Tuesday, November 30, 2021

A battery price wake-up call - btbirkett@gmail.com - Gmail

News Briefs

Volvo sticks to resilient view even as shortages take a toll.
U.S. grant program pivots to sidewalks, bikes and public transit.
Commerce Secretary pushes for government backing of chips.

Battery Price Declines Could Soon Reverse

Hello Hyperdrivers, James Frith here. I wanted to follow up on a topic I first raised in September — battery costs. BloombergNEF has just published the 2021 battery price survey, one of the most important pieces of research we carry out annually.

The key takeaway: On a volume-weighted average basis across the battery industry, prices fell to $132 per kilowatt-hour in 2021. This is down from $140/kWh in 2020 (in real 2021 dollars). The 6% drop isn’t as drastic as the 9% decline we had forecast last year.

Why are this year’s prices higher than expected? The cost of raw materials used in the cathode — lithium, cobalt and nickel — and other key components including the electrolyte have risen this year, putting more pressure on the industry. The increases have been more prominent in the second half of 2021, and even led to Chinese battery manufacturer BYD announcing a 20% battery price increase in November.

The results aren’t as bad as I had feared when I previewed the early findings in September. There are four reasons behind this. First, prices for raw materials and components were relatively low in the first half of the year. This meant that for the first six months of 2021, battery prices were lower than they were in 2020, helping the yearly average to fall.

Second, low-cost lithium iron phosphate (LFP) batteries have been used more in 2021, in both the passenger EV and stationary storage sector. Despite the increase in the price of LFP cells in China in the second half of the year, the average price of these cells in the country is now the same as the average price of high-performing nickel-based cells in the first half, at around $100/kWh. Again, higher adoption of these low-cost batteries has helped to bring the average price down.

Third, when using nickel-based cells, automakers have more widely adopted cathode chemistries that reduce the amount of expensive cobalt used, such as NMC (811). This resulted in lower average NMC prices in the first half of the year, helping to reduce some of the impacts of higher raw material costs in the second half.

Finally, when automakers place large battery orders, they increasingly use contracts that link raw material costs to a commodity index. These prices are normally reviewed on a quarterly basis, and use a price averaged over three months trailing the quarter by a month. This means that prices in the fourth quarter of this year would use an average price from June, July and August. Many automakers won’t feel the hit from the huge lithium price rise seen in September and October until the first quarter of 2022.

We expect prices next year will be $3/kWh higher than 2021 prices on a nominal basis. This would mark the first price increase that the battery industry has seen since we began tracking these prices in 2012. Inflation also will affect the outcome for 2022. Once adjusted for real 2022 dollars, we could still see prices fall.

When I start talking about battery prices, I inevitably get a bunch of folks saying that these prices are unobtainable and unrealistic. However, this really depends on the sector you are working in and how big your order volumes are. Automakers with annual orders in the tens of gigawatt-hours are able to negotiate more competitive pricing. In 2021, battery-pack pricing reported to BNEF ranged from $85/kWh to $546/kWh. Low-volume, niche applications came in at the top of the range.

In sectors like stationary storage, prices still are slightly higher than the industry average — $152/kWh this year, a 16% fall from last year’s average, and only $20/kWh higher than the average. As the scale of other sectors grows, we expect prices to continue trending closer to our industry average.

2021 has been a wake-up call for the battery industry, with the realization that we are at a point now where prices may not necessarily fall every year. In the long run, I’m still confident prices in 2030 will be close to half of what they are today, but it may not be smooth sailing to get there. For the moment we need to concentrate on getting the industry through the next 18 months, to ensure the continued electrification of transport and other sectors.

Before You Go

The Volocopter GmbH 2X electric air taxi.

Photographer: Qilai Shen/Bloomberg

Flying taxis will face a key test come 2024, when the summer Olympic games will be held in Paris. To ensure smooth ferrying of athletes and guests to and from airports and a few Olympic venues, France plans to operate two dedicated flight paths. Several companies, including Volocopter, Airbus, Vertical Aerospace Group, Lilium and Joby Aviation will participate in the project along with France’s civil aviation authority. Testing is expected to start in the coming months. The project adds to a growing list of planned bases around the world, including those being promoted by infrastructure firm Urban-Air Port and South Korean automaker Hyundai Motor, which is targeting the opening early next year of a first site in Coventry, England.

