The Capital Note

The Capital Note: Kodak’s Slide & Adam Smith’s Kidnapping

The back of a new British Twenty Pound Note showing Adam Smith’s head (kevinj/Getty Images)

Welcome to the Capital Note, a newsletter (coming soon) about finance and economics. On the menu today: Higher Homeownership, A Tale of Two Stocks, and a guest appearance from National Review intern Luther Abel, who recounts the (likely apocryphal) kidnapping of Adam Smith.

Higher Homeownership

I’m old fashioned enough to think that higher homeownership rates are, despite the negative effect they may have on labor mobility, a good thing for a number of reasons. These range from the greater security homeownership ought to represent at a personal level, to the opportunity it may offer to build up personal capital (Mrs. Thatcher once said something along the lines that it was tough to persuade people to believe in capitalism if they didn’t have any capital), to the fact that it gives people more of a stake in the economy and, in some ways, in society. Homeownership can be the key to a property-owning democracy in the most literal sense of that phrase.

So, it was a pleasant surprise to see data (h/t Axios) from the St. Louis Fed that show a spike in homeownership to 68.2 percent, compared to a recent nadir of 63.1 percent in the first quarter of 2016, the lowest level in decades. The level peaked at 69.4 percent in the second quarter of 2004.

That said, such a sharp spike seemed odd to me, and suggested that something strange was going on with the data collection.

Housing Wire (my emphasis added):

The homeownership rate jumped to 67.9%, the highest since 2008’s third quarter, from 65.3% in the prior quarter, the Census Bureau said on Tuesday. The reported noted a change in methodology that could have impacted the numbers: Because of the COVID-19 pandemic, in-person interviews were suspended and most of the survey was conducted by telephone, the release said. . .

The cheapest financing costs on record have widened the pool of people who qualify for mortgages, said Lawrence Yun, chief economist for the National Association of Realtors. Lenders qualify applicants by the amount of the monthly payment measured against their income, and when financing costs go down the payment shrinks.

“Lower rates always do a magic trick of bringing more buyers into the housing market,” Yun said in an interview. . .

The average U.S. rate for a 30-year fixed mortgage fell to an all-time low of 2.98% in mid-July, breaking the 3% threshold for the first time, according to Freddie Mac data. Last week, it was 3.01%, compared with 3.75% in the same week a year earlier.

Purely intuitively, it would seem to me that moving to a telephone survey would probably overstate homeownership rates, but it seems safe to assume that the trend is moving in the right direction, although it will be interesting to watch for changes within the housing market. Will there be a sustained flight to the suburbs, as anecdotal evidence suggests or, as history would suggest, are we just looking at a blip? Cities have, after all, been around for a very long time — and so have offices.

Meanwhile from CFO Magazine:

The U.S. mortgage delinquency rate rose in May to its highest level in more than eight years though homeowners have been making a higher share of payments this month. As Americans continue to struggle to pay bills amid the COVID-19 pandemic, another 723,000 homeowners became past due on their mortgages in May, pushing the delinquency rate to 7.76%, according to property research firm Black Knight.

The delinquency rate was 6.45% in April and 3.39% in March, when states began issuing stay-at-home orders to try to stem the spread of COVID-19. Serious delinquencies, which means mortgages that are 90 days past due but are not yet in foreclosure, increased 36.5% to 631,000 in May over the previous month.

With the May additions, there are now 4.3 million homeowners past due on their mortgages or in active foreclosure — up from 2 million at the end of March. However, Black Knight also noted that “a higher share of payments have been made thus far in June than at the same time in May, suggesting the rise in delinquencies may be leveling off.”

Prolonged lockdowns of the type we have being seeing since March are, whatever one thinks of their wisdom, a social experiment — and, as was all too predictable, it has not been going well. It is a statement of the obvious, but a wave of foreclosures will not help.

— A.S.

A Tale of Two Stocks

In late July, shares in Eastman Kodak shot up more than 1,500 percent after the camera company received a $765 million loan from the government to produce drug ingredients. It has since lost 70 percent following allegations of insider trading in the lead up to the loan’s approval. The agency responsible for the loan, which was disbursed under the Defense Production Act, announced today that it would put the deal on hold pending an investigation.

The Financial Times reports:

The $765m loan, the first under the Defense Production Act since the start of the coronavirus pandemic, drew scrutiny from members of Congress because shares of the company rose in advance of its announcement. Share purchases in June by Jim Continenza, executive chairman of Kodak, and Philippe Katz, a board member at the Rochester, New York-based company, also drew scrutiny.

Kodak’s sharp rise and fall is just the latest example of pandemic-driven cronyism. Government interventions to combat the coronavirus recession have opened the floodgates to inside dealing, as evidenced by the Paycheck Protection Program, of which large corporations ended up being beneficiaries. While large companies have tapped credit lines at the Federal Reserve, small businesses are shuttering at record numbers.

