The Capital Letter: Bubble Tea & Much More

The Capital Letter: Bubble Tea & Much More

The NASDAQ market site displays an AirBnb sign featuring CEO Brian Chesky on their billboard on the day of the company’s IPO in Times Square in New York City, December 10, 2020. (Carlo Allegri/Reuters)

Bubble tea and much, much more.

Yes, U.S. markets have been a little weaker in the last few days, and as I write (11:55 a.m.), are down again this morning, but signs of a bubble aren’t too difficult to find. There is, for example, the continuing demand for “blank-check” companies or, less euphemistically, SPACs (special purpose acquisition companies).


There’s been more than $125 billion in special purpose acquisition company, or SPAC, merger activity this year, more than quadrupling the 2019 total. And it’s only expected to accelerate in 2021.

Driving the news: Three new SPAC mergers were announced in the past 24 hours, totaling over $3.6 billion, all in the vehicle space. Plus, nine new SPACs priced IPOs, raising a combined $2 billion.

The big picture: Both supply and demand are overflowing — hundreds of unicorns and even more near-unicorns with more than 225 SPACs are actively seeking targets.

Then there are the IPOs.

The New York Times:

Over the last decade, Airbnb has upended the travel industry, riled regulatorsfrustrated local communities and created a mini-economy of short-term rental operators, all while spinning a warm narrative of belonging and connection.

On Thursday, Airbnb sold investors on an even unlikelier story: that it is a pandemic winner.

The company’s shares skyrocketed on their first day of trading, rising 113 percent above the initial public offering price of $68 to close at $144.71. That put Airbnb’s market capitalization at $100.7 billion — the largest in its generation of “unicorn” companies and more than Expedia Group and Marriott International combined.

Just a day earlier, DoorDash, a food delivery start-up, also defied gravity by raising $3.4 billion in its first day of trading, when its share price surged 86 percent to a valuation of $68 billion. Both debuts followed a string of other hot I.P.O.s that together make 2020 the busiest year for U.S. public offerings since 1999, according to Renaissance Capital, which tracks I.P.O.s.

1999, eh?

I have a faint memory of something called, oh yes, the dot-com bubble, peaking that year, but, say, what you will about that, it was driven (primarily) by exuberance fueled by technological change that ultimately changed things for the better, an echo, arguably, of the railway mania of mid-19th-century Britain. This time around, however, there are fewer signs that the market is celebrating a technological leap. Many of the more mature “Internet” names, such as an Amazon, have been valued as much for their defensive as for their innovative qualities, while other tech names (a Zoom, say) have emerged as stock-market winners as a result of the conditions created by the pandemic.

Perhaps the companies that come closest to being celebrated for their technological promise are those, electric vehicles, say, operating in the climate-change space. Observant types will have noticed that much of the hope placed on many — certainly not all — of these climate-change plays rests on the promise of aggressive government action (on carbon emissions), rather than the decisions of individual consumers. That’s less promising than was the case with the Internet stars of two decades ago, especially as many of these “green” winners are likely to represent technological substitution of sometimes dubious value rather than a genuine net technological advance, made all the more questionable by the mandated value destruction (the technologies and resources abandoned, and the costs imposed, all in the name of decarbonization) that will have created room for them.

But there’s something else.

The New York Times’ report refers to the way that this stock-market bubble has been expanding at a time when the economy has been torn by the pandemic and when some key economic indicators are again moving in the wrong direction.

From an earlier Times’ report:

Applications for jobless benefits resumed their upward march last week as the worsening pandemic continued to take a toll on the economy.

More than 947,000 workers filed new claims for state unemployment benefits last week, the Labor Department said Thursday. That was up nearly 229,000 from the week before, reversing a one-week dip that many economists attributed to the Thanksgiving holiday. Applications have now risen three times in the last four weeks, and are up nearly a quarter-million since the first week of November.

On a seasonally adjusted basis, the week’s figure was 853,000, an increase of 137,000.

Nearly 428,000 applied for Pandemic Unemployment Assistance, a federal program that covers freelancers, self-employed workers and others who don’t qualify for regular state benefits.

Unemployment filings have fallen greatly since last spring, when as many as six million people a week applied for state benefits. But progress had stalled even before the recent increases, and with Covid-19 cases soaring and states reimposing restrictions on consumers and businesses, economists fear that layoffs could surge again. . . .

The monthly jobs report released on Friday showed that hiring slowed sharply in early November and that some of the sectors most exposed to the pandemic, like restaurants and retailers, cut jobs for the first time since the spring. More up-to-date data from private sources suggests that the slowdown has continued or deepened since the November survey was conducted.