Friday, November 26, 2021

Fractional lands $5.5 million to let friends (and strangers) invest in real estate together | TechCrunch

Fractional lands $5.5 million to let friends (and strangers) invest in real estate together

Natasha Mascarenhas@nmasc_ / 5:00 PM GMT•November 22, 2021

$fractional-product$

mage Credits: Fractional

As teammates at buy now, pay later fintech Affirm, Stella Han and Carlos Treviño bonded over their shared background of growing up in real estate families. The mission of “pay at your own pace” at Affirm clashed with their firsthand experience of the taxing time commitment and high costs that comes with owning real estate; a contrast that eventually seeded the idea for Fractional.

Fractional, a San Francisco-based startup, wants to make real estate ownership more accessible. The platform, which participated in Y Combinator’s Winter 2021 batch, helps people co-own investment properties with friends and strangers. It takes out some of the logistical challenges of finding property, and also removes financial barriers by allowing people to put smaller checks into a collective that will then invest into a property.

The vision has brought over 400 users to its beta, who have gone on to co-invest across 95 properties. It’s also brought millions in early funding to the team: Fractional announced today that it has raised $5.5 million in total funding at a $30 million valuation. Fractional’s seed round is led by CRV, but includes Y Combinator, Will Smith, Kevin Durant, Goodwater Capital, Unusual Ventures, Global Founders Capital, On Deck, Contrary Capital and Soma Capital.

Fractional divides the home ownership process into three main parts. First, the startup either matches together co-owners or onboards a friend group to kickstart the underwriting process, which blends well with the co-founder’s experience at Affirm. Then, it helps facilitate the purchase through legal and financial software services. Finally, it partners with property management companies and other services to make sure the co-owned homes stay in good shape (without the time commitment from its new co-owners).

While Fractional certainly alleviates some of the financial hurdles of real estate ownership, friends may stray away from getting into business with each other due to the sheer pressure it can put on a relationship. What if life circumstances cause one person to want to sell before others? Or another refuses to upgrade the kitchen?

Fractional co-founders Stella Han and Carlos Treviño. Image Credits: Fractional

CRV general partner Saar Gur thinks that the social networking layer of Fractional, “where new and experienced investors participate in a symbiotic environment,” is one of its distinguishing factors, according to a statement. “This also lets Fractional drive constant engagement on the platform beyond raw transactions and fuel their growth through organic word of mouth instead of aggressive paid marketing,” he said.

The rise of alternative investing, from NFT ownership to private equity funds, may trigger more adoption. Consumers are getting comfortable with the idea of diversifying their portfolios away from traditional public equities, and Fractional is a platform that capitalizes on one of the better-known asset classes out there — real estate.

Not Boring Capital’s Packy McCormick, who is an angel investor in Fractional, thinks the startup brings a highly scalable, high-margin business to a typically hard-to-scale, low-margin business.

“What’s been most impressive to me,” the investor and writer told TechCrunch, “is that in an industry that’s been very asset heavy — you need to buy a house and do construction and then sell it, or buy an asset and then let people invest — they’ve taken a pure software approach that doesn’t compromise the ease of the process and still gives people the hands-on feel of owning a house.”

Addressing the World’s Issues... - btbirkett@gmail.com - Gmail

Why We Don’t Discuss Suffering in the Circle of Twelve

Greetings Bruce B.,

Can you believe that we just completed our 56th Healing Wednesday episode? Thank you to everyone who has tuned in for one of these amazing programs over the last year.

This week we wanted to highlight a question from someone who chooses to remain anonymous. They are asking, "With all the world's problems and sufferings (and my goodness, there certainly are quite a few, wouldn't you say?), why don't you ever mention them in the question and answer section? Or why is it not addressed in the Circle of Twelve? It would seem like it is the perfect place to work with these issues."

Thank you for your question. I want everybody to truly understand this from the experience we've had. This is on purpose.

All of you right now (whatever device you're looking at this on) are three clicks away (or perhaps even less) from all of the suffering, the death reports, hurricanes, distress, fear, anger, and all of the awful things that are happening in our country with politics, and the wars on the planet. Three clicks away… you can have it all.

