The Capital Note

The Capital Note: Amazon Damned (by the EU)

Amazon boxes stacked for delivery in New York City, N.Y., January 29, 2016. (Mike Segar/Reuters)

Welcome to the Capital Note, a newsletter about business, finance and economics. On the menu today: the EU takes on Amazon, the greening of the Fed, Argentina and Lucy’s football, a REIT mess, the business of witchcraft, and the Treasury market’s plumbing.

A tough day in the markets for the tech sector, mainly as investors start to adjust to the idea that a post-vaccine world may be in sight. We’ve talked before how that can leave some of the tech names, such as an Amazon, which have been revalued (partly) because of their ability to weather (and indeed even benefit from) the pandemic, vulnerable due to their high valuation.

And what’s true of Amazon is even more so when it comes to pandemic plays such as Zoom.

And so, it came as no great surprise to read this in the Financial Times:

A global shift away from highly priced technology stocks continued on Tuesday as investors adjusted their portfolios following a breakthrough in the hunt for a Covid-19 vaccine.

The technology-heavy Nasdaq Composite sank 1.4 per cent in New York in mid-afternoon trading, compared with a fall of 0.3 per cent for the blue-chip S&P 500 share index. Tech was also the worst-performing sector in Europe’s Stoxx 600 index, as other segments such as financials pushed ahead.

Meanwhile, the Russell 2000 grouping of small-cap stocks, seen as a barometer of the US economy, rose 1.6 per cent.

Pierre Bose, chief investment officer at wealth manager Tiedemann Constantia, said some “faster money” was selling out of the tech sector, partly to take profits after a sustained rally, and on the expectation that sectors more closely linked to the economy would benefit if the arrival of a vaccine allowed social restrictions to be eased.

Could you see a short-term rotation into cyclicals right now and into things that have been really beaten down? Absolutely,” he added.

Investors have shunned companies that have been winners during the pandemic. Amazon’s shares fell about 3 per cent while Zoom, the videoconferencing app, slid 7 per cent. The London-listed online grocery retailer Ocado lost 5 per cent.

Meanwhile, Amazon shareholders should keep an eye on what is happening across the pond.

The Financial Times:

The EU has hit Amazon with formal antitrust charges over its treatment of the 150,000 European merchants selling goods through its website.

Margrethe Vestager, who oversees the EU’s competition policy, outlined two sets of concerns against the world’s dominant online retailer.

After a year-long probe, the European Commission reached the preliminary view that Amazon breached EU competition rules by using non-public data it gathers on sales on its website to boost its own-label products and services.

The EU has separately opened a second formal antitrust investigation into whether Amazon gave preferential treatment on its site to its own products and for sellers who paid extra for Amazon’s logistics and delivery services.

“We must ensure that dual-role platforms with market power, such as Amazon, do not distort competition,” said Ms Vestager. “Data on the activity of third-party sellers should not be used to the benefit of Amazon when it acts as a competitor to these sellers.”

No one should think for a moment that this action has anything to do with improving competition. What Vestager is doing, and has been doing for a while now, is weaponizing antitrust for mercantilist purposes.

In 2000, the EU’s “Lisbon strategy” set the bloc the target of achieving “the most competitive and dynamic knowledge-based economy in the world capable of sustainable economic growth with more and better jobs and greater social cohesion” by 2010.

That didn’t work out — and, given the dismal history of central planning (and the EU’s ingrained hostility to free enterprise), it was never likely to. But the bitterness felt by Brussels over its failure in this area was only intensified by America’s success, something that the EU’s Brussels’ technocrats found difficult to accept. Their rationalization for this failure, in public at least and whether they believed it or not, was that the blame lay not with the inadequacies of the EU model, but with American “cheating.” If that could be remedied, European champions would emerge.

Vestager, a woman known neither for her humility nor her intellectual honesty, took (and is taking) the EU’s protectionism in this respect to quite remarkable levels, peaking (so far) with her claim that Ireland’s tax policy was unfairly favorable to Apple, a piece of presumption that has so far proved to be too much for the European Court of Justice.