With any stimulus package still stuck in the congressional mire, it is difficult to see what will reverse what is looking alarmingly like a renewed economic downturn. As I have mentioned before, it is impossible not to be concerned about the slaughter unraveling on the national balance sheet. But it is unwise not to be even more concerned about the social and economic consequences of letting the chips now lie where they have fallen. The pandemic has been a humanitarian tragedy, but the governmental response to it has, effectively, been a giant, unprecedented experiment conducted on our society. The results have not been good. Stress-testing the country still more would be . . . unwise.

The decision by the Fed and the federal government to manage the effects of this experiment by throwing money at them goes, of course, a long way to explaining why stock markets have performed in the way they have. The quest for some return — any return — has pushed up the prices of those assets that offer the possibility of more than a few basis points in the till.

What the impact of all this will be on the broader savings markets, to money-market funds, to savings accounts, to pension funds, and so on, ought to be the subject of increasingly grim contemplation. And it’s not exactly good news for banks, life-insurance companies, and the like either.

And so, on to CNBC:

JPMorgan Chase CEO Jamie Dimon said that low-yielding Treasurys are a poor investment right now.

“I would not be a buyer of Treasurys,” Dimon said Tuesday at an annual Goldman Sachs financial services conference. “I think Treasurys at these rates, I wouldn’t touch them with a 10-foot pole.”

The yield on the 10-year Treasury was last at just 0.9% and has stayed below 1% since breaking below that threshold during the March pandemic collapse in stocks. Since bond prices must move inversely to yields, people like Dimon see little room for Treasurys to rally with rates already at such low levels.

Of course, as the head of a lending institution with $3.2 trillion in assets, JPMorgan has to continually purchase Treasurys and other low-yielding investments to earn a spread, a fact that Dimon acknowledged. Low yields in the fixed income world are one reason that banks’ profitability and stock values have been under pressure since the pandemic began.

Dimon’s comments were in response to a question from Goldman Sachs analyst Richard Ramsden about whether the markets were fairly priced.

The long-time JPMorgan CEO and chairman responded that if investors’ base case occurs – a recovery next year spurred on by coronavirus vaccines — then that means today’s “bond spreads and most equity prices would be justified.”

″There may be a bubble in small parts of the stock market, not all of it,” Dimon said.

There’s something to that last comment, but it will be of cold comfort to investors, if the stocks that dominate the indices come crashing down.

And on bonds, well, consider this from the FT’s John Dizard (an NR alumnus from way back when):

The US Treasury market, supposed to be the supplier of the world’s risk-free assets, is facing a very educational 2021. As Mark Cabana, head of US rates strategy for BofA Securities, says: “There is going to be a train wreck at the front end of the [Treasury] curve next year. There is way too much cash chasing too little paper.”

Given what we know today about the US government’s likely spending over the next several months and its cash on hand, it is possible, even likely, that Treasury bill rates will be negative for a significant period of time. Other key interest rates, such as SOFR, the new lending benchmark, could well follow T-bills into negative territory. . . .

Dizard can be on a gloomy side, but for him to write, well, this, as he works his way through his argument (which is well worth reading in full) caught my eye:

Really, it is enough to drive you to buy up canned goods, ammunition and iodine pills.

Just a joke, of course.

And then, to add to the merriment, there is renewed inflation chatter.

The Wall Street Journal:

U.S. inflation readings are almost certainly heading higher next year. The trick will be figuring out whether they are signal or noise.

The Labor Department on Thursday reported that consumer prices rose 0.2% in November, putting them 1.2% higher than a year earlier. Prices excluding food and energy items—the so-called core that economists see as a better reflection of inflation’s underlying trend—were up 0.2% on the month and 1.6% on the year.

The inflation indexes the Federal Reserve focuses on, from the Commerce Department, run a bit cooler than the Labor Department measures, so for now inflation isn’t within spitting distance of the 2% the central bank is aiming for. That could change soon.

A big reason the year-over-year inflation readings are low now is that there was a dip in prices in March through May, when the Covid crisis first struck. Come next March, that shock will start reaching its first anniversary, and the year-over-year comparisons will appear souped-up as a result. If over the next half year prices on a monthly basis rise by just half as much as they did in November, for example, the Labor Department’s headline inflation measure would be up 2.6% on the year by May, with core prices up 2.3%.

But the cycling out of last year’s inflation dip won’t be the only thing going on next spring. By then millions of Americans will likely have been vaccinated against the coronavirus, relaxing safety measures just as warm weather returns. The likely result is a surge in demand, particularly in services categories such as travel.