We're intentionally not going to give you any of that drama. However, that's not what the question is really truly asking. You’re wondering why don't we actually describe these things or perhaps involve the people in the subjects.

Monika and I were recently in a Hindu temple, and we got a chance to take a look at some of the attributes of the temple. This particular temple was under construction. There were some interesting looking things, like gargoyles (and there were pretty scary things), that were carved at the entrance.

So scary in the fact that you wouldn't think it would be something commensurate with meditation and grandness and the things that you do in a temple. And they're not. So we asked about them.

The Swami who was leading us through this tour of the temple under construction said, "These are the reminders that when you come into this temple, leave your duality outside."

Now he's not talking about the issues of fear, anger, politics, and all these things. He's talking about your duality. Leave the consciousness of duality out before you enter this temple so that when you come in all that you have is your magnificence as a God-given creature and not all the duality that comes with humanism.

Talking about the concept of the Circle of Twelve, Kryon said, "Lee, this is a temple."
We're always working with those who are suffering. Understand that even by the tone of everything, in the consciousness that we set up, this is what this time is all about… we know there's so much.

When you enter a temple, and you meditate, you don't have to itemize things. You don't have to list those in trouble. You don't need a prayer list or a meditation list. When you pray, when you enter a temple, Spirit knows it.

God knows. Spirit understands and knows what's happening on this planet. All the love and the compassion and the prayer always goes to those who need it most.

So, as long as you truly understand what we're talking about here, and you understand that this is a temple that we're asking you to go to, you'll understand why we don't itemize these things.

We don't talk about them, especially in the Q&A. Leave your duality outside when you tune into this program. And understand that this is a temple, a temple of your consciousness, your magnificence, of your heart, and of your compassion. That's what we do here.

The Swami also said, "Leave your crazy thoughts outside. Come in here. When you leave, you can pick them up and live with them if you want."

So this is our invitation to you to leave the crazy thoughts behind. And we won't say to pick up all your troubles when you leave the Circle of Twelve. :)

Blessings,

Wednesday, November 24, 2021

Iterative Ventures - Creating the Facebook mafia - btbirkett@gmail.com - Gmail

Creating the Facebook mafia - btbirkett@gmail.com - Gmail

Hey everyone, it’s Kurt. Current and former Facebookers want to help each other launch new startups, but first…

Today’s top tech news:

Samsung says its new $17 billion Texas plant will create more than 2,000 jobs
In a lawsuit Apple accused Israeli spyware maker NSO Group of illegally surveilling its users
Strong PC demand continues to benefit HP

How to leave Big Tech

I met Richard Chen this week, a former Facebook engineer who left the company earlier this year with hopes of starting his own business.

The problem was he didn’t really know where to start. He didn’t have a roster of mentors, or know how to fundraise, or know the perfect go-to-market strategy. While at Facebook, the company now rechristened Meta Platforms Inc., Chen was part of an internal employee group focused on angel investing. He realized that there were a lot of people like him—big tech workers who were also aspiring entrepreneurs without a great idea for how to get started.

So Chen started Iterative Venture, an “entrepreneurial community” of former Facebookers looking to build the next big thing. The Slack group he created has more than 800 members, all of them looking to either build startups, invest in startups, or somehow work with startups founded by their old colleagues.

Chen has set up networking and speaking events for the group’s members–a few, he says, have been sponsored by Silicon Valley Bank–and he’s now flooded with recommendations from old colleagues about which startups he should work with and invest in.

In many ways, the concept behind Iterative Venture is as old as Silicon Valley itself. Often the best way for entrepreneurs to get funding or mentorship is to leverage their networks, which tend to be full of old colleagues. Silicon Valley venture capital firms are littered with former Meta executives, many of whom can write very big checks. It’s not what you know, it’s who you know, right?

But Chen says that Iterative Venture is particularly helpful for people without an A-list rolodex, usually junior- or senior-level engineers, who have ideas to promote and money to invest. Former Googler staffers, or “Xooglers,” have started a similar organization for “helping ex-Google entrepreneurs.” But “there doesn’t seem to be a group for us,” Chen says.

