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Plant-Based Plastics Gain Favour as Companies Pursue Sustainability Goals

The future is more plastic. Plant-based plastic, that is.

Plant-based plastics, or bioplastics, have accounted for just 1% of the world’s plastic production for well over a decade, according to a review of more than 100 companies by research organisation nova-Institute. Bioplastics haven’t taken off largely because they are typically 50% to 80% more expensive than traditional fossil-fuel-based plastics, but their production is now growing 14% a year, putting them on track to reach up to 3% of the plastics market in the next five years.

Bioplastics are expanding faster than recycled plastic in some cases, such as in Asian countries like China and Japan that are mandating more ecologically friendly materials, nova-Institute founder Michael Carus said. Even if global plastic recycling rates someday reach 70% compared with around 9% today, bioplastics alongside materials made from captured carbon dioxide will have a big role to play asthe world transitions away from fossil-fuel-based materials, he said.

“Not one of them can do it alone,” Carus said, referring to the sustainable materials that will drive the green transition.

Bioplastics’ benefits

Bioplastics are usually derived from plants rich in starch, sugar or pulp, such as corn, wheat, sugar cane, wood and cotton, which makes them costlier than plastics made from fossil fuels because crops need fertiliser and other resources such as water. However, the environmental benefits of plant-based plastics are increasingly appealing to companies promising to use more sustainable materials by the end of the decade.

Plants absorb the atmosphere’s carbon dioxide, which cuts the greenhouse-gas emissions from making bioplastics to at least half that of fossil-fuel-based plastics. Bioplastics can also sometimes cause less pollution when they degrade in the environment.

Broadly, there are two types of bioplastics: Materials that have similar performance to plastic, such as pulp-derived cellulose acetate found in eyeglasses and textiles, and bioplastics that are chemically identical to conventional plastics, such as a polyethylene, polyester and nylon. Around half of today’s bioplastics are biodegradable, according to nova-Institute, meaning they break down more naturally and are less harmful to habitats. Still, many of these bioplastics require industrial composting facilities to degrade and aren’t designed to be thrown away in a home garden.

Some of the earliest adopters of bioplastics are fashion companies, including Lululemon, which has a goal to replace the majority of oil-based nylon with plant-based nylon by 2030. A big selling point for the sportswear company is using plants to make chemically identical nylon that can be easily switched in, but still cuts emissions by nearly half.

The strongest demand for bioplastics is currently from fashion and food-packaging companies, but interest is also rising from companies in cosmetics, electronics and more durable goods such as tools, Eastman Chemical’s Chief Technology Officer Chris Killian said.

Eastman, formerly a division of Kodak, earns more than $1 billion of its $10 billion or so in yearly sales from bioplastics made from cellulose acetate, a material it has produced for more than 70 years. Cellulose acetate, which Eastman makes from cotton linters and wood pulp, was first used in Kodak film in the company’s early days, but it is now expanding into packaging, textiles and other applications. In 2022, Eastman signed an agreement with Warby Parker for the material to be used in eyewear.

“It has a great deal of legs,” he said of the cellulose acetate-derived plastics.

Challenges ahead

Plant-based plastics remain a tough sell because fossil-fuel-based plastics are much cheaper, but prices could fall if companies continue to buy more bioplastics and governments encourage their use. This year, the Biden administration called on the federal government to assess the potential for biomaterials, including for plastics, fuels and medicines. And last year, the U.S. Defense Department said it would invest $1.2 billion in bio manufacturing. The European Union is also considering mandating bioplastics under packaging rules that are being discussed.

In the U.S., there is government support at the state and federal level to convert biological raw materials into fuels such as ethanol, but that level of support doesn’t yet exist for plant-based plastics, said Manav Lahoti, chemical giant Dow’s global sustainability director, olefins, aromatics and alternatives.

“The market is ready to take off on the demand side,” he said. “But to make the economics work, there is some regulatory support that is required.”

Another hurdle to scaling up bioplastics is what happens at their end of life. Only plant-based plastics that are chemically identical to fossil-fuel–based versions can enter the existing and growing recycling infrastructure. The world’s limited amount of feedstock, which often goes to feeding cattle and other livestock, also presents challenges to using more bioplastics.

One answer: turning agricultural waste into recyclable plastics.

This year, Dow struck an agreement with biomass refinery startup New Energy Blue to buy bioethylene made from the stalks and leaves of corn grown in Iowa. Dow will then make conventional and recyclable plastics from the material and sell to companies in transportation, footwear, and packaging.

Dow is already providing bioplastics for Crocs shoes and LVMH Moët Hennessy Louis Vuitton’s perfume packaging, and sees demand outstripping supply, said Haley Lowry, Dow’s global sustainability director for packaging and specialty plastics.

“We are trying to find more sources,” she said. “The demand from our customers is there; it’s really finding the sources of biofeed that makes sense.”

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China’s 40-Year Boom Is Over. What Comes Next?

For decades, China powered its economy by investing in factories, skyscrapers and roads. The model sparked an extraordinary period of growth that lifted China out of poverty and turned it into a global giant whose export prowess washed across the globe.

Now the model is broken.

What worked when China was playing catch-up makes less sense now that the country is drowning in debt and running out of things to build. Parts of China are saddled with under-used bridges and airports. Millions of apartments are unoccupied. Returns on investment have sharply declined.

Signs of trouble extend beyond China’s dismal economic data to distant provinces, including Yunnan in the southwest, which recently said it would spend millions of dollars to build a new Covid-19 quarantine facility, nearly the size of three football fields, despite China having ended its “zero-Covid” policy months ago, and long after the world moved on from the pandemic.

Other localities are doing the same. With private investment weak and exports flagging, officials say they have little choice but to keep borrowing and building to stimulate their economies.

Economists now believe China is entering an era of much slower growth, made worse by unfavourable demographics and a widening divide with the U.S. and its allies, which is jeopardising foreign investment and trade. Rather than just a period of economic weakness, this could be the dimming of a long era.

“We’re witnessing a gearshift in what has been the most dramatic trajectory in economic history,” said Adam Tooze, a Columbia University history professor who specialises in economic crises.

What will the future look like? The International Monetary Fund puts China’s GDP growth at below 4% in the coming years, less than half of its tally for most of the past four decades. Capital Economics, a London-based research firm, figures China’s trend growth has slowed to 3% from 5% in 2019, and will fall to around 2% in 2030.

At those rates, China would fail to meet the objective set by President Xi Jinping in 2020 of doubling the economy’s size by 2035. That would make it harder for China to graduate from the ranks of middle-income emerging markets and could mean that China never overtakes the U.S. as the world’s largest economy, its longstanding ambition.

Many previous predictions of China’s economic undoing have missed the mark. China’s burgeoning electric-vehicle and renewable energy industries are reminders of its capacity to dominate markets. Tensions with the U.S. could galvanise China to accelerate innovations in technologies such as artificial intelligence and semiconductors, unlocking new avenues of growth. And Beijing still has levers to pull to stimulate growth if it chooses, such as by expanding fiscal spending.

Even so, economists widely believe that China has entered a more challenging period, in which previous methods of boosting growth yield diminishing returns.

Some of these strains were apparent before the pandemic. Beijing was able to keep growth ticking over by borrowing more and relying on a booming housing market, which in some years accounted for more than 25% of China’s gross domestic product.

The country’s initial success in containing Covid-19, and a surge in pandemic spending by U.S. consumers, further masked China’s economic troubles. The housing bubble has since popped, Western demand for Chinese products has ebbed and borrowing has reached unsustainable levels.

The outlook has darkened considerably in recent months. Manufacturing activity has contracted, exports have declined, and youth unemployment has reached record highs. One of the country’s largest surviving property developers, Country Garden Holdings, is on the cusp of a possible default as the overall economy slips into deflation.

Japan-like slowdown?

Without more aggressive stimulus from Beijing, and meaningful efforts to revive private sector risk-taking, some economists believe China’s slowdown could snowball into prolonged stagnation akin to what Japan has experienced since the 1990s, when the bursting of its real-estate bubble led to years of deflation and limited growth.

Unlike Japan, however, China would be entering such a period before reaching rich-world status, with per capita incomes far below more advanced economies. China’s national income per person reached about $12,850 last year, below the current threshold of $13,845 that the World Bank classifies as the minimum for a “high-income” country. Japan’s per capita national income in 2022 was about $42,440, and the U.S.’s was about $76,400.

A weaker Chinese economy could also undermine popular support for Xi, the most powerful Chinese leader in recent decades, though there is no current indication of organized opposition. Some U.S. analysts worry Beijing could respond to slower growth by becoming more repressive at home and more aggressive abroad, raising the risks of conflict, including potentially over the self-governing island of Taiwan.

At an Aug. 10 political fundraiser, President Biden called China’s economic problems a “ticking time bomb” which could spur its leaders to “do bad things.”

Beijing fired back with a commentary by its official Xinhua News Agency, saying Biden “intends to take smearing China as part of his ‘grand strategy’ to shoot America’s economic troubles.” The commentary also described China’s economic recovery this year as robust, despite some challenges.

Chinese officials have taken some modest steps to revive growth, including cutting interest rates, and have pledged to do more if conditions worsen. The State Council Information Office, which handles media inquiries for China’s leadership, didn’t respond to questions.

“Certain Western politicians and media have exaggerated and hyped up the current difficulties in China’s post-Covid economic recovery,” a Foreign Ministry spokesman said on Aug. 16. “Facts will prove them wrong.”

‘Chinese Century’

The transition marks a stunning change. China consistently defied economic cycles in the four decades since Deng Xiaoping started an era of “reform and opening” in 1978, embracing market forces and opening China to the West, in particular through international trade and investment.

During that period, China increased per capita income 25-fold and lifted more than 800 million Chinese people out of poverty, according to the World Bank—more than 70% of the total poverty reduction in the world. China evolved from a nation racked by famine into the world’s second-largest economy, and America’s greatest competitor for leadership.

Academics were so enthralled by China’s rise that some referred to a “Chinese Century,” with China dominating the world economy and politics, similar to how the 20th century was known as the “American Century.”

China’s boom was underpinned by unusually high levels of domestic investment in infrastructure and other hard assets, which accounted for about 44% of GDP each year on average between 2008 and 2021. That compared with a global average of 25% and around 20% in the U.S., according to World Bank data.

Such heavy spending was made possible in part by a system of “financial repression” in which state banks set deposit rates low, which meant they could raise funds inexpensively and fund building projects. China added tens of thousands of miles of highways, hundreds of airports, and the world’s largest network of high-speed trains.

Over time, however, evidence of overbuilding became apparent.

About one-fifth of apartments in urban China, or at least 130 million units, were estimated to be unoccupied in 2018, the latest data available, according to a study by China’s Southwestern University of Finance and Economics.

A high-speed rail station in Danzhou, a city in China’s southern province of Hainan, cost $5.5 million to build but was never put into use because passenger demand was so low, according to Chinese media reports. The Hainan government said keeping the station open would incur “massive losses.” Efforts to reach the local government were unsuccessful.

Guizhou, one of the poorest provinces in the country with GDP per capita of less than $7,200 last year, boasts more than 1,700 bridges and 11 airports, more than the total number of airports in China’s top four cities. The province had an estimated $388 billion in outstanding debt at the end of 2022, and in April had to ask for aid from the central government to shore up its finances.