If that’s temporary, fine, but if sets off something more, well . . . (full disclosure: I came of age in 1970s. Inflationary spirals are seared in my brain).

Bloomberg’s John Authers adds more (again, read the whole thing, and check out the charts), but here’s an extract:

Beyond the core measure, attention tends to be grabbed by headline inflation, which includes fuel and food and which, after all, represents the stuff that people actually have to spend money on. Next year could see a big change. For the post-GFC decade, oil prices have generally trended down. At any one point, gasoline prices have tended to be lower than they were a year earlier, neatly helping to reduce headline inflation.

While the oil market is still in a lot of trouble, and gasoline futures are still cheaper than they were 12 months ago, the chances are strong that that will change in the next few months. The base effects from this spring’s crash in oil prices should ensure that headline inflation starts to rise…

Then there is the matter of the dollar. It is weakening. The currency ended its last depreciation cycle during the GFC and has trended upward for much of the time since. This reduces inflation by making imports cheaper. A weakening dollar turns this around and becomes a pressure for inflation to rise.

So far, the world has avoided “cost-push” inflation arising from the bottlenecks and supply shocks created by the first phase of the pandemic. But there are still a few months to go, at best, and prices of a number of commodities are rising. For the longer term, if globalization doesn’t pick up again, that tends to mean companies must source their goods with more expensive suppliers, pushing up prices. . . .

There is no reason to fear hyperinflation, or even anything on the scale of what was witnessed in the 1970s.

But it’s popular to expect a return to normality, and that would include a world in which economic expansions are accompanied by rising prices. Larry Hatheway and Alexander Friedman of Jackson Hole Economics, put the risks as follows. It is worth quoting them at length:

“History suggests that inflation is typically slow to emerge. But when it does, it manifests inertia, as rising prices reinforce expectations of more to come. That’s why the Fed’s overshooting objective is risky. Once inflation exceeds thresholds, bringing it down could be difficult.

Which brings us . . . to the implications for asset prices. Rising inflation always undermines bond returns, with their fixed nominal coupons. But bond markets are much more vulnerable today, given significant over-valuation caused by central bank asset purchases and in the context of massive future supply due to unprecedented fiscal deficits. Bond markets will be in for a rude awakening if inflation accelerates.

Some argue that equities can withstand inflation because earnings and dividends rise with inflation. That’s simplistic and dangerous thinking.

As interest rates rise, so does the rate at which future earnings are discounted. Even more important, rising inflation increases economic risk. Central banks will eventually have to dampen spending to curb inflation. Accordingly, when inflation picks up investors require a higher risk premium to hold equities. Inflation de-rates valuations, which in some cases are already very high.

In sum, investors should care about rising inflation, which is now more probable than at any time in the past two decades. When it comes, it will be fast. Given that the consequences are huge for all investors, it is time to take notice.”

Yes, it’s time for a drink.

We opened the week early on Capital Matters, on December 6, with Judge Glock casting a chilly eye over calls for, yes, stimulus:

A fiscal stimulus in this particular recession is nonsense. Members of both parties seem to assume that the problem with our economy is insufficient spending money, or consumer demand. This is false. This is the most obviously supply-side recession in modern history. Many Americans (those lucky enough to still be working, that is) have the money and the will to buy things, but they can’t, because the coronavirus and the government response have caused stores, restaurants, planes, and more to shut down.

That’s not to say government aid isn’t necessary here. Congress must distinguish between “stimulus” — which is just pumping more money into the economy, say, in the form of checks given to every American — and “relief,” which aims to help those individuals who have suffered the most in the crisis. The government should not offer broad-based stimulus in the next bill, and should focus instead on targeted relief for those directly affected. Meanwhile, the only money that would truly stimulate the economy would be spent rolling out more vaccinesdrugs, and tests.

And if we’re talking about stimulus (or not) then the deficit is not going to be far from the discussion.

Enter Brian Riedl, tackling the question of Republican hypocrisy:

The predictable Republican shift to fiscal responsibility under a Democratic president has earned widespread mockery from Democrats and reporters, who note that Republicans are happy to borrow for their own priorities under GOP presidents.

And to an extent, this mockery is deserved. It is true that Republican lawmakers focus on deficits — both rhetorically and legislatively — much more under Democratic presidents than under Republicans. We see this most acutely in the battles over discretionary spending, where Republicans helped shut down much of the government to force cuts under President Clinton before engaging in a “compassionate conservative” spending spree under President George W. Bush. Then under President Obama, Republicans pushed the federal government to the brink of default in order to enact tight discretionary-spending caps, which they essentially repealed after President Trump took office. . . .

And yet, the “Republicans are partisan hypocrites on deficits” argument is not as clean as some suggest.