Anya Cheng, a former product lead at Facebook, says Iterative Venture has indeed been helpful as she builds a commerce startup called Taelor. She connected with a former Facebook colleague through Iterative Venture who did commerce partnerships, and who offered helpful advice about a side of the business she hadn’t experienced.

The fact that everyone in the group worked at Meta helps, too, as it gives people a common language when talking about products, she added. Many people are more than happy to share their expertise. “You probably saw [Hermione Granger] from Harry Potter – the smart girl who always raised her hand and loved to answer questions,” Cheng says. “There are so many people like that at Facebook.”

Eventually, Chen hopes to turn Iterative Venture into an actual venture capital fund that will invest exclusively in startups founded by former Facebookers and their friends. “Fundraising,” he says, “is going to be our North Star.” —Kurt Wagner

Sunday, November 21, 2021

Sleek Lines and Thoughtfully Collected Furniture Distinguish This Portuguese Home by Oitoemponto - 1stDibs Introspective

Cumberland Advisors Commentary - November 2021 COVID Update - btbirkett@gmail.com - Gmail

... In Singapore, the government has ruled that an unvaccinated person who gets COVID will have to cover costs for COVID care (“Singapore’s Unvaccinated Will Have to Foot $18,000 Covid Bills Now,” https://www.bloomberg.com/news/articles/2021-11-12/singapore-s-unvaccinated-may-face-18-460-of-medical-bills?sref=TG2o5EVv).

A parallel fight rages in the insurance sector: Who will pay for the health care of people who accept no COVID vaccine but then demand a monoclonal antibody treatment if they become sick?

... One variant recently in the news, B.1.640, detected in October in France, has not been categorized as a “variant of concern” or a “variant of interest” by the WHO, the CDC, etc., and thus does not make the long list on the UK page above (“New COVID-19 Variant Identified in France: Concern Rises Amid Surge in Cases,” https://fit.thequint.com/coronavirus/covid-19-variant-discovered-in-france-in-october-is-to-be-listed-in-a-variant-of-interest#read-more).

There are some epidemiologists who suspect the B.1.640 variant is not being detected by many tests which show a negative result when applied to a patient with COVID-like symptoms.

A solution to the small-item-in-a-big-box problem - btbirkett@gmail.com - Gmail

What Does It Do? Independent cart technology helps reduce bottlenecks and keep systems running more continuously. The programmable nature of the equipment also means that different parts of a factory can communicate better with one another, and assembly lines can be adapted easily for different packaging or product formulations. Continuing with the peanut example, if a manufacturer wanted to switch from a small bag to a large bag, that’s now possible by simply pressing a few buttons, Turner said. Before, a person would have to manually unbolt the tooling and set up the system for new specifications. This has a meaningful implications for productivity, maintenance downtime and the amount of square footage a manufacturer might need. A toilet-paper packaging machine can automatically adjust on the fly to the size and pitch of the rolls. A large medical-products maker credits independent cart for a 15% improvement in daily productivity, while a small automotive assembly company is now churning out 9,600 additional parts per shift, according to testimonials provided by Rockwell. The technology also enables more customization. Traditional manufacturing systems are designed to crank out the same thing over and over; “people don’t want that any more,” Turner said. They want bottles of Coca-Cola with their names on it and variety packs of beverages with three different flavors. Those are the kinds of things that independent cart can enable — without adding a lot of extra space on the factory floor.

Why Should We Care? I’ve mostly described the technology within the context of the factory floor thus far because that’s the easiest to understand conceptually. But one of the more interesting features of independent cart is that it can be used in a broad range of applications. Walt Disney Co. is using the technology to move passengers through the Pirates of the Caribbean ride at its Shanghai theme park: it feels more realistic to move at varying speeds through the ride — i.e. slower when there’s something to look at and faster when you’re just moving on to the next station. The U.S. Navy is using it to move missiles from the belly of an aircraft carrier to the top deck. Independent cart can also be used in e-commerce warehouses to more efficiently sort orders into boxes. This is probably only scratching the surface of the technology’s possibilities: “This is the kind of product where when you go to a customer, I can’t tell you what we’re going to end up doing,” Turner said. Rockwell acquired the building blocks for its independent cart technology through a pair of acquisitions in 2013 and 2016, but the technology has garnered more attention among Wall Street analysts lately because of a string of blockbuster orders. “As they say in the entertainment industry, sometimes it takes five or 10 years to make an overnight success,” Rockwell CEO Blake Moret said of independent cart in an interview earlier this year.

