We’ll talk a little bit about the pandemic, and the latest COVID numbers, and vaccine developments, but we’ll pivot fairly quickly into the economic landscape. And a number of important thematic topics to cover. One is Chinese property market and the extent to which Evergrande has run into trouble, and what all of that means. We’ll talk more broadly about the Chinese regulatory crackdown, mostly tech firms, but we’ll talk about that as well. We’ll acknowledge natural gas prices spiking, and what that means, and what effects that is having.

And then lastly, we’ll talk about supply chains. And this has been an issue for quite some time, but it feels like, if anything, it’s only getting worse as opposed to better, and may not resolve all that quickly. So we’d better understand what’s happening there and its implications on key economic variables.

Let’s start, though, with the pandemic itself. And we can say and celebrate, in fact, that the Delta numbers, the infections per day are getting better in most parts of the world. And indeed, there’s a chance this could be the last major wave that we are dealing with.

That’s not a prediction that COVID goes away, it’s simply an observation that in the past we’ve seen these waves form in significant part because there have been new, more contagious variants that have continuously cropped up. And we haven’t seen a more contagious form than the Delta yet at least. And so it’s possible the numbers stay more tame for a while.

I wouldn’t quite guarantee that in the sense that, of course, equally the weather is getting colder, which has been a trigger in the past. I can say that schools have reopened. In fact, there was research recently finding that when schools reopened in a jurisdiction, you see about a 25% increase in cases, all else equal, over the subsequent four weeks. So that’s a challenge as well. And of course, if people behave less cautiously, that can also allow the numbers to go up. So no guarantees there, but it’s nevertheless promising that there isn’t a new variant set to push the numbers in an adverse direction in the near term.

Maybe the other thought, though, would be—and maybe a silver lining to some of those concerns that the numbers could yet go up—one would be, the weather has gotten somewhat colder. We haven’t seen the numbers go up all that much despite that.

And we have seen some jurisdictions—the U.S., Scotland, and a number of others—that have had schools opened since late August, and so for a month now. And as much as there is some evidence of cases in those schools, it hasn’t been enough to send the overall caseload spiralling out of control. And so, again, the main theme is one in which this Delta variant is proving a little bit less problematic than it was, and that’s a wonderful thing, clearly. The other pandemic-related thought but of a vaccine nature is that Pfizer has now announced that its tests on children aged 5 to 11 were quite successful. The vaccine appears to be safe and generate robust antibodies. And so it seems very likely that governments will begin approving this in the coming weeks and, at worst, months.

And just for context, children aged 5 to 11 are about 7 to 9% of the average developed country’s population. And so, this is helpful in the pursuit of herd immunity. However, I would equally say, it leaves us still probably somewhat short of actually fully achieving herd immunity. It won’t be a 100% take-up for children, particularly given that the cases tend to be much milder. And so it will be a helpful thing. I’m not sure it radically changes the equation.

Okay. Let’s move from there into the Chinese property market. And to begin with, let’s acknowledge Chinese property market is a big share of the Chinese economy. It’s as much as 25%, which is a big number. Prices have risen quite a lot over the years.

In fact, many Chinese individuals view the housing market essentially as their retirement fund. They buy either an apartment for themselves or multiple apartments and that’s where they stow their savings. And so there’s an expectation that prices just continue to rise forever.

Housing is actually a more popular place to invest than the stock market or the bond market in China. And so, housing matters quite a lot.

Chinese regulators, though, aren’t entirely happy with how quickly the housing market has ascended and some of the bubblier aspects of that housing market, and so we have seen Chinese regulators recently begin to crack down.

And the most prominent among these were three red lines, these debt ratios. And so, if I can remember, the debt-to-asset ratio of builders is more constrained than in the past. The debt-to-short-term assets and the debt-to-equity ratios are all much more limited. And this has prompted something of a scramble, and some of these builders have not been in a good position to deal with that, particularly as housing cools somewhat.

And, prominently, Evergrande, which is the second-largest builder in China and actually ranking 122nd on the Fortune Global 500—so this is a globally relevant corporation that mostly builds and sells apartments to middle- and high-income households—it’s having trouble servicing its debt.

