Breaking Bad: The Dangerous Work of Shipbreaking

The International Labor Organization (ILO) describes hazardous work as containing the "3Ds: dirty, difficult and dangerous." Shipbreaking is a particularly dirty and dangerous occupation exploiting low wage workers in South Asia, including Bangladesh. According to the ILO, "shipbreaking has grown into a major occupational and environmental health problem in the world. It is amongst the most dangerous of occupations, with unacceptably high levels of fatalities, injuries and work-related diseases."

The NGO Shipbreaking Platform has great data on this subject. There were more than 53,000 active ships over 1,000 gross tonnage globally at end of 2019 with an average life span of 25-30 years. Approximately 1% of the global fleet is scrapped each year; mostly in South Asia (97% of all shipbreaking happens in just five countries: Bangladesh, India, Pakistan, Turkey and China). In 2019, 630 large end-of-life ships were scrapped, 446 of whom were broken and recycled on the shores of Bangladesh, India and Pakistan manually using basic tools in a process known as "beaching." 

In terms of tonnage Bangladesh was far the biggest recycler of ships as shown below (click to enlarge chart). It is estimated the shipbreaking industry directly employs 50,000 persons in Bangladesh and perhaps up to 200,000 indirectly providing an annual revenue of $1.5 billion. Shipbreaking is also a key source of steel, supplying 60%-80% of domestic demand.  

Data on injuries and fatalities are often underreported. Based on local press reports in Bangladesh, 400 workers have been killed and 6,000 seriously injured from accidents alone between 1993 and 2013. Taking into account long-term illness from exposure to toxic substances the numbers could be substantially higher. An average size ship contains up to 7 tons of asbestos which is often sold in the local communities after scrapping. Large amounts of other carcinogens and dangerous substances include PCBs, PVCs, PAHs, TBT, mercury, lead, isocyanates and sulfuric acid. According to the ILO, they not "only intoxicate workers but are also dumped into the soil and coastal waters taking an enormous toll on the surrounding environment, the local communities, fishery, agriculture, flora and fauna."

Bangladesh is a favored destination for old ships because of cheap labor and weakly enforced safety and environmental regulations. Unskilled workers, 10% of whom are children, toil 16 hours a day, seven days a week for $1-$2 dollars/ day on the open beaches of Chittagong. Because the costs of operations are so low, Bangladeshi shipbreaking companies are able to post higher bids for the scrap metal of ships compared to companies in developed countries, where shipbreaking takes place in dry docks under strict labor and safety conditions. Large shipping corporations are more than happy to knowingly send their toxic ships to be recycled in Bangladesh under dangerous conditions as long as it means more profits. Holding Western shipowners accountable can be satisfying. But greater accountability, more stringent regulations and stronger enforcement of global rules could also reduce the competitiveness of Bangladeshi shipbreakers and put at risk the livelihood of potentially thousands of Bangladeshi workers. Doing good may do some harm as well. But that's no excuse for inaction. The international community should provide greater support to Bangladeshi workers, while also offering shipowners tax credits or other incentive structures, such as environmental offsets, to send cleaner ships (removed of carcinogens) to developing countries.

Does "Printing" Money Cause Inflation? Not Necessarily...

The big financial news of the past week was that the consumer price index (CPI), a broad measure of inflation, jumped to 4.2% yoy in April, up from 2.6% in March--the highest level since...2008. Cue the frantic headlines in the financial press. Never mind, that (i) the change is coming off a low base due to the Covid-19 lockdown and (ii) that in 2008 we were in the midst of the Great Recession. Yes, inflation was higher even during that recession than it is today, which tells you how much of a disinflationary environment we've been living in the past dozen years. When the Fed says any inflation is likely to be transitory, we are inclined to agree with them.

But investors know better, of course, and the financial press that caters to them are screaming about how we are on the precipice of runaway inflation. Why? Is it because of ultra accommodative monetary policy? Umm, no...the market is okay with that...throwing a major tantrum last time yields rose. Free money is great! (to be fair not everyone agrees...hedge funds have long complained about low rates). No the "real" danger are the massive stimulatory fiscal policies designed to help lower-income Americans, which they feel will end very badly. Paul Krugman's recent column has a couple of interesting charts that say otherwise.