We have discussed this topic frequently on Capital Matters (you can find an introduction to it in a Capital Note from mid October and, indeed, plenty of discussion in NR of this issue over the years). We will be running another article on this subject tomorrow on Capital Matters.

The American response ought to be to treat such “antitrust” cases as the protectionist policymaking they are, and to respond with an appropriate level of tariff retaliation. Sadly, we cannot be sure that Washington, whether in the days of a waning Trump administration, or in the Biden era to come, will be prepared to do that.

By launching its ill-judged antitrust litigation against Google, Trump’s Justice Department has sent a message to Brussels that America’s high-tech sector cannot rely on Washington’s support, a message that may well be amplified under Biden.

Worth watching.

The Greening of the Fed (Continued)

From the Capital Note in late August:

It is not a bad rule of thumb that, when something political is concerned and someone or something is described as “evolving” that is a bad sign.

So it was not altogether reassuring to read in the Wall Street Journal yesterday that, in the view of the Senate Democrats’ Special Committee on the Climate Crisis, “the Fed appears to be evolving on the issue of climate risks.”

Now Reuters, yesterday:

The U.S. Federal Reserve for the first time called out climate change among risks enumerated in its biannual financial stability report, and warned about the potential for abrupt changes in asset values in response to a warming planet.

“Acute hazards, such as storms, floods, or wildfires, may cause investors to update their perceptions of the value of real or financial assets suddenly,” Fed Governor Lael Brainard said in comments attached to the report, released Monday.

Brainard is, incidentally, being talked about as a possible Biden pick for Treasury secretary.

“Increased transparency through improved measurement and more standardized disclosures will be crucial,” Brainard said. “It is vitally important to move from the recognition that climate change poses significant financial stability risks to the stage where the quantitative implications of those risks are appropriately assessed and addressed.”

This is, in effect and however indirectly, legislation by regulation, and whether a central bank should be doing it, well . . .

From Reuters today:

Having pushed policy into unchartered territory, even at the cost of some legal challenges, with oversized bond purchases and negative rates, central bankers are now discussing doing even more.

The Fed is now openly talking about wanting to help lower income families, while the ECB is calling for a greater role in the fight against climate change.

This is raising questions about the actual role of unelected bureaucrats with vaguely defined mandates.

You don’t say.

Expect much, much more of the same, especially if the GOP blocks Democratic control of the Senate by prevailing in Georgia and expect it especially where climate change is concerned.

Around the Web

Argentina, football, Lucy, Charlie Brown.

The Financial Times:

Market nerves are still clear in Argentina’s government bonds. Since a successful restructuring of $65bn of foreign debt in early August, the price of Argentina’s benchmark bond maturing in 2035 has fallen from 46 cents on the dollar to 37 cents, deep into “distressed” territory, betraying concerns that the country could default on its sovereign debt for a tenth time.

Successful for whom?

Meanwhile, the gap between the official and unofficial exchange rates, a reliable indicator of investor confidence, has reached the highest level in decades. The value of the dollar on the black market shot up from around 130 pesos in early August to more than 190 pesos in late October, although it has since fallen back to around 150 pesos in response to the state efforts at support. The official exchange rate has moved more slowly, with the dollar climbing since August from 72 pesos to 79 pesos.

For “black market” read free market.

“Either they solve the underlying situation and stop the fiscal bleeding, and start absorbing some pesos [to] anchor the currency, or they continue with short-term stop-gap measures that just delay the inevitable [devaluation],” said Diego Ferro, founder of M2M Capital Management.

He described the aftermath of the debt restructuring as a “bad joke”, given that normally, debt relief provides a fresh start that fuels a market rally. But “it was so poorly planned that it was wasted. Without a [macroeconomic] plan, all the goodwill generated lasted about a week . . . it’s hard to think that they will not have to restructure again.”

Daniel Marx, a former finance secretary, warns that the current situation is “fragile”, fearing that it will be “very difficult” to reverse the trend of declining foreign exchange reserves. “Money from the IMF will help, but it is not as important as creating [an economic] framework that enables capital inflows, rather than outflows.”

Ultimately, foreign exchange pressures will not abate until Argentina presents a credible path to sustainable fiscal accounts, argued Mr Czerwonko [the chief investment officer for emerging markets in the Americas at UBS Global Wealth Management].

