The Capital Note

The Capital Note: Bulls & Bullies

Traders watch President Donald Trump speak from the White House on a monitor on the floor of the New York Stock Exchange, March 13, 2020. (Lucas Jackson/Reuters)

Welcome to the Capital Note, a newsletter about business, finance and economics. On the menu today: Bullish markets, overbearing banks, hidden muni defaults, the last picture show and whisky galore.

Market Optimism
We’ve recently discussed investors’ defensiveness going into the November elections. Fund managers are bending over backwards to find ways of shielding themselves from the risk of a contested election. Yesterday’s news that Trump pulled out of negotiations of a fresh round of coronavirus relief should make matters worse.

Yet markets are unperturbed: Stocks are up on the day. While partially a response to Trump’s sudden about-face on stimulus talks, financial-market bullishness seems largely independent of the news cycle. The yield curve is steepening, a sign of confidence in the economic recovery, and hedge funds are betting on continued strength in 10-year Treasuries.

Morgan Stanley’s chief of cross-asset strategy, Andrew Sheets, summed up the view in a Bloomberg interview: “The glass half-full view of stimulus talks is if you don’t get it today you’ll get it tomorrow from whomever wins the election…This V-shaped recovery is still intact.”

In a research note yesterday, Nomura quant strategist Masanari Takada reported that commodity trading advisors are growing increasingly bullish after a shaky September: “CTAs have already started rebuilding their net long positions in Russell 2000 futures and DJIA futures, and their positions in S&P 500 futures and NASDAQ 100 futures look likely to be next.” Nomura estimates indicates that U.S. equity sentiment is at pre-pandemic levels, albeit below its highs from earlier this summer. That’s in part due to an improving economic outlook: September’s business-confidence and jobs numbers reflected continued growth.

The upshot is that the elections may have less of an impact on the economy than many expect. If the Democrats sweep, a pick-up in spending will likely offset the negative impacts of increases and taxes and regulation. If Republicans hold on, the opposite is true.

— D.T.

Banks, Clients, and Climate
As a traditionalist (of sorts), I’ve always thought that the idea that “the customer is always right” was, well, pretty fundamental.

Not, it seems, where JPMorgan Chase is concerned.

The Wall Street Journal:

JPMorgan Chase & Co. is pledging to use its financing weight to push clients to align with the Paris agreement and work toward global net zero-emissions by 2050. The bank said it would invest in technologies that help reduce carbon emissions and will work with clients to cut their own carbon footprints.

JPMorgan’s bankers and advisers hold considerable sway in boardrooms around the globe. The bank plans to argue to clients that combating climate change opens the door to more capital from investors and reduces their risk of becoming outdated.

For the Paris agreement to reach its goals, JPMorgan said, businesses and investors must figure out how to better measure carbon output and then make improvements that will require massive investment and spending.

“We’ve got to act now,” said Doug Petno, the head of JPMorgan’s commercial bank.

Quite what motivated the timing of this announcement, I don’t know (not this embarrassment, I’m sure), but I could not help noting this from Moral Money, the more than usually sanctimonious section of The Financial Times dedicated to “socially responsible” investing.

[H]as Jane Fonda outsmarted Jamie Dimon? Perhaps. The celebrity recently made viral videos lambasting JPMorgan Chase for its financing of fossil fuel companies. Now, the banking behemoth has responded: it announced on Tuesday that it is cutting its exposure to fossil fuels. That won’t placate critics. But it shows the zeitgeist is shifting.

It is, however, probably unfair to start referring to “Hanoi Jamie.” A better explanation is found in the fact that Dimon was a signatory of the corporatist manifesto under which the Business Roundtable embraced “stakeholder capitalism”, the idea that shareholders—the, you know, actual owners of a business—are just one stakeholder group among many to whom management owes a responsibility. What JPMorgan’s management is doing is using the leverage they gain from other people’s (the shareholders) capital to play a corporatist power game, a game that, regardless of their views on climate change (for what it’s worth, I’m a lukewarmer) should concern both shareholders and those who believe in representative democracy.

Two principles appear to being consigned to the scrapheap:

  1. A company’s duty is to its shareholders.
  2. Environmental policy should be the responsibility of democratically elected governments, not a cabal of corporations, activists, NGOs, representatives of the “international community” and politicians too arrogant to go through the usual legislative channels to pursue their agenda.

These are not difficult concepts to understand and, I would hope, accept, but JPMorgan is hardly the only bank that finds it difficult to come to terms with them.

From the same Wall Street Journal article:

Other banks have made various pledges to stop supporting Arctic drilling and coal companies. British banks NatWest Group PLC (the former RBS Group PLC) and Barclays PLC have both committed to using their business to further the Paris agreement, the 2015 deal that called on global governments to curb rising temperatures. Citigroup Inc. earlier this year said it would walk away from clients that aren’t taking climate change seriously.

If I were a Citigroup shareholder (the stock is now trading about where it was in August 2016), I might be asking whether now is quite the time to be “walking away” from clients.

The article’s authors go into a little more detail on what JPMorgan is going to do (or not do):

JPMorgan…said in February it would move away from coal companies, pledged $200 billion in financing for green business and said its own operations would be carbon neutral this year.

JPMorgan won’t fire its oil-and-gas companies, saying the sector remains too important to the economy, and it isn’t promising to jettison clients that don’t agree with the bank. But the move shows an understanding from the bank that its own carbon footprint extends to the dollars it lends. It plans to focus its new environmental efforts on its clients in energy, automotive manufacturing and electricity generation, where it said it can do the most good.

