Recommended Weekend Reading

May 26 - 28, 2023

Here are our recommended reads from reports and articles we read in the last week. We hope you find these useful and have a great weekend.   And let us know if you or someone you know wants to be added to our distribution list.

“More than Words: Twitter Chatter and Financial Markets”   US Federal Reserve Board Paper

Abstract: We build a new measure of credit and financial market sentiment using Natural Language Processing on Twitter data. We find that the Twitter Financial Sentiment Index (TFSI) correlates highly with corporate bond spreads and other price- and survey-based measures of financial conditions. We document that overnight Twitter financial sentiment helps predict next-day stock market returns. Most notably, we show that the index contains information that helps forecast changes in the U.S. monetary policy stance: a deterioration in Twitter financial sentiment the day ahead of an FOMC statement release predicts the size of restrictive monetary policy shocks. Finally, we document that sentiment worsens in response to an unexpected tightening of monetary policy.

“Industrial policy for electric vehicle supply chains and the US-EU fight over the Inflation Reduction Act”  Peterson Institute for International Economics

Abstract: The Inflation Reduction Act (IRA) of 2022 provoked a transatlantic trade
spat. After the law was passed, the Biden administration addressed some of
the concerns raised by the European Union by writing controversial rules to implement the legislation. These regulations are expected to have complex effects that, in some instances, may offset the intended impact of other provisions in the original legislation. This paper examines how the law, its implementing regulations, policy decisions on leasing, as well as potential critical minerals agreements all, have the potential to affect the electric vehicle (EV) supply chain. The EV case study showcases the political-economic complications involved in US and EU's attempts to cooperate over clean energy transition policy to address the global externality of carbon dioxide emissions.

“Why US Tech Giants Need Africa”  Nate Allen & Nanjira Sambuli/Project Syndicate

Last year, Google’s Equiano undersea cable, which began conveying terabytes of data per second and stretches from Western Europe to South Africa and has 20 times the capacity of the previous cables that served the continent.  According to Google projections, the new cable has the potential to transform Africa’s economy by creating millions of jobs, reducing data costs by nearly 20%, and enabling a fivefold increase in internet speeds. Yet, a little over a third of Africa’s 1.4 billion people use the Internet.  US tech companies have to step up their focus and investment on the continent – and that means they must show they take local interest seriously.

“Empire’s Twilight? Russia Loses Support in Its Own Backyard”   Gallup

Russia’s image took a hit worldwide after it invaded Ukraine in 2022, according to a recent Gallup report, including in post-Soviet states that Russia considers part of its sphere of influence. This is quite a reversal for Moscow which sought to regain preeminence over countries that formed the Soviet Union. For President Vladimir Putin and other Russian nationalists, the idea of a “privileged” sphere of influence among post-Soviet states is crucial to the perception of Russia as a great power. In the wake of Russia’s invasion of Ukraine, its image has suffered significantly across many, but not all, post-Soviet states. Here are five key takeaways from Gallup’s 2022 data on the approval of Russia’s leadership in those countries. 

  “Decoupling is Already Happening – Under the Sea”  Foreign Policy

U.S.-China rivalry has led to the rerouting of crucial subsea internet cables, which could have major geopolitical consequences.

Charts of the Week 

The US Department of Commerce’s Entity List has Grown.  A Lot.

The list of companies on the US Commerce Department’s Entity List – a blacklist – of people and entities who US companies cannot export technology without first securing a license has grown massively in the last two years.  While Russia has been disproportionately hit by the Entity List with almost 900 entities, China and a number of countries have been hit harder, too.  China has almost 700 entities on the list now. But that does not mean a complete ban on exports to Russia or China.  In Q1 2023, the Us exported goods to Russia worth almost $2 billion (which is down 77 percent year over year).  And trade with China came in at almost $140 billion (down 20 percent year over year).  Other countries of note who show up on the Entity List – some obvious, some surprising – include Venezuela, Switzerland, Germany, Taiwan, Japan, Myanmar, Singapore, Canada, Iran, Lebanon, Netherlands, Pakistan, South Korea, Turkey, United Arab Emirates, United Kingdom, and Israel.

China’s Baffling Young Unemployment Problem

The Financial Times recently published a fascinating report on the unexplained and unexpected spike in youth unemployment in China.  For Chinese between the age of 16 and 24, the unemployment rate hit 20.4 percent in April and seems to be climbing – yet, the overall jobless rate fell to 56.2 percent in the same month. This is twice the US level but somewhat comparable with some European countries such as Italy and Spain.  Citing a recent Goldman Sachs study, the Times points out this is an increasingly politically sensitive issue for Beijing. 

But why is it happening?  The Goldman report suggests both cyclical and structural factors, including the impact of COVID on service sectors such as hotels and catering which tend to hire younger workers.  But the report also suggests that there may be a “misalignment of academic disciplines with business requirements.  For example, the number of graduates from vocational schools who majored in education or sports rose by more than 20 percent in 2021 vs. 2018, but the hiring demand in the education industry weakened meaningfully during the same period.”

Recommended Weekend Reading

April 14-16, 2023

Here are our recommended reads from stories we saw in the last week. We focus this week on the rapidly accelerating search for critical minerals needed for alternative energy and electric vehicles. Let us know your thoughts and if you or a colleague want to be added to our distribution list. Have a great Easter and a week ahead!

·       “A Fresh Look at North Korea at Night” 38 North

In January 2014, astronauts on board the International Space Station (ISS) took a photo that dramatically illustrated the economic divide between North Korea and its neighbors. It showed both South Korea and China bathed in nighttime light while North Korea was largely dark. Nine years on, has anything changed? And what does that mean for assessing North Korean risk to the region (and the world)? 38 North (a publication of the Stimson Center in Washington, DC) offers an in-depth interactive assessment of what has changed and why.