Kenneth Rogoff, a professor of economics at Harvard University, said China’s economic ascent draws parallels to what many other Asian economies went through during their periods of rapid urbanisation, as well as what European countries such as Germany experienced after World War II, when major investments in infrastructure boosted growth.

At the same time, decades of overbuilding in China resembles Japan’s infrastructure construction boom in the late 1980s and 1990s, which led to over investment.

“The leading point is they are running into diminishing returns in building stuff,” he said, “There are limits to how far you can go with it.”

With so many needs met, economists estimate China now has to invest about $9 to produce each dollar of GDP growth, up from less than $5 a decade ago, and a little over $3 in the 1990s.

Returns on assets by private firms have declined to 3.9% from 9.3% five years ago, according to Bert Hofman, head of the National University of Singapore’s East Asian Institute. State companies’ returns have retreated to 2.8% from 4.3%.

China’s labor force, meanwhile, is shrinking, and productivity growth is slowing. From the 1980s to the early 2000s, productivity gains contributed about a third of China’s GDP growth, Hofman’s analysis shows. That ratio has declined to less than one sixth in the past decade.

Deepening debt

The solution for many parts of the country has been to keep borrowing and building. Total debt, including that held by various levels of government and state-owned companies, climbed to nearly 300% of China’s GDP as of 2022, surpassing U.S. levels and up from less than 200% in 2012, according to Bank for International Settlements data.

Much of the debt was incurred by cities. Limited by Beijing in their ability to borrow directly to fund projects, they turned to off-balance sheet financing vehicles whose debts are expected to reach more than $9 trillion this year, according to the IMF.

Rhodium Group, a New York-based economic research firm, estimates that only about 20% of financing firms used by local governments to fund projects have enough cash reserves to meet their short-term debt obligations, including bonds owned by domestic and foreign investors.

In Yunnan, location of the giant quarantine centre, heavy infrastructure spending lifted growth for years. Officials spent hundreds of billions of dollars including on Asia’s tallest suspension bridge, more than 6,000 miles of expressways and more airports than many other regions in China.

The projects boosted tourism and helped expand trade of Yunnan products including tobacco, machinery and metals. From 2015 to 2020, Yunnan was one of the fastest-growing regions in China. Growth has weakened in the past few years. The slumping property market has hit local finances hard, as revenue from land sales dries up.

Yunnan’s debt-to-revenue ratio climbed to 151% in 2021, breaching a 150% level designated as alarming by the IMF, and up from 108% in 2019, according to Lianhe Ratings, a Chinese rating agency. Fitch Ratings earlier this year said financing firms used by the province to fund infrastructure construction were risky because of the size of their borrowings and the government’s strained finances.

Yet Yunnan has continued to hatch big schemes. In early 2020, the Yunnan government said it planned to spend nearly $500 billion on hundreds of infrastructure projects, including a more than $15 billion program aimed at diverting water from parts of the Yangtze River to the dry centre of the province.

A February plan issued by Wenshan, a city in Yunnan, listed the “permanent” quarantine centre as one of several measures aimed at promoting economic stability. Once the government officially put out a bid in June for its construction, local residents questioned the use of funds.

“It’s such a waste of money,” wrote one user of Weibo, a popular microblogging platform in China.

A Yunnan official confirmed the plan to build the quarantine facility, which is expected to be completed at the end of this year, but declined to comment further.

Tighter control

In Beijing’s corridors of power, senior officials have recognised that the growth model of past decades has reached its limits. In a blunt speech to a new generation of party leaders last year, Xi took aim at officials for relying on borrowing for construction to expand economic activities.

“Some people believe that development means investing in projects and scaling up investments,” he said, while warning, “you can’t walk the old path with new shoes.” Xi and his team so far have done little to shift away from the country’s old growth model.

The most obvious solution, economists say, would be for China to shift toward promoting consumer spending and service industries, which would help create a more balanced economy that more resembles those of the U.S. and Western Europe. Household consumption makes up only about 38% of GDP in China, relatively unchanged in recent years, compared with around 68% in the U.S., according to the World Bank.

Changing that would require China’s government to undertake measures aimed at encouraging people to spend more and save less. That could include expanding China’s relatively meager social safety net with greater health and unemployment benefits.

Xi and some of his lieutenants remain suspicious of U.S.-style consumption, which they see as wasteful at a time when China’s focus should be on bolstering its industrial capabilities and girding for potential conflict with the West, people with knowledge of Beijing’s decision-making say.

The leadership also worries that empowering individuals to make more decisions over how they spend their money could undermine state authority, without generating the kind of growth Beijing desires.

A plan announced in late July to promote consumption was criticised by economists both in and outside China for lacking details. It suggested promoting sports and cultural events, and pushed for building more convenience stores in rural areas.

Instead, guided by a desire to strengthen political control, Xi’s leadership has doubled down on state intervention to make China an even bigger industrial power, strong in government-favoured industries such as semiconductors, EVs and AI.

While foreign experts don’t doubt China can make headway in these areas, they alone aren’t enough to lift up the entire economy or create enough jobs for the millions of college graduates entering the workforce, economists say.

Beijing has spent billions of dollars to try to build up the country’s semiconductor industry and reduce its dependence on the West. That has resulted in expanded production of less-sophisticated chips, but not the advanced semiconductors produced by companies such as Taiwan Semiconductor Manufacturing. Among the projects that failed were two high-profile foundries that received hundreds of millions of dollars in government support.

Last week, just as Beijing released a barrage of disappointing economic data, the party’s premier journal, Qiushi, published a speech made by Xi six months earlier to senior officials, in which the leader emphasised the importance of focusing on long-term goals instead of pursuing Western-style material wealth. “We must maintain historic patience and insist on making steady, step-by-step progress,” Xi said in the speech.

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AI Is the Real Deal for Investors—if You Understand It. Our Roundtable Is Here to Help.

It has been less than a year since OpenAI changed the world overnight with the release of ChatGPT. Since its November launch, the chatbot’s display of generative artificial-intelligence software has triggered a reshuffling of investment priorities in Silicon Valley, on Sand Hill Road, and on Wall Street. Almost every company—and this goes well beyond tech—has prioritised the development and adoption of generative AI.

The notion of artificial intelligence, or computers that can “think,” has been around since the Cold War. What makes generative AI so fresh is the ability to answer questions posed as simple natural-language requests—and respond with rich, creative content in the form of text, music, video, images, or even poetry.

Generative AI promises to democratise the power of large data sets, making it dramatically easier for people and businesses to find information, create content, and analyse data. And yet, AI isn’t magic, despite all appearances to the contrary. The technology is creating widespread worries about the misappropriation of personal information, the misuse of copyright-protected content, and the creation of false and misleading data. Some people even see AI as an existential risk to the future of life on Earth—a recent Time magazine cover asked whether AI will eventually lead to “The End of Humanity.”

To consider the outlook for AI, how it works, where the risks lie, and who will lead the way, Barron’s assembled a panel of five experts who approach AI from divergent angles. Our AI roundtable panelists included Dario Gill, director of research at IBM, which has spent decades working on artificial-intelligence software and hardware; Irene Solaiman, policy director at Hugging Face, a marketplace for AI models, data sets, and software; Cathy Gao, a partner at Sapphire Ventures, which has committed to investing at least $1 billion in AI-focused start-ups; Mark Moerdler, a software analyst at Bernstein Research who completed a doctorate in computer science and artificial intelligence in 1990; and Brook Dane, a portfolio manager at Goldman Sachs who lately has revamped his investment strategy to focus on AI stock plays.

The conversation took place in early August on Zoom. An edited version follows.

Barron’s:Let’s start by framing just how big a deal generative AI is. The biggest thing since the Web? The iPhone? Electricity? The wheel? Dario, IBM has been working on AI for decades—it has been 12 years since Watson’s famous appearance on Jeopardy. So, what has changed?

Dario Gil: IBM has actually been involved in AI since 1956, the year of a famous conference we co-sponsored called the Dartmouth Summer Project on Artificial Intelligence. Arthur Samuel, an IBM computer scientist who did pioneering work in AI, coined the term “machine learning” in 1959. So, yes, the idea of AI has been around for a long, long time. The past decade or so has been the era of deep learning and neural networks, where we discovered that if you could label enough data, you could achieve superhuman levels of accuracy.

But that turned out to be extremely expensive.

Gil: Right. There were only a handful of institutions that could actually amass enough labeled data—say, hand-tagged photographs—to generate good value and a reasonable return on investment. The fundamental reason why there’s so much excitement around AI now is this transition toward “self-supervision.”

Explain that for us.

Gil: The advent of foundational models—the basis of generative AI—allows us to take large amounts of unlabelled data and create very powerful representations of language, code, chemistry, and materials, or even images. And as a consequence of that, once you train these models, the downstream use cases allow you to fine-tune or prompt or engineer them with a fraction of the energy, effort, and resources that historically would have been required to create those use cases. It’s what is unlocking this productivity moment in AI.

Bill Gates has said that ChatGPT was the most impressive technology he’d experienced since he first saw a graphical user interface in 1980—that it was as fundamental as the creation of the microprocessor, the PC, the internet, or the mobile phone. Nvidia [ticker: NVDA] CEO Jensun Huang says AI is having an iPhone moment. Cathy, Sapphire just announced a commitment to invest $1 billion in AI start-ups. Does this moment really feel that big? What is the opportunity that Sapphire sees?

Cathy Gao: In AI, we invest end to end, in everything from the plumbing to how data move through the stack to the application layer. With AI, we are definitely seeing a similar arc to other platform shifts. We believe that this is a significant platform shift. We’re in the early stages of that explosion, headed ultimately to ubiquity.

But why now? What makes this the moment?

Gao: It’s being driven by many things. One of the keys is that the consumer imagination has been captured. ChatGPT reached 100 million users in a groundbreaking two months. You can see a future where AI becomes so ubiquitous that companies no longer market themselves as “AI companies” because they’ve all become AI companies. In part, this is about ease of use, the ability to leverage foundational models via API [application program interface, a protocol for software programs to connect], so you’re not having to rebuild them every time. You’re not having to build these LLMs [large language models] from scratch. And the other element is the end-user experience, which will take us to the next phase of ubiquity.

Mark, you earned a doctorate in artificial intelligence a few decades back. What’s different now?

Mark Moerdler: It feels like 100 years ago. We were learning how to do very basic things with AI. Since then, we’ve seen massive improvements in technology. Underlying computing capabilities have massively expanded. You couldn’t run the types of learning models that you can do today, because the computers couldn’t deal with that capacity. We were using far smaller computers, with less memory, storage, and bandwidth.

And I would agree with Cathy that this is all about conversational AI. Until now, it’s all been under the hood. Now, you can hold a conversation with software in the same way you might talk to a person, and the system will respond to you, maybe with a report, or by creating an image, or simply with an ongoing conversation.

This was all sparked by ChatGPT and a consumer experience, natural-language chat. Will consumers—and advertising—ultimately be the revenue source for this business, or will it be more about a growing market for enterprise applications?

Moerdler: Some of the largest companies in the world—including Microsoft [MSFT] and Alphabet [GOOGL]—are involved in both consumer and enterprise AI software. There will be disruption on the consumer side, in terms of where you search for information. But arguably, the bigger value creation is going to be unlocking the data within enterprises, to leverage that data to drive efficiencies within organizations, make leaps of intuition in coming up with answers, or make decisions faster, or in some cases reach conclusions you couldn’t previously reach because you didn’t have easy access to the data.

