10th Sept
Matt Stoller on monopoly
Everyone has noticed that the stockmarket in the USA has had an incredible run over the last year or two. The finger of blame (or praise, possibly) is pointed at the Fed. I am not convinced that the Fed is solely responsible. The ECB has been fairly aggressive in pursuing easy money policies, to the extent that 10 year bunds are trading at negative redemption yields. Christine Lagarde is purchasing €80B govt. bonds a month, with a balance sheet which is €1.85T. This is not quite keeping pace with Jerome, but it’s not doing badly, given the dominance of Germany in Europe and their obsession with inflation.
So, what explains the relative outperformance of the USA? To a certain extent, it is the FAA(N)G. Big Tech has a stranglehold on several global markets. Apple may not sell as many phones as Samsung, but it has margins which are an order of magnitude higher. Nothing outside China compares with Amazon or Facebook, or Google. This is undoubtedly a factor.
But, another factor is the total neutering of the competition authorities in the USA. Big Tech totally dominates the sectors they specialize in. Apple outsells all other mobile phone manufacturers combined, at least in the US. Where there are large barriers to entry, there are economic rents to be had, and the gross margins charged by Big Tech certainly proves that they are able to exercise monopoly power. Well, to my mind at least. The insane prices of medical treatments, and of Ivy League university fees, suggest that Big Tech is not unique.
I think this is regrettable, but this is not a politics blog. I am not here to save the world, just to try to understand it.
This is why I am not a huge fan of Matt Stoller. He has campaigned against the collapse in anti-trust enforcement in the US for ages, without making any impact, that I can discern.
But his stuff is interesting, in a way, because he sometimes mentions companies that operate in markets that you’d think would have negligible barriers to entry.
Such as meat processing or tree growing.
But you’d be wrong. His latest piece mentions a few.
Wyerhauser ($WY) appealed to me. When lumber futures went up like a rocket earlier this year, I could not understand why much, much cheaper Canadian lumber could not be trucked into the US.
Well, somehow $WY executives have found a way of blocking them off, or buying up the transport, or paying them to keep out.
The net result should be good for its bottom line. The neat thing is that its share price hasn’t gone anywhere in five years.
As always, this is absolutely not investment advice.
China
I’ve read a lot about China lately. Their vaccine seems to be pretty rubbish, and their lockdown enthusiasm seems less effective against the Delta Variant than against the earlier strains of Covid. Xi Jin Ping has decided to declare war on videogames, and consumer-facing tech. Red Roulette is getting a lot of attention. The ‘revelation’ seems to be that China has turned into a hereditary dictatorship, with an elite cadre formed from the offspring of the earlier leaders plundering the economy for their own ends. Anyone who has ever been to Macao, or has read about who are the most important buyers of property in Belgravia, would not be surprised to hear that the Chinese leadership is just as corrupt and oligarchic as Russia’s. It’s hard for a country with a corrupt government to achieve sustained economic growth. China has done surprisingly well, but it has had a strong tailwind for a long time. Although the globalists are not yet defeated, the popular distrust of the Davos agenda is increasing. At some point, China will cease growing at 6.6% pa, and the disparity between what is seen on the ground and what is recorded in official statistics will be too great for anyone to ignore.
The boomer one controls the government, says Elmer
Elmer Spud has a bit of a rant about the true awfulness of US politics. He points out that the US is rigged to reward a very small section of society, because politics has been captured by that section. It’s pretty ugly. He writes:
How does it end? I don’t know that it does, at least until the boomers die off. Until then, I suspect that inflated asset prices and pro-upper-class policies will be maintained so that boomers can liquidate their 401ks and sell their houses to fund shuffleboard at a Florida condo in their golden years. And once they die off, Millennials and Gen Z will be left to pick up the pieces. At least I think that the younger generations see through the bullshit a bit more clearly and hopefully have a bit more empathy towards their fellow citizen.
Well, before it ends, what does it mean for asset prices? They continue going up, I guess. J Powell looks pretty healthy for a guy of his age, and he won’t want to let the air out of the bubble for a few more years. It’s hard to guess exactly which asset classes will benefit. QE feeds most directly into bonds, if the Cantillon Effect is real, so bond prices should go up first. Well, yields on long dated bonds are heading straight to zero (nominal) and seriously negative (real). It’s hard for them to keep going up. US Treasuries are the collateral used by the whole world, but somehow banks just want to keep their assets as reserves at the Fed. Stocks have been the beneficiaries. I guess they will continue to be, but maybe there will be a rotation out of the FAANG.
As Elmer points out, at some point, the old order will change, and Millenials will start to run the economy. Something tells me that they will not have the same objectives as Jo and Jerome.
As the Sensational Alex Manzara Band had it,
Small dip in stocks yesterday as Kaplan and Rosengren exited longs and shifted into FI. Who says that regional Fed Presidents can’t influence markets?
The thread he mentions is worth reading too. The allusion to “the euthanasia of the rentier” is wonderful. It explains that by flooding the economy with liquidity, savers are forced into pure speculation. Certainly, I increasingly see all asset markets as driven largely by ‘hot money’ flows, rather than by any fundamentals. The NFT Cyberpunks phenomenon, and generally the crypto mania are examples, as are the rise of meme stocks and SPACs. I have no idea when it will end, or exactly how, but I feel sure that it will not be pretty when it does.
Covid policy
COVID policy has become purely ad hoc and reactive. There’s no strategy, there’s no endgame, there’s no philosophy, there’s no internal consistency, there’s no cost-benefit analysis, there’s no metrics to define success, there’s no consensus on what we want to accomplish. - Nate Silver
I think this comment could be made for policy on a range of topics. Immigration, perhaps, taxation, certainly, healthcare, probably. One could say that Covid is new, so politicians haven’t had time to formulate a coherent policy around it. But it’s just an infectious disease. We’ve had them since the dawn of time. Politics is largely about making decisions on matters where there is non consensus on an objective, quantitative metric. That’s why health policy debate never dares even make a passing reference to “quality adjusted life years.”
Boomer stocks
I don’t really think (or write) about ESG funds, or bitcoin investing. My priors, which say that capital should be deployed in the highest return investments, can’t cope with these things. The reality, though, is that huge torrents of cash is flowing into fads and Ponzis, so one would be well advised to avoid these things going off the radar. As Kuppy memorably said, “Fraud is alpha!” Well, certainly economic rents are alpha, and maybe fraud too.
Wrap
Today was a risk off day. SPX was down 65bp, as were nearly all developed markets bourses. The drumbeat of accelerating inflation is becoming louder. PPI was over 8% yesterday, going up 70bp in a month. I guess the market is pricing in a chance of early tapering. Krugman wrote a piece yesterday saying that we’ve had spikes of inflation in the past, notably in the 50s and we’ll have them in the future and that they are nothing to worry about unless expectations become entrenched, as they were in the 1970s and they are in Brazil and Turkey. He knows a lot, but I feel that the Fed doesn’t have the tools it needs or, rather, that it does have the tools but it dare not use them for fear of crashing the economy. Maybe I’m completely wrong, but it’s interesting that bonds didn’t respond at all to the inflation news. Commodities were generally up, especially “green” metals, such as uranium, nickel and copper. Precious metals were flat to down, reflecting a confidence that we will not see real rates rise.
The VIX was up strongly. Maybe it will finally break out.
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