Here is our take on the articles summarized below: 

As the stability of the global economic system is increasingly shaken, more and more potential outcomes are becoming “known unknowns” – fields where an excess of uncertainty challenges our heuristics to interpret changes. For example, our first article examines the case of China’s Huarong Asset Management, a state-owned firm which was bailed out by the government (a well-known phenomenon in China) in the midst of a crackdown on shady debt (an initiative with unknown primary and secondary effects). Our fourth article looks at how this kind of regulation in the technology sector has wide-ranging consequences, both for today and the future. Similarly, the debate over the proper actions to take against climate change has unsettled old norms about proper policy and expected timeframes. The asset markets have taken notice in some areas, while others have engaged in what many describe as excessive speculation, as we examine in our third article. When old ways of thinking are challenged and we enter epochs of uncertainty, a careful balance between flexibility and fidelity must be struck to maintain our footing. Should we fail to adapt where necessary and remain resolute when required, we will quickly fall.

China Bails Out Huarong

 Chinese Bad-Debt Manager Huarong to Be Bailed Out by State-Owned Companies

Xie Yu and Serena Ng, Wall Street Journal

Huarong’s Survival Doesn’t Mean Chinese Firms Can’t Fail

Nathaniel Taplin, Wall Street Journal 

China’s largest bad debt manager, Huarong Asset Management, announced that it would be bailed out by five state-owned financial companies after reporting a net loss near $16 billion for 2020. The company, itself owned by China’s Ministry of Finance, has been on shaky ground for some time as its distressed assets came under pressure from the coronavirus pandemic. While the bailout is not unexpected given Huarong’s crucial role as a purchaser of defaulted debt, the government has made efforts to dispel the idea that it will always step in to support state-owned companies. The notion of “too big to fail” remains an implicit credit to these firms. On the other hand, president Xi Jinping has declared war on shadow banking, with corresponding crackdowns on local government issues leading some investors to question how far down the government is willing to reach to support the system. Barring a systemic crisis, the CCP is unlikely to allow a financial linchpin like Huarong to go belly-up, but it may not be so quick to aid smaller firms. As China moves to de-obfuscate its debt markets in its campaign against shadow banking, investors are watching closely to see how involved China will be in balancing market forces with government interests.

The World is Getting Hotter 

Climate Models Forecast More Frequent Extreme Heat

Leslie Hook and Steven Bernard, Financial Times 

Summer of Anxiety: Have We Finally Broken the Climate

Francesco Collini and Johann Grolle, Spiegel International 

The world has seen a series of extreme weather events and record-breaking temperatures this summer. The Canadian town of Lytton was lost to fire amidst a once-in-a-millennium heatwave. One-third of the population of Afghanistan is facing food shortages due to heat and drought. A million hectares of forest are on fire in Siberia. More than 200 people were killed by flash floods in Germany. The list goes on. The recently released report from the Intergovernmental Panel on Climate Change (IPCC) concludes that such events and scorching temperatures will become more frequent, especially if countries fail to cut emissions. If the planet warms by 4 degrees Celsius, then an extreme heat event that would have occurred once in 50 years is nearly 40 times as likely to occur, but if the planet warms by only 1.5 degrees Celsius, then an extreme heat event is only 8.6 times as likely. Though countries are making renewed promises to combat climate change, the goals set by the Paris Agreement are slipping away as climate change has accelerated.

As scientists try to understand the reasons for this weather phenomena, they are becoming more concerned that human influence on global climate developments has triggered new climate change processes that we do not yet understand. A new branch of research, called attribution studies, has been developed to determine the likelihood that individual weather events are the consequence of human activity, also called anthropogenic climate change. The IPCC report determined the fires in Lytton would have been “virtually impossible” without anthropogenic climate change. The fear is that important ecosystems could be permanently thrown out of balance by feedback loops which have been triggered by human activity, also known as “tipping points”. For example, the thawing of the permafrost in the Arctic releases the methane trapped within it, leading to further heating of the atmosphere and rising temperatures, which in turn, accelerates the thawing of the permafrost. In the Amazon rainforest, trees are being damaged by heat and aridity which means they release less water into the atmosphere. Less water leads to fewer clouds and the stagnation of “flying rivers” in the Amazon, so damage to the trees accelerates. To prevent potentially irreversible changes to the climate’s processes, we must reduce global carbon dioxide emissions as soon as possible. In an already record-breaking summer, “one doesn’t even want to imagine what a once-in-a-millennia summer might look like.”

Waiting to Deflate

Edward Chancellor, The New York Review

Read the full article here

“Men, it is said, think in herds; it will be seen that they go mad in herds, while they only recover their senses more slowly, and one by one.” This quote from Charles Mackay’s Extraordinary Popular Delusions and the Madness of Crowds illustrates the power of collective thinking in shaping the actions of the individual. That book is notable partly for its presentation of economic bubbles (such as the South Sea bubble in the early 1700’s), a phenomenon no less common today than it was when the book was published in 1841. The continued existence of these investing manias is problematic for modern economists, who typically see market participants as rational actors(though this latter definition is typically more a reflection of the economists’ personal convictions than of any empirical process). Given the enduring power of the psychological forces of fear and greed, it should come as no surprise that exuberant speculation is alive and well today, despite nearly two centuries of philosophical, psychological, and economic progress. One need look no further than the present market rally – during a period of sharp economic contraction, the S&P 500 rose nearly 68% from its lows in late March of 2020 through the end of last year. This buying spree has likely been helped along by easy access to money in the form of leverage, low interest rates, increased interest in the markets due to stay-at-home orders, and the amplifying effect of social media.  Many have called this push the “democratization of investment;” that may be, but it is not the first time such claims have been made, and individuals with unbalanced portfolios tend to underperform the market in the long run. The speculation train may be running hot, but it can’t go on forever, and those who don’t get off before it stops will likely be left holding the bag.

Xi Jinping’s Assault on Tech Will Change China’s Trajectory

The Economist

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The rise of China’s technology industry has been impressive. Alibaba, once deemed by Silicon Valley “a copycat”, now hosts twice as much e-commerce as Amazon. Didi, a mobile transportation platform, has more users than America has people. Tencent has 1.2 billion users, making it the world’s most popular app platform. China’s tech revolution has allowed its economy to expand beyond manufacturing towards services and enter new fields like digital healthcare and artificial intelligence. If China’s $4 trillion tech industry is so valuable, then what is the reason for President Xi Jinping’s recent crackdown on the industry? For one, stronger regulation and policing of the tech industry was overdue. Echoing the concerns of politicians in the US and Europe, the big digital platforms have exploited their freedom to monopolize, hoard data, and push smaller firms out. However, the crackdown is also reflective of the Communist Party’s “untrammeled power.” The party seeks to refine their policy of state capitalism, writing the blueprint for combining prosperity and control. Of course, there are risks to the wave of regulations. The crackdown has already raised suspicion abroad which could potentially inhibit China’s ambitions to set global tech standards and sell services. In addition, the crackdown could hamper the entrepreneurial spirit. Several of China’s tech moguls have pulled away from the companies and from public life. It has yet to be seen whether China will be able to successfully balance promoting prosperity and maintaining control of its tech industry.