Gao: What’s happening in Gen AI on the consumer side and the B2B—or business-to-business—side are highly symbiotic. They’re feeding into each other. There is a huge opportunity for enterprise software companies today, and that’s why you’re seeing a lot of investment. Gen AI is the ultimate double-edged sword. On the one hand, it represents tremendous potential to be transformative, and the key to future growth. But it can also create new competition that could be hard to beat, in some cases creating existential risk for the incumbents.

Gen AI can increase the addressable market for many companies and industries. Take a core system of record like ERP, or electronic medical records, or a payroll service like ADP, which stores a lot of valuable data. Often, the existing customer interface layer limits many potential use cases. Gen AI can be used to reimagine and reinvent workflows, and to open up the addressable markets in a significant way.

Irene Solaiman: It’s important to step back and think about what systems we are discussing, because there are so many language models out there. When we’re talking about generative AI, the way you would do research on or adapt them to a given application is going to different by modality. There’s a lot of chatter around chatbots, but there’s a lot happening with imagery and audio and even video that isn’t the subject of as much research or literature as there is for language. There’s so much opportunity.

Remember, also, that these base systems often aren’t developed for a specific use case. They may be optimized for tasks like code generation. But generally, they can be applied to many different fields, which is exciting. There are also risks; we need to figure out what safeguards we need.

Irene, I was visiting the Hugging Face website and was struck by the number of models and data sets your site offers. This isn’t just about Microsoft, Meta Platforms [META], or Alphabet.

Solaiman: We have almost 300,000 different models, over 100,000 applications, and more than 50,000 data sets. Not all of the models are focused on natural-language processing. There are models for more-specific fields, like biomedical AI. There’s a lot of discussion around advanced models like OpenAI’s GPT4. But that’s not what everyone is going to use. Large language models are computationally expensive to run. At Hugging Face, we’re seeing a lot of researchers use much smaller models that are cheaper to adapt and fine-tune.

That raises questions about where the value lies—and who the winners will be. Brook, it’s your job to identify AI winners. Do you see the value going to those that have the data, or the application vendors, or someone else? How do you approach that when looking for AI-related companies in which to invest?

Brook Dane: It’s incredibly early in this journey, especially when you look beyond the providers of semiconductor and networking infrastructure, like Nvidia, which has a near-monopoly on graphics processors used to train models. When you think about the software layer, it is TBD—to be determined—on some of these things. Early on, though, it appears that this idea that data have gravity and will be the source of competitive advantage appears to be true. We’re focused on that.

Beyond infrastructure, we are spending the bulk of our time on data, and which players can drive value and capture value over time. The other issue is that, unlike some other big tech transitions of the past, you don’t have to rewrite the entire software stack. In other words, I wonder whether there will be as much disruption to the leaders in the marketplace as in previous shifts. The shift to mobile and the internet created a whole new class of companies that rose up and displaced the incumbents. I wonder if this time the incumbents will actually reinforce their power, because they already have the data.

Moerdler: I agree. The speed of building models is very high. We’re talking months, not years. It’s just a matter of money. Differentiation is going to create sustainable value where you can create something trained on unique data and capabilities—and where the uniqueness is sustainable. In traditional software, the moat was created because it took so much time to create the technology. For a competitor to catch up took a really long time. Here, everyone is building capabilities. If you can’t differentiate, you aren’t going to be able to monetise it.

We’ve talked a lot about models and data sets. What differentiates the two?

Moerdler: When people talk about models, there are several types. There are generic models trained on very large data sets, for the purposes of answering more generalised queries, like ChatGPT and Bing. There are specialised models for very specific problems—say, in chemistry or materials sciences. And there’s an enormous amount of data sitting inside companies. Companies may choose to use a more generic model and ground it with their corporate data.

Gao: Let me give you an example to illustrate what Mark is saying. One of our portfolio companies, MoveWorks, is an AI chatbot that cuts across enterprise applications like information technology, service management, and human resources, and adds company-specific data. If a customer has a conference room called Taylor Swift, for instance, and you ask a public chatbot if Taylor Swift is available at 9 a.m., the model is going to get confused. But if the chatbot is infused with information about the company’s conference-room names, it can produce an accurate answer.

Gil: The pattern of consumption is essential for how AI is used in the real world. So, you start with your base model, and then you load your records of, say, past customer exchanges and service documents around that—you’re fine-tuning the model so it incorporates your local data. Productivity gains are linked to that idea. Once you have base models for solving IT problems, all of a sudden your internal team can do 50 or 100 projects a year. In the era of just deep learning, having to label everything by hand, where every model was custom, you could do just four or five projects.

Solaiman: I always use the term “system” instead of model. But I’m so glad to hear all this talk about data. And when we’re thinking about system life cycles, there’s a lot of work, as Dario was saying, that goes into data collation, curation, and governance. An organization is going to train on an open data set that may have been collated and curated by somebody else.

This brings us to the question of why this is all happening now. We have much more impressive systems than we did just a few years ago. We have better techniques and better infrastructure, including more efficient computing, more computing, and more data. And we have better safety research, better fine-tuning of the information, and better accessibility, not just via APIs, but with models that are more compute-efficient, that can run even on local hardware.

In an interview with Barron’s after the latest Palantir [PLTR] earnings call, CEO Alex Karp said that this technological revolution favors the incumbents—unlike previous tech disruption that advantaged new companies. He thinks the winners will be familiar players, not new ones. Brook, you already touched on this idea. Cathy, as an investor in new companies, do you find that discouraging?

Gao: That’s the No. 1 question. Look, the incumbents have scale and capital. They have the computing resources, which are scarce these days. And they have tremendous data. They have key ingredients to be very, very successful around Gen AI. The incumbents are certainly going to be playing an outsize role in this era. I’m talking about hyperscalers, such as Google, Amazon.com [AMZN], Microsoft, and others, that are aggressively investing in this technology. On its latest call, Microsoft mentioned AI 59 times.

That’s even more times than the 53 times that Microsoft said the word “cloud.”

Gao: For an investor like me who is looking for the disrupters, the biggest question—and the biggest risk—when you look at most Gen AI application software companies is, what if Microsoft, or Google, or Adobe [ADBE] does this in the future? Is this new company going to be wiped out? The differentiators will be the same as with any software-as-a-service application. It will be about customer and product experience being deeply embedded into workflows, and that data moat that we talked about earlier.

A lot of the founders I’ve been speaking to over the past couple of months, when asked about Gen AI suddenly blowing up in the past two quarters, always say the same thing. They say, on the one hand, that it has been amazing for the market, with inbound queries just flooding in. But at the same time, it has lowered the barrier to entry for new players. Plus, the hyperscalers like Amazon, Meta, Alphabet, and Microsoft are now paying more attention to this opportunity.

Dane: I agree with everything Cathy just said. In every transition, new companies emerge, and some become large. But there really is a power of incumbency here, because of the need for data, and because you can develop these tools and techniques relatively quickly, the way Microsoft has announced AI software across its software stack. The incumbents do have a huge advantage. It’s going to come down to leadership and execution, as it always does, and especially in a time like this when the market has been through a period in which it has been focused on margin expansion. There’s a level of investment required to do this, and some of the incumbents are going to hesitate to spend what they need to spend to be relevant players. But the advantage starts with incumbency on this transition.

Mark, do you agree?

Moerdler: Yes, but let me add to that. AI is a data-driven learning experience. The more you have access to data, theoretically, the better your product becomes. And therefore, the quicker you can get to market, the more you can absorb in terms of information, the broader the reach—it has somewhat of a self-fulfilling prophecy effect. But as Brook rightly said, it comes down to execution, and there are many companies now that are giving lip service to generative AI rather than the significant focus and investment that may be necessary to create a moated solution.

Dane: As I think about my models and forecasts across the software ecosystem, the ones that execute well in this are going to see a lower churn rate, higher customer retention, and higher upsell and cross-sell into their installed base. You’re starting to see companies for which your degree of confidence in the two-, three-, four-year-out free-cash-flow outlook is structurally higher now. All of this is still super-early, and I’m not sure that it impacts the next 12 months’ cash flows in any material way. But as I think beyond that horizon, I get increased confidence in their ability to be bigger, stronger, faster businesses.

It seems clear that we’re not talking just about the importance of data held by tech companies. Legacy companies in areas such as financial services, pharmaceuticals, and materials have tons of data, too.

Gil: Understanding the moment as a shift in data representation is really important. It may sound a little bit abstract, but it is profound. When the relational database was invented, there was a form of data representation that we’re all accustomed to, of rows and columns. Databases were invented to do that well, transaction processing systems do that well, and it had huge implications for payroll and finance and accounting. Now, imagine instead a graphical data representation. It turns out that graphical representation is essential to do things like search, social media, and so on. You’re going to take the data that you have today, relational databases, graphs, and so on, and map them to this new way to encode information.

So, who gets to be a value creator? Enterprises and governments the world over have the most data. It looks at the moment like all of this is concentrated in about five American companies, but that isn’t how the future is going to evolve, because contrary to popular opinion, and thanks to open-source initiatives, the democratisation of AI is perhaps the most important force at present. Understanding how much simpler it will become to take advantage of these large language models, to adapt them, to create them, will turn out to be the defining trend as it gets internationalised and democratised, and value creation gets more distributed.

Solaiman: That’s one of the reasons I do this work. What we’re building has a lot of potential, but potential for whom? For instance, what are most keyboards optimised for? Latin character alphabets, like English. When I worked at OpenAI, I used to test a lot of the models, not just in English but also in the only non-Latin character language I understand, which is Bangla, the national language of Bangladesh. I got to see Bangla-speaking researchers working in a language deeply underrepresented in natural-language processing. When you make systems work for many different groups of people, opportunities open up. The question from a governance point of view is, how do we make sure data collection isn’t exploitative and appropriately represents every community.

That brings us to an important topic, which is regulation, and mitigating risks and potential harms. There are questions around job loss, intellectual property protection, and deep fakes. Congress has held hearings. Do we need a new regulator? New rules? And how do we do that without reducing the competitive position of U.S. companies relative to those in China or elsewhere?

Moerdler: We’re in a new era. Regulators don’t necessarily have the experience in this area. They are learning as the rest of us are learning exactly how to deal with it. Regulation, like everything, can be a two-edged sword. It can be used to limit bad actions. It could also limit development. There needs to be control to assure governance, privacy, and security, that the systems aren’t misused by bad actors. There needs to be some level of standardization of requirements, of control, and maybe even regulation. But it has to be done in a thoughtful way, or what will end up happening is that you will create an opportunity for companies outside the U.S. to take market share and take advantage.

Irene, what is your sense of this?

Solaiman: Good regulation is hard to do. Regulators wear so many hats. They can’t be experts in AI. But what they are experts in is the public interest. I want to learn from policy makers in which direction they think AI should be going. But it is immensely difficult to regulate. And what systems are we actually talking about? There’s not one single piece of legislation that is going to affect every aspect of AI. Regulators in the U.S., the European Union, the United Kingdom, and Canada are trying. There is an unprecedented level of attention in Congress. Hugging Face is pro regulation, but we want that to be in a way that guides innovation in the right direction. There needs to be better standards, but that means working together closely. There are incredible experts throughout all of these regulatory bodies on what that would look like and how that can be extrapolated to non generative AI systems, as well.

