The Capital Note

The Capital Note: Betting on a Biden Binge

Democratic presidential candidate Joe Biden speaks during a campaign stop at the East Las Vegas Community Center in Las Vegas, Nev., October 9, 2020. (Kevin Lamarque/Reuters)

Welcome to the Capital Note, a newsletter about business, finance and economics. On the menu today: Betting on a Biden binge, Jack Ma’s (mini) Khodorkovsky moment, Estonian tax, the return of sail, commercial real estate woes, and execution vs. exorcism — an economic case study.

Betting on a Biden Binge
There’s an election on?

Well yes.

As of the time of writing (11:55 a.m.), the S&P and Dow are both up strongly, driven by investors’ hopes of a Biden win, and, more specifically, that, after that win a spending spree will ensue. If I had to guess (and my record as a forecaster is not the best), they are probably correct on both counts. The prospect of a Biden binge is also hitting the dollar and the price of Treasuries.

The Financial Times:

The benchmark 10-year Treasury yield rose 0.05 percentage points to touch 0.899 per cent, the highest level since early June. At the start of October, it hovered below 0.7 per cent. The 30-year yield advanced by a similar margin to 1.67 per cent.

Hope can take markets a long way, and it wouldn’t surprise me if (in the absence of post-election chaos) we continue to see share prices rising in the aftermath of a Biden win (to repeat myself, my record as a forecaster is not the best). Whether that is entirely wise is a different matter. A stimulus package would certainly help the economy stay (roughly) on track in the event that the country goes through the twin agonies of a COVID winter and clumsy governmental overreaction to the current resurgence in the virus.

To believe, however, that it will deliver long-term growth is a different matter: That’s just not what massive expansions in government spending tend to do. And this, I suspect, will be the case with Biden’s, even more so as its green aspects give off more than a whiff of central planning and, quite explicitly, will involve a dramatic reduction in the asset value and the earnings potential of much of America’s successful energy sector.

The best chance of delivering long-term growth will be revived dynamism in the private sector. That will rake a willingness to invest. One of the explanations for the sluggish performance of the economy in the years after the financial crisis was that it had “permanently” heightened perceptions of risk (I have written about this in an earlier Capital Letter) and thus increased the hurdle rate for future investment. If that was indeed the case (and it seems credible to me), I wonder what both memories of the pandemic and the realization that the government can shut down a business “just like that” are going to do to the way that businesses weigh risk.

There’s also the little matter of the signal sent by ultra-low interest rates. Theoretically, ultra-low interest rates should be an incentive to invest, but they send a downbeat message that is unlikely to fire up the animal spirits needed to get a boom going.

And finally, I’ll admit to finding it hard to see how revived regulatory vigor and the introduction of higher personal (for many, whether directly or indirectly) and corporate taxes are going to encourage businesses to invest and consumers to spend.

Meanwhile, as Daniel noted yesterday, a Hoover Institution report released last week and covered for Capital Matters by Kevin Hassett finds that Biden’s economic agenda would reduce long-run per capita GDP by more than 8 percent if fully implemented.

If that indeed looks like becoming the case, and if investors start to pay attention, there could be trouble ahead, even more so if interest rates start a sustained move upwards.

Best guess: Investors’ Biden binge will be followed by a Biden hangover. 

Jack Ma’s (mini) Khodorkovsky Moment?
At the time of his arrest, Mikhail Khodorkovsky was probably Russia’s richest man, but he had made two big mistakes (other than staying in the country). He was the owner of assets that other people wanted, and he was beginning to dabble in politics. Putin then put him in his place, which was, for a decade, in prison. He now lives in exile.

Now to today’s news about Jack Ma.

The Financial Times:

Ant Group’s $37bn public offering in Shanghai and Hong Kong has been suspended by Chinese regulators, one day after officials summoned Jack Ma and other Ant executives for an interview.

China’s largest financial technology company was set to list on Thursday in both cities in a record-breaking IPO.

The Shanghai stock exchange said in a statement that Mr Ma, Ant’s founder, had been called in for “supervisory interviews” and there had been “other major issues”, including changes in “the financial technology regulatory environment”.

“This material event may cause your company to fail to meet the issuance and listing conditions or information disclosure requirements,” the exchange said. “Our exchange has decided to postpone the listing of your company.” It told Ant and its underwriters to make an announcement about the suspension.

Ant said in a statement to the Hong Kong stock exchange that its offshore share offer had also been suspended because the company “may not meet listing qualifications or disclosure requirements due to material matters relating to the regulatory interview of our ultimate controller, our executive chairman and our chief executive officer by the relevant regulators and the recent changes in the fintech regulatory environment”.

To say that this is significant is an understatement. The postponement (?) of this IPO is, on its face, a massive own goal for China, Inc., as the regime in Peking will be very aware, even more so at a time when American de-listings of Chinese companies are on the agenda.

At the same time, however, someone thought that was a price worth paying.

Scroll down, and we discover why:

At the end of October, Mr Ma criticised China’s state-owned banks at a financial summit in Shanghai. Mr Ma suggested the big banks had a “pawnshop mentality” and that Ant was playing an important role in extending credit to innovative but collateral-poor companies and individuals.

On Monday, Mr Ma, together with Eric Jing and Simon Hu, Ant’s chief executive and chairman, were called in by the People’s Bank of China, as well as China’s banking, securities and foreign exchange regulators. Subsequently, Ant said it would “implement the meeting opinions in depth”.

Describing the nature of the Chinese state is not straightforward. However tempting it may be to label the dictatorship as just another bunch of murderous commies, the truth is more complicated, and involves a strong element of corporatism. One element of corporatism is the way that nominally independent companies are ultimately subordinate to the state.

Shrewder, perhaps, than Khodorkovsky, Ma understands that. Thus Ant’s “agreement” to “implement the meeting opinions in depth.”