Saturday, November 20, 2021

Party Round raises $7M to make the process of raising capital less awful | TechCrunch

...It’s still early days. Party Round is focused on automating seed deals today. Its service has founders create a round, set terms and invite investors to participate. It then helps handle the requisite documents, signatures and capture of raised funds. Smaller checks than are normally considered economically viable — lawyers are expensive, as is CEO time — can be accepted, Hays said, opening up the investor pool to one’s larger network instead of merely the already wealthy.

The company didn’t share much in the way of metrics, a somewhat standard level of disclosure for early-stage companies. But it did say that during a beta period, a collection of founders raised in the low six figures per day using its service.

Which, today, is free. The startup will monetize later on, with Hays saying that there are a number of ways for it to do so. Normally I’d protest at delayed monetization, but given that Party Round intends to sit atop an artery of capital, it should be able to tap the vein to feed itself when it chooses to. Close proximity to money, and especially money in motion, is never a bad place to build a business.

Friday, November 19, 2021

Money Stuff: Zillow Tried to Make Less Money - btbirkett@gmail.com - Gmail

Zillow

On the one hand, sure, I can see why someone might consider this a problem:

When executives at Zillow Group Inc. pored over the company’s earnings in the spring, they saw a problem: The real-estate firm was making too much money.

On the other hand, it does feel like a problem that I would happily take off Zillow’s hands? There are worse problems than making too much money! Making too little money is a worse problem, for instance. Losing money. These are the problems. Making too much money is just interesting.

That was the first sentence of the Wall Street Journal’s postmortem about how Zillow ended up losing a bunch of money buying and flipping houses and had to shut down that business. The problem was that “the company’s algorithm, which was supposed to predict housing prices, didn’t seem to understand the market,” and was generating prices that were too low.

This had two effects. First, most people declined its offers, which were too low: “Only 10% of people who asked for a Zillow offer and eventually sold their home ended up selling it to Zillow,” and “Zillow was also behind on its target for home purchases” in the first quarter.

Second, when people did accept Zillow’s offers — because they were in a hurry, or didn’t have a good sense of the market — Zillow made a ton of money:

The first quarter delivered home-sale profits that were more than twice as high as anticipated, the company said. Zillow expected to make money primarily from transaction fees and from services such as title insurance—not from making a killing on the flip.

Zillow executives looked at this state of affairs and said, well, this state of affairs is bad, we need to grow our market share and make our algorithms more accurate. We are looking to be a first-choice market maker in home-selling, and we can’t do that if our prices are too low. So they tweaked the algorithms to generate higher prices. Those prices also turned out not to be particularly accurate, but in the other direction. If you systematically bid too low, you will not do many trades, but you will make a lot of money on each trade. If you systematically bid too high, you will lose money on each trade, and also you will do a whole ton of trades. This is much worse.[1]

You could imagine being in that meeting and saying, hang on a minute, are we sure about this? Sure, it’s bad that our algorithms are inaccurate, and it would be better if they were more accurate. But that seems hard. We have smart people working to make them accurate, and so far they have failed. If we tweak the algorithms to generate higher prices, that may just make them inaccurate in the much worse direction.[2] On the other hand right now we have a business that buys houses at below-market prices, flips them, and makes a big profit on each one. A lot of people would like to have a business like that! Sure it would be better if we could do more trades like that, but you’re realistically not going to find tens of thousands of people who will sell you their homes for below market value. But we have found thousands! That’s pretty good!

I don’t know, it’s a weird story about technology and scale, about how many businesses — in particular, many public companies — aim to maximize not profit but size. In concept, a business model like “send everyone in America a bid on their house that is too low, and then buy the houses from the minority of suckers who take your bid” seems … obviously … lucrative?[3] Like, I would be happy to do that business? I don’t have the capital for it, but I’m sure there are hedge funds who would do this business if they could.