Gil: A framework of precision regulation would serve the industry well. Look at the work the EU did in the past few years. They developed a very thoughtful approach on use cases and risk-adjusted regulatory frameworks. There’s a huge difference between applying AI in a nuclear reactor and applying AI for a pizza-recommendation system. Right? And so risk-adjust, where you categorise how much harm this is likely to cause, or how much risk this is going to induce in society, and use the appropriate regulatory bodies to beef up the expertise.

Enable every agency to become an AI agency, an additional element that they incorporate. This is in contrast to having a single AI regulator that is going to figure out the whole thing. Regulating the technology itself, regulating mathematics, is a really bad idea. And there are people talking about registering the models—that’s the wrong way to go.

Focus on the use cases. Focus on the harm and the impact around that, and regulate using existing bodies against those by beefing up their AI knowledge and expertise and sophistication. Sometimes, the hyperbolic rhetoric that has come even from the tech industry is causing more harm than good. Lowering the tone and focusing around the harm and the damages and the impact, and on those regulatory bodies and the people who are doing that, would be the right way forward for precision regulation.

Cathy, how does the risk of added regulation affect your thinking about where to put Sapphire’s money?

Gao: It’s something we consider closely. We’re still in the very early innings—there are a lot of unknowns. Venture capital is a high-beta asset class by definition. But we want to be smart about the risks we take. When it comes to AI, many of the use cases we’re looking at right now are less likely to be a target of regulatory scrutiny. We’re not looking at companies that affect life or death, like in healthcare. Still, we’re following it very closely. We definitely take that into consideration, but we also accept that some of the unknowns will remain when we make an investment.

Moedler: These systems could be problematic from a privacy point of view, from a bias point of view, from an intellectual-property point of view. Investors need to think through where they could be exposed. It may not be regulators. It may be the fact that, you know what, you trained up these solutions, and the responses they’re giving impinge on other people’s IP, and therefore your clients—and you—are going to get sued. That becomes part of the math you need to do when determining whether these systems are going to become good, sustainable businesses that will generate not just revenue, but also profits, over a long period. Investors need to think carefully about where the exposure can be, whether they’re going to cross a line or create some legal, regulatory, or economic exposure.

One other risk that has been widely discussed is the potential that AI will cost people jobs. Is AI going to be a net job creator—or destroyer?

Gil: We have a couple of hundred years of evidence that the nature of jobs changes over time. A hundred years ago, half of the U.S. population was working in the fields. So, first of all, this phenomenon isn’t new. Whenever really disruptive technology emerges, people think this time will be different. The evidence suggests that won’t be the case. There’s a lot of good analysis that jobs are composed of many, many diverse tasks, and some will be subject to automation while many others won’t. The key metric that people are focused on is whether we can deliver on the productivity promise. With better productivity, we can generate more wealth, and invest in things we care deeply about to create better institutions, a better society, and so on.

I’m more worried about whether we can deliver solutions fast enough to reach the productivity gains we need, and discover solutions to the problems that we face. When I talk to people about advances in AI, semiconductors, and quantum computing, and they are stressed out about the rate of technological evolution, I like to say, look around. I don’t think we’ve run out of problems to solve. And if we can use these technologies to accelerate how quickly we can discover some of these solutions, we are all going to be very well served. One of my fears is definitely not that people won’t have jobs because of the advances in AI. History tells us that.

Solaiman: Just five years ago, one conversation was around how autonomous vehicles would replace drivers and cost the jobs of truck drivers and others. But it turns out, the most adversarial environment is the real world. I’d like to see more research on how we augment and not automate. What will be the impact on the wage distribution? Should people’s wages be reduced if they’re being helped by AI? There are important economic questions.

OK, we have to discuss the notion that generative AI is an existential threat to humanity, as some have warned. It’s worth mentioning here that there’s a difference between generative AI—what chatbots do—and artificial general intelligence, or AGI, the idea that software can be sentient and act on its own, like HAL in the movie 2001: A Space Odyssey.

Gil: I’m very opposed to that language of existential threats because it distorts things in a significant way. First of all, it freaks out our fellow citizens. To some degree, some of the people who espouse that language are behind the scenes aiming at regulatory capture.

Solaiman: A fun fact about me that’s not very public is that I worked on AGI for a while. When I was working on that, a lot of what I was thinking about through my research was, if we’re building these incredibly powerful systems, whose values do they represent? My primary motivator now is to make AI systems work better for underrepresented people in the technical world. A lot of the harms to marginalized people truly are existential to those communities.

But we’re not going to be serving robot masters soon, right?

Moerdler: The more immediate issue is how the AI is used and misused, not whether the AI itself is going to decide to cause damage. That’s the crux of the issue. Worry about how it’s going to be used or misused, because it’s a long time horizon before you have to worry about AI making decisions. People are trying, as Dario said, to blow this out of proportion for other purposes.

Let’s take a few minutes to talk about AI stocks. Brook, when we last talked a few months ago, you walked me through a bunch of non obvious ideas for AI investments. Are you still finding attractive things to buy, despite a big rally in the stocks?

Dane: First, as I’ve said, it’s very early. We’re in the emergence of this technology right now. The landscape is going to change dramatically over the next one, three, five years. Investors have to pay attention to how these things are changing and where opportunities emerge. The second thing is that, in general, there’s going to be considerable differentiation between winners and losers. Right now, the obvious plays are the ones getting revenue today, the picks-and-shovels players, semiconductor components, and networking, and then the big cloud vendors.

We’re at a funny moment, though, where the market has realised that there is going to be a boom in applications, and that there will be a bunch of infrastructure software that gets pulled along with this. There are exciting opportunities, but that isn’t going to move numbers for calendar-year 2023. So, as long as your investment horizon is long enough, you’re likely to see the payoff from this. If you’re trying to manage a portfolio from now to the end of the calendar year, the companies that are seeing the benefit are the very obvious choices that have already moved, like Nvidia and Microsoft and Alphabet.

When Microsoft reported June-quarter earnings a few weeks ago, the market’s reaction was a little tepid. The results didn’t really reflect all of the things they have been saying are coming on the AI front.

Dane: As we’ve moved through this latest earnings period, you saw a lot of companies produce results that have been ahead of expectations or right in line with expectations. Nobody has particularly gotten aggressive about raising guidance, and stocks have sold off into that, because they had large moves into the end of the quarter through June and July. People were expecting some excitement. The excitement is coming in a lot of these names, but just not in the next 90 days.

Microsoft seems incredibly well positioned from our perspective, given what the company is doing with Copilot and Azure. For us, that seems like a compelling opportunity.

Give us a couple of other picks.

Dane: I’m bullish on Marvell Technology [MRVL], which makes chips used in data-centre networking. It will grow right alongside Nvidia. Its AI-related business is around $200 million in revenue, and should double in each of the next couple of years. The stock has moved up, but so have estimates. This is a picks-and-shovels play, where the numbers are going higher.

Another company we like is Adobe, which dominates the creative software market. We’ve been hearing good things about the beta test for its corporate version of Firefly, Adobe’s collection of generative-AI tools. From what we hear from the sales channel, the beta version is doing exceptionally well. One of the biggest advantages that Adobe software offers is that customers will be protected from copyright infringement for their text-to-image software. There’s a little bit of TBD around how big this is—we still don’t have pricing information—but this is one of those situations where the incumbent has an advantage.

And what about Nvidia?

Dane: We have owned it and continue to own it in our large-cap and tech-focused funds. But we’re always managing risk and reward with position sizing; you want to make sure you stay in balance. As the leader in graphics processors, they are in a unique position—they are really benefiting from this wave. The business will do exceptionally well, but valuation has a range of outcomes.

Mark, you wrote a piece recently that asked if we are in an AI bubble. Are we?

Moerdler: We’ve been in an expectation or optimism bubble. The investor community has gotten enthusiastic about the near-term revenue that’s going to be generated by the technology. Again, this technology exploded on the market. Investors looked at it and went, OK, it’s going to generate meaningful revenue in a relatively short period. Expectations moved up, and valuations moved up accordingly. Many management teams started talking about their AI solutions. You could literally watch stock valuations move up the more they talked about AI, even though they weren’t giving you any guidance about when and how much. We’ve seen multiples move up to relatively high ranges, approaching what we’ve seen at peak multiples in recent times, without that line of sight to the revenue-generation possibility.

And so from that perspective, there is a bit of a bubble going on. It’s going to take longer than many people believe for AI to drive meaningful revenue. That doesn’t mean no revenue, but enough to move the needle from a revenue growth perspective or an earnings perspective. It is likely that in most cases, revenue is going to lead earnings here because there’s a lot of investment required to offer AI tools. You’re using them in the cloud. You’re paying for that usage, even if you own it yourself. You’re probably paying a premium right now, because of the GPU [graphics processing unit] shortage. And so, yes, we got a little bit ahead of our skis.

I also don’t think the rising tide will lift all ships equally. It’s going to come down to the companies that are able to create differentiated capabilities, protected against competitive threats—and that have the ability to monetise them. A lot of companies are going to add AI capabilities, and it is going to be, at least in the near term, a cost of doing business. It isn’t going to be monetisable because your competitors are going to add similar capabilities.

As Brook discussed, you need to think about the time horizon. We think of three buckets. There are the companies where you can see differentiation in what they’re offering now. There are companies that are adding AI, but it may just mean a higher cost of doing business, at least for the near term. Longer term, years from now, it could become real. And then there are the companies that will be disrupted. Most companies are in that middle bucket today.

Which companies would be in the first bucket? And the last?

Moerdler: Two of the companies that I put in the winners bucket were just mentioned by Brook—Microsoft and Adobe. I put in the losers list companies offering no-code and low-code software solutions; they are going to face new competition from AI-written code. For the losers, we see a combination of increased customer attrition and pricing pressure. Almost everything else is the middle bucket. For most companies, generative AI won’t be a major differentiator but will be necessary from a competitive positioning perspective. Most of these are jumping on the AI bandwagon, and while they should be able to get functionality to market quickly, it won’t be differentiated and, in many cases, really valuable to customers.

Dane: One thing to note: The opportunities in tech companies are compelling right now, with AI as an option in front of them. Business fundamentals are largely stable. The economy is in better shape than we all thought it would be six or nine months ago. These companies have largely pivoted to driving cash flow and operating income instead of chasing growth for growth’s sake. And then you have this optionality around AI.

Moerdler: Agreed. If your focus is on the value of the business, and the upside from AI, you’re going to get better a risk-reward in terms of your investment profile than if you jump on the all-about-AI ship, because it may just take longer until that revenue comes to fruition.

While tech stocks have had a big year, and everyone is talking about AI, there haven’t been any AI initial public offerings, or really any IPOs in tech. Cathy, what does that say about where we are in the development of the AI sector?

Gao: When the general IPO markets will unfreeze for tech is the million dollar question. I have no idea. In any case, it’s going to take a while before we see pure-play AI companies come public. The speed of adoption that we’re seeing in this cycle with AI has outstripped anything that I’ve seen in prior platform shifts. But maybe there’s something we can learn from the internet revolution that could be applied to the current era. In the internet era, the first wave of companies that came out weren’t the ones that ultimately succeeded. It was more the second wave and the third wave that watched their predecessors, learned from their mistakes, refined, rehoned, and went out. My gut is telling me that this is going to take a while.