First, while there was a relationship between money supply (blue line) and CPE--the measure of "core" inflation the Fed follows--in the 1970s and 1980s, there has been little, if any, correlation between money supply and CPE over the last 30 years.  

What's going on? The classic definition of inflation is "too much money chasing too few goods." And that shows up in the "velocity" of money, technically the ratio of GDP to money supply, but more colloquially how quickly money changes hands. Well, the velocity of money has plunged in the last 20 years. So while money supply has spiked, GDP hasn't, growing at an anemic 2% per year.  

Moreover, most, of that growth, as we know, has accrued to the top 1%, which has resulted in asset price inflation. We mention that because Biden's policies are geared towards giving lower-income households economic relief as this cool chart from the NYT shows. Middle and lower-income families are more likely to spend than save. That could increase the velocity of money and economic growth, which would be good. But runaway inflation? Nah, demographics and other powerful structural factors will keep inflation in check.  

Trevor Noah Asks the Hard Question: What is Your Responsibility?

With fighting raging in Jerusalem Trevor Noah bravely addressed the tensions in the ongoing conflict between Israel and Palestine. Look, this is a very difficult and contentious issue...so complex, Noah acknowledged, that even Jared Kushner couldn't solve it! Yet, Noah  in ten minutes did a better job of in the describing the situation than any mainstream journalist has ever been able to. He rightfully points out that depending on when you start the clock on a conflict that goes back 73 years, you can fairly blame one side or the other. (I'd also add the damn Brits! Who, really, when you think about it are responsible for many of the world's long-running conflicts...but I digress). At the end of the day, today, with a vastly superior military strength, Noah points out that Israel faces no real existential threat from the Palestinians, and that imbalance is akin to a teenage Noah fighting his annoying and pesky 5-year old cousins. Yes, the kids are trying their hardest to land a punch and will fight dirty, but Noah understands the difference between them and his responsibility not do the same. So he bluntly asks, "What responsibility does Israel have?"    

It was a pretty powerful The Daily Show segment. Raw and genuine. Watch it below (or again).

Separately, the NYT ran two op-eds today featuring the latest Mid-east conflict. One is from the paper's "conscience," Nicholas Kristof, who is critical of Hamas and of Israeli policies that led to their rise and also unconditional U.S. military aid, some $112 billion since 1946. 

The second is from Peter Beinart, who writes about the Nabka, or “catastrophe” in Arabic, generally referring to the over 700,000 Palestinians expelled during Israel’s founding. Beinart notes that it's a difficult subject for many of his fellow Jews to discuss "because [it's] inextricably bound up with Israel’s creation. Without the mass expulsion of Palestinians in 1948, Zionist leaders would have had neither the land nor the large Jewish majority necessary to create a viable Jewish state." Today, Israeli leaders insist Palestinians give up their demands to return citing facts on the ground. Beinart find this demand rich in irony because "because no people in human history have clung as stubbornly to the dream of return as have Jews. Establishment Jewish leaders denounce the fact that Palestinians pass down their identity as refugees to their children and grandchildren. But Jews have passed down our identity as refugees for 2,000 years. In our holidays and liturgy we continually mourn our expulsion and express our yearning for return."

At the same Beinart does provides some hope of reconciliation recounting the experience of George Bisharat, a Palestinian-American law professor. After Bisharat "wrote about the house in Jerusalem that his grandfather had built and been robbed of, a former Israeli soldier who had lived in it contacted him unexpectedly. “I am sorry, I was blind. What we did was wrong, but I participated in it and I cannot deny it,” the former soldier said when they met, and then added, “I owe your family three months’ rent.” Mr. Bisharat later wrote that he was inspired to match the Israeli’s humanity."

Ultimately, our common humanity overwhelms our differences. My guess is, if Israelis and Palestinians got to know each other better they would realize they have more in common than difference.   

Value's Comeback?

The Value factor has had a rough few years, ok...maybe more like a decade. As shown below (click to enlarge chart) Value massively underperformed Growth, particularly in the second half of the last decade with interest rates continuing to remaining near zero; 2020 was just brutal.   