·       “How Indonesia Used Chinese Industrial Investments to Turn Nickel into the New Gold” Carnegie Endowment for International Peace

China has become a global power, but there is too little debate about how this has happened and what it means. Many argue that China exports its developmental model and imposes it on other countries. But Chinese players also extend their influence by working through local actors and institutions while adapting and assimilating local and traditional forms, norms, and practices. This study shows how China’s Belt and Road Initiative helped build an industrial complex in Indonesia—but contestations at the local and national levels compelled Chinese players to adapt to rapidly shifting Indonesian cross-currents.

Will the scramble for rare earth produce a transatlantic trade accord?  Peterson Institute for International Economics

As the world invests heavily in the digital economy and green transition, the need for these rare earth elements—including bauxite, cobalt, lithium, and nickel—will increase five to six times by 2030 and seven times by 2050, according to estimates by the European Commission and the World Bank. But the European Union and the United States import 98 and 80 percent, respectively, of these rare earth from China, which controls large parts of the world’s mining and processing. In a recent meeting, EU Commission president Ursula von der Leyen and President Joseph R. Biden discussed a rare earth/critical mineral strategy and jointly announced that they would immediately begin negotiations on a targeted critical minerals agreement. A future deal could lead to the EU being treated as an equal partner in an equivalent of a free trade agreement, thereby qualifying the EU for certain tax credits for electric vehicles in the IRA. The objective is to have an agreement where critical materials sourced or processed in Europe are recognized as sourced or processed in the US. 

Several countries in the EU have minerals deep underground—for instance, France, Greece, Greenland, Portugal, and northern Scandinavia. LKAB, the state-owned mining company in northern Sweden, estimates that most critical minerals can be found in Swedish territory, with reserves measuring a million tons, potentially making Sweden the biggest supplier in Europe.

·       “Schell on the Long Arc of US-China and Long Reach of Leninism” ChinaTalk podcast on Spotify

How did Chinese President Xi Jinping’s formative years influence how he views the world today?  Very few in the West understand what formed him. Veteran China scholar Orville Schell, the Arthur Ross Director of the Center on U.S.-China Relations, looks back at decades of writing and working on China, weathering the cycles of the country opening up and shutting down, and gives his two cents on what’s going on in Xi’s head.

Chart of the Week 

The Spiking Demand for Critical Raw Materials And the Few Countries Which Produce Them

China has moved to restrict the export of raw materials critical for green technologies.  But they are not alone – India, too, has placed new restrictions on their exports.  But China dominates the production supply chain, as the chart below shows.  As the US and EU move to aggressively ramp up the production of electric vehicles and alternative energy production facilities, there is a only a few countries that produce these raw materials – setting up a major geopolitical race for access.

Recommended Weekend Reads: November 18 - 20, 2022

We wanted to share a few of the research pieces and notable news stories that caught our eye in the past week. We hope you find it interesting and useful.

·  "CCP: Who makes up the party" The Lowy Institute

Demography is destiny, as is said – and the numbers in China make for a compelling story. In a series of charts and graphs, the Lowy Institute shows who makes up today's Chinese Communist Party and its senior ranks. The short version: It is overwhelmingly male and well over 60 years old.

·  "Interpreting Chinese Economic Policy: Another Brief Guide"  by Derek Scissors/American Enterprise Institute

Chinese economic policy is seen as increasingly important, including to global investors. But transparency has not risen in tandem, and policy is frequently misinterpreted. Here is a guide to understanding China's economic and monetary policy more clearly.

·  "Global Economic Turmoil Calls for a Modernized Global Financial Architecture to Address Needs of the Most Vulnerable Countries"  by David McNair, Executive Director at ONE.org and nonresident scholar at the Carnegie Endowment for International Peace

·       The author argues that, unfortunately, those Western governments with decision-making power and resources to help vulnerable countries respond to the polycrisis are not inclined to use it, given domestic cost-of-living crises in G7 nations, the ongoing conflict in Ukraine, and limited domestic political appetite for international initiatives.

·  “Russia’s Defense Industry Growing Increasingly Turbulent” Jamestown Foundation

Moscow has actively tried to restore at least part of its arms lost in Ukraine after almost nine months of its bloody war. The Russian national defense budget has skyrocketed. However, the true reality of the current state of affairs appears to be rather complicated for the Kremlin. Even the trillions of additional rubles will make its defense industry less productive and efficient in the short term due to a number of critical difficulties.

·  “Putin’s Fear of Retreat – How the Cuban Missile Crisis Haunts the Kremlin"  Foreign Affairs

History matters and Russian President Vladimir Putin knows it. Putin has closely studied the detailed events of the Cuban Missile Crisis. He understands that then-Soviet leader Nikita Khrushchev was the one who backed down -- not President Kennedy – leading to Khrushchev's removal from office less than two years later. Putin recently spoke of the Cuban Crisis and is clearly desperate to avoid a similar fate.

Chart of the Week: We Reached 8 Billion People Last Week… But Population Growth is Starting to Slow, and India Will Surpass China: 

According to estimates from the United Nations, the world's population surpassed 8 billion people this past week. While populations in sub-Saharan Africa are expected to continue growing substantially over the next 30 years, the annual global population growth rate is now at its slowest pace since 1950 – and moving into negative rates in many advanced economies. Additionally, India will become the most populous country in 2023, overtaking China. By 2050, India's population will be 1.7 billion to China's 1.3 billion.