The Capital Note

The Capital Note: Tech Monopolies & Treasury Markets

The logos of Amazon, Apple, Facebook and Google. (File Photos via Reuters)

Welcome to the Capital Note, a newsletter (coming soon) about finance and economics. On the menu today: Big Tech Hearings, A Very Near Miss in the Treasury Market, and the Bearish Dollar’s Effect on Stocks, plus some stories from around the Web and the Roman gold standard.

Big Tech Hearings

The CEOs of Amazon, Google, Facebook, and Apple are preparing to testify before the House over allegations of anticompetitive practices — not on Capitol Hill, but via remote videoconference. It’s likely a welcome change for Mark Zuckerberg, who made unfortunate use of a booster seat for his 2018 testimony. While Google’s Sundchar Pichai and Apple’s Tim Cook have testified on Capitol Hill before, it’s the first appearance for Jeff Bezos, perhaps the CEO who’s worked hardest to foster connections in Washington (here are some photos of Mitt Romney, Kellyanne Conway, and Ivanka Trump at a party Bezos threw in January).

The hearing pertains to a yearlong investigation by the House antitrust committee into Big Tech’s allegedly monopolistic behavior. What it is not about is politics or privacy, but I suspect some representatives will give in to the temptation to ask about hate speech and election interference.

The nature of the complaints against each company is roughly the same. Amazon, Google, Facebook, and Apple all have massive platforms, which they use to expand their market share and revenue. Apple, for instance, charges app developers a hefty 30 percent to sell their products on the iPhone app store. Google places its own products and services high in search results, so that Google Maps, YouTube (owned by Google parent Alphabet), and Google’s travel-booking service get more traffic than competitors.

Some argue that this results in less choice for consumers and, because of reduced competition, less innovation. Both the Justice Department and the Federal Trade Commission have ongoing probes into the Big Tech companies. Bipartisan groups of state attorneys general have joined to fray, too.

The difficulty for regulators is that consumers are free to use different search engines or purchases different smartphones. People choose Big Tech not because it is the only option but because it is the best option. Strong network effects mean that tech platforms tend towards monopoly, and dismantling tech companies could hurt consumers as much as it hurts the firms. Google Maps is good precisely because its large user base provides it with masses of data that improve the platform. Rather than reducing consumer surplus, the “anticompetitive” practices of Big Tech companies mostly reduce the surplus of other producers. While that might be bad for competition and innovation, it has not yet raised prices. On the other hand, in the long run, the dominance of Big Tech firms could oust competitors and result in less consumer choice.

In any event, the political tide is turning against Big Tech. After Trump’s victory, Facebook fell out of favor with liberals who charged the platform with facilitating foreign interference. Its policy on “hate speech” has recently drawn the ire of Democratic politicians. Conservatives, on the other hand, say that they are being censored on social-media platforms and in search results. Hatred of Big Tech is becoming an area of rare bipartisan agreement.

— D.T.

A Very Near Miss

Whatever concerns some may, quite reasonably, have about the long term implications of Quantitative Easing (one skeptic is quoted in a story we link to in Around the Web below), there is no doubt that there are times when the Fed really has to weigh in, and in a big way.

In a fascinating and disturbing read for those who like to study financial disasters (and who doesn’t?) or even, for that matter, near-misses, the Financial Times has taken a look at what happened in the Treasury market in early March:

Trading conditions for US Treasuries had been poor for a while. But that Thursday — the day after Covid-19 was declared a pandemic — unnerving glitches escalated into mayhem… The wild price swings in March meant many investors struggled to offload even modest Treasury positions at sensible prices. Suddenly, broker screens were going intermittently blank and showing no pricing information for what is considered the world’s risk-free rate.

This is not a market where something like this is supposed to occur. As the FT explains:

It is hard to overstate the importance of the roughly $20tn market for US government debt, or the alarm that its mounting dysfunction in March caused. The Treasury market is the biggest, deepest and most essential bond market on the planet, a bedrock of the global financial system, and the benchmark off which almost every security in the world is priced.

Fortunately, the Fed stepped in and saved the day, “surpassing,” the FT reports, “even its response to contain the crisis over a decade ago.”

But I couldn’t help noting this passage in the FT’s report:

Compounding the volatility was an under-appreciated evolution in the Treasury market ecosystem. Over the past decade, high-speed algorithmic trading firms have become increasingly integral in matching buyers and sellers in the Treasury market, with many “primary dealers” — the club of big banks that arrange government debt sales — copying their tactics. Electronic-style trading activity now accounts for more than 75 per cent of liquidity provision in the Treasury market, according to estimates from JPMorgan, up from just 35 per cent after the 2008 crisis.

