The anger and ambition of India’s youth

Dreamers: How Young Indians are Changing the World. By Snigdha Poonam. Harvard University Press; 288 pages; $17.95. Hurst; £14.99.

VINAY SINGHAL and his brother, Parveen, co-founded WittyFeed, a content-factory that churns out clickbait, as a Facebook page in 2011. By 2016 it had its own website, 150 writers around the world, a valuation of $30m and a big HQ in Indore, a third-tier city about halfway between Mumbai and Delhi. Mr Singhal has bigger aspirations yet; for a while he thought he might aim to become prime minister. And why stop there? “I want to lead humanity…I want to lead Mars,” he tells Snigdha Poonam, an Indian journalist.

“Dreamers: How Young Indians are Changing the World”, Ms Poonam’s first book, contains an abundance of bombastic characters. “Eyes red from sleepless nights of plotting his and his country’s rise to glory, Singhal can seem like the face of the new India,” Ms Poonam writes. “This new India”, she adds wryly, “is not always easy to like.” Quite. The country she describes is deeply worrying.

Two-thirds of India’s 1.3bn citizens are under 35. Roughly 1m people enter the workforce every month. Few find jobs; most graduates are too poorly educated to be employable. Meanwhile a numerical gender imbalance means many men remain single. Yet India’s young men—Ms Poonam’s interlocutors are mostly men, because they dominate public spaces—believe they can have it all.

And they believe they are owed it all. Unlike previous generations, they see the pleasures of the wider world in their Facebook feeds, Instagram timelines and WhatsApp chats, and wonder why everybody else goes on foreign holidays, drives imported cars, and parties with vodka and girls. They blame the Muslims, the West, the Congress government and its decades of socialism and appeasement of minorities. Now Narendra Modi, whose muscular brand of Hindu nationalism has fired up the young, is prime minister. He will put those miscreants in their place.

Ms Poonam travels to small towns, largely in Hindi-speaking parts of north and central India, and repeatedly finds the same mix of aspiration and anger. At a motivational class in New Delhi, 32-year-old Shahnawaz Chaudhary, who wants to become president, explains to a paying audience that the British destroyed India. Vikas Thakur, a 29-year-old social-media warrior for the ruling Bharatiya Janata Party and an aspiring MP, boasts about “flattening his enemies” when he was at college. Arjun Kumar, 19, carries around an iron rod on Valentine’s Day in the hope of finding Hindu-Muslim couples to intimidate. Sachin Ahuja, 26, leads a gang of cow protectors on midnight raids, looking for Muslims transporting cattle on northern highways. Pawan Poojary, 19, merrily duped Americans through phone-scams, partly for the sheer joy of deceiving people who “considered themselves superior to the rest of the world”. (Eventually his conscience drove him to tip off the American authorities.)

That these young Indians are “dreamers” is incontrovertible; the idea that they are “changing the world”—as Ms Poonam’s subtitle asserts—is more questionable. But her book offers valuable insights into the politics of identity and resentment that have gripped much of the world. It demonstrates, for instance, that the perfect past of nostalgia need not lie within living memory. Nor is that fantasy restricted to the middle-aged. Many devotees of Mr Modi want to bring back the glories of pre-colonial, pre-Islamic Hindu kingdoms from centuries before they were born. Greatness is a point forever receding in the distance, and yet somehow within reach.

How did this politics of anger go global? A clue can be found in the structure of this book. “Dreamers” begins and ends with stories of young Indians deploying assets they acquired from the West against credulous Americans: content-free listicles and call-centre databases. Silicon Valley’s social-media platforms feature throughout as the foundation of young Indians’ social lives. They spend their leisure time staring into their phones. The part this technology has played in the rise of populism in the West has been much discussed. That its spread in other parts of the world has been coterminous with that of smartphones and internet connections is noted less frequently. Ms Poonam offers empirical, if anecdotal, evidence of that overlap.

She does not dwell on statistics. But what “Dreamers” lacks in citations of official data it makes up for through its Hindi-speaking author’s ability to draw out her subjects’ inner thoughts. The picture she paints is impressionistic. It is also alarming. If young Indians really are changing the world, it may not be for the better.