Everyone, thanks for a fascinating conversation.

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Tokyo Hopes Rooftop Solar Mandate Will Help It Get Through Hot Summers

TOKYO—Heat waves this summer are pushing Tokyo’s power grid near the limit. The city of 14 million has mandated installing solar panels on new single-family homes to get some breathing room—even if it has to buy most of the panels from China.

The policy in one of the world’s largest metropolises is a test case for whether solar power makes sense on urban rooftops. The idea has long drawn attention as a way to fight global warming but has advanced relatively slowly worldwide, apart from a rooftop solar mandate in California pushed by Democratic Govs. Jerry Brown and Gavin Newsom.

“We need to prepare to protect not only our national security, but also the energy security of individual households,” Tokyo Gov. Yuriko Koike, the architect of the mandate, said in an interview.

Koike has had panels on her own house for a decade. As a government minister, she created a “Cool Biz” plan that led Japanese salarymen to ditch suits and ties in summertime so they could keep the thermostat higher.

In the Land of the Rising Sun, Koike said, “we unfortunately aren’t rich in oil and gas, but wouldn’t it be fitting if we could instead harness the sun?”

Proponents say more rooftop solar would help on hot summer days when electricity demand peaks, and make the city resilient if an earthquake or typhoon knocked out the power grid.

The downsides: More solar also means higher electricity bills, including for lower-income apartment dwellers, because homeowners with rooftop panels can sell their excess power to the grid at an above-market rate. Even with the mandate, solar power generated in Tokyo is projected to supply only 4% of the city’s electricity in 2030.

“We cannot have a sufficient amount of power generation just by having solar panels on limited rooftops,” said Tatsuya Terazawa, head of the government-affiliated Institute of Energy Economics, Japan.

Still, Koike said it is important to move toward carbon-neutral electricity and help Japan buy less Russian natural gas.

The city predicts that by 2050, half of Tokyo’s current structures will be replaced. “By targeting newly built houses, we can decide the future 50 years from now,” Koike said.

Tokyo’s mandate, released last December, will initially apply only to about 50 of the largest home builders in the city, which it says account for around three-fifths of new homes. Starting in April 2025, those builders will be given a quota that will in effect require them to put panels on most new homes, while allowing them leeway to forgo solar in cases where the roof is too small or lacks sunlight exposure.

“We want companies to make sure that wherever you can put them, you put as many as you can,” said city environmental official Toshifumi Fukuyasu.

Japan relies on imported natural gas and coal for most of its electricity, and Russia supplies about one-tenth of its natural gas. The power company serving the capital, Tokyo Electric Power, or Tepco, isn’t operating any nuclear plants currently after the meltdowns at its Fukushima Daiichi plant in 2011.

In March 2022, the city came dangerously close to running short of electricity on a cold day, and it faced another crunch months later during a heat wave.

Tepco has managed to keep the lights on this summer, despite weeks of sweltering weather in which the thermometer consistently topped 95 degrees. Still, it says it worries about electricity running short, and the city encourages people to keep their homes at 82 degrees.

Tokyo University professor Yumiko Iwafune, who studies energy demand, said that even if rooftop solar panels don’t generate much electricity overall, they still can help households become self-sufficient on summer days, lessening demand on Tepco.

Tokyo has drawn comparisons between its policy and California’s rooftop solar mandate, which took effect in 2020 and similarly applies to new low-rise residential buildings. The California Energy Commission estimates that 150,000 new homes covered by the law have been constructed with solar panels.

Newsom, the governor, said in May 2022 that rooftop solar is “an industry that is essential to our state’s future.” California expanded its mandate last year to encompass certain new commercial buildings.

But the state’s mandate is contentious even among advocates of renewable energy, some of whom say it would be cheaper to build large solar and wind installations.

James Bushnell, an economics professor at the University of California, Davis, said rooftop solar mandates tend to raise electricity bills for people who don’t have solar because grid operators often pay higher prices for home-generated electricity. “A large ‘benefit’ of solar is in fact a shift of costs onto other, often lower-income non-home owning customers,” Bushnell wrote in an email.

Another problem in Japan is its lack of domestically produced solar panels, although it was once a leader in the technology.

According to the International Energy Agency, China produces around 85% of the globe’s solar cells and 95% of key components needed to make them.

“We’ve realised we can’t win against China,” said a spokesman for the Japan Photovoltaic Energy Association, an industry group representing companies in the solar-energy business.

Unlike the U.S., Japan still permits the import of solar panels with materials sourced from China’s Xinjiang region, where the U.S. has alleged the Beijing government has carried out genocide against the Uyghur ethnic group. Beijing denies that.

“Most people aren’t very aware about the human-rights violations associated with solar panels. They think of it as a good thing because of the environment,” said Taishi Sugiyama, a research director at the Canon Institute for Global Studies, a Tokyo-based think tank. He said Tokyo should scrap its solar mandate.

Fukuyasu, the Tokyo city official, said he agreed Japan needed more suppliers of solar panels. “But in Tokyo, we need solar to create a zero-emission society, and we can’t postpone that,” he said.

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Australia set for a bumper spring selling season

Property markets across the country are heating up ahead of the traditionally busy spring real estate season as seller uncertainty begins to thaw, with the trend expected to continue.

The latest PropTrack Listings Report shows the number of homes being brought to market surged by 9.2 per cent year-on-year in Sydney and 9.1 per cent in Melbourne.

While other capital cities were flat, the total volume of properties for sale edged upwards by 0.4 per cent in July.

“While part of the reason for that growth is that last July was a slower month, it is not the whole story,” PropTrack economist and report author Angus Moore said.

“There were more new listings in both Sydney and Melbourne in July than has been typical on average for this time of year over the past decade.”

Activity is likely to continue increasing over coming months after what was a particularly quiet start to the year, he said.

Seller activity would typically be low during the colder months. According to CoreLogic data, new listings historically drop by about five per cent between autumn and winter.

“In contrast, through the winter season to-date, new listings have risen by 13.2% this year, driven mostly by a 17.9% rise across the capital cities compared with a 4.6% rise in the flow of new listings across the combined regional areas of the country,” CoreLogic executive research director Tim Lawless said.

That apparent surge in vendor confidence can be attributed to recent rising home prices in almost all capital cities, Mr Lawless said.

July marked the seventh consecutive month that home prices nationally increased – now up 2.8 per cent across the year, according to PropTrack data.

But for some vendors, Mr Lawless said listing now could be a matter of necessity.

“Anecdotally, we may also be seeing more homeowners needing to sell amid a peak in the ‘fixed rate cliff’, elevated interest rates and high cost of living pressures.

“Data on mortgage arrears continues to show a historically small portion of borrowers are behind on their mortgage repayments, however we are likely to see mortgage stress becoming more evident through the second half of the year.”

The trend in rising listings will be a critical factor to monitor in coming months, he said.

“The spring season is shaping up to be a busy one, making up for the relatively sedate spring and early summer selling season last year.

“Through the recent recovery phase to-date, low available supply levels have been the key factor supporting value growth.

“A rise in stock levels could signal a further easing in the pace of capital gains across Australian housing markets as buyers benefit from a broader selection of available housing.”

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How to Stylishly Bring More Sunlight Into Your Home

THE OPEN floor plan lost considerable appeal once the din of WFH video calls began echoing through it. As Americans have grown more interested in walls, but no less interested in airiness, a new-old solution has emerged: interior windows. These apertures let light jump from room to room while creating a soothing sense of separation.

When renovating her historic 1902 home in Grand Rapids, Mich., interior designer Jean Stoffer found 100-year-old storm windows there. As part of a new wall pierced by a wide doorway, they proved a handy way to introduce a distinct but not too darkening division between her grand living room and kitchen-seating area. She then painted the windows’ wood sashes black, in keeping with the home’s exterior windows. “The style of an interior window should be the same as or complementary to the home’s exterior windows,” Ms. Stoffer advised.

Other designers stress the importance of visually quiet portals. Max Worrell, an architect in Brooklyn, recommends windows with slight frames that “go away as much as possible.” In a South Carolina home, interior designer Barbara Westbrook also wanted an interior window to disappear. Atlanta architecture firm Historical Concepts installed nearly floor-to-ceiling glazing between a living room and a reading room (which has windows overlooking the outdoors), making the reading room “look like a porch,” she said. She matched the trim work around the interior windows to the colour of the reading room’s walls so that “your eye does not stop at the window but looks through the window.”

Vintage windows have advantages. Designers in search of handsome frames have more leeway when they needn’t factor in heat retention and element resistance. Retrouvius, a salvage company and design studio in London, often repurposes exterior windows no longer up to code, to add “an instant historical reference” in older buildings, said co-founder Adam Hills.

Wedging even a small transom window above a door frame can brighten darker spaces like laundry and powder rooms. Assuming the doorway is a standard 80 inches tall, you need a ceiling height of at least 9.5 feet, said Stephanie Sabbe of Sabbe Interior Design, in Nashville, Tenn. Any lower, and your transom will look squished.

Costs for an interior window vary greatly. On one end of the spectrum, explained Ms. Stoffer, is a simple wooden-sash window with minimal millwork set into a non-load-bearing partition wall that’s, say, 6 feet wide in a room with an 8-foot ceiling. A skilled carpenter can turn such a project around for roughly $1,500. Ditto for a standard transom.

Meanwhile, if you’re planning to install a custom steel window with complicated moldings into a bigger existing wall with mechanicals in it, you’ll need an engineer and other tradespeople. Cost: in the tens of thousands of dollars.

If all this glass seems like an overshare waiting to happen, know that light and modesty can coexist. To brighten a windowless bathroom in a Brooklyn home, Mr. Worrell cut an aperture in the wall between bed and bath, then filled it with a translucent but not transparent glass. “In the bath, you get daylight from the bedroom’s windows, while in the bedroom, you see only a shadowy figure,” he explained. The result is less edgy than it sounds, he said. “There’s a bit of play with voyeurism, but it’s discreet.”

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Federal Government aims for 1.2 million new homes

The Federal Government is seeking to break the deadlock on the housing crisis, committing to 1.2 million new ‘well-located’ homes over the next five years.

The announcement follows a meeting of the National Cabinet in Brisbane yesterday and represents an additional 200,000 homes over the National Housing Accord agreed by states and territories last year. The plan will come into effect from July 1 next year.

To incentivise states and territories to undertake reforms and boost housing supply, the Commonwealth has created the New Home Bonus, a $3 billion performance-based fund.

Labelling it as an ‘ambitious’ target, the Office of the Prime Minister said in a statement it would be supported by a $500 million Housing Support Program aimed at areas such as connecting essential services and delivering amenities to support new housing development.

Part of the strategy agreed to at yesterday’s meeting also includes a National Planning Reform Blueprint, which covers off targets for housing supply as well as promoting medium and high density housing. Reforms to address delays with development approvals are also included in the blueprint.

The blueprint also addresses the rights of renters, with plans for a consistent policy around evictions, rent increases as well as a ban on soliciting rent bidding. Better regulation of short-stay residential accommodation is also on the agenda.

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Wall Street Is Ready to Scoop Up Commercial Real Estate on the Cheap

Wall Street firms are raising new funds to acquire office buildings, apartments and other troubled commercial real estate, looking to scoop up properties at a fraction of the price investors paid a few years ago.

