Differences, Subprime and Drones | Learning by Proxy

This is the third edition of the 'Learning by Proxy' series that I am writing. I have been fine-tuning what I write and I am providing a little more structure to this. I have always thought of myself living at the intersection of Business, Politics, Economics and Technology. So breaking this down by those topics.

Politics

Indian political parties seem to harbour far less bitterness in the current environment. CMs across party lines have been seen cooperating and working together with the centre through this pandemic. Is this going to be a short-lived change or is a more permanent change taking place?

Political parties across the spectrum have cooperated with Prime Minister Narendra Modi’s BJP government, offering constructive feedback instead of mindless barbs. State governments across party lines have engaged positively with the Centre, and vice versa, bringing out the true spirit of ‘cooperative federalism’ that Narendra Modi repeatedly talked about since coming to power in 2014, but was not seen so far.

The US Postal Service (USPS) has been losing 2 Billion dollars a month, due to lower volumes. Trump has always been against the USPS and has wanted to either privatise or shut down the service. But the USPS plays a very key role in the US elections, namely, making mailed ballots possible. He has always thought of USPS as Amazon’s subsidised delivery service. Will it survive the pandemic?

Elections and US

Also, with all the mismanagement that the Trump administration has put on display, forcing people to go through an election in the midst of a pandemic seems to have finally done it. Albeit temporarily.

The surprise defeat of a conservative justice in a statewide Wisconsin election — despite a show of support from President Trump — drove Republicans and Democrats back to their 2020 electoral playbooks on Tuesday, as both parties examined whether a surge of enthusiasm and on-the-ground organization among Democrats could help them capture that critical battleground state in November.

Leaders of both parties said that the victory, by an overwhelming margin of more than 120,000 votes, could provide a road map for Democrats trying to beat Mr. Trump in November in Wisconsin (which he carried by 22,748 votes in 2016) and other states where he narrowly prevailed. Democrats did have an advantage, though: A presidential primary was on the ballot, which probably raised turnout.

Economics

Subprime

The great country of America which gave us 2008 is preparing an encore. They did not outlaw subprime loans after that catastrophe. They just told banks not to undertake them. So the number of subprime loans reduced to almost zero at the time and everything was alright. Only to blossom again starting in 2012. By 2014, it has already surpassed 120 Billion dollars worth of debt far more than the 97 Billion it was at in 2006 - the prior record.

Now as the coronavirus pandemic has let loose in the USA, the question of what is going to happen to these ‘Junk bonds’ has come up.

About a quarter of the loans that are at higher risk of default are held by collateralized loan obligations (CLO), according to the Financial Stability Board (FSB). CLOs are like investment funds: They raise money by issuing bonds and investing the proceeds in junk loans. Some of the bonds they issue get paid first and are senior to the other ones that are riskier and won’t get paid if the underlying loans default. The riskier the bonds are, the more they yield.

In a world where fewer assets offer much of a return, the demand for CLOs has soared. These products can be stuffed with loans from buyouts led by private-equity companies like KKR and Apollo Global Management, whose founders are billionaires. In the US, more than $60 billion of risky loans and junk bonds last year were used for share buybacks and to pay dividends to investors, according to the IMF. That kind of financial maneuvering, while lucrative for private-equity companies and stock investors, can make companies more susceptible to default.

If the Federal Reserve started buying junk bonds or dreamed up some other way to help speculative-grade companies, it could be a quick and effective way to lower market stress, but it would also create dangerous incentives for risk taking. “In the leveraged loan market, they have long levered up these balance sheets at the expense of the bond holders and issued tons of debt,” Schwab’s Jones said. Supporting the leveraged loan market risks “bailing out private-equity billionaires.”

I am pretty sure this will happen, given that this is the USA and the rich have to be allowed to get richer. If not, I just hope that the pandemic has created a kind of buffer between the US and the global financial system. But I am afraid this will just be hope.

Supply Chain

Global supply chains are a reality today but when that supply chain gets disrupted strange things begin to happen. Asparagus gets cheaper in America when Mexico loses the ability to ship it to global markets.