First, the 2020 GOP backlash against spending and deficits began shortly after the CARES Act was enacted in March, not after the presidential election. Even during the summer and fall, congressional Republicans were capping their proposals for the next stimulus at $500 billion and dismissing President Trump’s calls for nearly $2 trillion. The theory that Republicans secretly agree with Keynesian deficit spending but deprive Democratic presidents in order to sabotage their economies cannot account for Republicans’ “sabotaging” their own economy during the reelection campaigns of themselves and a GOP president.

Second, the recent backlash occurred shortly after pandemic-related spending added an unprecedented $3 trillion to the federal debt. Setting aside the political calendar, it would be irresponsible for $3 trillion in rapid new debt not to get the attention of lawmakers. Similarly, the 2009–12 tea-party backlash occurred during a period in which the debt held by the public nearly doubled. Even those who prefer to table deficit reduction until the economy recovers can be forgiven for beginning to plan these reforms now.

Making his first contribution to our new Supply & Demand column, John Cochrane weighed in on the debt:

Does debt matter? As the Biden administration and its economic cheerleaders prepare ambitious spending plans, a radical new idea is spreading: Maybe debt doesn’t matter. Maybe the U.S. can keep borrowing even after the COVID-19 recession is over, to fund “investments” in renewable energy, electric cars, trains and subways, unionized public schools, housing, health care, child care, “community development” schemes, universal incomes, bailouts of student debt, state and local governments, pensions, and many, many more checks to voters.

The scare quotes around “investments” are all too appropriate (in my view). As I observed above, the technological legacy of the green bubble is going to be rather less positive than that left behind by its dot-com predecessor.

Back to Cochrane:

The argument is straightforward. Bond investors are willing to lend money to the U.S. at extremely low interest rates. Suppose Washington borrows and spends, say, $10 trillion, raising the debt-to-GDP ratio from the current 100 percent to 150 percent. Suppose Washington just leaves the debt there, borrowing new money to pay interest on the old money. At 1 percent interest rates, the debt then grows by 1 percent per year. But if GDP grows at 2 percent, then the ratio of debt to GDP slowly falls 1 percent per year, and in a few decades it’s back to where it was before the debt binge started.

What could go wrong?

Everyone recognizes that the debt-to-GDP ratio cannot grow forever, and that such a fiscal path must end badly.

How? Imagine that a decade or so from now we have another crisis. We surely will have one sooner or later. It might be another, worse, pandemic. Or a war involving China, Russia, or the Middle East. It might be another, larger, financial crisis. And with the crisis, the economy tanks.

The U.S. then needs to borrow another $5 trillion or $10 trillion, quickly, to bail out financial markets once again, to pay people’s and businesses’ bills for a while, to support people in dire need, as well as to fight the war or pandemic. But Washington borrows short term, and each year borrows new money to pay off old bonds. So we also need to borrow another $10 trillion or so each year to roll over debts. As bond investors look forward to think about how they will be repaid, they see a country that at best will return to running only $2 trillion or $3 trillion deficits, still faces unreformed Social Security and unfulfilled health-care promises, and whose debt to-GDP-ratio, far from being stable as the rosy scenario posits, is on an explosive upward trajectory.

Imagine also that the U.S. follows its present trends of partisan government dysfunction. Perhaps the president is being impeached, again, or an election is being contested. There are protests and riots in the streets. Sober bipartisan tax and spending reforms look unlikely . . .

It is perhaps beyond hope that politicians will ignore such low rates and foreswear borrowing and blowing an immense amount of money. But if the U.S. borrows long term, then it is completely insulated from a debt crisis, in which rising rates feed higher deficits which feed higher rates. Avoiding a debt crisis for a generation really is worth an extra percent of interest cost.

Cutting spending, reforming taxes and entitlements, and saying no to voters who want bailouts and to a progressive army that wants immense spending programs is the tough job of politicians, one which they will likely fail to do. But the incoming Treasury secretary pick, the talented and sensible Janet Yellen, can choose all on her own whether the country borrows short or long, and thereby avoid a debt crisis for a generation.

If I get to whisper two words in her ear, they will be these: Borrow long.

Cochrane’s right. And now is the time for the U.S. to try to do that. Sooner or later bond investors are going to wake up (see Jamie Dimon’s comments about that ten-foot pole).