Cohen & Steers, Goldman Sachs, EQT Exeter and BGO, formerly known as BentallGreenOak, are among the prominent names raising billions of dollars for funds to target distressed assets and other real estate with slumping values, according to regulatory filings.

“The last few weeks, I’ve been saying, ‘holy mackerel, they’re coming out of the woodwork,’” said Kevin Gannon, chief executive of Robert A. Stanger & Co., an investment-banking firm that tracks real-estate fundraising.

The new funds are seeking to capitalise on one of the most troubled commercial-property markets in decades. Values have nosedived since interest rates spiked last year, driving up borrowing costs in the highly leveraged business. The office market, one of the largest sectors, has also been clobbered by a sluggish return-to-office rate, which has sent vacancy rates soaring. Apartment buildings, an investor haven in the past, look vulnerable as owners try to refinance at much higher rates. Mall owners are contending with steep value declines, some of more than 70% over the past few years.

Commercial-property sales have been moribund until recently because most sellers haven’t been willing to cut their prices to the levels that buyers are demanding. Now, a small but growing number of office owners have begun to capitulate, unloading distressed properties.

The capitulation marks a new phase in the commercial real-estate upheaval, as more beleaguered property owners turn over properties to lenders or decide to take what they can get, rather than hold out hope for an eventual recovery. This wave of fundraising is the latest sign that sales activity is expected to increase as more sellers yield on price.

In one recent example, the owner of a downtown San Francisco office tower unloaded the property for $41 million to developer Presidio Bay. The seller, Clarion Partners, had purchased the property for $107 million in 2014.

While the clearest distress is in the office sector, many property owners with floating-rate debt may also feel pressured to sell at marked-down prices because they are unable to refinance at today’s higher rates. In addition, fund managers expect values to fall as regional banks, under pressure from this year’s rash of bank failures, unload commercial-property loan portfolios at discounted prices.

“There are selective opportunities beginning to arise for investors that are in a position to take advantage of weakness,” said Rich Hill, head of real-estate strategy for Cohen & Steers, which is aiming to raise more than $2.5 billion in a new nontraded real-estate investment trust.

Commercial-property values already have fallen about 10 to 15 percentage points from their peaks in the third quarter last year, and might fall a total of 20 to 25 percentage points, said Hill. “You have to go back to the [savings and loan] crisis and the global financial crisis to see such big declines in property valuations,” he said.

The volume of distressed commercial real estate grew by $8 billion in the second quarter, reflecting the rise in cases where the owners defaulted or lenders foreclosed, according to data provider MSCI Real Assets. That is the biggest quarterly increase since the second quarter of 2020.

While most of the new funds are looking to buy property, some are planning to lend to property owners and fill the void left by the cutback in activity from regional banks and mortgage real-estate investment trusts. With less competition, the lenders who are still active are able to charge higher rates and get better deal terms from borrowers.

Invesco Real Estate, which has a long track record of raising funds from institutional investors for real-estate credit funds, is raising its first such fund targeting the retail audience.

Many of the new funds, such as those being raised by Invesco and Cohen & Steers, are targeting individual investors. Smaller investors have shown an enormous appetite for property investments in recent years, especially with the growth of the nontraded real-estate investment trust industry which raised about $100 billion in the past seven years.

But many of the non traded REITs that were formed before last year’s rise in interest rates have been under pressure to redeem money back to investors who want to cash out. Over $9 billion was redeemed in the first six months of this year, according to Stanger, and many investors have been forced to wait to get their money because of the rush to the redemption door.

Still, the new funds will be facing a lot of competition from cash-rich funds aimed at institutions. Opportunistic real-estate funds run by private-equity firms have nearly $145 billion in so-called dry powder for future investments, up from $120 billion at the end of last year, according to data firm Preqin.

It is still possible that distressed opportunities won’t arise if the U.S. economy has a soft landing, in which inflation is tamed by the Federal Reserve without tipping the economy into recession.

Sales volume will likely increase when debt markets stabilise and values become more clear. “Broadly speaking, people are waiting to see what the world looks like,” said Michael Stark, co-head of the PJT Park Hill Real Estate Group, a global advisory firm and placement agent. “They’re waiting for motivated sellers.”

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Pininfarina Reveals Its Radical ‘Luxury Utility Vehicle’ Complete With Glass Dome and 1950s Inspiration

There are many advantages to unveiling high-end cars this week at Pebble Beach this week, where the average attendee will find the vehicles well within their means. And so it is with the venerable Italian coachbuilder-turned-automaker Pininfarina, founded by Battista “Pinin” Farina in 1930.

The PURA Vision design concept to be shown at Pebble was developed in-house at Pininfarina. Most onlookers would call it an SUV, or at least SUV-adjacent, but Pininfarina calls it a Luxury Utility Vehicle (e-LUV). The first design element to capture the eye is the glass dome that sees the door glass and windshield flowing uninterrupted into the roof. The side glass opens up in gullwing fashion but the doors stay put and open in “suicide” fashion, with the rear doors rear hinged to allow easy access to the back seat.

The PURA Vision looks like no other car, or at least no recent one. It sits high on huge 23-inch wheels, with slab sides and a low and aerodynamic “pillbox” upper body that recalls some chopped 1950s customs. And a 1950s design was an inspiration, the Lancia Florida I and II concepts of 1955 and 1957 respectively. The Florida I sedan also had suicide doors and no vertical roof support structure between the doors, known as a “B” pillar. Another inspiration, the gorgeous Pininfarina-designed 1953 Alfa Romeo 6C 3000 Superflow concept, had a similar glass dome roof and a futuristic look. There are very slim horizontal LED lights at the back that extend into the curved rear hatch. The interior is relatively simple, with controls on a console-mounted tablet.

Pininfarina’s Battista Edizione Nino Farina is a tribute to the founder’s race-winning nephew. Pininfarina photo

Dan Connell, the chief brand officer for Pininfarina, describes the car as “beautiful, but in an unexpected form.”

Currently, Pininfarina offers the Batista, a US$2.2 million electric supercar based on the ultra-fast Rimac Nevera, and in the process of developing the PURA Vision, the company “kept the Battista owners and other admirers of the brand close,” Connell says. “We had a private showing for them, and some were skeptical—but their minds were blown by what they saw.”

The company’s second production vehicle, code-named B95, is the first Pininfarina to reflect the PURA Vision design philosophy, Connell says. Details will be revealed during B95’s formal debut at the Quail: A Motorsports on Saturday. It’s sure to be a very exclusive car with a big price tag.

Pininfarina will also have the Battista Edizione Nino Farina on its stand at Pebble. First shown at the Goodwood Festival of Speed in England last July, it’s a special edition of the Battista presented as a tribute to the first Formula One World Champion, Nino Farina, who was Battista Farina’s nephew. Setting it apart are unique paint colors, special gold wheels, and body side graphics. An aluminium door plate celebrates the younger Farina’s racing wins. Only five of the high-end electric cars will be built. It’s the second limited-edition Battista, after the Anniversario model.

Simplicity is the watchword in the PURA Vision’s interior. Pininfarina photo

Pebble Beach is always a parade of new model reveals. The “House of Maserati” is celebrating the 75th anniversary of the GranTurismo (GT) model. Both the electric Folgore GT and the Trofeo versions, powered by a three-litre twin-turbo Nettuno V6, are to be sold in the U.S. Two one-of-a-kind GTs, the Luce and Prisma, will be on display at the Quail. Also seen will be the MC20-based Maserati MCXtrema, with 730 horsepower and a build of just 62 cars. Lotus will be giving rides in the 2024 Emira sports car, the final gas-powered Lotus with both four-cylinder and V6 power. Prices start at US$77,100. Rolls-Royce will show a one-of-a-kind car created for a customer.

Other cars to be shown at Pebble include: the Acura ZDX electric crossover, a “world-first new model” from Aston Martin, the Bugatti Chiron Super Sport Golden Era, the Hennessey Venom Revolution Roadster (with a 17-pound removable carbon fiber hardtop), the world premiere of the new Mercedes-AMG GT, the second Lamborghini electric concept, and the Infiniti QX Monograph Concept.

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Are We Ready to Debate the Housing Crisis and Face Reality

ANALYSIS:

As the final-term Reserve Bank Governor, Philip Lowe, faced the House of Representatives Standing Committee on Economics last Friday, a sigh of relief was shared amongst mortgage holders that “the worst is over” regarding the fight against inflation. It only took 12 interest rate hikes to bring inflation at bay in the quickest contraction in monetary policy in Australia’s modern history. As many Australian mortgage holders are now tipping over the wretched mortgage cliff, we see signs within leading economic indicators such as retail sales, consumer business confidence and mortgage arrears, that there is much more pain to come. 

To many people’s surprise, the economy has been incredibly resilient, despite stubbornly persistent rental and service inflation. Raising interest rates is unlikely to reduce these two lingering inflationary pests substantially. As further critical economic data comes to light, we believe the justification for further interest rises will soon abate. 

At the same time, Australia’s largest trading partner, China, is experiencing the unthinkable ‘deflation’, which may have a contagion impact on our economy and prompt us to anticipate rate cuts sooner than we expect, leading to revisions in rate forecasts. 

As the inflation storm clouds begin to settle down, we can assess the damage caused, especially concerning ongoing cost-of-living crises, inequitable wealth distribution, rental crises and falling labour productivity. 

The Structural Problem 

The most significant casualty is the housing market, specifically its ability to supply sufficient housing to keep rents stable and improve affordability. At the peak of the interest rate cycle and property unaffordability, it is economically strange that property prices are bucking the trend and have increased 9% from the trough to its current heights, reinforcing that something is fundamentally wrong with the housing market.

The first glaring issue in our current structural problem is rampant rental growth. CoreLogic’s latest July figures confirm annual national rental growth at 9.4% p.a. In the months ahead, there will surely be a vibrant, albeit distressing, public debate examining perhaps one of the biggest threats to our economy and quality of life: the dreaded ‘Housing Crisis’. 

Our current Prime Minister, Anthony Albanese, will no doubt attempt to unify the states and territories to find an appropriate, balanced solution to ease the rental crisis and increase the supply of properties as he goes into this week’s cabinet meeting. 

Rental Market and Rent Freezes 

Sydney, and Australia more broadly, grapple with a clear rental crisis as we observe low vacancy rates (0.9%) and soaring rents.11 With 31% of Australians being renters,12 these issues impact a large, vulnerable demographic, who feel the full impacts associated with cost-of-living pressures. This is playing out not only as an economic issue but as an ongoing social issue that warrants immediate attention from politicians. 

11 Vacancy rates: August 2022 (domain.com.au). 

12 Housing statistics in Australia: home ownership & rent | Savings.com.au. 

13The ACT is the only territory to limit rent increases but tenant groups say gaps in protection leave tenants vulnerable | The Canberra Times | Canberra, ACT. 

14 https://www.abc.net.au/news/2023-08-11/asx-markets-business-live-news-philip-lowe-rba-inflation/102716942. 

As a result, many people across the political spectrum propose rent control as a solution. However, such measures may backfire, as seen in ACT.13 As Philip Lowe recently made clear, rent control could be a short-term solution to improve housing affordability; however, in the long-term, such a solution will prove inadequate as the fundamental structural problem of low housing supply will persist.14 

This is because a cap on rent increases would discourage property development and investment, leading to a lower supply and higher rents in the long-term, as observed in San Francisco and Ireland.15 These rental rules burden property investors as they are not given a reprieve from an increase in mortgage repayments and holding costs, which will drive much-needed investment away from the property sector. 