And so, it’s not necessarily a solvency issue. In theory, Evergrande has $350 billion in assets versus about $305 billion in debt, so, in theory it’s solvent. It is for the moment a liquidity issue, which is just there’s a lot of short-term debt coming due and not a lot of liquid assets to pay for that.

And, unfortunately, what happens sometimes in that situation is then the company has to engage in a fire sale of assets. It’s selling those assets below their theoretical value because they have to be sold so quickly to fund this debt that’s coming due. And that creates a problem, and you end up with fewer assets than you thought, and sometimes that turns into a solvency issue. And so it’s a little bit unclear whether that is indeed precisely happening, but that’s the risk here.

Now what is the Chinese government going to do about that? Probably not fully bail out the company. It’s unlikely that billions of dollars are just handed over as a gift. Nevertheless, the Chinese government’s pretty good at handling debt crises. It’s actually dealt with a number over the last decade. There were quite significant concerns about wealth management products at one point in time. There have been concerns about local government debt and off-balance-sheet government debt. There were big problems in the early 2000s. And for the most part, the Chinese government has handled them well.

And so, one scenario here is that Evergrande may be turned into something like a state-owned enterprise. It may become like a quasi-governmental company that can then be wound down or sold off in parts to its peers. And if that were to happen, stock owners would lose everything. I should say, they’ve almost lost everything already. Bond holders would likely suffer haircuts, and so they would lose some money.

But crucially, from a Chinese perspective, retail wealth management product investors, the WMPs of this company would probably not be wiped out or would not suffer large losses. And, maybe even more relevantly, the more than a million apartment units that have been promised—that people have bought but haven’t been constructed yet—people would either get their down payments back or those projects would be completed, and so, avoiding a big problem there.

It doesn’t seem to us this has to be a financial crisis. It’s certainly financially relevant, and there are some other Chinese builders who are a bit wobbly as well right now, but it doesn’t have to be a crisis. I think instead it just adds up to somewhat slower Chinese growth as the boil comes off the housing market in particular.

Another Chinese theme I want to cover is China’s broader regulatory crackdown. You can argue part of it is what we just discussed. It was locking down some of the excesses in the housing market. But China’s been busy beyond that over the past year plus, though, particularly enthusiastic with regard to tech companies over the past several months. And it’s imposing these stricter rules and it’s imposing limitations and giving fines, really for a couple of reasons.

I think the one and the more noble reason is just to limit the excesses of mostly tech companies that are nearing monopoly status and, therefore, to help smaller firms and help competitiveness and help customers who maybe don’t have a lot of choice.

However, I think it’s fair to acknowledge as well, there is a secondary consideration which is the Communist Party, which, of course, runs China, is looking to re-exert some power pushing back against big tech companies and social networks that were beginning to usurp some of the government’s traditional power.

In terms of the things that have been done. Well, broadly speaking, some anti-monopoly legislation to limit the ability of these companies to dominate a particular market. More oversight of these companies when they raise money overseas.

And then specifically, internet retailer Alibaba, which is much like Amazon, has been given a $2.8 billion fine in an anti-monopoly probe. So has one of its main competitors. Meal delivery app, Meituan, was fined $1 billion for abusing its dominant market share. The fintech company, Ant, had its public offering suspended two days before the planned issuance. Ride-hailing app DiDi, much like Uber, was removed from the App Store altogether, in part we think as punishment for fundraising in the U.S., but also for other practices.

And then, quite recently, the entire private education and tutoring sector is no longer allowed to earn profits and it had been a very lucrative sector. And so the rug has been pulled out from under many of those companies. And then quite prominently and interestingly, and maybe tantalizingly for those of us with children, but children are now limited to 3 hours per week of online video gaming and 40 minutes per day of social network use. And so, of course, that’s a big hit to the companies providing those services.

And so, I guess the question is, are these good things? Are these bad things? And in the short run, it’s probably negative for the economy, negative for corporate profits, and negative for markets as a result. But I think where the debate is is over the long run. And you can really debate because some of these moves are classic antitrust trying to unleash more competition and permit new innovation and avoid excessive pricing.

And so there are some long-term positives in here and I think that’s a useful way to think about this. This is not necessarily negative for China over the long run, as much as there are some short-term hits. Maybe it’s even good for China.

