Things we are reading today - August 21st, 2023

Evergrande, once China’s second-largest property developer, filed for Bankruptcy protection in New York in 2022 after defaulting on its debts the previous year. Evergrande had taken on massive debt totaling over $300 billion, and its collapse triggered a real estate crisis in China, where property makes up around 30% of GDP. Several other major Chinese developers have since defaulted as well. Evergrande unveiled a debt restructuring plan earlier this year but still requires billions in additional funding to resume normal operations over the next three years. Most recently, an electric vehicle company invested $500 million in Evergrande’s EV unit in exchange for a stake, providing some needed funding. Evergrande’s default highlights China’s efforts to rein in the real estate sector and curb excessive borrowing, but the industry’s problems continue to affect the broader economy.

The average income of Indian middle-class taxpayers has significantly increased from Rs 4.4 lakh in 2013 to Rs 13 lakh in 2022 according to an SBI Research report. A key reason is many taxpayers are transitioning to higher income groups. The report also found a decline in zero tax liability returns from 84% in 2011 to 64% in 2022. Timely tax filing improved, with 75% of returns filed on time in 2022 compared to only 40% in 2019. Maharashtra, Uttar Pradesh, Gujarat, Rajasthan and West Bengal accounted for nearly half of all returns filed in 2022. However, some states like UP and Rajasthan saw net negative migration yet high returns, likely due to tax filing linked to permanent addresses. The report recommends linking tax returns to current Aadhaar addresses to better capture work locations.

There are different ways to measure inflation trends, and looking at monthly changes rather than yearly changes provides a clearer picture of when inflation peaked. While inflation surprised economists in 2021, the data now supports the view that the price increases were largely due to temporary supply chain issues as demand rebounded post-pandemic. Bond markets largely kept faith in economists’ predictions that inflation would recede, as Treasury yields have hovered near 4% despite critics arguing high inflation would persist.

The passage discusses the investment strategy of cutting losses early and letting profits run. This approach has outperformed a static portfolio over the past 100 years, with lower maximum drawdowns during market crashes. It works similarly to momentum investing, which buys assets that have recently performed well. Hedge fund managers prefer this strategy as it increases expected returns while lowering the risk of a major loss. The strategy helps overcome the natural human tendency to sell winners too soon and hold onto losers too long. While not optimal in all situations, cutting losses early and riding wins can be a rewarding approach for investors.

Our memories are often unreliable and can be distorted over time by hindsight bias. To counter this, the author advocates keeping a handwritten journal of beliefs and decisions to have an objective record that is not subject to unconscious editing. Recounting a personal experience where his memory of a stock market event did not match his journal, Jim explains how writing things down makes it harder to fool ourselves later on. The physical act of writing also helps imprint information differently in the brain compared to typing. With regular practice, journaling can help make one’s thought processes more flexible and open to improvement by surfacing unconscious patterns of distortion.

Today’s Finshots, explores what’s going on with India’s craft beer brewers. The posterchild of the Indian craft beer scene has been Bira91. The success of micro-brewery pubs in Bangalore and Gurgaon, which made and sold craft beer, were clear indications that consumers were loving the craft category. Everyone wanted to get into the craft beer business and brands mushroomed left, right and centre. Because we haven’t seen comprehensive reports about the craft beer industry. So the question is - how did the once vaunted craft beer industry lose its way? For starters, maybe people just overestimated the market for craft beer in the first place.

China’s economic growth model, which relied on heavy investments in infrastructure, construction, and manufacturing, has begun to falter. This model, which led to remarkable growth and lifted China out of poverty, is now facing challenges as the country grapples with rising debt and diminishing returns on investments. Parts of China are burdened with underutilized infrastructure like bridges, airports, and unoccupied apartments. Returns on investment have declined, and economic data paints a troubling picture.