When it comes to increasing supply, property developers and investors are the essential lubrication that enable the property machine to function. Therefore, even rumours of 

additional tax for property investors is enough to spook and jeopardise the pipeline for much-needed developments, which is already significantly insufficient to meet current demand. 

As Philip Lowe echoed his view on this matter at the parliamentary committee, government interventions in the rental market via rent freezes and caps have immediate short-term gains. However, it does not resolve long-term structural problems and only exacerbates these issues in the future.16 

The key to addressing the crisis lies in increasing the housing supply. Government inefficiencies, especially with regard to planning systems, stifle progress. Efforts to aid homebuyers through subsidies, which has been a popular policy in the past, can also inadvertently drive-up housing prices. 

Why has so Much Gone so Wrong so Quickly 

There has been a long history of housing stock deficiency in Australia; we need to build enough property to meet demand, especially since the immigration reprieve experienced during COVID-19 lockdowns is slowly fading away. Once international borders reopened, net migration skyrocketed, with future forecasts migration and total population growth remaining elevated.

This is placing further pressure on our fragile construction industry, which has experienced a once-in-a-lifetime perfect storm. This is especially so for builders operating within the residential sector, who are locked into fixed-price contracts, and have dealt with construction costs flying up by 30%-40%, La Niña (a climate pattern leading to greater rainfall in Australia), supply chain issues, rising interest costs, labour shortages, as well as COVID-19 lockdowns and disruptions, whilst on thin margins. Unsurprisingly, ASIC data shows 1031 construction companies falling to the liquidator’s knife – more than anytime experienced over the past decade.

Project Feasibility 

Traditionally, many medium to large-scale development projects take 3-6 years to obtain necessary approvals, then a further 8-12 months to obtain construction certificates. This is followed by off-plan marketing campaigns to get enough sales to meet financiers’ requirements even before the first shovel hits the ground. Not to mention it also takes time for councils to consider re-zoning. 

Construction costs over the past three years have skyrocketed by 30-40% due to inflation and labour shortages within the sector. Land values typically remain constant and do not provide room for adjustment. This has resulted in many approved projects being shelved as developers wait for property prices to increase enough to compensate for construction costs, holding costs and greater demand for purchasers to buy off-the-plan. 

Ultimately, the supply component of the property market is driven by the private sector – an army of mum-and-dad investors to established property developers. Unfortunately, making money on property projects is at one of its most challenging times in decades, further contributing to the challenge of providing property supply to the system. 

Planning and Rezoning Process 

We also want to avoid knee-jerk, desperate planning outcomes as well as unnecessary rezoning of more farmland and urban sprawl, which have only been short-term fixes to the underlying problem of inadequate supply; however, in most cases, this does not generate net gains as the benefits are outweighed by government spending and immense costs on infrastructure projects. 

It takes 4-8 years for councils to consider large-scale rezoning projects properly. Nevertheless, we should look at best practices and improve the bureaucratic red tape to avoid future property price and rental increases; however, make no mistake – there is no quick fix. 

Solutions to the housing crisis will involve all levels of government coordination, patience, well-measured policies, and a deep understanding of the delicate balance between different stakeholders’ interests. 

In short, the housing crisis is here to stay for several years. We will continue having to talk about it and lay blame to governments, developers, builders, and investors. The government’s job is to make the planning system more efficient, promote property development and investment, and let the market deliver supply based on demand. 

Ultimately, market forces will result in property prices remaining elevated and, over time, property will attract capital once the perceived market risk normalises. We should then see the necessary supply to meet demand. 

Msquared Capital is a private credit provider with investment opportunities backed by quality property along the Eastern Seaboard; we ensure that all investment opportunities are based on risk-to-reward as our core offering and performance. Mortgage funds perform well during volatile times, and capital preservation is regular, with a reliable monthly income that gives our investors peace of mind. 

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Sustainability goes mainstream for Australian property buyers

The number of for-sale listings promoting eco-friendly inclusions in homes has jumped in recent years as would-be buyers prioritise sustainability, new research reveals.

Analysis by Ray White shows a clear trend in what the real estate group has dubbed ‘green listings’, with energy and water-saving features the most frequently mentioned in ads.

“Over the last three years, there has been an increasing proportion of listings with ‘solar panels’, ‘battery’ or ‘off-grid’ appearing in advertising copy,” Ray White data analyst William Clark said.

“This is not an exhaustive list of ways a house can be green, however solar panels were the most frequently advertised, while batteries and being off-grid make a house green to the greatest degree.”

Sellers are responding to increased demand from homebuyers but regulatory changes in some states, including laws against gas connections in new builds, are also driving the trend, Mr Clark said.

Most listings with green features mention just one, he added.

“Although, it is also becoming more frequent over time to see two to four and even five green features per house. In 2023, we even saw eight listings with five green features.”

William Clark from Ray White Real Estate said ‘green’ features are appearing more often on property listings

Queensland had the highest proportion of green listings (20.3 per cent) in the 2022-23 financial year, followed closely by the Northern Territory (19.6 per cent) and South Australia (19.5 per cent).

The country’s two most populated states, New South Wales and Victoria, had the lowest proportion of green listings with 11.4 per cent of all ads each.

“There’s no denying that all states have sufficient physical space to support more properties with rainwater tanks and a self-powered grid, but we saw in the results that Queensland, with large amounts of wealth along the coast, had the most green listings,” Mr Clark said.

“Meanwhile, New South Wales had a lot of ground to cover in last place. As the industry modernises and more laws are put in place, will 2024 see even more green listings?”

The findings mirror analysis by data house PropTrack earlier this, which found 55 per cent of surveyed Australians rate a home’s energy efficiency as being “extremely important”.

That figure was up 17 per cent on the same period last year, perhaps indicating the desire to save money during the cost-of-living crunch, the research concluded.

The analysis found solar power was the green feature most searched for (71 per cent) while other items on property searchers’ wish lists included double-glazed windows, effective insulation, hydronic heating and electric vehicle charging.

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Stand Outside Barefoot for Better Health? ‘I Feel Like an Oddball, But if It Works, It Works.’

When Sara Jean Meyer got a text from her mom that said, “I have a surprise for you,” she assumed it would be a free bubble tea. Instead, her mother showed up with a roll of foil tape, a long copper pipe, an electrical wire and a rod clamp.

They were all supplies required to “ground” Meyer’s bed. Grounding is what proponents call the process of connecting to the earth’s natural electric charge, often by physically touching it or connecting to the grounding system built into most U.S. homes.

The wellness practice is gaining, well, ground, among alternative-health fans, who claim it cures headaches, helps them sleep and reduces inflammation. Some go basic by simply standing barefoot in their yards. Others try more complicated, do-it-yourself approaches to maximise time spent grounding—even while indoors.

Luis Rios, a pilot based in Los Angeles, says grounding, also known as earthing, helps ease joint pain in his knees after long flights. He mostly does it outdoors, with his feet touching the ground, though it can be difficult to find places to hike or stand barefoot at travel destinations.

During a recent trip to Savannah, Ga., he stood in a park across from a stretch of restaurants and businesses on a tree with an exposed root while two tour buses drove by. “I felt like I was kind of like the main attraction, they were looking at me like, ‘What is this guy doing?’” says Rios, 58. “I feel like an oddball, but if it works, it works.”

Grounding merchandise proliferates, and in July 2023, TikTok searches for the hashtags #grounding, which has 529 million views, and #earthing, which has 163 million views, reached peak popularity from the previous three years. Some pro athletes dig grounding: Baseball player Spencer Turnbull said in a 2021 MLB talk-show interview that the practice helps him get loose, focused and “just kinda wakes me up.”

Karamvir Bhatti, 30, a model and freelance graphic designer in New York, purchased a $30 earthing mat which arrived with a cable to plug into the bottom hole of any three-pronged outlet. The bottom or grounding hole connects to a wire that runs into a service panel that connects to the ground. These wires are installed around most newer buildings to prevent electric surges.

In the U.K., a couple created a “grounded” running shoe, manufactured with conductive materials such as silver fiber webbing, that has sold thousands of pairs since the company, Bahé, launched last year, says director of operations Nikki Ward.

Earthing researchers—some of whom have connections to companies that sell products such as yoga mats and bedsheets—say the habit can reduce oxidative stress, a condition linked to various conditions. It does so, they contend, by dissipating static electricity buildup in the body and syncing with the earth’s natural negative electric charge.

“We surmise, but don’t have direct research, that earthing will help slow the aging process,” says Gaetan Chevalier, director of the nonprofit Earthing Institute, which funds research and education about earthing and grounding.

Most traditional doctors and scientists say the benefits of grounding aren’t grounded in evidence. Dozens of studies have popped up on the subject, but many have limitations including small sample sizes, self-reported or subjective outcomes and conflicts of interest.

“At the most basic physics level, a fifth-grader should be able to debunk this,” says Dr. Steven Novella, a neurologist at the Yale School of Medicine and editor of the website Science-Based Medicine.

Like many adopters of earthing—sometimes dubbed “earthers”—who hope the practice will relieve chronic pain, Meyer hoped her husband would find some relief from rheumatoid arthritis when she tried grounding a bed.

She laid out a grid of the tin tape on the mattress pad, popped out her bedroom window screen to run the wire through it, hammered the copper rod into the ground outside and attached the stripped wire to the clamp.

“It’s a little crazy. I was curious what my neighbours might think if they see us out there pounding a hole into the ground,” says Meyer,35, a stay-at-home mom in Cottage Grove, Minn. “I just kept telling myself, if it works, great, and if it doesn’t, we tried.”

Grounding the bed didn’t dissipate her husband’s pain, she says, but they both generally slept better despite some poking and prodding from the metallic tape. Eventually, she ordered two earthing mats from Amazon to replace the homespun system.

Many earthers concede the placebo effect could be at play in health improvements they experience. Stress reduction as a result of spending more time away from screens, or meditating, as some earthers do outside or on earthing mats, can have benefits, doctors say.

And connection to nature likely accounts for some benefits people say they experience after earthing outdoors, says Dr. Brent Bauer, who directs Mayo Clinic’s Complementary and Integrative Medicine Program.

Despite a lack of solid scientific evidence, even skeptics largely concede: What is the risk in trying?

(Not zero. Websites that sell grounding products that plug into wall outlets warn users to disconnect their devices during lightning and thunderstorms to protect against electrical surges.)

“I was just like, these are trees. What are they going to do?” Bhatti, the New York City-based model, wondered before she tried earthing the first time. For outdoor earthing, she sits under trees barefoot.

She started taking the train upstate for monthly nature getaways during the pandemic. On one trip, she kicked off her shoes, sat on the ground, and immediately felt calmer.

“I just thought, OK, if this is hippie-dippie, if this is weird, it’s free and I’m not hurting anyone,” she says.

Not everybody earths unscathed.

Thomas Ichim, 47, chief executive of a psychiatry biotechnology company in San Diego, Calif., walks 10,000 barefoot steps almost every day as part of his earthing routine. He has built up some calluses—but they weren’t enough to protect him one day last month. About halfway through, just as he started to feel the earthing “energy,” he says, he stepped on a bee. “I said a couple of bad words to myself.”