New decade, new hope? With the threat of inflation and rising rates on the horizon as President Biden's plans for up to $6 trillion of fiscal spending gets underway, Value made a strong comeback in Q1 2021. In fact, it was the second best quarter of Value outperformance in nearly a 100 years (click chart below to enlarge). But will it last? After hitting a high of 1.74% on March 31, the yield on the benchmark 10-year Treasury Note has steadily fallen to 1.6% as of May 7. So, don't count the FAANGMs out just yet, they continue to be, we think, investors' best bet (except for maybe Netflix :().

Unicorns and Unicorn Hunters

Last post we talked about how Tiger Global was disrupting the venture capital industry with a new speedier investment model. Well, in venture land the big prize is still backing "unicorns"--a private company with a valuation over $1 billion. CBINSIGHTS has a list of all the current unicorns worldwide as of May 2021. The 650+ unicorns have a cumulative valuation of $2.2 trillion. Below are some charts highlighting who these companies are and who's backing them.

First, a break down of unicorns by size. Yes, some unicorns are more special than others, a decacorn is a private company with a valuation over $10 billion and a hectocorn is one worth over $100 billion. There aren't that many of them: 

And where are unicorns usually found? Mainly in the USA and China. More broadly, North America is home to 344 unicorns, Asia 214, and Europe (surprisingly?) only 79. The RoW has about 20.

Most unicorns are in fintech these days it seems (Stripe, Klarna, Nubank, Chime, Robinhood, SoFi, etc.). CB's classification is sometimes a little to hard understand, though; for example, Bytedance (Tik Tok, really) is categorized as an artificial intelligence company (?!), sure, I guess...in the same way Facebook or Twitter could be considered an AI company, but they are generally known as social media companies. 

 

And who's finding and backing these unicorns? Is Tiger "capturing" all the unicorns with its aggressive style or is still the more traditional VCs? Tiger Global and Softbank (another disruptor) are up there, but the champion unicorn hunter is still blue-chip VC-firm Sequoia Capital. Sequoia is backing 74 unicorns more than Tiger and Softbank combined. 

So, who are the biggest unicorns or decacorns or hectocorns? They would be (drum roll):

The top 10 unicorns have a collective valuation of $550 billion, roughly 25% of the cumulative value of all 650+ unicorns. Bytedance is social media! Stripe, Klarna and Nubank are fintechs, SpaceX is Star Trek, Didi is transportation and Instacart is logistics/delivery. Their backers are shown below (click to enlarge). Most will go public in the next 24-36 months. They'll no longer be "unicorns" at that point but then we'll finally be able to ride them!

Tiger Global: Moving Fast and Breaking Things?

"Move fast and break things," that was Mark Zuckerberg's (in)famous motto. Venture capitalists loved it. Disruption was the new buzzword, the perhaps the word. If you weren't disrupting something, you weren't worth financing. Now it seems a big hedge fund is disrupting venture capital investing and VCs are not happy! Change, disruption, creative destruction...all great stuff until they happen to you!!

Axios and Everett Randle, a VC himself, tells the story of how Tiger Global, a $65 billion dollar "crossover" hedge fund that's been investing in private markets for over a decade, is upending the clubby, cloistered VC industry. Here's a summary:

Traditional venture capitalists like to think of themselves as Yodas of investing...finding and guiding Padawans (promising startups) into full-fledged Jedis (unicorns ready for an IPO) with their knowledge, wisdom and expertise. They raise comparatively small funds <$1 billion of assets under management and deploy capital over 4-5 years. Tiger has a different take, it doesn't believe that VCs really add much value to talented entrepreneurs beyond the cash they invest (you know, "those who can't do...become VC" or something like that). So, they offer gobs of money, because "missing out on a hot deal is a much bigger mistake in VC than overpaying for the same deal." In fact, Tiger deliberately overpays to shuts out rivals and generally leave founders alone to do their thing, which can be very attractive to experienced entrepreneurs (get more money and greater autonomy, who doesn't like that?). 

