The Capital Note

The Capital Note: SPACking & Fracking

Chevron fracking site near Midland, Texas, August 22, 2019. (Jessica Lutz/Reuters)

Welcome to the Capital Note, a newsletter (coming soon) about finance and economics. On the menu today: SPACs & the Resurgence of Public Markets, Kamala & Fracking, and Automation in China.

The Coronavirus Made Public Markets Cool Again

During the last technology boom, the mark of a successful startup was an IPO. The Dotcom bubble took place largely in the public markets, where scores of hot tech startups sold stock long before generating any profit. During the current tech wave, which dates back roughly a decade, “unicorn” status — the term for private companies with valuations over $1 billion — has replaced the blockbuster IPO as the Silicon Valley success story.

The recent hype around special-purpose acquisition companies (SPACs) — vehicles that allow companies to list their shares without going through the tedious IPO process — seems to buck this trend. Electric-truck maker Nikola and sports-betting company Draft Kings have both chosen to go public through SPACs, and a number of prominent investors have raised money to launch their own “blank-check” companies.

A story in the Financial Times recounts the fraught history of SPACs. A lack of regulatory oversight has made black-check companies a favorite of fraudsters, and their returns significantly underperform the market.

But their newfound popularity may be the result of a paradigm change in Silicon Valley:

“The Masayoshi Son story of the cool kids stay private forever — I think the wheels have come off the bus on that one,” said Niccolo de Masi, a video game executive and Spac founder, referring to the SoftBank chief executive whose $100bn Vision Fund has become synonymous with huge investments in start-ups.

One of the principal reasons companies spurn public listing in that stock prices introduce volatility. Moves in the market can meaningfully hurt a firm’s ability to raise money, and outside investors can influence companies’ decision-making. Privately held companies are valued on a discretionary “mark-to-market” basis, which shields them from the vicissitudes of the market. And an abundance of dry powder means that illiquidity is not a particularly pressing problem for venture-backed firms; if you’re performing decently well, it’s not all that difficult to get investors to write another check.

But during the coronavirus sell-off, the dynamics were reversed. While public markets recovered swiftly thanks to the interventions of Congress and the Federal Reserve, private companies faced the reality of an economic shutdown with a limited pool of short-term funding. During a liquidity crisis, public funding looks a lot more attractive.

Given these circumstances, the surge in SPACs is not especially surprising.

— D.T.

Kamala & Fracking

One of the more entertaining aspects of Joe Biden’s choice of Kamala Harris as his running mate will be a determined effort to portray Harris as some kind of moderate.

In that context, it is interesting to look at her stance on fracking (spoiler, she is not a fan).

Notwithstanding its coronavirus woes, fracking has been one of the American success stories of the last decade.

Almost exactly a year ago Mine Yücel and Michael D. Plante of the Dallas Fed examined the contribution that fracking has made to GDP:

The U.S. shale boom—a product of technological advances in horizontal drilling and hydraulic fracturing that unlocked new stores of energy—has benefited the nation’s oil trade balance and oil-producing regions and led to unusually large employment and output gains.

While quantifying the boom’s benefits is difficult, we show in a working paper analyzing the shale boom during 2010–15 that the benefits extended to the overall economy, adding perhaps 1 percent to U.S. gross domestic product (GDP) during that time [about one tenth of the total growth over that period].

And those benefits included more spending power for the consumer:

Households also increased their consumption of other goods because the decline in fuel prices increased their disposable income, leading to a 0.7 percent increase in overall consumption.

Fracking also dramatically transformed America’s trade balance in petroleum products for the better, reducing reliance on Mideast oil and offering the U.S. strategic opportunities — essentially a greater freedom of movement — even if they have yet to be fully exploited.

And these benefits did not come to a halt in 2015.

It should also be remembered that certain states benefit disproportionately from fracking — not only, as is well-known, Texas or North Dakota, but also, say, New Mexico, one of the poorest states in the country.

From a 2019 report:

New Mexico is enjoying a windfall of tax revenue and other economic benefits from an oil boom concentrated in the Permian Basin, where drilling is on pace to set a production record…According to the study released Wednesday, 27,000 jobs would be lost and $7 billion in economic activity would be eliminated in New Mexico within the first year of a prohibition on fracturing. It also states that household income would drop by $2 billion, and $681 million in state and local tax revenue would be lost.

And while there is a continuing debate about the impact of fracking on CO2 emissions, there is at the very least an arguable case that it helps reduce them.