But the only way to actually do it — to generate millions of plausible-but-too-low bids, and to get them in front of potential sellers — is to have the scale and reach and technology of a big online home-information company like Zillow. And once you’re at that scale, doing a few thousand dumb lucrative transactions almost isn’t worth it for you; the only way to justify it is to scale it up until it’s larger, smarter and less lucrative. (Or, in Zillow’s case, larger, equally dumb and disastrous.)

Also you probably got to that scale by being a popular trusted source for home information, which is valuable for your main business of selling ads on the internet; sending people lowball bids to try to sucker them into selling to you might not be great for that business. As Ben Thompson wrote: “Because the company felt compelled to push Offers, it was actually leaving most potential sellers with a bad taste in their mouth; this is a big problem given that an Aggregator’s advantage is the fact the end users like it and go there first.”

And so Zillow could not do this business model, because the business was too small for Zillow. And I could not do this business model, because I am too small for the business. But for a little while, it was kind of a good business!

China - Where Did It All Go Wrong for Emerging Markets? - btbirkett@gmail.com - Gmail

Where Did It All Go Wrong for Emerging Markets? - btbirkett@gmail.com - Gmail

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A Deeper Submergence?

Emerging markets are back in the morass. They were supposed to be prime beneficiaries of a broad global reflation this year, and it hasn’t happened. The challenge is to work out why.

The basic facts are clear enough. The currencies of these countries, as measured by the JPMorgan EM FX index, have dipped to an 18-month low, approaching the all-time trough during last year’s Covid-19 shutdown. And earlier this week, their stocks, as measured by the MSCI emerging markets index, dropped to a new low compared to the developed world (represented by the MSCI World index):

Looking further, we can see that the way emerging markets behave as an asset class has changed. Their drivers in the last decade have been utterly unlike those of the prior 10 years, when they led the world.

The most poignant illustration comes from Brazil, Russia, India and China, or the BRICs. After the 9/11 terrorist attacks in 2001, Goldman Sachs Group Inc. published a report suggesting the world “needed better BRICs.” The idea was that in these new and frightening circumstances, the addition of four big emerging economies to the G-7 and other international groupings would help the world cohere. Somehow, in the months that followed, this turned into a popular investment strategy. China and India, it was argued, would buy natural resources from Brazil and Russia. The big economies would support each other.

It worked spectacularly for a while, and then it didn’t. This shows how MSCI’s BRIC index has performed since 9/11, compared to the World index:

The big four emerging markets are still below the peak set on Halloween 2007. Even though China was critical in helping the world through the Great Recession, they have consistently lagged behind the developed world since then.

This was ironic because one of the key arguments made for the BRICs 20 years ago was “decoupling.” As these huge economies reached maturity and built thriving consumer markets, the theory was that they would move independently. Even if the U.S. and western Europe went into recession, the argument went, the emerging markets would be fine.

In fact, experience was the opposite. As seen in the charts, from 2001 to 2011, emerging markets were a leveraged play on the developed world. The better developed markets did, the more EM outperformed them, and vice versa. This is the polar opposite of decoupling.

In the decade since 2011, however, the pattern is different and emerging markets have indeed decoupled. Sadly, this hasn’t been in a good way. They have continued to decline in relative terms as the developed world has prospered:

For a decade, when asset allocators felt “risk-on” they would put even more into emerging markets. These days, they prefer developed markets, however good their risk appetite is.

The perceived macro underpinnings of the emerging world have also ceased to help. Previously, the boom in commodities — especially industrial metals — boosted EM. High demand for metals showed China was in good shape, the argument went, and meant money for Brazil. The entire emerging market complex tended to move in line with bull and bear markets in industrial commodities. No longer. Metals staged a massive rally after the Covid shutdown, and it hasn’t helped emerging stocks a bit:

This brings another issue. For years, the whole emerging world behaved as though it was a direct extension of China. The MSCI index looked pretty similar whether or not it included the country. But this year, China has been a lead weight. The full EM gauge has fallen this year, while the index excluding China is faring well:

One important point: Correlated markets in the years before the credit crisis were a symptom of poor allocation and faulty risk management. Investors thought they had diversified by moving into different asset classes. In fact, they had made the same bet several times. As we know, they all fell together in 2008.