Capital Matters does not move in lockstep. So here’s Fred Bauer sounding a warning on the politics of austerity:

There is reason to think that this might not be the most propitious moment for green eyeshades. . . . A successful roll-out of a coronavirus vaccine by early 2021 might set the stage for an economic rejuvenation, but the shock waves from the pandemic could still be echoing through the economy. And beyond political positioning, retreating to austerity politics could cost Republicans a chance to promote other kinds of reforms that would strengthen workers and families: fixing the medical marketplace (by reducing cartelization, revising medical licensing, etc.), passing a 21st-century infrastructure program, trying to secure a strategic industrial base, enacting smarter regulation of Big Tech that addresses market concerns and serves the public welfare, offering Americans family tax credits, and so on. To be a true party of workers, the GOP will have to show that it can deliver on some of these lunch-bucket issues.

Yes, a party can walk and chew gum at the same time. Republicans could certainly try to attempt to address the debt while also adopting more pro-worker policies. But there is a real risk that press releases about a “debt crisis” could become a substitute for the hard work of developing a policy agenda that tackles the needs of the present.

Moreover, if Republicans are serious about trying to get a political consensus behind efforts to tackle the federal debt, they will need to promote other policies to show that theirs is a full-spectrum political party and not just a budget-activism organization. This will mean recognizing that policy reforms can also help address the federal deficit. For example, while the American medical system can do great things (as the rapid development of the coronavirus vaccine might indicate), it is also inefficient in many ways. Efforts to reduce the cost of medical care could help level out the spending trajectory of federal health-care entitlements. Policies to tighten the labor market could also lessen the need for income-support programs and fuel more economic growth, which in turn would help reduce the federal debt burden.

Steve Hanke lauded the arrival of water futures:

Today the world’s first water-futures contracts begin trading on the Chicago Mercantile Exchange (CME). At last, scarce water, water for future delivery, will be priced. The novel water-futures market will, among other things, offer those who use water a way to hedge (read: insure) against the risk of fluctuating water prices. In the CME’s words, its futures contracts will be “the first regulated, exchanged-traded risk management tool to manage water supply and demand risk.” The introduction of water futures contracts is a significant milestone. . . .

Why are the CME’s innovative futures contracts in water so important? In the past, water users were forced to bear the risk of fluctuations in the price for water. There was no price-discovery process to determine the value of scarce water resources for future delivery and no way to insure against the risk of price fluctuations. Now, the CME’s water-futures contracts will provide crucial risk-management tools for both short and long hedgers alike. Sharp fluctuations in water supply and demand can now be offset by “insurance policies” offered by the new futures contracts. This innovative insurance will lower the cost of producing agricultural products — a win for farmers and a win for consumers.

I wrote not once but twice about the fact that the climate warriors are eyeing the meat (and not just the meat) on your plate. Robert VerBruggen, however, looked kindly on Singapore’s lab-grown “chicken”:

Earlier this month, Singapore reached a milestone: It approved lab-grown chicken meat from the company Eat Just for sale. The idea of lab-grown meat is that it’s the same substance as the real stuff, just grown from stem cells in a bioreactor rather than pumped full of weird chemicals and slaughtered on a farm. Dozens of companies are working on their own varieties. . . .

Will some have misgivings about meat that’s made in a reactor, instead of in a factory farm, like nature intended? Sure, but if the runaway success of genetically modified crops is any indication, these misgivings won’t withstand the onslaught of economic efficiency for very long. Surveys already indicate that a large percentage of Americans, perhaps a majority (depending how the question is phrased), are willing to at least give cultured meat a chance. If and when lab meat provides the same taste and nutrition at a lower price, this stuff is going to sell, and it’s not just going to sell to vegetarian hippies; it’s going to sell at the expense of real meat.

Somewhere Colonel Sanders screams.

Woke chicken may end up being palatable enough, woke capitalism not so much. Eric Grover looked on, horrified:

To paraphrase O’Sullivan’s law, all public corporations that are not explicitly anti-woke will become woke over time, at the expense of their owners and of society writ large. The orgy of progressive peacocking sweeping the financial-services and payments industries is emblematic, and particularly troubling because these industries form the backbone of the economy.

No CEO embodies performative progressive piety more than PayPal’s Dan Schulman, who warned “values all of us hold dear are under attack” and decried “a rise in racism and xenophobia.” In 2020 PayPal committed $530 million to funding black-owned businesses. Sitting in the same pew, Mastercard committed $500 million to minority communities and minority-owned businesses. Preening Chase declared it would direct $30 billion in credit and equity to minority-owned housing and businesses. American Express’s head of Enterprise Inclusion, Diversity and Business Engagement announced it would spend $1 billion promoting “racial, ethnic and gender equity internally and externally.”

These vanity projects exemplify a risk identified by economists decades ago.