Given low interest rates in developed markets, global investors are engaged in “an aggressive search for yield”, he said. “If Argentina sends the right messages, the market could quickly change its perception of the country.”

So long as the Peronists are in government that will be a mistake.

We’ve written a bit before about trouble in the commercial real estate market (and its derivatives).

Now this, via The Wall Street Journal (my emphasis added):

Mall landlords are starting to seek bankruptcy protection or shutting down, the latest signs that the pandemic is deepening a crisis that began before Covid-19.

CBL & Associates Properties Inc. and Pennsylvania Real Estate Investment Trust, two midsized publicly listed mall owners, said last week they were filing for chapter 11 bankruptcy protection after their earlier debt-restructuring efforts failed. Both companies said they have secured support from a majority of their respective bondholders entering the bankruptcy process and hope to emerge from it as soon as possible.

While retailers like Neiman Marcus Group Inc., Brooks Brothers and J.C. Penney Co. have filed for bankruptcy in recent months, it’s rare for real estate investment trusts that own malls or shopping centers to do so. That is because REITs have more conservative debt levels than many retailers. They also have multiyear leases across a wide variety of tenants.

Witching, Ours.

Superstition has been a seller for a long time, so there were not too many surprises in this Business Insider article on “how witchcraft became a multi-billion dollar industry.”

But this, initially, took me aback, not least because what we describe as witchcraft today is, when not entirely invented (quite a bit of it by a mid twentieth-century Brit) then wildly syncretic:

In 2018, cosmetics giant Sephora launched their $42 “Starter Witch Kit”, containing sage, tarot cards, and rose quartz. After witches around the globe decried it as cultural appropriation, Sephora pulled the product from the market.

Then again, in 2020, how surprising really were the complaints or, for that matter, the capitulation?

Random Walk

The Economist:

The Treasury market has long been able to strike fear into the hearts of the powerful. Frustrated by worries in the 1990s that bond yields would spike if Bill Clinton, then America’s president, pushed through economic stimulus, James Carville, his adviser, joked that he wanted to be reincarnated as the bond market, because “you can intimidate everybody”.

In the quarter-century since then, Treasuries have only become more pivotal to the world’s financial system. The stock of tradable bonds amounts to $20.5trn, and is expected to approach 100% of America’s gdp this year, roughly double the share in the 1990s (see chart). The dollar’s dominance means that everyone holds them, from American banks and European pension schemes to Arab sovereign-wealth funds and Asian exporters. The yield on Treasuries is known as the “risk-free” interest rate, and underpins the value of every other asset, from stocks to mortgages. In times of stress investors sell racier assets and pile into Treasuries.

On October 14th Randal Quarles, the Federal Reserve’s regulatory boss, said that the Treasury market’s expansion over the past decade “may have outpaced the ability of the private-market infrastructure to kind of support stress of any sort”. His comments were prompted by the fear of a repeat of the extreme stresses in March and April, as the economic threat of covid-19 became clear. Usually a haven, the Treasury market convulsed. The bid-ask spread—the gap between the price at which you can buy a bond and that at which you can sell—was 12 times its typical level. The spread between “on-the-run” bonds, which are recently issued and tend to be most liquid, and older “off-the-run” Treasuries widened. Investors rushed to dump their holdings. Municipal-bond yields, which tend to trade at 60-90% of Treasury yields, spiked above 350%. The chaos spread to corporate-debt markets and panicked equity investors, forcing the Fed to act.

To understand why the Treasury market broke down, consider how the burdens on the system have grown. The debt stock has risen from $5trn in 2007, owing to stimulus after the financial crisis, deficits under Donald Trump, and stimulus this year. At the same time, “the provision of credit to households and businesses has become much more market-based and less bank-based,” Nellie Liang of the Brookings Institution, a think-tank, said at an event held by the New York Fed in September. Non-bank firms facing redemptions in a crisis rely on selling Treasuries to meet demand, placing further strain on the system.

And that debt stock is only going to rise, meaning that the market’s “plumbing” will matter even more.

Read the whole thing.

— A.S.

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