Something much more discriminating is afoot now. This isn’t a repeat of naive investment using indexed commodities and passive equity funds, and for this we can be grateful. But if investors are more discerning, it’s disquieting that they no longer perceive great value in countries that support the majority of the world’s population, and are still trying to grow from a lower base.

Why is this happening? And are investors right?

China, Xi and the Private Sector

One profound issue is China’s clampdown on the private sector. Whether this is the Communist Party rediscovering its true colors, or (more likely) a pragmatic attempt to limit possible centers of opposition, it’s bad news for investors in private Chinese companies.

It’s always possible that investors have overreacted, and there’s a decent chance that valuations already reflect the new dirigiste reality. But for now, it’s hard to invest in Chinese stocks. This isn’t just about perceptions. The clampdown, in which authorities stopped Alibaba Group Holding Ltd. and others from continuing exclusivity arrangements with retailers, has had a real effect on profits as other companies made inroads. A downbeat forecast for sales next year led to a savage reaction in Alibaba’s ADRs, which have now underperformed the S&P 500 since their 2014 listing:

It’s just possible that some of Beijing’s interventions are for the long-run good of consumers and the economy. They’ve unquestionably been awful for shareholders of leading companies like Alibaba.

China’s Property Market

The single biggest reason for emerging market underperformance this year is the Chinese property market. The problems of China Evergrande Group sparked fears of a Lehman-style crisis, or “Minsky Moment.” And the elements seemed to be in place. Lots of developers have sunk money into a wildly over-extended housing industry. The following chart, from Barclays Plc, shows that China’s real estate market is far more overblown than Japan in 1989 or the U.S. in 2006, which is terrifying:

So why should we be calm? Firstly, a critical element in the Lehman crisis is missing: leverage. Adam Wolfe, emerging markets economist for Absolute Strategy Research Ltd., shows that property developers’ funding has come primarily from pre-selling houses yet to be built. Reliance on loans is far less than it was during China’s near-crisis of 2015, and inordinately less than in the U.S. housing bubble:

Further, contrary to appearances, the primary problem isn’t wildly overblown valuations. As a share of disposable incomes, house prices have fallen considerably over the last quarter century, as Wolfe shows in this chart. Homebuyers may be getting a bad deal, but they aren’t overstretching themselves:

Rather, the dilemma is that China has built far more houses than it needs. Such excessive supply will mean losses for developers, and declines in house prices. This isn’t good for the economy, and is reason to expect that growth can no longer continue rocket-like at 6% or more per year. This justifies the downgrading of emerging markets. But the problem seems bad, not cataclysmic:

The wider issue is asset allocation. As Wolfe puts it, China’s leaders know that the economy is too reliant on housing. Engineering a deflationary move away from property is much easier now, amid signs of accelerating inflation, than it was when China first attempted it in 2014 and 2015. Then, prices were stagnant, and housing deflation was dangerous.

Meanwhile, Chinese people continue to save at a prodigious rate, but as most financial investments have been disappointing in recent years, they still favor property. The challenge is to get them to switch to the kind of tech investments that can reinforce China’s competitive position, and help the economy grow. Jian Chang of Barclays summarizes China’s policy as follows:

“Three stability”: To stabilize land prices, home prices and market expectations. This was first mentioned by the Ministry of Housing in late December 2018 as the “predominant objective” for its 2019 work agenda.
“Housing is for living in, not for speculation.” This was said for the first time at the 2016 Central Economic Work Conference and reiterated at high-level meetings including by President Xi.
The property sector won’t be used as a short-term tool to stimulate growth. This was said for the first time at the Politburo meeting in July 2019 and reiterated in September this year.

As this chart from Barclays shows, this is a big job, but nudging Chinese savers only a little out of property into something riskier could make the economy far more productive:

Where does this leave us? China is trying to turn the housing market around in a way that will help in the long term and probably hurt a lot in the short run. It therefore makes sense for investors to exit while they wait to see whether the government can pull off the trick. Authorities have made clear for years that they wish to avoid a “Minsky moment” and it looks as though they should succeed.

But China is a special case. Other emerging markets face more of a problem fighting inflation without provoking a recession. On which note:

Economic Solutions