In their seminal The Modern Corporation and Private Property, Adolf Berle and Gardiner Means highlighted the agency problem that arises when public corporations’ professional management pursues its own interests rather than those of owners. They worried that corporate executives would have undue influence over the boards of directors charged with policing their behavior on shareholders’ behalf.

In a similar vein, Nobel Prize–winning economist Milton Friedman presciently worried that management would serve causes and interests unrelated to shareholders’ interests. In his landmark 1970 piece “The Social Responsibility of Business is to Increase its Profits,” he argued that businesses would produce the best social outcome by lawfully and ethically increasing profits for shareholders. . . .

America’s great banks and payment systems must focus on growing, delighting customers, and maximizing sustainable long-term profits. Corporate chieftains passionate about Davos causes should use their personal time and checkbooks to support them.

Quite, and they should not ask their shareholders to pay for their attendance at (or to give any other financial support to) the World Economic Forum (“Davos”), an institution dedicated to the undermining of shareholder rights.

On the other hand, John Berlau pushed back against the idea that banks should be denied the right to refuse credit for industries of which they disapprove:

In his majority opinion in Burwell v. Hobby Lobby, Justice Samuel Alito noted that a “corporation is simply a form of organization used by human beings to achieve desired ends.”  While some lawmakers and bureaucrats seem to think the employees and owners of corporations leave their individual rights at the door, both the Constitution and the Religious Freedom Restoration Act (RFRA) — the federal law that grants religious liberties beyond those in the First Amendment — say otherwise. Accordingly, based on the RFRA, the Supreme Court upheld the religious-freedom rights of corporations to opt out of a provision of Obamacare requiring businesses to include contraception in their employee health plans.

Conservatives and libertarians lauded Alito’s decision and generally oppose laws that compel business owners to engage in conduct that contradicts their beliefs. They have argued that the government should not coerce bakers, florists, or photographers to provide services for weddings that violate their moral and religious beliefs. Some defending the business owners may not necessarily agree with the beliefs in question, but oppose government coercion as a matter of principle.

Conservatives and libertarians also strongly object to reviving the Fairness Doctrine, under which the federal government compelled radio and television stations to provide air time to opposing viewpoints.

Those same conservatives and libertarians advocating freedom of conscience in business transactions should be alarmed by a proposed mandate that would effectively act as a “Fairness Doctrine” for banks. . . .

Meanwhile, I wrote about another attack on Friedman’s advocacy of shareholder primacy, this time by designing a different way of calculating a company’s results in a way that would specifically incentivize managers to do the “socially responsible” thing:

The hard, if infinitely debatable, numbers generated by Serafeim’s method might subject managers to a tougher standard of accountability than is normally associated with stakeholder capitalism, but they will act as an even more efficient solvent of the duty those managers ought to owe their shareholders. As an assault on property rights that’s bad enough, but by incentivizing management to shift its focus away from a conventionally measured bottom-line, this approach will be far more damaging to profitability than the usual ESG yardsticks. This will rob society as well as shareholders of the extra wealth that would otherwise have been created.

That such ideas are taken seriously — and by whom they are taken seriously — reflects the rot that is spreading within what passes for capitalism’s intellectual leadership, whether in business schools or the C-suite. The membership of the advisory councils of the Impact-Weighted Accounts Initiative (or Project, take your pick) includes the co-founder of a major private-equity firm, the CEO of a major British asset-management firm, a Morgan Stanley board member, a prince, a partner at McKinsey and, naturally, denizens of the sustainability ecosystem, such as asset managers, consultants, a former chief sustainability officer, the CEO of IMP, the CEO of the Value Balancing Alliance (“we integrate business into society and nature for a better future”), and so on.

What’s more, Kishan notes:

“Already, about 60 companies globally, including Dutch bank ABN Amro Bank NV, Kenyan telecommunications firm Safaricom Plc and Sweden’s Volvo Group, have quantified some of their impacts, Serafeim said. French food producer Danone has introduced a metric called “carbon-adjusted” earnings per share.”

Doubtless, others will follow their lead and almost certainly overtake them. When the ruling class changes the rules, it’s not easy to push back.

Rich Lowry noted how heavily the burden of the measures taken to combat the pandemic had fallen on those least able to afford it:

Just when it seemed some of the most disheartening trends in the U.S. economy were finally beginning to reverse, COVID-19 arrived to entrench them.

The pandemic has been a neutron bomb targeted at the prospects of lower-income working people. They had finally begun to benefit from the recovery from the Great Recession when the virus ravaged sectors of the economy that disproportionately employ them.

The Washington Post has called the resulting economic damage “the most unequal recession in modern U.S. history.” As the paper puts it, starkly, “the less workers earned at their job, the more likely they were to lose it.”