The terrifying thing about “The 2020 Commission Report” is how much of it is real

The 2020 Commission Report on the North Korean Nuclear Attacks Against the United States: A Speculative Novel. By Jeffrey Lewis.Mariner Books; 304 pages; $15.99. WH Allen; £9.99.

OPEN-SOURCE intelligence is the art of learning things by procuring and analysing unclassified (if not always very accessible) evidence. Jeffrey Lewis, an expert on arms control and disarmament at the Middlebury Institute in Monterey, California, is a keen exponent of this craft. In “The 2020 Commission Report” he applies it to the near future.

The fiction is framed as an American government report, published in 2023, into the loss of 3m lives—1.4m of them Americans—to North Korean nuclear weapons in March 2020. Like the reports of the Roberts Commission on Pearl Harbour and the 9/11 Commission, it finds that the disaster could have been avoided, but that the evidence of the escalating threat was missed—because the people in charge were misreading the world they lived in. Mr Lewis’s message is that anyone who believes that either supine summitry or threats of a “bloody nose” are good responses to North Korea’s nuclear programme is guilty of just such a misreading today.

The imaginary sequence of errors—in software, communication, tactics, intelligence and politics—that leads to the spasm of mass murder is chillingly plausible. This is largely because, as the book’s notes make clear, most of them have already happened in real life. Jets have indeed strayed off course because of software glitches; airliners have been taken for military probes of air defences and shot down. Decision-makers have assumed that actions by one ally were sanctioned by another; America has tried to kill its adversary’s leaders on the eve of war. The commander-in-chief has tweeted threateningly in ALL CAPS.

Though some of the characters in the book are invented, its cast includes Presidents Donald Trump and Moon Jae-in, plus Kim Jong Un and Jim Mattis, America’s defence secretary. Again, they mostly say and do things very like those they have said and done before. The harrowing tales of victims are similarly authentic; Mr Lewis has adapted many of them from accounts of survivors of Hiroshima and Nagasaki. The book’s American publication came one day after the anniversary of the Hiroshima bombing.

Fans of “Arms Control Wonk”, Mr Lewis’s podcast, will expect notes of absurdist and scornful humour; they will not be disappointed. More surprising is that, in a sense, the book is optimistic about American democracy. The devastating blow that it envisages might undo even the sturdiest polity. Given the existing rifts in American society at a time of relative peace, it is easy to see the recriminations and repercussions after a nuclear catastrophe capsizing its politics altogether. Yet Mr Lewis’s premise depends on America’s institutions continuing to function in recognisable form. That implies a bedrock faith in the resilience of the republic—more, perhaps, than soberly assessed open-source intelligence might warrant.

David Kirkpatrick chronicles the tumult in Egypt and America’s myopic response

Into the Hands of the Soldiers: Freedom and Chaos in Egypt and the Middle East. By David Kirkpatrick. Viking; 384 pages; $28. Bloomsbury Publishing; £21.

IN 2005 a middle-aged Egyptian army officer arrived in Carlisle, Pennsylvania. While taking classes at the US Army War College, the officer, a devout Muslim, sometimes led Friday prayers at the local mosque. During campus debates he took exception to those who claimed that political Islam was incompatible with democracy. In his final paper he argued that Arab democracies must include Islamists, even “radical ones”.

So when the Muslim Brotherhood, Egypt’s main Islamist movement, won the country’s first free and fair elections in 2011-12, the officer, Abdel-Fattah al-Sisi, seemed keen to work with the group. He was appointed defence minister and quickly gained the trust of the new president, Muhammad Morsi, a Brotherhood leader. Mr Sisi would show up at meetings with his sleeves rolled up and hands wet, as though he had been washing himself for prayer. Yet, less than two years later, he ousted Mr Morsi, slaughtered hundreds of his followers and imprisoned what was left of the Brotherhood’s leadership.

Egypt, where a quarter of Arabs live, has always been something of an enigma. Despite the public’s disenchantment with Hosni Mubarak, the long-term dictator, few predicted the revolution of 2011 that laid the groundwork for Mr Morsi’s election and Mr Sisi’s subsequent coup. “Nothing is going to happen in Egypt,” editors at the New York Times told David Kirkpatrick when he took over the paper’s Cairo bureau at the start of 2011. Weeks later Mr Mubarak was toppled and the political order was thrown into disarray. In the years that followed, soldiers, Islamists, liberals and the old elite jostled for power. None could be trusted.