How JPMorgan achieves the pledge isn’t clear or assured.

The bank plans to measure its clients in new ways, including “carbon intensity” metrics that show emissions as a rate of output and that allow easier comparison. What exactly it counts will depend on engagement with clients and outside experts, executives said. It hasn’t disclosed how its current portfolio would score as a baseline for how much it has to improve. It will disclose a preliminary 2030 target next year.

The lack of data has long proved an issue, making it hard for environmentally focused investors to score companies’ climate records. JPMorgan will push clients for more disclosures on carbon and climate impacts, said Marisa Buchanan, the head of sustainability.

JP Morgan will “push clients.” The notion of client service is, clearly, no longer what it was.

JPMorgan is creating a new advisory group to centralize the bank’s businesses and industry groups and to engage companies and outsiders on how to structure the work. Executives said they don’t want to impose JPMorgan’s views alone.

“We want to invite voices and companies together and act as a catalyst for change,” said Rama Variankaval, who will head what the bank is calling the Center for Carbon Transition.

That the bank’s executives don’t want to impose JPMorgan’s views alone sounds benign, but I cannot help wondering who selects those “voices,” and to whom those “voices” are accountable.

Connoisseurs of the way that the climate change campaign is creating its own flourishing ecosystem will also relish the detail that the bank (which has a “head of sustainability” and is now creating a “Center for Carbon Transition”) will also be engaging “outsiders” to help it move forward.

Of course.

— A.S.

Around the Web
The last picture show? No, but (via CNN):

The US movie theater industry has been clinging to the hope that a future blockbuster would save its devastated business. But with Regal Cinemas’ plans to suspend operations again, it’s clear that 2020 is likely over for the movies.

Cineworld Group, the owner of Regal Cinemas, said Sunday it would suspend operations at all of its theaters in the United States and the United Kingdom as coronavirus cases continue to spread. The news sent the company’s London-listed stock down as much as 60% Monday.

And it could be only a matter of time until other major movie theater chains follow suit, according to Jeff Bock, a senior analyst at entertainment research firm Exhibitor Relations.

At one point the CNN TV clip compares going to the movies with “swimming in a sea of Covid”, not, perhaps, the most enticing image.

As the story above reminds us, we live in grim times, but free enterprise keeps trying to do what it can to cheer us up.

The Financial Times:

A Silicon Valley-based start-up is taking on the $500bn global spirits industry with proprietary technology it claims can reproduce the taste of a barrel-aged whisky, rum or brandy in three to five days.

Bespoken Spirits, founded by materials scientist Martin Janousek and entrepreneur Stu Aaron, has won awards in blind tastings with drinks made by exposing alcohol to “micro staves” of different woods under pressure, in what they likened to a “Nespresso machine on an industrial scale”.

Its public launch on Wednesday comes as spirits prove resilient in the pandemic, partly because of a trend for home cocktail making that helped compensate for the impact of bar closures on distillers such as Diageo and Pernod Ricard.

Mr Aaron said: “Rather than putting a spirit into a barrel and passively waiting for nature to take its course over decades, our technology instils the barrel into the spirit, delivering a premium-quality tailored spirit in days rather than decades.”

The process uses a fraction of the wood and energy of barrel ageing, Bespoken said, while avoiding the disappearance of the so-called “angel’s share” of spirit that evaporates during maturation.

In an unsurprising development:

Bespoken’s launch met with a frosty response from the Scotch Whisky Association…

From The Wall Street Journal: What CEOs Really Think About Remote Work

Spoiler: It varies.

— A.S.

Random Walk
With federal assistance to states and municipalities emerging as the main sticking point in another coronavirus-relief bill, it’s a good time to take a look at the municipal-bond market. While data from rating agencies suggested that municipal defaults are exceedingly rare, under the hood the situation is more complicated.

Liberty Street Economics:

Two large bond rating agencies, Moody’s Investors Service (Moody’s) and Standard and Poor’s (S&P) provide annual default statistics for the municipal bonds that they rate. S&P reports that its rated municipal bonds defaulted only 47 times from 1986 to 2011. Similarly, Moody’s indicates that its rated municipal bonds defaulted only 71 times from 1970 to 2011. As shown in the table below, this record of defaults compares very favorably with the corporate bond market, especially given the larger number of issuers in the municipal bond market.

However, not all municipal bonds are rated and the market’s rated universe only tells part of the story. We have developed a more comprehensive municipal default database by merging the default listings of three rating agencies (S&P, Moody’s, and Fitch) with unrated default listings as tracked by Mergent and S&P Capital IQ. Rather than confirming Moody’s 71 listed defaults from 1970 to 2011, our database shows 2,521 defaults during this same period. Similarly, our database indicates 2,366 defaults from 1986 to 2011 versus S&P’s 47 defaults during this same period. In total, we find 2,527 defaults from the period beginning in the late 1950s through 2011.

To provide some background, we note that the municipal market is bifurcated into general obligation (GO) bonds and revenue bonds. GO bonds carry the broad full faith and credit pledge of a state or local government.; GO pledges are considered among the strongest type of security because municipalities have the authority to levy taxes; GO defaults like those in Jefferson County and Harrisburg are relatively rare. Revenue bonds, on the other hand, are backed only by a pledge of revenues raised from a specific enterprise, such as an airport, toll road, hospital, or school. GO bonds are therefore stronger than revenue bonds, because the revenue base for general obligations is much broader (for example, the ability to levy taxes on property or citizens within a specific geographic area) than the typical revenue bond revenue base (for example, a specified stream of revenue or enterprise).

— D.T. 

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