The pandemic has hammered restaurants, hotels, and places of entertainment, all of which don’t pay high wages and tend to employ women and minorities. It has cut a swath through small business. It has slammed workers who can’t retreat to home offices for Zoom calls.

In short, it has taken all of the tendencies of our knowledge economy that benefit the better-educated and disadvantage non-college-educated workers and has made them more pronounced, amidst a public-health crisis that has also hit the most vulnerable the hardest. . . .

What is to be done? Policymakers need to realize that when they promulgate COVID-19 restrictions, they are asking the people with the least economic margin for error to sacrifice the most. Congress needs to pass a new stimulus bill to cushion the blow of a natural disaster that has immiserated many millions of people through no fault of their own. And the incoming Biden administration ideally would realize that fashionable causes such as climate change need to take a back seat to the pursuit of full economic recovery.

The economic pain is not the worst that the pandemic has wrought, but it cannot be ignored.

And yet, in not entirely unrelated news, this Friday, New York’s governor Cuomo announced a renewed ban on indoor dining in restaurants in New York City, another kick aimed at an industry that is already on its knees.

Writing in the New York Post, Steve Cuozzo recorded this:

The state’s own data at Friday’s press conference revealed that indoor dining accounted for a scant 1.4 percent of infection spread.

The pandemic has been a powerful reminder of how often technocrats are as destructive as they are incompetent. Cuomo and other governors across the nation have all too often been given something close to free rein by their legislatures. It is a mistake that should not be repeated.

David Bahnsen looked at San Francisco’s new wealth tax:

So, what is this new tax? Supporters call it the “overpaid executive tax.” (Kudos to them for framing so bluntly.) Technically, the citywide tax will operate as a levy of at least 0.1 percent on companies that pay their CEO more than 100 times the median pay of their workforce. That 0.1 percent tax can reach as high as 0.6 percent depending on how far above the company’s median pay the CEO’s total compensation is. Embedded in the name attached to this new legislation is the belief that disinterested third parties should determine fair and appropriate pay. Whether that be city bureaucrats or voters unconnected to the company in question, the notion that such actors should serve as the arbiters of proper pay levels is nothing more than a form of price-and-wage control. An easy retort to my concern here may be, “Why care about a mere 0.1 percent hit?”

Well, if what we are seeking to address is really egregious, unfair, socially contemptible income inequality — robber-baron stuff — why should we stop at 0.1 percent? In other words, if the rationale for this 0.1 percent is what its proponents say it is, why are we only talking about 0.1 percent? If a Silicon Valley tech billionaire makes an amount considered to be unfair relative to the money paid to, in all probability, administrative support staff, shouldn’t voters and bureaucrats up the ante here, seeking far more than a 0.1 percent surtax?

The fatal flaw of this bill and others like it lies in the idea that fair compensation should be defined by people other than those who have skin in the game — namely, a company’s principals, board of directors, and ultimately the shareholders to whom it reports. Once one concedes the principle that legislative intervention is required to force those within a company to change the way it pays people, the door is opened to an arbitrary exercise of power. Make no mistake: There is no magic behind the 0.1 percent figure. Setting the tax at that level was arbitrary, and arbitrary judgments are easy to change. Sure, it remains there today, but perhaps 1 percent or 5 percent will be the “right” number next year. And perhaps even higher the year after that. The lack of limiting principle here is frightening, and the slippery slope is easy enough to see.

Steve Hanke, who, among other attributes, is a specialist in international financial disasters, may one day have to visit San Francisco, but for now he “travels” to Zimbabwe with Craig Richardson . . . and finds a bright spot.

Traveling from any other place in Zimbabwe to Victoria Falls is like stepping through a portal that aligns much more with an experience of visiting, say, Yosemite Valley in the United States. Hotels, lodges, and restaurants abound, offering everything from down-home cooking to elegant five-course meals. Safari companies offer a wide variety of first-class venues. U.S. and other international credit cards are gladly accepted, a rarity in other parts of Zimbabwe. And the glue that holds Victoria Falls together is the U.S. dollar. It’s the coin of the realm in Victoria Falls. Yes, Victoria Falls is officially dollarized. It only accepts U.S. dollars for payment of property taxes and keeps its books in U.S. dollars as well.

There even are plans to open a new stock market in the city: The Victoria Falls Stock Exchange (VFEX). The VFEX will trade securities listed in U.S. dollars and other convertible currencies. Once established, the new “dollarized” market would challenge the National Zimbabwean Stock Exchange (ZSE) in Harare, which has few trades and little investor trust because the stocks are traded in Zimbabwe’s junk currency.

