The Capital Note

The Capital Note: Going After Google

(Dado Ruvic/Reuters)

Welcome to the Capital Note, a newsletter about business, finance and economics. On the menu today: The war on Google, clouds over commercial real estate, clouds in space, food hoarding — and money as a memory device.

Going After Google
Probably the most significant economic news today (at least over the long term) may be the decision by the Justice Department to take a run at Google.

The Wall Street Journal:

The Justice Department filed an antitrust lawsuit Tuesday alleging that Google engaged in anticompetitive conduct to preserve monopolies in search and search advertising that form the cornerstones of its vast conglomerate.

The long-anticipated case, filed in a Washington, D.C., federal court, marks the most aggressive U.S. legal challenge to a company’s dominance in the tech sector in more than two decades, with the potential to shake up Silicon Valley and beyond. Once a public darling, Google attracted considerable scrutiny over the past decade as it gained power but has avoided a true showdown with the government until now.

The department alleged that Google, a unit of Alphabet Inc., is maintaining its status as gatekeeper to the internet through an unlawful web of exclusionary and interlocking business agreements that shut out competitors. The government alleged that Google uses billions of dollars collected from advertisements on its platform to pay mobile-phone manufacturers, carriers and browsers, like Apple Inc.’s Safari, to maintain Google as their preset, default search engine.

It’s too early to comment in detail on the case, but I’d draw readers’ attention to a piece we ran by CEI’s Jessica Melugin a couple of weeks ago, and in particular, this:

A traditional case against these tech giants is hard to prove: Innovation is the norm, costs are falling if not already at zero, and Americans have benefited from these firm’s products — especially during the COVID pandemic. It’s hard to imagine being quarantined at home or trying to keep a business afloat without the services of Amazon’s online shopping, Facebook’s facilitation of communicating curbside pick-up options, Google’s maps for home deliveries, and Apple’s devices to enable it all. Consumer welfare abounds.

That’s due in large part to intense competition. Google has Amazon nipping at its advertising revenue heels. Amazon is watching Walmart, the nation’s largest retailer, roll out a same-day home-delivery service. Apple competes with Google’s Android operating system and Google’s app store, Google Play. Facebook competes with Google and Amazon for online advertising dollars and against other social-media platforms, like Twitter, Google’s YouTube, TikTok (for now), Pinterest, and Snapchat for eyeballs.

Quite.

I’ll admit to a long-term predisposition against antitrust ever since I studied it in graduate school a (very) long time ago, admittedly in the context of the EU, rather than U.S. law, but there is a reasonable overlap between the two systems.

At its core, antitrust rests on a lack of confidence in the ability of markets to do what they are supposed to do. In particular, there’s a focus on cases when a company has established (or will, as the result of a merger or acquisition, acquire) such a strong position in its market that it will abuse that position, and that its competitors will be too weak to take advantage of the customer dissatisfaction created by that abuse to attract business away from the dominant player.

It’s certainly true that the market can do little to correct such abuse in the case of certain “natural” monopolies or, for that matter, in the case of companies that have been put in a privileged position as the result of state support of one type of another. But such cases are relatively rare.

What makes the current action even more disturbing is that it is being brought under the auspices of a Republican administration. I’m no market fundamentalist — a species more hyped than seen — but there is every good reason to expect that a GOP administration ought to have some faith in the ability of markets to do their thing, something that, left (more or less) to their own devices, markets generally seem to do.

That’s not the case with this administration, it seems. Let’s hope that petty political animus — perish the thought — has played no part in the decision to sic big government on big tech. Adding to the GOP’s shame is the fact that eleven states with Republican attorneys general have joined in the attack against Google.

Reinforcing the sense of the strangeness of this case is that if there is any sector where champions rise and fall — in another words, a sector where creative destruction does what it is meant to do — it is tech. AOL? MySpace? Netscape?

Investors in American stocks should also watch out.

In a recent Capital Note, I observed that:

Enthusiasts for anti-trust action against big tech (I’m not one of them) might want to think through the implications for their 401ks, as this argument contained within a recent article by Bloomberg’s John Authers suggests.

“The performance of the NYSE Fang+ index continues to be barely believable. It has outperformed the equal-weighted version of the S&P 500 by almost exactly 100% over the last 12 months.