In his new book, “Into the Hands of the Soldiers”, Mr Kirkpatrick describes these tumultuous times in compelling detail. The author is honest about how hard it was to interpret events, grasp the motives of people such as Mr Sisi and Mr Morsi and predict the direction in which Egypt was heading. “I brought with me the standard Western assumptions,” he admits. “Almost all of it was wrong.” But Mr Kirkpatrick, who dodged bullets and official harassment, deciphered the mystery. The same cannot be said of the foreign powers, especially America, that watched as Egypt’s democracy crumbled.

The Islamist riddle

The Brotherhood was Egypt’s biggest puzzle. “For a supposedly secret society, they were easy to spot,” writes Mr Kirkpatrick. Often middle-aged and middle-class, they kept their beards trimmed and wore chinos and button-down shirts. But, before the revolution, their intentions were difficult to discern. When Hassan al-Banna founded the group in 1928 he was fuzzy on whether it should be militant or peaceful, political or spiritual, democratic or authoritarian. Egypt’s dictators by turns persecuted, embraced and tolerated the Brotherhood. America, which lavishes military aid on Egypt, followed their lead.

Opponents of the Brotherhood warned foreign journalists that the group wanted to “Islamise” Egypt. But to Mr Kirkpatrick—and your reviewer, a former Cairo correspondent—the Brothers said all the right things. They advocated the separation of mosque and state, free expression and equality for women and non-Muslims. These views were more liberal than those of mainstream Egyptians. Moreover, to avoid a backlash, the group said during the uprising that it would not seek more than a third of parliamentary seats; later it said it would not field a presidential candidate in the polls following the revolution.

But when those elections came around, the Brotherhood contested most of the seats, winning nearly half and also the presidency. After his victory, Mr Morsi installed Brothers in powerful positions. Months later he issued a decree holding himself above judicial review and pushed through a constitution opposed by liberals. “We thought we were losing our country,” one young Egyptian told The Economist. Millions took to the streets in 2013 calling for Mr Morsi to go. Egypt’s so-called liberals saw those protests as a rerun of the 2011 revolution—another organic uprising; another chance for democracy, as they defined it.

They were nothing of the sort. Egypt’s liberals were not taking back the country—the army was. A slow-motion coup had been in the works since Mr Morsi was elected. Egypt’s generals did not even want to recognise his victory. Mubarak-era judges duly dissolved the parliament. The president’s own foreign minister, a non-Islamist, admitted to poisoning other governments against him, while the intelligence services worked covertly to bring the Brotherhood down. The United Arab Emirates, whose authoritarian rulers fear democracy, especially if it has an Islamic tint, funnelled millions of dollars to the supposedly grassroots opposition to Mr Morsi. Much of it went through Mr Sisi’s defence ministry.

The coup befuddled America. As Mr Morsi teetered, “Washington did not speak with a single, credible voice,” writes Mr Kirkpatrick. Barack Obama, then America’s president, opposed the takeover and leant on Mr Morsi to make concessions to save his skin. (Mr Morsi did invite the opposition for talks—they declined.) But many American officials seemed resigned to, or even encouraged, a military power-grab. Chuck Hagel, then secretary of defence, told Mr Sisi: “I don’t live in Cairo, you do. You do have to protect your security, protect your country.” John Kerry, then secretary of state, said later that the generals “were restoring democracy”.

American officials couldn’t get their facts right. James Mattis, then the commander of American forces in the region, blamed the Brotherhood alone for Egypt’s troubles. He later claimed that the constitution backed by Mr Morsi had been “rejected immediately by over 60% of the people”. In fact, about two-thirds of voters approved the charter, which is similar to the one Egypt has now. Mr Mattis and Michael Flynn, then head of the Defence Intelligence Agency, lumped the Brotherhood in with the jihadists of al-Qaeda and Islamic State, even though the Brothers repeatedly condemned those groups and opposed violence. Both men were given top jobs by Donald Trump.

