The Capital Note

The Capital Note: 13F Reform & the UK Economy

The U.S. Securities and Exchange Commission (SEC) headquarters in Washington, D.C. (Jonathan Ernst/Reuters)

Welcome to the Capital Note, a newsletter about business, finance and economics. On the menu today: financial-disclosure reform, the British economy, and the pandemic power-grab.

13Fs
Since 1975, the Securities and Exchange Commission has required investment funds with more than $100 billion in assets under management to file quarterly 13F forms disclosing equity holdings. These disclosures allow regulators, investors, and businesses to monitor the trades of sophisticated market participants and react accordingly.

The SEC’s rationale for the rule is as follows:

The section 13(f) disclosure program had three primary goals. First, to create a central repository of historical and current data about the investment activities of institutional investment managers. Second, to improve the body of factual data available regarding the holdings of institutional investment managers and thus facilitate consideration of the influence and impact of institutional investment managers on the securities markets and the public policy implications of that influence. Third, to increase investor confidence in the integrity of the U.S. securities markets.

There are clear winners and losers as a result of 13Fs. Public businesses get a relatively reliable picture of their shareholder base, equipping them to engage actively with their investors as well as to anticipate potential activist campaigns. Unsophisticated investors are winners, too, because they can “piggyback” on the research and diligence of institutional managers.

But fund managers who must share their intellectual property on a quarterly basis lose out on investment returns. Indeed, institutional investors often attempt to circumvent 13F filings by accumulating positions in derivatives or convertible bonds rather than buying stock outright. Such maneuvering imposes deadweight costs on financial markets, while reduced returns overall decrease the incentive for price discovery.

So the news of a potential rule change that would reduce the number of firms required to file 13Fs was music to fund managers’ ears. The reform proposed by SEC commissioner Jay Clayton would require disclosures from only asset managers with $3.5 billion or more under management, a threshold that exclude all but the largest 550 funds.

The SEC cited changes in the market landscape since 1975 as a rationale for the amendment.  The $3.5 billion figure represents “proportionally the same market value of U.S. equities that $100 million represented in 1975, the time of the statutory directive,” reads the statement. “The new threshold would retain disclosure of over 90 percent of the dollar value of the holdings data currently reported while eliminating the Form 13F filing requirement and its attendant costs for the nearly 90 percent of filers that are smaller managers.”

That explanation did not assuage the concerns of businesses, which voiced their opposition to the change yesterday:

A total of 381 companies on Monday signed a letter, organised by the New York Stock Exchange, saying the Securities and Exchange Commission proposal would deal a “debilitating blow” to investor relations…

The proposal “limits access to information for public issuers and investors, which is the exact opposite direction of where the commission should be heading,” the letter stated. “The proposal’s limitation on transparency is at odds with the commission’s regulatory agenda in general and with how the commission itself has explained access to information and its role in facilitating such access.”

I suppose one’s view on this depend on whom one finds more sympathetic: multinational corporations or hedge-fund managers.

— D.T.

UK Lockdown
The British pound has been dropping back against the dollar, buying around $1.27 as I write. At the end of August, the pound was trading at $1.34.

That is partly because of general dollar strength today, but the broader move is unsurprising on many levels. Following the path set since the Brexit referendum in 2016, the UK government has continued to botch Britain’s withdrawal from the EU. This was a process that required a scalpel, but the UK’s Conservatives have repeatedly shown a strong preference for a rusty hacksaw. Britain left the EU on January 31, 2020, but the final stage of this process is a transition period during which the UK and EU are supposed to have set up their new trading relationship by December 31, 2020. London resisted any suggestion that COVID-19 might be a reason to extend this transition period. At the moment, the difficult course of the negotiations means that it is more likely than not that the UK/EU trading relationship will end up on “WTO terms,” in other words, the hardest of all Brexits, and at a very hard time. Ultimately, that may work, or it may not, but what is now almost certain is that there will be a period of significant dislocation and disruption at year-end. I’m sure that will go splendidly.