On the flip side, COVID-related disruptions have also bred increased innovation. Legacy businesses unable to adjust to the new world of remote work and online commerce have lost out to emerging tech companies. In the car businesses, where a convoluted, federally regulated dealer-based structure had held back innovation in the past, the pandemic has catalyzed a shift to online shopping. Shares in Carvana, an online used-car dealer, have increased more than sixfold since March:

The Tempe, Ariz., company last week posted a 25% increase in vehicles sold for the second quarter, a time when many dealerships were still closed because of the Covid-19 pandemic. Total revenue grew 13% to $1.12 billion for the April-to-June period.

“What we needed was an event that would generate the willingness to try something new,” Chief Executive Ernie Garcia said. “That may be happening now faster than it ever has.”

It is still uncertain how the pandemic will change the business landscape. But for those dismayed by blatant displays of rent seeking over the past few months, there are signs of hope.

— D.T.

Around the Web

More evidence of the transformation of retail (as if that were needed):

The largest mall owner in the U.S. has been in talks with Inc., the company many retailers denounce as the mall industry’s biggest disrupter, to take over space left by ailing department stores.

State-budget woes:

The COVID-19 pandemic could swipe roughly $200 billion from state coffers by June of next year, according to an analysis by the Urban Institute’s State and Local Finance Initiative….

With dwindling cash, cuts to education, health care and other areas are inevitable in many places. State leaders have described the situation as “unprecedented,” “horrifying” and “devastating.” Florida’s Republican governor, Ron DeSantis, compared his state’s budget cuts to the Red Wedding scene in HBO’s Game of Thrones.

Maryland Gov. Larry Hogan, a Republican, said, “Responding to this crisis has created a multiyear budget crisis unlike anything the state has ever faced before, more than three times worse than the Great Recession.”

Stricter disclosure requirements for Chinese firms:

The President’s Working Group on Financial Markets said Thursday that in order to trade on a U.S. exchange, companies must grant American regulators access to their audit work papers. The group hasn’t determined how to enforce the guidelines, said a senior Treasury Department official who briefed reporters on the condition of anonymity. While the final penalty would be removal from U.S. exchanges, the Treasury and Securities and Exchange Commission would establish how binding the mandate is in implementing the rules.

The recommendations target a problem that has vexed U.S. regulators for more than a decade: China’s refusal to allow inspectors from the Public Company Accounting Oversight Board to review audits of Alibaba Group Holding Ltd.Baidu Inc. and other firms that trade on American markets. The issue has gained added urgency due to rising tensions between Washington and Beijing and following this year’s high-profile accounting scandal at Luckin Coffee Inc.

Random Walk

Adam Smith, the father of free-market economics, is said by Dugald Stewart, an early biographer (despite, discouragingly, the fact that he “hate[d] biography”) to have been kidnaped as a toddler “by a party of that set of vagrants who are known in Scotland by the name of tinkers.” Stewart recounts:

Luckily he was soon missed by his uncle [Mr. Douglas], who, hearing that some vagrants had passed, pursued them, with what assistance he could find, till he overtook them in Leslie wood; and was the happy instrument of preserving to the world a genius, which was destined, not only to extend the boundaries of science, but to enlighten and reform the commercial policy of Europe.

As related by La Trobe University’s Stuart Kells, in 1895, a later biographer, John Rae, added more drama still to this tale (Stewart’s account dates from 1793). After young Smith had been stolen by “a passing band of gypsies”:

[A] gentleman arrived who had met a gypsy woman a few miles down the road carrying a child that was crying piteously. Scouts were immediately despatched in the direction indicated, and they came upon the woman in Leslie wood. As soon as she saw them she threw her burden down and escaped, and the child was brought back to his mother.

The “abduction” appears, one way or another, in most Smith biographies, but Kells is not convinced:

There is much to dislike in the abduction story. The Douglases had a big house and it would have been a big deal to steal a child from its front door. A more likely explanation is that he wandered off, and came into the company of the so-called tinkers by chance. In Smith’s adulthood, his absentmindedness would become a defining trait. During a visit to a tannery, for example, he walked the plank over a tanning pit. Expounding on the division of labour, he forgot he was on precarious ground and ‘plunged headlong into the nauseous pool’. John Rae’s…account of the ‘abduction’ ends with a dig at Smith’s absentmindedness: ‘He would have made, I fear, a poor gypsy.’

Nevertheless, Kells wonders how the episode might have affected Smith’s views:

A case study in human nature and human failings, the ‘abduction’ may have affected Smith’s ideas about how people should live and what makes a good society. On economic as well as moral grounds, he opposed the trade in people. His major writings are full of references to slavery and the abuses to which it led. In other ways, too, he had progressive views. In considering the economic and legal causes of theft, for example, he was ahead of his time.

A large part of the economic gains of that time arose from extending the rule of law. In The Enlightened Economy, Joel Mokyr writes of how Smithian economic growth depended on the institutions that eliminated piracy, restrained highwaymen, and improved enforcement of contracts and property rights. Throughout recorded history, ‘predators, pirates and parasites’ were the arch enemies of growth. Smith’s world view and economic system depended on the extension and enforcement of laws, including those of personal protection.

All in all, whatever the true story behind Smith’s disappearance, we should be grateful that he was found.

— Luther Abel

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