What could go wrong?

Well, this:

In normal times, algorithmic market-making helps to keep trading conditions smooth and ensures tiny gaps between bids and offers for even big chunks of Treasury bonds. But when volatility spikes, market-makers automatically ratchet back the size of trades they are willing to do, and pricing quotes on purchases and sales are widened to compensate for the additional risks.

The combination of markets and machines has been a worry since well before the era of flash crashes, in fact since at least the 1987 crash (a day still seared in my memory) which was widely—and probably correctly (although there were other causes)—seen to have been triggered by computer-driven “program trading.” It’s not a worry that’s going away any time soon, or ever.

And, as so often, regulation played a part in March’s disorder. As the FT explains, the reliance on electronic-style trading “has been magnified by post-2008 regulations that made it more costly for banks to store bonds on their own balance sheet and therefore less able to ensure that markets function efficiently, analysts say.”

Oh.

— A.S.

Bearish Dollar, Bullish Stocks

In yesterday’s newsletter, I talked about how recent depreciation of the dollar is in large part the result of deliberate efforts from the Federal Reserve to flood the global financial system with liquidity. Rather than a sign of the U.S. economy’s weakness, it should be seen as a deliberate policy tool.

One consequence of dollar depreciation is stock-market strength. A Goldman Sachs Research note from this week explains that a falling dollar increases both corporate earnings and foreign demand for U.S. equities. A 10 percent fall in the trade-weighted dollar is correlated with a 3 percent rise in the earnings per share of companies in the S&P 500 index. The biggest gains go to firms with the most international revenue. A weaker dollar also increases the purchasing power of foreign investors, leading to capital inflows to the U.S.:

A weakening US dollar has historically been the biggest catalyst for foreign investor demand for US stocks. In fact, since 1980, annual purchases of US equities by foreign investors have averaged $96 billion during periods when the trade-weighted USD fell by more than 2 percent vs. just $14 billion when the dollar rose by more than 2 percent.

Dollar bears are stock bulls.

— D.T.

Around the Web

What you will find on Google?

Increasingly, Google: “The search engine dedicated almost half of the first page of results in our test to its own products, which dominated the coveted top of the page”.

A Second Kodak Moment?

“Eastman Kodak Co (KODK.N) will get a $765 million loan from the U.S. government to produce pharmaceutical ingredients in the country, helping reduce dependency on other countries by strengthening domestic supply chains”.

Unease over Quantitative Easing

“Earning no interest on savings and being paid to borrow distorts basic economics. Central bank bond-buying has kept far too much capital locked up in over-indebted ‘zombie companies’ — resulting in low productivity.”

Random Walk: All That is Solid(us)

With gold in focus, perhaps it’s worth turning to the website of Citéco, a museum in Paris dedicated to the history of the economy, to read a celebration of the solidus, a currency that, well, endured:

After the economic disruption caused by the inflationary crisis of the 3rd century AD, Emperor Constantine decided to reform the monetary system in order to restore stability. In AD 310, he began to issue a new gold coin called the solidus, whose name, derived from the Latin for solid, clearly reflected the emperor’s desire to stabilize the currency.

In AD 312, the weight of the solidus was set at 4.55g, representing a devaluation of around 15% compared to the Diocletian aurelus. It continued to be used throughout the Byzantine Empire up until the 10th century, and its weight remained unchanged…

Constantine ensured there was a sufficient supply of gold to issue the solidus through the seizure of war booty from his enemy Licinius, the confiscation of gold from pagan temples and the application of new taxes that were payable in gold.

The choice of the name solidus (a word which already meant pretty what you’d expect it to mean) was, perhaps (classicists will doubtless put me right) an early example of the name of a currency also being used to convey a message. The latest example of that, of course, is the euro, a currency unlikely to last for centuries, even if its demise will take considerably longer than some seem to think.

And the solidus endured in the language (Narrator: your writer is now clearly turning to Wikipedia). Thus, to take two examples, the French sou is derived from solidus, as is soldi, the Italian for “money.”

Citéco itself is housed in the Hotel Gaillard, a faux château built in the middle of Paris in the late 19th century, a building that is a reminder that not everything holds its value as well as the Solidus. Completed in 1884 it enjoyed a brief heyday before being put up for sale in 1904. To say it struggled to find a buyer is an understatement. Years passed, and the outbreak of the First World War in 1914 made a bad situation worse. The building was finally bought by the Bank of France for 2 million francs in 1919, rather less than the 11 million francs that it had cost to build over three decades before.

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