Secondly, there has been (guarded) talk by the Bank of England of negative interest rates, something unlikely to spur overseas demand for the pound.

CNBC (from early August):

Bank of England Governor Andrew Bailey told CNBC Thursday that there are no plans to deploy negative interest rates in the coming months, despite the U.K. central bank’s “constrained position.”

His comments came shortly after the BOE’s Monetary Policy Committee voted unanimously to keep benchmark interest rates at an all-time low of 0.1%.

But:

When asked during an interview with CNBC’s Geoff Cutmore whether the bank would consider negative interest rates next year, Bailey replied: “No, I can’t give you that because I would never give you a judgement on what monetary policy is going to be a year ahead before we get there.”

“What I can tell you is that other analysts are essentially right, in the sense of saying it is in the toolbox. But, there is no plan at the moment to bring it out of the toolbox and put it to work,” Bailey said.

Hmmm…

Now from the Guardian today:

Andrew Bailey has cooled expectations that the Bank of England will deploy negative interest rates in the immediate future, despite the sharp rise in coronavirus infections weighing on Britain’s economic recovery.

Sounding the alarm over the growing risks to the economy, the Bank’s governor said the “hard yards are ahead of us” as a second wave spreads and stressed that some industries were suffering more than most. “Obviously that does reinforce the downside risks we have in our forecasts,” he added.

And those downside risks have been deepened by more stringent steps that the Johnson government is taking to combat that second wave, which seems to be developing “despite” the prolonged lockdown earlier in the year (I put “despite” in scare quotes, as there was always a very good chance that such a lockdown would achieve nothing more than kick the can down the road).

The ratchet had already been tightening, including the now notorious “rule of six”:

Limits on the number of people you can see socially have changed. From Monday 14 September, when meeting friends and family you do not live with (or have formed a support bubble with) you must not meet in a group of more than 6, indoors or outdoors. This is against the law and the police will have the powers to enforce these legal limits, including to issue fines (fixed penalty notices) of £100, doubling for further breaches up to a maximum of £3,200.

And then there was the announcement of the appointment of “Covid marshals,” either volunteers or members of local authority staff, to explain matters to the public, and, if necessary to call the police “if enforcement action is needed.”

Following that, came the announcement of early closing times for pubs, restaurants, and other such perilous places.

The BBC:

Closing pubs early may not seem like a big step but the hospitality industry is warning it will have devastating impact on the sector.

“People have this vision, it’s just a few blokes standing at a bar at 10.30. What does it matter?” says Oliver Vaulkhard, who runs venues across north east England. “10 o’clock doesn’t sound dreadful, but it does halve your revenue,” he said.

The new rules will come into force in England on Thursday. All pubs, bars, restaurants and other hospitality venues in England will have to shut at 10pm. Prime Minister Boris Johnson said this will mean “closing and not just calling for last orders”.

Businesses must also ensure customers are served at tables of no more than six and groups are not permitted to mingle. Pub owners say the earlier closing time will be “absolutely devastating” for some venues and will affect takings not just at late night venues, but at restaurants too.

And now:

Business Insider:

UK Prime Minister Boris Johnson on Tuesday urged people to work from home in order to halt a spike in coronavirus infections and announced a series of new restrictions…

Johnson told the House of Commons that the government had scrapped its push for more people in England to return to their workplaces.

“We are once again asking office workers who can work from home to do so,” Johnson told members of Parliament.

And of course, “Fines for noncompliance will be increased against both businesses and individuals.” What’s more, “Unless we palpably make progress,” [Johnson] said, “we should assume that the restrictions I’ve announced will remain in place for perhaps six months.”

Six months. And quite what “progress” means is anyone’s guess. One of the features of so many governments’ reaction to this pandemic is the way that progress has constantly been redefined. Flattening the curve one week, crushing the virus, the next.

