Here is our take on the articles summarized below: 

For this week’s summary review, we look at some of the forces behind tectonic shifts in the markets of tomorrow. Of course, no discussion of the future would be complete without an analysis of the Covid pandemic; specifically, our first article looks at how the longstanding “monetary policy first” approach to economic hardship seems to have been inverted in the past year. Our second article deals with the ever-growing swell of environmentally conscious investing and the tidal wave of money being poured into green energy by both the public and private sectors. For our third summary, we look at three Bloomberg articles on the mounting debt crisis in China’s corporate bond market. Finally, we examine how manufacturing best practices exacerbated the supply shortage brought about by the pandemic. Given the speed and breadth of such foundational changes to the investing landscape, we would urge our readers to keep in mind the following timeless idea: : the world has seen monumental shifts many times before, and while it is difficult to predict the shape of such change, one can nevertheless be better prepared for the outcome by carefully examining the trajectory of the change. We hope these insights will help you do just that.

The Covid Trauma Has Changed Economics—Maybe Forever

Matthew Boesler, Bloomberg

Read the full article here

The Covid-19 pandemic has transformed economic policy. Going against the conventional approach of curbing inflation and managing the speed of economic growth by adjusting the cost of private borrowing, the new economics that has emerged from the pandemic prioritizes public spending. Fiscal policy has taken over monetary policy as governments channel cash directly into households through stimulus checks and government spending. Meanwhile, central banks have taken a secondary role to governments by buying up government debt, keeping interest rates low, and insisting there is no need to worry about inflation. The result of this new approach has, so far, led to a much faster recovery than after the Great Recession in 2008. Looking back, many economists regard the response to the 2008 crisis as “lopsided and inadequate”. Big banks were bailed out which fixed the financial system, but little was done to help households and the millions that were left unemployed by the economy’s fallout. During the decade that it took to restore employment levels to pre-2008, the income gap in the US widened and economic, social, and racial inequality issues came to the forefront. The economics that has emerged from Covid-19 crisis has shielded the financial system from the bottom up instead of the top down, protecting those at the bottom of the economic ladder. Of course, this new approach has not come without criticism as concerns over ballooning government debt and fears of inflation dominate the debate. Furthermore, the new policies have yet to face the potential problems that result from such rapid growth, including how to deal with inflationary risks. While the new economic approach that has emerged from the pandemic has the potential to uproot the traditional framework to deal with recessions, we are still very much in the middle of the recovery with many unknowns ahead of us.

Green Finance Goes Mainstream, Lining Up Trillions Behind Global Energy Transition

Scott Patterson and Amrith Ramkumar, The Wall Street Journal

Read the full article here

The shift towards environmental, social, and corporate governance (ESG) investing has been well-documented over the past year, but with the general societal push towards a greener planet, that trend has accelerated. Already, more than $2 trillion has been invested in funds focused on the environment. Even some traditional energy companies (like Dominion Energy) have begun issuing “green bonds” and investing in sustainable infrastructure. While many businesses have been hesitant to give up profit lines in the name of climate change, the tide seems to be shifting, not only in public opinion but also in money flows. In order to meet net-zero emission goals by 2050, an additional $50 trillion of investment in green infrastructure is needed; investment in renewable energy projects reached $520 billion in 2020. The biggest winners are likely to be wind and solar power, as well as battery storage. These winners seem to be producing returns already, as more that 70% of ESG funds had better returns than non-ESG funds. The wave of money has led many small renewable companies to go public and seek additional funding, often in the form of special purpose acquisition companies (SPAC’s). The Energy Department’s Loan Programs Office is holding out more than $40 billion for clean energy funding, a position that has led some investors to question whether the government is capable of properly assessing the risks involved in financing these companies. In addition, such loans can have a chilling effect on private equity, as the government becomes the most senior lender in the case of default. Regardless of the source of funds, a great deal of investment is going into sectors and companies aligned with sustainable themes, and that trend is likely to continue for the foreseeable future.

In Focus: The Looming Chinese Debt Crisis

Inside the Race to Avert Disaster at China’s Biggest ‘Bad Bank’

Bloomberg – Read the article here

China Braces for $1.3 Trillion Maturity Wall as Defaults Surge

Bloomberg – Read the article here

China’s Bond Defaults Pile Up at Fastest Pace on Record

Rebecca Choong Wilkins and Ailing Tan, Bloomberg – Read the article here

As China is the world’s second-largest debt market, an alarming increase in the default rate of Chinese corporate bonds has become an issue of central concern for both international and local investors. Chinese corporations have already defaulted on about $15.5 billion of the $1.3 trillion due in onshore bonds this year; by comparison, the 2015 crash in China’s stock market only generated roughly $1.4 billion of defaults that year. Leading the charge is the troubled China Huarong Asset Management Company, a state-owned “bad bank” with approximately $6.2 billion in debt maturing this year. Huarong has been at the epicenter of the credit risk crisis since 2018, when its previous chairman, Lai Xiaomin, was dismissed on graft charges, leaving behind some $41 billion of risky debt. Following two consecutive quarters of missed financial reports, the company now sends weekly operations and liquidity reports to financial regulators, and public statements on its financial situation must be approved by government authorities. For the time being, it seems unlikely that the Chinese Communist Party would allow such a high-profile failure a month away from its centennial celebration on July 1st, but beyond that, the future is less certain. Indeed, the broader Chinese credit market has begun shedding the assumption that the government will step in to bail out corporations, increasing the importance of credit risk. While this is likely to have painful short-term consequences for the Chinese corporate bond market, in the medium-to-long term it could have a stabilizing effect, making the market more attractive to foreign investors. As the government ceases to be an implicit creditor to many corporate bonds, bond maturities have dropped as investors seek to limit exposure to credit risk and issuers turn to cheaper short-term debt. With the fundamental dynamics of one of the world’s largest markets shifting, the implications for global investing are as numerous as they are unpredictable.

How the World Ran Out of Everything

Peter S. Goodman and Niraj Choksi, The New York Times

Read the full article here

The Covid-19 pandemic has revealed just how dependent global businesses are on the “Just in Time” manufacturing method, in which parts are delivered to factories as they are required. This method has allowed businesses across many industries, from auto to retail and beyond, to adapt to changing marketing demands while also cutting costs. The pandemic forced factories across the world to shut down and, at the same time, created chaos in global shipping as individuals flocked to e-commerce, leading to shortages of a vast range of goods. Automakers have had to halt assembly lines because of a shortage of computer chips, apparel brands are struggling to stock retail outlets, and construction companies are having trouble purchasing paints or lumber. While the Just in Time method has allowed manufacturers to customize their goods and pivot quickly to new products, companies have moved away from stockpiling inventories. The recent shortages are raising concerns that companies have been too aggressive with Just in Time and have been caught unprepared to deal with shocks to the system. Some experts think this crisis will lead companies to stockpile more inventory in preparation for the next shock, but others believe the pursuit of cost savings will, once again, prevail. Furthermore, would consumers be willing to pay a higher price for resilience when they are not in crisis? Probably not.