So, for us, Victoria Falls qualifies as a Wonder of the World in more than one sphere. It’s not just the great falls on the Zambezi that make it so wondrous, but the dollarized world of the city, too.

Isaac Schor attacked Congressman Tom Suozzi (D., N.Y.), a SALT (deduction) seller:

So why is Suozzi so determined to uncap the SALT deduction? The answer is purely political. In overtaxed, predominantly blue states, Democrats in the state and local government raise taxes to provide the social services they want. Suozzi himself did this as Nassau County executive, raising property taxes by well over 20 percent. While social services are popular, higher taxes are not, and discontent with increases such as the ones Suozzi supported represent an electoral liability for his party. The solution to this problem is the SALT deduction, which allows state and local officials to raise taxes with less blowback since their upper-class constituents can just write them off on their federal bill. It’s manifestly unfair to South Carolinians and Iowans who are then forced to pay more in federal taxes than their counterparts in New York only because they chose to forgo certain social services available to New Yorkers.

If high-income New Yorkers are unhappy with the amount that they’re forking over in taxes, there’s a simple remedy: Don’t elect people like Tom Suozzi. Allowing for an unlimited SALT deduction is not only regressive, but selectively so.

Not content with indulging in this savage class warfare, Isaac then trolled me on Twitter:

I’ve weaponized @AStuttaford’s own institution against him.

Undaunted, I shall persevere in my defense of this splendid deduction, despised (so far as I know) by almost everybody who visits this site.

We began a three-part series by William Levin:

With equity markets setting all-time records, many observers are puzzled by astronomical stock valuations, particularly in the technology sector. How is it rational for a company such as Tesla to be valued in excess of $570 billion when it has produced fewer than 400,000 cars at break-even levels, while a typical industrials company steadily earning, say, $3 billion in operating profit is valued in the range of $20 billion to $30 billion?

Most analysts would argue that the difference has to do with future growth. At a certain level of abstraction, this answer is correct. At the same time, it is imprecise and does not explain this year’s dramatic price movements. The disparity in growth trends between industrials and tech companies, especially the so-called FAANG stocks (Facebook, Apple, Amazon, Netflix, and Google/Alphabet), has been evident for at least a decade. Why have we only now hit market highs?  Are investors in the grip of a speculative mania, as some claim?

Read on.

Jessica Melugin took the FTC (and 48 state attorneys general!) to task for the absurd antitrust action initiated against Facebook, an action that will, incidentally, delight the EU, always pleased to see antitrust weaponized against an American success story. Quite why the U.S. should want to make the EU’s job any easier escapes me, and it may puzzle consumers too:

The claim by the Federal Trade Commission (FTC) and 48 state attorneys general that Facebook’s acquisition of Instagram and WhatsApp qualifies as anticompetitive behavior foolishly focuses on the motivations of the world’s largest social-media firm and ignores what those acquisitions have meant for consumers.

In the filings, the FTC and the states allege that Facebook snatched up the picture-sharing and messaging apps to prevent them from becoming a competitive threat. Perhaps it did. Maybe Facebook was indeed worried about being displaced as the market leader. But what does its motivation matter? Certainly, every business decision involves a bundle of different motivations and it’s just as certain that some of those motivations are self-serving. That’s what capitalism does so well: It channels selfish impulses into benefits for consumers. As Adam Smith observed in the Wealth of Nations, “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”

U.S. antitrust law is based on consumer harm. So, the more relevant question is: When Facebook acquired Instagram in 2012 and WhatsApp in 2014, how did consumers fare?

Regardless of why Facebook decided to purchase Instagram and WhatsApp, users have benefited from improved versions of those apps. More broadly, U.S. consumers continue to enjoy more and better options in the social-media space. And so the jury is not still out: Competition and innovation are alive and well in the marketplace and consumers have decidedly not been harmed by Facebook’s acquisitions. The FTC and state attorneys general ought to find a better use of their time and of taxpayers’ money than by asking courts to stop such fruitful acquisitions.


Finally, we produced the Capital Note (our “daily” — well, Monday-Thursday, anyway, except for a mysterious omission this week on Tuesday).  Topics covered included: Sustainability by fiat, Milton, Nikola and Paradise Lost, the IMF’s net-zero fantasy, renters in trouble, two tales of discontinuing catalogues (Sears and Ikea), Bitcoin as strategy, bubble fun with SPACs and food, not seeing the wood for the trees, wealth taxes, a paradigm shift on Wall Street, Airbnb’s IPO, China’s private-sector crackdown, and the Lindy Effect.

To sign up for the Capital Letter, follow this link.

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