Forbes (from 2018):

The U.S. Energy Information Administration released a report on Wednesday offering new evidence supporting the importance of natural gas replacing coal as the leading fuel source for the electricity generation sector of the economy. Per the EIA, “U.S. energy-related carbon dioxide (CO2) emissions in 2017 fell to 5.14 billion metric tons, 0.9% lower than their 2016 levels, and coal emissions were the primary driver behind the decline.

This was not a result of coal becoming “cleaner” — though power generators continue to work on the development of cleaner coal technologies — but of a significant number of retirements of older coal-fired power plants during 2017, the vast majority of the capacity for which was replaced by combined cycle natural gas capacity. The end result is that, while carbon dioxide emissions in the U.S. actually rose in the Industrial, Transportation and Residential/Commercial economic sectors, the decrease in the Electricity sector of 4.6 percent was so substantial that it more than offset those increases.

Bloomberg (from yesterday): “Harris… has vowed to fight the fossil fuel industry in court, embraced the Green New Deal and last September said there was ‘no question’ she’d ban hydraulic fracturing.”


— A.S.

Around the Web

As we have mentioned before, our best guess is that once the pandemic passes, many of the changes that we have seen in its wake, such as the switch to remote working, will dwindle. However, the way that COVID-19 (and the steps taken to deal with it) has accelerated changes that are already under way will leave a longer-lasting impact.


The collapse of traditional pay-TV services continues to accelerate. In the first quarter, subscriber counts for the cable, telco, and satellite-TV services from companies like Comcast, AT&T, and Dish Network fell at about an 8% annualized rate, accelerating from declines of 5.4% last year and 3.3% in 2018.

In the foxhole:

A key supplier to Apple Inc. and a dozen other tech giants plans to split its supply chain between the Chinese market and the U.S., declaring that China’s time as factory to the world is finished because of the trade war.

Hon Hai Precision Industry Co. Chairman Young Liu said it’s gradually adding more capacity outside of China, the main base of production for gadgets from iPhones to Dell desktops and Nintendo Switches. The proportion outside the country is now at 30%, up from 25% last June.

That ratio will rise as the company — known also as Foxconn — moves more manufacturing to Southeast Asia and other regions to avoid escalating tariffs on Chinese-made goods headed to U.S. markets, Liu told reporters after his company reported financial results.

Amazon goes to Sweden:

It’s Sweden’s storied worker protections and climate-conscious citizens welcoming Amazon’s ruthless drive for low prices. What could go wrong?

Stockholm is preparing for a tug-of-war with one of the world’s most powerful companies — which just announced its entry into the Swedish market — and hopes that its arrival will mean the country of 10 million will be able to change Amazon, instead of being changed by it.

Good luck with that.

[The] country also has an affluent, internet-savvy market ripe for Alexa, Kindles, Prime and the thousands of items on Amazon’s online store, the company believes. Around 68 percent of Swedes shopped online in 2018, and they spent an average of €200 per online transaction. In total, the Nordic countries spent over €22 billion online in 2018, according to a study by PostNord, the country’s postal service.

There’s not a lot of competition in online marketplaces, and nobody can match Amazon’s massive cornucopia of goods.

“Swedish e-commerce is still like regular retail without shopping malls,” said Jonas Arnberg, the CEO of HUI, a market research company.”

Random Walk

Catching up on a back issue of the (London) Spectator last night, I came across this in a review of The Year 1000: When Explorers Connected the Globe and Globalization Began by Valerie Hansen:

Hansen is herself an expert on Chinese history, so it is no surprise that her final chapter depicts China as the most globalized part of the world. Through its early participation in trade along the Silk Road and connections to south east Asia, China does offer examples of what we think of as modern economic systems — in terms of specialization of production and regional trade. Hansen suggests that the reason China didn’t industrialize, despite its sophistication, was simply a labor issue. The Chinese never needed to mechanize because they never lacked manpower.

Perhaps it is just me, but that is an argument that I had never seen before and it makes a lot of sense. We can see an echo of it in the discussion over the UK’s low productivity, which has been a problem for quite a while.

From the New York Times earlier this year:

On Wednesday, the [British] government said that it would prioritize people with skills and that employers would have to wean themselves off a seemingly inexhaustible supply of cheap labor.

Britain suffers from poor productivity growth, and some economists believe that a ready supply of cheap foreign labor has discouraged companies from investing in technology.

As for China, the interplay between a large population and “mechanization” or, now, automation, may well leave the country lagging. One of its major sources of competitive advantage has been cheap labor, a factor that was already beginning to erode (as wages rose) but is now under pressure from the impact of automation. If the “robots” are doing much of the work, why shouldn’t firms locate (or relocate) production closer to their home markets rather than rely on production in China that is losing its cost advantage and comes with increasing political risk?

“Premature deindustrialization” may well be headed China’s way.

— A.S.

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