Despite the sting, Ichim is still walking barefoot most mornings. He says it help him feel more energized, more creative and put him in a better mood.

“The placebo effect, if it does something good for you, then who cares?”

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2024 Mercedes-AMG GLE 63 S Is a Coupe on V8 Steroids

The coming model year brings an updated machine into the Mercedes-Benz AMG garage: a large, powerful coupe launched by a wonderfully inappropriate V8 engine.

The 2024 Mercedes-AMG GLE 63 S is a type of vehicle that didn’t exist for previous destinations. Bigger than some lesser SUV models at 195-inches long and weighing more than 2.5 tons, the AMG GLE 63 S rides higher than most Mercedes-Benz models. It lives under the coupe label despite its four-door frame, preserving the moniker with a hard top roof and sloping rear lines. Still, as the 63 S muscles its way along from its almost 118-inch wheelbase to its broad haunches, its visual impact says “coupe, but on AMG steroids.”

If there’s a challenge to overcome in getting comfortable with the GLE 63 S Coupe, it’s those visuals. With so many modern vehicles on the road taking the form of SUVs or crossovers that are really no more than large hatchbacks, the sight of a vehicle that’s none of the above while also shrugging off the modest lines of a sedan takes some getting used to from the outside. Still, once the driver makes that adjustment, he or she can get on with the enjoyment of driving an AMG-tuned Mercedes barely tamed brute.

More:From Handbags to Classic Cars—the Value of Collectibles Is up 7% Annually

For the uninitiated, AMG is the Mercedes-Benz tuning shop where already great cars become more aggressive. AMG amps the power and handling abilities, adds more than a few more bucks, quid, or euros to the price tag and hands them along to serious driving enthusiasts.

The 2024 Mercedes-AMG GLE 63 S has 603 horsepower and a 0-to-60 time of 3.8 seconds. Mercedes-AMG

For the GLE 63 S, the shop penned in a handcrafted 4-liter V8 Biturbo beast under the hood—but at least nodded to environmental concerns by layering electric hybrid assist. The result of all that uncompromising German engineering is 603 horsepower and a 0-to-60 time of 3.8 seconds. That’s serious, “snap your head back” speed in a large, solidly built vehicle.

A combination of AMG Speedshift TCT 9-speed automatic transmission with sport paddle shifting and all-wheel drive with fully variable torque distribution keep all of that power on the road. The end result driving experience features a grounded, balanced, and stately ride that elevates the owner above the ugliness of common pavement—with truly aggressive, roaring power waiting if you put your toe down in Sport or Sport+ mode.

Michael Knoeller, head of marketing and sales at Mercedes-AMG, says a lot of planning and thought go into how the company maintains two identities: an automaker providing traditional, tuned power and performance for enthusiasts, while also forging technology for electric vehicles.

“Mercedes-AMG is in the transformation phase in the mid- and long-term,” Knoeller says. “While our handcrafted V8 powertrains will continue to be offered in familiar models for some time, we are also working on AMG’s own BEV platform, AMG.EA. This will enable us to meet a wide range of customer needs in markets where the V8 engine continues to play a role, as well as with our all-electric EQ models.”

And regardless of the drivetrain technology, a Mercedes has to be a Mercedes, Knoeller adds. There are high expectations for buyers of make and its models, whether or not they’re AMG-forged vehicles.

“All Mercedes-AMG models must deliver on our brand promise of superior performance and unique technology,” he says. “In doing so, we can adopt certain technologies from the world of combustion engines, while other technologies we develop completely from scratch.”

As for what purpose the 2024 AMG GLE 63 S Coupe plays in this grand scheme of old meets new and power meets preservation, the answer is a mixed grill. The monster-sized coupe is large enough to serve as a luxury people carrier, but powerful enough for the occasional track day before standing in as a grand tourer with ample power.

“We think the GLE 63 S Coupe excels in a variety of areas,” Knoeller explains. “It perfectly meets the demand for luxury and comfort, while also offering ample space.”

More:Cadillac’s Escalade Goes Electric With Three-Row Luxury

He points to the distinctive, though challenging appearance as a plus that brings interested eyeballs to the vehicle, while the 603-horespower output looks to thrill the human behind the wheel. The Sport + dynamic driving setting is intended for track days and maximum driving entertainment, he says (even if there are more suitable products in the Mercedes-Benz portfolio for track days, such as the SL Roadster).

In terms of the future, Knoeller reassures passionate drivers that high performance models such as the GLE 63 S Coupe and its ilk will have a place in the Mercedes AMG family for a while yet.

“The segment of sporty SUVs and the demand for our models has grown steadily in recent years,” he says. “We also see further potential here in the long term, so there is no need to worry about the future of the GLE 63 S Coupe. We have already set the course for an electric future and recently presented our new Mercedes-AMG EQE SUV.”

The starting MSRP for the rides making up the GLE class start around US$80,000, with the AMG enhancements on the GLE 63 S Coupe nudging the price up to US$125,000 and beyond. If the lover of German meticulousness can get used to the edgy and nontraditional styling cues, he or she will buy into a unique blend of stately performance with deceptive and effective power.

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Australians more mindful with spending as belt tightening moves another notch

Australian consumers are strapping themselves in for a bumpy ride, as they focus on key spending areas, new data reveals.

In signs that consumers are being more mindful with their money, the newly launched CommBank Household Spending Insights (HSI) Index shows that spending in July increased in areas such as household goods, transport, hospitality, education, insurance and communications.

This was offset by a decline in spending on more discretionary areas, such as recreation and food and beverage goods, as well as utilities, motor vehicles and household services.

The report showed that South Australia experienced the strongest growth of all Australian states in July, up 1.9 percent, followed by Victoria and NSW, both up 1.7 percent. However, over the past year, Western Australia came out on top, with spending increased by 3.5 percent, followed by the Northern Territory and South Australia, both at 3.4 percent. Over that same time period, spending fell in NSW, down -0.2 percent, with Victoria recording a fall of -0.3 percent.

CBA Chief Economist Stephen Halmarick said a dramatic hike in interest rates since May 2022 was clearly having a major impact on household budgets.

“The effects of 400bp of RBA interest rate increases is clearly reflected in a significant overall slowdown in household spending as measured by the CommBank HSI Index,” he said. 

“Monetary policy is now restrictive and financial conditions will continue to tighten in the months ahead on the lagged effect of RBA interest rate increases and the fixed rate mortgage refinancing task. We continue to expect household spending to weaken further over the remainder of 2023 and 2024.

“While the RBA is likely to hold the cash rate at 4.1 percent for an extended period, we expect it will start lowering interest rates in March next year to 3.1 percent by the end of 2024 – in response to a slowing economy, inflation closer to target and a softer labour market.”

The CommBank Household Spending Insights Index has been compiled using payments data from about seven million CBA customers, equivalent to about 30 percent of all consumer transactions in Australia, to track latest trends across 12 categories in consumer spending. Mr Halmarick said the CBA payments data is now aligned to Australian Bureau of Statistics spending categories to be nationally representative and seasonally adjusted.

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China’s Deepening Housing Problems Spook Investors

China’s latest property crisis is threatening to spill over into the broader economy, worrying investors and causing a broad market selloff.

Chinese stocks fell in Hong Kong and mainland China on Monday, with real-estate developers, electric-vehicle manufacturers and other companies in economically sensitive sectors declining the most. The Hang Seng Index, which is loaded with Chinese companies, dropped 1.6%, taking its year-to-date loss to 5.1%. China’s CSI 300 of large-cap stocks fell 0.73%, and is also in the red for 2023.

The financial struggles of Country Garden Holdings, China’s top surviving privately run developer, have been front-and-centre since it missed interest payments on two U.S. dollar bonds a week ago. The property giant said over the weekend that trading in 11 of its yuan-denominated domestic bonds has been suspended, and that it intends to discuss repayment plans with investors. Country Garden’s Hong Kong-listed shares, which had been relegated to penny-stock status last week, fell another 18%on Monday.

China’s property sector has gone from being a major contributor to the country’s overall growth to a drag on its economy. New home sales increased in the first few months of 2023, providing a glimmer of hope that the worst of the housing downturn was over. The market turned in April, and nationwide sales at China’s top developers have slumped since. Country Garden’s latest problems are likely to turn off potential home buyers, further delaying a housing recovery.

Data released last week showed that China was slipping into deflation. Households, which have racked up high levels of savings, are also borrowing less.

Chinese banks extended the equivalent of $47.8 billion in new loans in July, down nearly half from the same month a year ago. It was also the lowest monthly total in more than a decade, according to data provider Wind. The July figures reflected slightly higher corporate lending and a drop in lending to households.

The loan data was “a big letdown,” as it reflected a lack of demand for borrowing, said May Ling Wee, a Chinese equities portfolio manager at Janus Henderson Investors. “Animal spirits are very low in China, and the government may need to do some pump-priming,” said Wee.

China’s economic troubles are also weighing on its currency. The offshore yuan depreciated past 7.28 to the U.S. dollar on Monday, and is close to its weakest level this year.

The country is scheduled to release a barrage of economic data on Tuesday, including monthly updates for real-estate investment, factory output and retail sales.

Problems are also cropping up in other financial-asset classes in China. Three publicly listed companies said in recent days that they didn’t receive payments they were promised on wealth-management products sold by Zhongrong International Trust, which is part of Zhongzhi Enterprise Group, a large domestic Chinese conglomerate. The missed payments are making investors worried about China’s sprawling trust industry, which has been a source of funding for property developers in the past.

Country Garden admitted to having liquidity problems last week and said it expects to post a big first-half loss. A default by the 31-year-old developer could have a bigger impact on China’s economy than the slow-motion fallout from China Evergrande Group’s debt crisis that began in 2021, some economists predict.

The company withstood the earlier slump that took down Evergrande and Sunac China, which together with Country Garden had been China’s three biggest privately run developers. “Country Garden’s default would mean a complete reshuffle and reorganisation of China’s real-estate industry,” said Wang Shengzu, global head of asset management at Haitong International.

When Evergrande defaulted on its international debt, China’s economy was in much better shape. The country was enjoying a boom in exports, and global investors widely believed that growth and domestic demand were being suppressed by its strict Covid-19 pandemic restrictions. China has since lifted those restrictions, but its economy has sputtered.

Before the downturn, Country Garden’s annual contracted sales were close to that of Evergrande’s by total value, but the former’s larger presence in China’s less prosperous cities meant it sold more homes at cheaper prices.

Country Garden also has a lot of unfinished property projects, as it was common for Chinese developers to sell partially built homes along with commitments to complete them in a few years. The company’s contract liabilities, a proxy for its unfinished projects, totalled the equivalent of $92.3 billion at the end of 2022, according to Country Garden’s last financial report.

The property sector is at a critical juncture, said Larry Hu, chief China economist at Macquarie Group. Plunging sales are a result of weak consumer confidence, and it is going to be hard for non-state-owned developers to survive in the absence of government help, he added. “Policy is the only game in town,” he said, referring to expectations that Chinese authorities will act to stop the market’s continued slide.

Shares of China’s homegrown electric-vehicle manufacturers dropped Monday, after Elon Musk’s Tesla cut prices in the country for two versions of its top-end Model Y car. Domestic rival BYD declined 6.1% in Hong Kong, while Nio, XPeng and Li Auto fell 2% to 3%.