It is true that the roots of al-Qaeda and other jihadist groups can be traced back to Egyptian jails, which began filling with resentful Islamists in the 1960s. Now the jails are bursting again, so much so that new ones have had to be built. The Islamists have been joined by liberals, who quickly soured on Mr Sisi’s inept and draconian rule. Egypt now holds about 30,000 political prisoners, including many journalists. Your reviewer was berated by the foreign ministry for, among other things, referring to Mr Sisi’s takeover as a coup (a label America refused to apply). Mr Kirkpatrick had it worse. Talk-show hosts denounced him on air as an enemy of the state.

The coup also fuelled a jihadist insurgency in Sinai that continues to torment Egypt. Yet American officials, citing renewed “stability”, argued that the Brotherhood’s overthrow was the least bad option. The alternative “wasn’t Jeffersonian democracy”, Mr Kerry tells the author. “Over whatever number of years we have put about $80bn into Egypt. Most of the time, this is the kind of government they had—almost all of the time. And the reality is, no matter how much I wish it was different, it ain’t going to be different tomorrow.”

Today’s American administration does not even wish it were different. To them, Mr Sisi has said all the right things. He wants to moderate Islam and reform the economy. He calls Mr Trump “a unique personality that is capable of doing the impossible”. Mr Trump, in turn, celebrates Mr Sisi’s tough leadership and calls him “a fantastic guy”. Like so many others, the American president seems unconcerned that autocracy is again breeding misery and extremism in Egypt.

Why is macroeconomics so hard to teach?

COMPARED with equity investing, bond investing can seem stuck in the dark ages. As hedge funds and asset managers use whizzy algorithms to trade shares automatically, bond-fund managers still often call traders by phone. So when new investing strategies do arise, they make an even bigger splash. “Factor” investing is the latest example.

This is the idea, credited to economists Eugene Fama and Kenneth French, that predictable, persistent factors explain long-term asset returns. Their 1992 model for equities used the size of firms and what became known as “value” (the tendency for cheap assets to outperform pricey ones). Later models added factors such as “momentum” (the tendency of prices to keep moving in the same direction). Factor-based analysis has squeezed active managers (since it explains much of their returns) and helped drive the rise of passive investing. Investors can access factors in equities, often called “smart beta”, through cheap index-tracking funds or exchange-traded funds (ETFs) from the likes of BlackRock and State Street Global Advisors.

Messrs Fama and French considered factors in bond returns as early as 1993, though not the same ones as for equities (they reckoned, for instance, that for bonds value had “no obvious meaning”). Federal requirements since 2002 to disclose transaction prices and volumes have enabled closer analyses. A recent paper by researchers at AQR Capital Management, a $226bn hedge fund founded by a student of Mr Fama that specialises in factor investing for equities, looks at four factors for global sovereign bonds and American corporate ones: carry (high-yielding bonds beat low-yielding ones), quality (safer assets have better risk-adjusted returns), value and momentum.

These not only would have provided consistently good returns over the past two decades, but were also largely uncorrelated with factors in equity markets, credit risk for bonds and macroeconomic variables such as inflation. Since active bond-fund managers tend to make excess returns mainly by buying riskier bonds, and a traditional bond index-tracking fund means exposure to the firms and countries that issue the most debt, factors provide a third, distinctive investment option.

AQR’s first dedicated fixed-income offering, a fund of American high-yield (that is, junk-rated) bonds, was launched in mid-2016. It outperformed the benchmark index by 2.1 percentage points in its first year, and 2.6 points in its second. Tony Gould of AQR credits not only the factor modelling for its success. He says that the higher cost of trading bonds compared with equities needs to be built into the bond-picking process. The firm has since started two more bond funds. Other such firms that used to focus on equities are looking into bonds, too. Man Numeric, for instance, a quant fund in Boston, wants to apply its expertise in company-level analysis to high-yield bonds.

Among the mass-market offerings are BlackRock’s first smart-beta bond fund, launched in 2015. It switched from active management to index-tracking in 2018, and the firm now has several index-tracking bond ETFs that use factors (mostly quality and value). Fidelity Investments launched two bond factor ETFs in March, and Invesco launched eight on July 25th.

Factor investing for bonds is still so new that many investors have not even heard of it. But opportunities to use it are growing because of recent European regulations mandating price and volume disclosure for bonds. Just five years ago a fund manager would have struggled to find enough data for non-American bonds, says Collin Crownover of State Street Global Advisors. Now the firm is applying quality- and value-factor analysis to corporate bonds in euros and sterling. The way index-trackers and smart-beta approaches laid waste to stock-pickers suggests that managers of active bond funds should be quaking.