Now that the biggest five stocks in the S&P account for 22% of its market cap, a problem for them could also mean a problem for the S&P itself…”

Oh.

It’s well worth remembering that even if this case has been begun under the auspices of a Republican administration, in all likelihood (if the polls are to be believed) it will be pursued by Democrats, a party with another agenda altogether.

And there’s one other thing. For all its faults (and it certainly has some), Google, like the other Silicon Valley giants, has been a great American success story, something that explains why a jealous EU, too sclerotic to keep up in this area, has been waging a long campaign, which is now intensifying, against the larger U.S. high tech companies.

I touched on this in a Capital Note last week. Here’s an extract:

Confronted by the reality of its failure to create the most competitive and dynamic knowledge-based economy in the world™ by 2010 (a year, ironically, in which the consequences of another of the EU’s adventures in central planning — the euro — had become all too visible), those leading the EU and some of its member states turned their hands to something at which they were better suited — destruction, rather than creation.

Specifically, they increasingly began turning their attention to ways in which they could hobble the high-tech giants that the U.S. kept producing. Most notoriously, they weaponized antitrust, a technique taken to absurd extremes by Margrethe Vestager, the EU’s competition chief, who argued that Ireland’s tax policy was too competitive (it was too favorable to Apple, you see). Even though the Irish government argued that it should not have the money, Vestager’s department attempted to insist that Dublin hit Apple with a retrospective tax bill of $15 billion.

This, as I noted back in July, was too much even for the usually docile European Court of Justice. It ruled that the Commission had failed to prove that Apple had received illegal state aid from Ireland through favorable tax agreements. Meanwhile, in addition to serving a second term as the competition commissioner Vestager has a new role. She is the Executive Vice President of the European Commission for A Europe Fit for the Digital Age, a pompous title, but don’t laugh too hard. When it’s awarded to a protectionist, that doesn’t bode well for American tech companies.

In the course of this note, I quoted this from the Financial Times (my emphasis added):

Brussels is…trying to tighten its laws to reflect the new realities of digital monopolies. The outlines of potential legislation are starting to emerge, in the shape of a broad-ranging Digital Services Act.

The European prescription begins with forcing the Big Tech companies to share data collected through their platforms with smaller rivals, a move designed to break the cycle that locks in the leaders of the data economy. The law would also limit their ability to set a preference for their own services, for instance preventing Google from inserting its own maps or local listings above its general search results, and Amazon from favouring in-house products. And it would limit their ability to have their services pre-installed on consumer gadgets, something that squeezes out competitors.

Even these measures, though, might not be enough. Brussels has also been pondering drastic new enforcement powers. These include the ability to force changes in dominant companies’ business practices without a full investigation or proof that the law has been broken — an idea that would provoke a storm of protest from across the Atlantic.

How naïve I was. Now it seems that Washington will be cheering Brussels on.

Drag America Down Again — or something.

Around the Web
CMBS Woes.

At the end of last month I wrote something in a Capital Note on problems in the commercial real estate market, and, in turn, the implications of that for the market in commercial mortgage-backed securities (CMBS). CMBS were, of course, at the center of the financial crisis, and there’s good reason to think that they might be running intro trouble again.

I concluded:

Without getting too deeply into the weeds here, the Fed can, these days, help by buying “agency” CMBS (securities backed by Freddie Mac and Fannie Mae). Those, however, mainly relate to multi-family housing. The central bank’s ability to buy non-agency “private-label” CMBS secured on commercial properties is restricted to those that are AAA-rated, and that is not where the trouble is likely to lie. Private label is a much smaller market than it was before the financial crisis, but still…

Worth watching.

Now, from today’s Wall Street Journal (in an article made even more depressing (for me) by the fact that it is illustrated by a photo of some buildings near where I live):

Although stock markets are near records, assets whose fortunes are more directly tied to New York’s status as a heart of tourism and culture are showing acute sensitivity to the pandemic’s disruptions. Prices for debt backed by hotels and shops have fallen, new loans have slowed and lenders are more cautious, leaving bankers and the real-estate industry bracing for a hard hit.