It’s not just asparagus growers facing this. US dairy farmers, hurt by the closure of restaurants and foreign export markets, are literally dumping whole milk onto the ground because they have more than they sell after losing 40% of their usual market. Giant meat companies are having to temporarily shutter their plants as workers have caught the virus. And produce pickers have voiced concerns that some of their employers aren’t taking the virus seriously enough, which would impact supply chains if enough farmworkers are stricken with the disease.

On that note, I had mentioned last week - the unexpected can be expected to happen at this time. Thanks to the lockdown in India, there is a growing chorus to let agricultural producers sell their products to anybody who can establish demand rather than being forced to sell through the APMC.

Indeed, as many have pointed out, and the NITI Aayog has recommended, this is the time to open these markets up, temporarily suspend state marketing laws and regulatory norms, and enable a wide range of buyers, market sites and channels to operate.

Technology

Ford has already re-calibrated its factory to produce reusable hospital gowns with airbag material.

With most big car companies having halted production, Ford is one of several automakers that has re-deployed its resources to fight the pandemic. Companies like General Motors and Tesla have transformed several of their factories into ventilator and face mask production plants.

Across the world, surveillance has moved into top gear.

Two technologies have been around for some time but were not considered mainstream - suddenly going mainstream. Bluetooth low energy, BLE for short, was supposed to be always on and enable quick movement of data. The problem was that smartphone batteries are almost always starved of battery. This meant most people kept their bluetooth switched off. I have met so many startups with cool applications that never saw the light of day due to this very reason. But what if the OS itself decided it needs to exchange data? This Pandemic has provided the reason. Foes are embracing each other.

And then you have a country as populous as India going into lockdown. How do you ensure that are Billion people stay at home? Borrow a leaf from the Chinese playbook. China deployed drones en masse across the country when it went into lockdown in late January. They used a lot of drone surveillance to keep people at home and now India is doing the same thing. I am just curious to see what this means for drone startups and how it might accelerate food delivery over drones and take thousands, maybe millions of bikes off the roads and make our roads less congested.

UPDATE - As I wonder, people are already using this technology to ship cigarettes and alcohol in India.

Business

Indian airliners are all grounded with all domestic and international flights banned during the lockdown. Despite this, they are not sitting still, they are using their capacity to deliver much needed essential health supplies.

On April 1, India’s aviation watchdog, the directorate general of civil aviation (DGCA) allowed carriers to use passenger planes to ferry cargo as part of the government’s Lifeline Udan initiative.

The scheme was launched for the movement of Covid-19-related reagents, enzymes, medical equipment, testing kits, personal protective equipment (PPE), masks, gloves, and other accessories needed for emergency workers.

As part of the initiative, SpiceXpress, SpiceJet’s cargo arm, had been helping in the delivery of essential items.

The airlines are offering their services at a time when the carriers themselves are battling a war for survival amid the various international travel bans and the ongoing 21-day long lockdown in India.

Startups are not starting up as much in the US.

In the last week of March, there were just 6,790 applications for new businesses that plan to hire workers. That was down from 11,720 applications from the same week in 2019, a decline of 42%.

Misc

Ben Evans in this usual style provides a very insightful opinion on how things would change and how things are changing due to this pandemic. In his blog he focuses on three broad themes.

The willingness of people to go online for services that they had not tried before. Changing the way people work and get things done. How health and education will evolve in this changed world.

I don’t think we can know which is which right now, but we’re going through a vast, forced public experiment to find out which bits of human psychology will align with which kinds of tool, just as we did with SMS, email or indeed phone calls in previous generations. Meanwhile, tens of thousands of software engineers are cooped up at home getting frustrated with their current tools and wondering if they can spot some pain point, or mechanic, or small difference to the flow, and solve some opportunity that no-one ever quite realised was there. Those insights let Zoom carve out 200m users in a space where all of the incumbent tech giants thought they had established, mature products. In that, Zoom reminds me a lot of Dropbox - everyone told Drew Houston ‘there are dozens of these already’ and he kept replying ‘yes, but which ones do you use?’ A lot of companies will be born in nine months, and more of them will be the next Slack or Dropbox than the next Zoom.

Signing off...