Clarification (August 10th 2018): This article was amended to reflect the fact that factors in bonds provide consistent returns, but not necessarily ones correlated with overall bond-market returns.

Why the largest group of American corporate bonds is a notch above junk

BY HIS own account Christopher Hitchens, an author who died in 2011, was a poor student. He left Oxford with a third-class degree. This was not for want of ability. Hitchens would become a prolific essayist and fearsome debater. Rather, it was a choice. His tutors warned him about neglecting his studies. But he preferred to divide his time between his social life, political protests, books (other than the prescribed ones) and lively debates with other thinkers.

As Hitchens’s counterexample demonstrates, it is possible to regret the opportunities missed while striving for top grades. It is a lesson that many of America’s biggest companies have grasped. At one time, the sort of company that could tap the bond market for capital would be given an A-grade as a matter of course. These days the typical corporate-bond issuer has a credit-rating of BBB, only a notch above a junk rating (see chart).

That might seem to imply that business has become less efficient or lucrative. Yet profits have never been higher as a share of GDP. In fact, for much of corporate America a BBB rating is the consequence of a financial strategy. Many established firms have chosen to load up on debt to buy back their own shares in order to boost shareholder returns or, more recently, to pay for mergers.

To understand why, it helps to start with a bit of textbook finance that says share buy-backs are pointless. According to a theory proposed in 1958 by Franco Modigliani and Merton Miller, a firm’s capital structure—its mix of equity and debt finance—has no effect on its value. Debt has first call on profits; shareholders get what is left over. Debt is thus less risky for investors and a cheaper form of finance for companies. The more debt a firm has, the more volatile are its equity returns. Investors dislike volatility. So a firm’s share price should in principle decline as it takes on more debt, leaving its overall financial value (the sum of its debt and equity) unchanged.

Grade deflation

The theory simplifies reality to illustrate a truth—a firm’s worth is ultimately its cashflows. In the real world, there are benefits to using debt. A big one is that interest costs are tax-deductible. This tax shield is in effect a subsidy to debt finance. Debt also has costs. A high interest burden can lead to missed opportunities or a damaging bankruptcy. Each firm has to make a trade-off between the costs and benefits. Capital-goods firms may plump for low debts and a solid credit rating to show they will be around to honour their warranties. Telecom companies, which have more stable earnings, are more likely to gear up.

As the corporate-bond market has expanded, new categories of firms have been able to take advantage of cheap debt finance. The taboo on issuing lower-grade debt became weaker in the 1980s after “corporate raiders” used junk bonds to finance leveraged buy-outs of listed companies. Since the financial crisis corporate-debt issuance has accelerated, says Adam Richmond, an analyst at Morgan Stanley. Low yields on government bonds as a result of quantitative easing have drawn investors into riskier sorts of paper. Companies have seized on this demand as a further subsidy to debt. The number of firms issuing bonds has increased by two-thirds in the past decade, according to PIMCO, a fund manager.

No doubt some firms will discover they have issued too much. It is of some comfort that the ratio of corporate debt to GDP is barely higher than its previous cyclical peaks, in 2000 and 2008. Bond finance has in part displaced bank finance. But if banks are less exposed, investors are more so. For now, strong GDP growth is a balm. A recent report by S&P Global, a credit-rating agency, plays down the risk of a rash of downgrades to junk. Firms might simply choose to buy fewer of their shares back to preserve their BBB rating.

Even so, a recession will come sooner or later. The profits of leveraged firms will be damaged, which will in turn hurt confidence. Downgrades and defaults will follow, as they always do. The process will be more drawn-out than usual if, as seems likely, there proves to be a shortage of buyers for a fresh supply of junk.

For now the market is stable. But corporate credit is an asset class to be wary of in a maturing economic cycle. In good times there seems little prospect that buyers might dry up. But they will. The best time to buy corporate bonds is early in an economic recovery, when downgrades and defaults are still under way. There are likely to be more bargains than usual next time. If companies no longer need to strive for an A-grade, all the more reason for investors to do their homework.