Tiger also raises massive funds— its last was $6.6 billion— and therefore also writes big checks to move the needle. On top of that it deploys its money fast...like very, very fast, within 18-24 months. How? Well, because it effectively outsources due diligence to top-tier VCs. "If the likes of Sequoia and Kleiner Perkins and Andreessen Horowitz all have term sheets out to a company, Tiger is happy to trust their judgment," and swoop in with a briefcase full of money.

While traditional VCs focus on maximizing returns on each investment in a given period, Tiger is focused on maximizing deployment ("thanks for the term sheet [insert top-tier VC name], well take it from here and add 25%). They are happy with a lower IRR/ investment because they make substantially more investments than their competitors, driving superior $ investment gains for themselves over time. As Randle notes "Tiger has developed the first structural, non-brand driven competitive advantage and flywheel at scale in venture. And they did it by throwing away a bunch of stale norms and made-up rules about how venture/growth should be practiced, and replacing them with a system that enables them to outcompete VCs on their own turf. That is why Tiger is going to eat VC."

So, what does it mean for the VC industry? Well, Randle has a great J.C. Penny (what else?) analogy: "When choosing between capital providers, sometimes founders will want the $12 Amazon Prime 1-day-shipping Carhartt T-Shirt (Tiger), sometimes they’ll want the $1,500 Gucci Cardigan (Sequoia, Benchmark, Andreessen Horowitz) but very rarely will they want the $22 J.C. Penney Hoodie (nearly everyone else). You really, really don’t want to be the VC version of J.C. Penney."

Netflix and Chill? Umm, No Thanks

New data from the CDC shows birth and fertility rates in the U.S. continued to decline in 2020 to the lowest level in more than 40 years down to 56 births per 1,000 women of child-bearing age and 1.6 births per woman, well below the 2.1 replacement rate. Twenty five states had more deaths than births.

Early in the pandemic there had been speculation that with couples cooped up at home with no place to go, there would be a baby boom. Well, the opposite happened. Instead of "Netflix and chilling," couples were just...well, Netflix binging. The amount of time U.S. households spent streaming nearly doubled in 2020 over 2019. It's hard to get busy when you're busy watching the Queen's Gambit, the Crown or Bridgerton. Last year Netflix added 37 million new subscribers worldwide — by far the biggest increase since the company expanded its DVD-by-rental service into video streaming 14 years ago. But its wasn't just Netflix, Amazon, Disney+ and a plethora of other streaming services gained captive viewers.

Of course, correlation isn't causation as statisticians frequently warn...so what's really happening? As the NYT notes, "births tend to dip after economic crises, as women put off having babies because of uncertainty with jobs and income. The birthrate dropped sharply in the early 1930s, after a stock market crash precipitated the Great Depression. But it picked up a few years later, once the economy started to bounce back. However, the recent decline, which began after the Great Recession in 2008, has continued, despite improvements in the economy. This unusual pattern has led demographers to wonder whether something else is going on."

Economics still may be an important factor, as couples worry about student debt, housing affordability and rising cost of child rearing, but there is also likely a social impetus with women choosing to form families at later ages to complete studies, build careers and generally gain more "maturity".

There are of course economic consequences to a lower birth rate. Combined with a leveling off of immigration rates (see chart below), falling birth rates could slow long-term growth. After all, GDP growth is driven by two key factors, the size of the labor force and productivity gains (for a given level of capital stock, which is ample in developed countries). Unless there are significant increases in productivity (which hasn't happened in 20 years), a shrinking labor pool will challenge standards of living as retirement and health benefits financed through taxes fall increasingly on lower proportions of the population. As they say, demographics is destiny...

Who Let the Doge Out?

Doge is going to the moon! (Perhaps literally, very soon.) For now it is up more than 13,000% YTD. It hit $0.60 at 10a on May 4th, before falling back to the mid $0.50s. So it's worth more than two quarters.

Can it go to $1 (probably), $10, $100...um, who knows? Musk is a big booster of the cryptocurrency which certainly helps. And it could be the currency of the Musk colonies on Mars one day...but even back on earth it can now be used to make real-world purchases on sites like Travala.com or for Dallas Mavericks tickets and merchandises. So really, who knows where it goes, particularly as Bitcoin hits $60K and is out of reach for many people. Woof! Woof!! Woof!!!