The Capital Note

Bubble, Bubble, but No Trouble (Yet)

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Welcome to the Capital Note, a newsletter about business, finance, and economics. On the menu today: Bubbles, California’s self-destruction (continued), inflation, weed, and Beethoven.

This will be our last Capital Note of the year, and the conservative temperament being what it is, a spot of gloom seems appropriate.

The stock markets may be struggling a bit today (at least at the time of writing), but after the run seen since the March lows, my thoughts inevitably have turned yet again to the bubbles that are being fueled by the collapse in interest rates.

The Financial Times (my emphasis added):

Sell everything that is not nailed down? In 2020, there was a better option when it came to raising cash: keep the assets while leveraging them as much as you can. Airlines and cruise companies had little trouble tapping capital markets even as their businesses were largely put on ice. Collateral included ships, planes, spare parts, rights-to-routes and even frequent-flyer miles. Investors were so happy to send cash that government aid was often barely required.

The infusions of liquidity helped the likes of Carnival and United Airlines to avoid bankruptcy. In 2021, as consumers start to travel again, these companies can either pay down debt or refinance more cheaply and push out maturities. But if the recovery is slower than hoped, debts will resemble a Gordian knot that cannot be defeated with a simple sword swipe. Complex negotiations will be needed.

Issuers sold junk bonds worth more than $400bn in the US this year. In December, AssuredPartners, sold CCC-rated unsecured bonds at a yield of 5.6 per cent, the tightest pricing ever for eight-year notes of such a low rating, according to S&P LCD.

High-yield debt is typically unsecured. But the proportion with a collateral claim was 14 per cent, ahead of the 9 per cent on average in the previous five years according to analysis from Moody’s. American Airlines, for example, sold to Goldman Sachs notes secured against the “” URL and “American Airlines” trademark. Just what an investment bank would hope to do with such assets if seized is unclear. Goldman must hope it never needs to find out.

There is collateral and there is collateral.


Status as a senior lender with a collateral claim is not all that it is cracked up to be. The boom in leveraged loan issuance means companies have less “cushion” — unsecured junior debt — to absorb losses. Moody’s data show that such cushions in 2019 halved from levels in the late 2000s.

Loose loan documents also allow for “priming” transactions where one group of lenders can push down the collateral of another.

Several lawsuits over priming deals were filed in 2020, including one involving mattress maker Serta Simmons. The next set of court fights will involve companies forced to file for bankruptcies where creditors scratch and claw for assets they think they are owed but whose real ownership is far from clear.

There are omens and there are omens.


The Wall Street Journal:

Home-price growth accelerated in October, as strong demand pushed home sales to a 14-year high.

The S&P CoreLogic Case-Shiller National Home Price Index, which measures average home prices in major metropolitan areas across the nation, rose 8.4% in the year that ended in October, up from a 7% annual rate the prior month. October marked the highest annual rate of price growth since March 2014.

Sales of previously owned homes, which make up the bulk of the housing market, rose in October to the highest level since 2006, according to the National Association of Realtors. Record-low mortgage rates have increased demand, while the supply of homes for sale has remained low, especially at affordable price points.

The Case-Shiller 10-city index gained 7.5% over the year ended in October, compared with a 6.2% increase in September. The 20-city index rose 7.9%, after an annual gain of 6.6% in September.

“The data from the last several months are consistent with the view that Covid has encouraged potential buyers to move from urban apartments to suburban homes,” said Craig Lazzara, managing director and global head of index investment strategy at S&P Dow Jones Indices, in a statement. . . .

A separate measure of home-price growth by the Federal Housing Finance Agency released last week found a 10.2% increase in home prices in October from a year earlier.

While I am sure that an exodus to the suburbs is one part of the story (and tight supply another) the demand for housing is also a function of ultra-low interest rates, both because of what becomes affordable (at least in good times) and because of the idea that housing is seen both as a store of value at a time when underlying faith in the dollar may be faltering (we’ll get to Bitcoin shortly) and because the opportunity cost of ploughing extra cash into it at a time when savings yield so little (we’ll get to the stock market shortly, too) is so low.

So how about Bitcoin?

USA Today:

In May 2019, NFL offensive lineman Russell Okung wrote on Twitter that he wanted his salary to be paid in bitcoin, a type of digital currency.

On Tuesday, he indicated that his wish had been granted.

“Paid in Bitcoin,” he wrote on Twitter.

Okung is receiving half of his $13 million base salary for the 2020 season in bitcoin, according to a news release from Strike, a company that helps users convert traditional money to the cryptocurrency. The company claims that Okung, who is now with the Carolina Panthers, is the first player in league history to receive part of his annual paycheck in the form of a digital currency.

That brought to mind this story from November 2007:

Marie Claire:

Linda Evangelista said she wouldn’t get out of bed for less than $10,000 a day – now, Gisele Bundchen has taken things one step further by demanding to be paid in euros not dollars.

The savvy supermodel, who is the face of more than 20 brands worldwide and has a personal fortune of $150 million (£72 million), has stipulated she wants to be paid in euros for fear the US currency will continue to weaken.

Bundchen’s twin sister and manager, Patricia, revealed that when the model signed her latest deal to represent Pantene hair products, she demanded that the brand owner, Procter and Gamble, pay her in euros.

Patricia told the Bloomberg news agency: ‘Contracts starting now are more attractive in euros because we don’t know what will happen to the dollar.’

In the short term, Bundchen was right. The euro continued to strengthen from around $1.45 in November 2007 to $1.57 or so the following May. Then everything went wrong. In November 2008, it hit $1.27. That sell-off was the product not of the structural problems in the EU’s single currency, which were only beginning to attract attention at that time, but because of one of the paradoxes surrounding the trading of the greenback: It is often regarded a safe-haven currency even in the event of a crisis in or surrounding the U.S.