BBC:

Business groups have reacted with dismay to the prime minister’s call for people to work at home where they can. The CBI said that it was a “crushing” blow that would have a “devastating impact”.

It marks a change in policy following a government advertising campaign to get people back to work where safe. Campaign group London First said it would discourage people from returning to workplaces and risk “derailing an already fragile recovery”.

Oh yes, there’s also this, via Metro:

Boris Johnson has announced that military support will be available if police become too busy ensuring people are following the rules. Forces will also be given extra resources to make sure hospitality venues are observing the new national 10pm curfew.

“Insanity,” as Albert Einstein didn’t actually say, “is doing the same thing over and over again and expecting different results.”

Under the circumstances, it is surprising that the pound has held up as well as it has.

— A.S.

Around the Web
RIP 60/40 Portfolio:

The traditional 60/40 portfolio — the mix of equities and bonds that has been a mainstay of investment strategy for decades — is at risk of becoming obsolete as some investors predict years of underperformance by both its component parts…

A “nuclear winter” beckons for the 60/40 portfolio in the 2020s, said Vincent Deluard, global macro strategist at StoneX Group, who predicts inflation-adjusted returns could be just a fraction of the 8.1 per cent enjoyed in the past decade.

Lessons from the NYC subway:

Outside of New York, new subways and extensions typically cost between $250-$450 million per mile. While every project is unique, it is not immediately clear why digging a subway on the Upper East Side is twenty times more expensive than in Seoul or ten times more expensive than in Paris.

The effect of these runaway costs is dire: first, they inhibit the expansion and development of high-capacity rapid-transit systems at a moment when concerns about climate and unequal access to affordable housing, jobs, education, and services are paramount.

Modern Monetary Theory:

[T]he sudden need for deficit spending in the wake of a global pandemic should not be used as an excuse to embrace MMT. While they may be convenient, MMT’s central claims regarding the harmlessness of deficits, debt, and mass currency production are not only flatly false, they are deeply dangerous. Theoretical considerations and historical examples not only strongly undermine the central tenets of MMT, they also serve as a critical reminder to policymakers — particularly in a moment when deficit spending may truly be necessary — of what happens when governments fail, over long periods, to take responsible measures to balance their checkbooks throughout the business cycle.

Random Walk
Given the news from the UK today, this article by Johan Norberg from the London Spectator of a couple of weeks ago seems timely.

Read the whole thing (in particular, Norberg has useful things to say about how the private sector has managed to adapt to the problems thrown up by the pandemic), but here’s an extract (my emphasis added):

The great pandemic of 2020 has led to an extraordinary expansion of government power. Countries rushed to close their borders and half of the world’s population were forced into some sort of curfew. Millions of companies, from micropubs to mega corporations, were prohibited from carrying on business. In supposedly free and liberal societies, peaceful strollers and joggers were tracked by drones and stopped by policemen asking for their papers. It’s all in the name of defeating coronavirus; all temporary, we’re told. But it’s time to ask, just how temporary? As Milton Friedman used to warn: ‘Nothing is so permanent as a temporary government programme.’

Measures that seemed unthinkable a few months ago have been implemented in haste and without debate. In the UK, as in many other countries, the rationale changed. First, lockdown was designed to ‘buy time’ so the health service could prepare. Next, it was needed to ‘flatten the curve’. But when the curve peaked a few weeks later, the restrictions didn’t merely stay in place, they were reinforced…

As Robert Higgs noted in his classic 1987 analysis of government expansion, Crisis and Leviathan, there is a ratchet effect. After the crisis has passed, governments yield some of their new powers, but not all. New measures set a new precedent…

Indeed they do. Here’s France’s President Macron being interviewed by the Financial Times in April:

There is a realisation, Mr Macron says, that if people could do the unthinkable to their economies to slow a pandemic, they could do the same to arrest catastrophic climate change. People have come to understand “that no one hesitates to make very profound, brutal choices when it’s a matter of saving lives. It’s the same for climate risk,” he says.

— A.S.

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