And more broadly, we can also say, this is part of a global theme because we see a lot of governments out there looking with a skeptical eye at tech companies and thinking in an antitrust direction. Europe’s been doing that quite significantly. The U.S. seems to be loading up as well. And so we should expect some headwinds on that front on a regulatory front for tech companies elsewhere going forward as well.

Let’s talk about natural gas now. And so, natural gas prices have spiked three to four times, depending on the region. In terms of why that’s happened, there’s actually a list of about 15 different reasons. But in terms of the big reasons, well, demand has risen faster than supply could recover as the pandemic has ebbed. So that’s a classic supply-demand mismatch we’ve seen in a lot of sectors as the pandemic has become less intense. But also, inventory levels of natural gas are quite low because there were cold winters in Asia last year. There was adverse weather in Asia and Europe this summer that resulted in more natural gas usage, so inventories were drawn down.

Often, Russia would respond to higher prices by producing and shipping more. It hasn’t done that so far. It might just be it can’t but there’s some speculation maybe it’s just not desirous of that because it’s hoping to pressure Europe into allowing more pipelines. And so, Russia isn’t fully playing ball.

Often you see a shift from natural gas to coal. Countries choose to shift their electricity generation. But coal prices are also high so there’s been less of a shift there. And then more structurally and more fundamentally, there’s just not as much investment in fossil fuel capacity as there once was as climate change initiatives unfold, and so there’s less capacity to respond.

So what does all this mean? Well, it’s a pretty small effect on inflation. In fact, natural gas prices are only about 0.7% of the average consumer price basket. So it doesn’t radically change the equation from an inflation perspective, but certainly, it’s not a good thing economically. It obviously increases the cost of natural gas for all sorts of manufacturers and industries that use electricity and use natural gas directly. Heating costs for households will go up making them somewhat poorer. Electricity generation cost for countries as well.

It doesn’t seem like it’s something that’s going to resolve overnight. It’s at least a multi-month experience, if not somewhat longer. And there have now been some corporate-specific consequences in the sense that some UK energy firms have now failed. And so they were playing a dangerous game of selling locked-in contracts to customers and then buying the natural gas on the open market. That proved to be unwise as the open market prices skyrocketed. But there are some solvency issues as well that are now being dealt with in the UK.

And let me finish with supply chain issues. And so, shipping costs have gone up enormously over the last year. And so shipping costs are up five times for container shipping and about five times as well for bulk goods shipping as well. And it might not get a lot worse in the sense that some big carriers have announced a freeze on their pricing going forward, though we’ll see where market forces eventually take them.

It’s worth acknowledging that shipping costs themselves are pretty small as a share of the cost of an item for most things, other than a low-value, very bulky good, doesn’t cost a lot. We’re talking an extra 0.05 or $0.10 on a T-shirt or something like that.

The bigger issue with all of these supply chain issues are the pinch points that are resulting. And so you have a car that’s essentially made but missing one chip or one part, and so you have all sorts of high-value things that are almost done but can’t quite be finished because one item in the supply chain is missing and is very hard to find. And it’s hard to resolve those issues quickly.

And as you look at some of these things, for instance, the lack of adequate shipping supply. Takes two to three years to build a ship. And actually, if anything, there are headwinds on that front because there are tougher environmental standards for ships that require a lot of retrofitting of the existing ships.

More generally and maybe the biggest point is, supply chains are not built for starting and stopping. There’s no slack in them. They can’t easily catch up. And so as people’s demand preferences have shifted and as people have bought more, there’s just almost zero capacity to handle that, and so that’s been a big and ongoing issue.

And so, when you look at what experts are predicting, conservatively, they’re saying it’s six months to a year before the worst of these supply chain issues are resolved. You do see some retailers planning for disruptions into 2023.

And so, the bottom line is, it’s not something that’s going to be resolved quite quickly. We need to live with this and recognize there are going to be ongoing shortages and it means extra inflation, which we’ve seen. It also is bad for the economy. It’s harder to produce things. It’s harder to buy things in this world. And so we should expect that to persist over the next year, in any event.

Okay. I’ll stop there. Thanks very much for tuning in. Hopefully, you found some of those interesting—some of those topics, rather—interesting, and please consider tuning in again next time.