 

Still, whoever finally emerges victorious from this increasingly unedifying affair, it is unlikely to be the IMF. 

How to Turn Your Pandemic Regrets into a Force for Good

Ruminating on all the things you didn’t accomplish? An expert on the psychology of regret explains why you should give yourself some grace.

BASED ON INSIGHTS FROM

Neal J. Roese


With so many Americans pausing during the pandemic to take stock of their lives, it’s inevitable that some are sifting through uncomfortable feelings of regret.

Whether it is lamenting a suddenly stalled career, mourning a much-anticipated vacation, or grieving time lost with loved ones, it’s hard not to recall the last 18 months more for the missed opportunities than for the achievements.

“Right now may seem like a time where there’s some excitement about new jobs opening up and new opportunities,” says Neal Roese. “Yet, we’ve also been hard hit by what seems to be a lost year, a year that we can’t make up.”

Roese, a professor of marketing at the Kellogg School, is an expert in the psychology of regret, the topic of his book, If Only. 

He explains that regrets are a perfectly normal—even essential—part of being human. 

And regrets that have grown out of the pandemic’s circumstances can be a force for good if we contextualize and learn from them. 

However, if nurtured too long, they can have negative effects on our mental health.

Roese offers advice on how to manage pandemic regrets.

Look at the Big Picture

One of the main ways that people cope with regret is by reframing it. 

So if you’re feeling upset about how the past has unfolded, Roese recommends reframing your focus beyond your own experience to see the bigger picture. 

Regret by its very nature involves a short-term focus, where we tend to home in on a single decision, rather than a series of decisions.

And the broader context of the pandemic is that it is a once-in-a-lifetime event that has threatened the well-being of everyone across the globe. 

Because it has also impacted each of us so dramatically on an individual level—our jobs, families, health, and security—it is easy to lose sight of that larger view.

“Maybe, with the passage of time, we’ll be able to put it into perspective and see that this is one of the most unique, powerful, and consequential experiences that any of us will have,” Roese says. 

“Most major events in history are things we read about in books. 

But how many of us have actually lived through something as tumultuous as this?”

Pausing to take in the magnitude of the pandemic’s shared tragedy can help absolve regrets, he says.

“Giving yourself some perspective helps you understand that your experience is part of a larger system of interlocking forces and events,” he says. 

“It also makes moving forward easier.”

For example, if you are kicking yourself for having overspent on that delicious Saturday-night meal, it may help to take a step back and review it in the context of all of your nonnecessity purchases over the past year. 

The value of taking a broader view is to see more clearly how single decisions fit with your overall life priorities.

Focus on What You Can Control … and Make Peace with What You Can’t

Looking back at the trials and tribulations of the past, people often blame themselves—whether circumstances were actually under their control or not. 

By obscuring this distinction, people are showing a very natural, and often unconstructive, illusion of bias.

“Like the gambler who blows on the dice before rolling, we assume that we can influence results more than we can, even for random events,” Roese says.

The illusion of control is one of a set of basic cognitive biases that affect each of us. 

It can be useful in helping us persevere in the face of tough challenges, but it can sometimes get us into trouble. 

Because the illusion of control involves a biased reading of reality, it can distort how our minds reflect upon difficult situations such as our pandemic work experiences.

For example, parents may feel mixed emotions, wishing they could have made different decisions to manage their job, remote schooling, and family responsibilities. 

But in reality, much of the burden was beyond their control—something had to give. 

The pandemic dealt a crushing blow to women in particular, with millions leaving the workforce as they shouldered the majority of caregiving responsibilities in the wake of school and childcare closures.

The simple recognition that the illusion of control can affect nearly all of us can be a pathway toward a reduction in self-blaming for any and every misfortune. 

It offers us the opportunity to reorient ourselves to those areas of life where we do have some control, such as interactions with friends, family, and close work colleagues.

“When we focus on those things that are within our control, we’re setting ourselves up for a healthier outcome,” Roese says. 

“If we can take some steps to correct, fix, or improve upon what we’ve been doing, we’re in a much better position.”

Look to the Future

Roese also points out that that regret does have an important upside—it can help us see how we might change things for the better going forward.

“Regrets generate alternative pathways and actions in our brains,” Roese says. 

“They may also provide options to try in the future.”

He advises looking to the future as much as possible. 

“As you take stock, it’s key to shift your thoughts from regrets to opportunities,” Roese says. 

“Ask yourself: Of all changes, which were the positive forces in my life? 

Which can I continue? 

If you can draw lessons, that’s the best possible outcome.”

Ruminating on the past can also inhibit people from acting. 

And research suggests that people tend to feel more regret when they do not try something versus when they try and the attempt doesn’t work out. 

So Roese has a suggestion: find one positive action you can take immediately.

For example, many professionals have felt disconnected from their work and colleagues, or insecure about their productivity. 

Rather than dwelling on these feelings, a positive action might be opening up to others, including colleagues, with these struggles.

“By being vulnerable and sharing a personal detail, you are forging a stronger connection with another person,” Roese says. 

“That’s a recipe toward greater intimacy that strengthens everyone in a working relationship.”

Acknowledge That Moving On May Be Hard

Roese cautions that we’re in a liminal moment. 

With the delta variant surging and the economy still uncertain, we’re not “done” with the pandemic.

Under this perceived threat, our psychological immune system switches on its defenses—and doesn’t switch them off. 

When a threat lingers, in other words, people get “stuck” in emotional narratives that make moving on hard.

“The pandemic multiplied this psychological experience many times over,” he says. 

“COVID is a long-running, slow-motion drama that makes it especially hard for us to cope.”

With emotional closure still far on the horizon, it is okay to not feel okay yet. 

It is also understandable that not everyone feels ready to reframe or learn from their regrets.

“With the distance of time, we can look back on an experience, see that we survived, and focus on moving forward,” says Roese. 

“It doesn’t feel like a lot of us have gotten there yet with COVID.


FEATURED FACULTY 

Neal J. Roese SC Johnson Chair in Global Marketing; Professor of Marketing; Professor of Psychology, Weinberg College of Arts & Sciences (Courtesy) 

 ABOUT THE WRITER 

Susan Margolin is a writer based in Boston.