Investors watch New York closely because Wall Street slices such loans up, packages them together into bonds and sells them to pension funds and asset managers world-wide. Collapsing prices for loans backed by top-tier properties in the Big Apple, which many consider a bellwether for urban markets nationwide, signals there may be more trouble ahead for the more than half-trillion-dollar market for so-called commercial mortgage-backed securities….

Nationwide, signs of stress are mounting. Prices on lower-rated commercial mortgage bonds nationwide have fallen in recent weeks. The extra yield, or spread, investors demand to hold an index of double-B- rated CMBS bonds over 10-year U.S. Treasurys climbed to nearly 20 percentage points as of Thursday, according to data firm Trepp, to their widest levels since the financial crisis. Some bonds have fallen to anywhere from 70 cents to 50 cents on the dollar depending on the industry and credit rating, bankers said….

“Distress in financial markets was all about residential mortgage-backed securities in 2008 and energy in 2015,” said Daniel McNamara, a principal at MP Securitized Credit Partners who is betting prices for some CMBS indexes will fall. “In 2021 it will be all about commercial real estate and the securities linked to it.”

Not so nebulous.

The Wall Street Journal:

Microsoft Corp. MSFT is teaming with Elon Musk’s SpaceX and others as the software giant opens a new front in its cloud-computing battle with Amazon.com Inc.,  targeting space customers.

Microsoft would help connect and deploy new services using swarms of low-orbit spacecraft being proposed by SpaceX, and more traditional fleets of satellites circling the earth at higher altitudes. Microsoft’s initiative targeting commercial and government space businesses, formally launched Tuesday, comes about three months after Amazon Web Services, the e-retailer’s cloud unit, disclosed its space-focused effort.

Some analysts have projected that overall revenue from space-related cloud services could total about $15 billion by the end of the decade, at least several times higher than current levels.

Competition in the cloud between Amazon, the market leader, and No. 2 Microsoft has been heating up in recent years. The pandemic has intensified the fight as companies accelerate their shift to the cloud and make vendor choices that could last for years. At the same time, military and intelligence agencies are ramping up spending on a range of space projects.

Competition in the tech sector. Who’d have thunk it?

Building the stockpile.

Bloomberg:

Agricultural commodity buyers from Cairo to Islamabad have been on a shopping spree since the Covid-19 pandemic upended supply chains.

Jordan has built up record wheat reserves while Egypt, the world’s top buyer of the grain, took the unusual step of tapping international markets during its local harvest and has boosted purchases by more than 50% since April. Taiwan said it will boost strategic food stockpiles and China has been buying to feed its growing hog herd.

The early purchases underscore how nations are trying to protect themselves on concerns the coronavirus will disrupt port operations and wreak havoc on global trade. The pandemic has already upset domestic farm-to-fork supply chains that provided just enough inventory to meet demand, with empty store shelves across the world leading consumers to change their shopping habits.

Random Walk
Money as a Store of . . . Memory.

From The Transactions Role of Money by Joseph Ostroy and Ross Starr (H/t David Andolfatto), an explanation of an oddly beautiful idea.

Two elderly, largely self-sufficient gentlemen live on an island. Having only the most anemic impulses to truck and barter, their sole contact is the irregular exchange of dinners. Since both agree that meal preparation is onerous, they take turns. However, because dinners are exchanged so infrequently and because their memories are not what they used to be, these Robinson Crusoes cannot always agree on who gave the last dinner. On several occasions both have claimed to have provided the last meal. Each gentleman recognizes that this is a self-serving claim since this is what each would like to remember, but neither is sufficiently confident of his recollection to be sure of the truth. These disagreements have produced so much tension and ill-will that dinners are now exchanged even less frequently.

To attenuate this problem, the one who is coming to dinner next picks up a stone and paints it an artificially colored green to distinguish it from other stones and brings it to his host. At the next planning session for a dinner, the most recent host will be reminded by the presence of the green stone that it is his turn to be invited, and he will be expected to bring the stone with him when he arrives. Indeed, without receiving the stone the host may feel justified in turning away his guest as not having the required evidence of an invitation.

This quite rudimentary story reveals an essential feature of monetary exchange. Money is a commonly acknowledged record-keeping device. Here the only information about the past which has to be recorded is who gave the last dinner. Each gentleman “pays” for his dinner by transferring the record of this fact to the other.

— A.S.

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