But if the leadership in Peking wanted to make the point that no one, not even someone as rich, famous and internationally connected as Ma, could step out of line, submission and contrition would not be enough.

The Financial Times:

Guo Wuping, an official at the banking regulator, advocated greater regulation of Ant and other financial technology companies in a commentary on Monday, noting their consumer lending products charged higher fees than credit cards issued by banks.

Mr Guo said fintech companies often lured young people into overspending so that “some people in low income groups and young people fall deep into debt traps”.

Meanwhile, the PBoC and China’s banking regulator jointly released new draft regulations on online lending on Monday, which will oblige Ant to cap loans at either Rmb300,000 ($44,843) or one-third of a borrower’s annual pay — whichever is lower. The rules could also make issuing loans across China’s provinces harder and analysts say they may dent Ant’s bottom line.

Ant apologised to investors and said it would “keep in close communications with the Shanghai Stock Exchange and relevant regulators, and wait for their further notice with respect to further developments of our offering and listing process”.

There was also this little detail from the FT yesterday (my emphasis added):

In a brief statement on Monday, the PBoC, the China Banking and Insurance Regulatory Commission, the Securities Regulatory Commission and the State Administration of Foreign Exchange said they had “conducted regulatory interviews with Ant Group’s actual controller Jack Ma, chairman Eric Jing, and chief executive Simon Hu”.

The regulators provided no further details, but the Chinese word used to describe the interview — yuetan — generally indicates a dressing down by authorities.

When Ant decided to go ahead with its public offering this summer, two senior people at the company said they had received assurances from people at the PBoC that regulatory issues would not be a problem.

If I were Ma, I might think of getting out of China.

Around the Web
Europe’s best and worst tax systems.

Tax Foundation:

Our recently published 2020 International Tax Competitiveness Index (ITCI) measures and compares how well OECD countries promote sustainable economic growth and investment through competitive and neutral tax systems. This week, we examine how European OECD countries rank on individual taxes, continuing our series on the ITCI’s component rankings.

The ITCI’s individual tax component scores OECD countries on their top marginal individual income tax rates and thresholds, on how complex the income tax is, and on the tax rates levied on income from capital gains and dividends.

Top (unsurprisingly to anyone who follows that part of the world) is Estonia.

Estonia has the most competitive individual tax system in the OECD. The Baltic country levies a top marginal income tax rate of 20.4 percent on wage income, the second lowest rate in the OECD. Estonia applies the top rate at 0.4 times the average national income, making it a relatively flat income tax.

Estonia’s labor tax payments are largely automated, resulting in one of the easiest income tax systems to comply with in the OECD. An Estonian business spends on average only 31 hours a year to comply with labor taxes, compared to the highest compliance burden of 169 hours, in Italy.

Due to Estonia’s cash-flow tax on business profits, there is no separate levy on dividend income, setting the dividend’s tax rate to zero percent. Capital gains are taxed at a rate of 20 percent, close to the OECD average of 19.2 percent and aligned with its corporate tax.

I may tend to grumble about climate warriors, but this is rather splendid . . .


Cargill Inc., the world’s biggest agricultural commodities trader, plans to harness wind power by fixing massive wing sails to some of its cargo fleet to reduce fuel use and greenhouse gas emissions.

Shipping is responsible for about 90% of world trade, and it also accounts for almost 3% of man-made carbon-dioxide emissions. The industry has vowed to cut greenhouse gas emissions by 50% by 2050, from 2008 levels. How it gets there and what new fuel technologies it uses to replace traditional petroleum-based ones is still up for grabs.

Cargill wants to add — in an as yet untested idea — solid wing sails, as high as 45 meters (148 feet), attached to the decks of cargo ships with specially designed hulls which the trader and its partners say could reduce fuel use by as much 30%. Minnesota-based Cargill has some 600 vessels under charter at any given time.

I’ve written before about growing problems in the commercial real estate sector. Now there’s this (via The Wall Street Journal):

Some of the most conservative real-estate funds are suffering from falling property values, putting their fund managers in a tough spot as investors look to cash out.

These real-estate investment vehicles are known as “core” funds because they buy higher quality properties and limit their debt. The biggest core funds have raised billions of dollars from pensions and other institutional investors that seek steady, lower-risk returns.

Now that the pandemic has caused values of hotels, retail properties and even many office buildings to tumble, investors are lining up to cash out of these funds. That has put fund managers in a bind: They either have to sell property into a stormy market to raise that cash, or tell investors they can’t get some or all of the money they want back.

The San Diego Employees Retirement System tried to redeem about $85 million from the $9.5 billion AEW Core Property Trust in the first quarter, but its consultant said it has received only a fraction of its request. “To date, 16% has been paid, and it will likely take several quarters to receive the full amount,” said a September report from Townsend Group.

Random Walk
The research itself is behind a paywall, and I haven’t read it. Halloween is also over, but this is too good not to post here:

A long history of research on the witchcraft hysteria in Massachusetts Bay Colony in 1692 contends that a group of Puritan ministers, including Salem Village’s Samuel Parris, developed and used the witchcraft hysteria in order to boost religiosity and church attendance in an effort to augment corporate and personal wealth. In carrying out this effort, these ministers pitted churched colonists against unchurched colonists, resulting in the wrongful convictions of 20 American colonials. This study argues that it might have ended without the executions of the colonists, and perhaps in even greater corporate wealth for the Puritan church, had Puritanism been receptive to the potential market-pull innovation represented by exorcism. Scrutiny of this proposition through the lens of rational choice theory suggests, however, that exorcism was inferior to executions as a technology choice for the congregant-maximizing Puritan ministers in Salem Village in 1692.

H/t: Marginal Revolution.

— A.S.

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