The euro today trades at around $1.23.

Bitcoin, of course, is enjoying quite a year (although I cannot help noting that this allegedly safe-haven currency fell sharply against the dollar in March, as did gold, although in the latter case for a shorter time). A part of the explanation for that reflects the lack of return from cash or near-cash dollar assets, as well, at some level (probably) inflation fears, but the recent surge has been something else.

Here’s what Tyler Cowen is thinking:

The recent run-up in crypto values seems to be driven by the possibility that major corporations will start adding them to their balance sheets. If you imagine crypto being treated like gold, and constituting say half of a percent of many balance sheets, that would imply a high price for the major crypto assets.


These corporations will want institutionalized, mainstream crypto assets, and they will not mind the notion of more heavily regulated crypto assets and crypto-linked financial institutions.

And note this too:

Cryptocurrency serves some useful purposes. But there are some pretty wild speculations going around. One of the more fundamental problems is that crypto assets can be either useful hedges, or useful forms of payment — but not easily both.

Do read the whole thing.

And then there is the stock market.

The Wall Street Journal:

A strong indicator of stock-market euphoria flashed red last month. Investors borrowed a record $722.1 billion against their investment portfolios through November, according to the Financial Industry Regulatory Authority, topping the previous high of $668.9 billion from May 2018. The milestone is an ominous one for the stock market — margin debt records tend to precede bouts of volatility, as seen in 2000 and 2008.

The month-by-month FINRA data can be seen here. The amounts borrowed had been rising fairly steadily after the March trough ($480 billion, down from $561 billion in January) with signs of slowing in October followed by a November spike echoed also in the market’s performance. Vaccines work. That said, I suspect that, while investors had been prepared to look through the pandemic prior to November (at least to a degree), the underlying drivers of the increase in stock prices between March and the Pfizer announcement were a combination of (1) specific plays, whether, say, pandemic-related, tech-driven (the latter often overlapping with the former) or (allegedly) green, and (2) the way that ultra-low interest rates have forced investors to look somewhere, anywhere for return, and made a nonsense of conventional valuation measures in the process.

Interest rates at these levels are both an invitation to malinvestment and (because of the discouraging signals they send) a disincentive for higher quality corporate investment. That is a combination that is unlikely to end well for investors or anyone else. However, these rates may last quite some time and, while they do so, put a floor under markets (although in the short term keep an eye on the Georgia vote and what it may mean for taxes). This is because however dangerous ultra-low rates may be, they are essential — and will be essential for some time — if the U.S. budget is not to become wholly unmanageable.

But, essential or not, interest rates at these levels will not prevail forever. Something will change: Just pick your black swan.

Happy New Year!

Around the Web

Mike Solana on California’s increasingly dysfunctional relationship with the tech sector:

As the catastrophic state of California’s finances finally begins to set in among politicians, anti-tech media personalities, and far left cultural influencers, the narrative on California’s techxodus — that is, the migration of California’s technology industry out of the state — has shifted from mockery, and “we’ll be better off without you,” to a far more sober, and increasingly-desperate “leaving California is immoral.”

As it is simply too embarrassing for politicians to admit the state needs the technology industry after more than a decade of antagonizing the men and women who built it, and as it is political suicide for incumbent politicians in a one-party state to admit that every one of the problems we’re facing has been created by our elected leaders, a moral argument for tech’s responsibility to California, and specifically the Bay Area, has recently been produced. It goes something like this: young ambitious people moved to the state, and struck gold. But rather than “give back” to the land, they’re leaving with resources they “took” from the region. . . .

It’s hard to blame them:

The San Francisco ruling class did secure a few wins this decade. They managed to ban vapes, scooters (effectively), electric bikes (kind of), and those little plastic swords that free men in free countries are still allowed to stick in cocktail fruit. They failed to ban busses and cafeterias, though somehow succeeded in turning both into symbols of billionaire greed. They also instituted the “San Francisco Office of Emerging Technology,” which in theory prohibits almost every future company and technology from existing in the city without prior approval from the local government. Laws aren’t enforced in San Francisco, so the OET hasn’t really come up. But a company in this city can now be attacked by the Board at any moment, for almost any reason. This is the nature of ambiguous laws in one-party states. In a country where nothing is technically legal, punishment can be meted out for almost any whim or unjust personal reason that can be imagined by small-minded people with political power.

And then there is the little matter of taxes.



For the first time in two years, bond investors are betting that U.S. inflation will average close to 2% per year over the coming decade.

The market’s key measure of price expectations reached 1.981% on Tuesday after touching 1.992% Monday, the highest since December 2018, data compiled by Bloomberg show. The gauge, known as the breakeven rate, is gaining momentum as traders prepare for an economic recovery in 2021 now that a Brexit deal has been reached and as U.S. legislators have approved additional virus-relief aid. The roll-out of vaccinations against the coronavirus is also fueling the move higher.



Almost all the states that legalized pot either require the approval of local officials — as in Massachusetts — or impose a statewide limit on the number of licenses, chosen by a politically appointed oversight board, or both. These practices effectively put million-dollar decisions in the hands of relatively small-time political figures — the mayors and councilors of small towns and cities, along with the friends and supporters of politicians who appoint them to boards. . . .

I think you can guess what happened next.

Random Walk

Beethoven the businessman.

Luis Dias, writing in

Once Beethoven had poured his creative energy to the fullest into a composition, he regarded it as commercial property, deserving the best possible price on the most favourable terms. Of the hundreds of his letters that have survived, a major chunk deals with the mundane business of getting published: pitching a work, complaining about poor terms, bargaining, and correcting proofs. This is hardly surprising; he is perhaps the first composer whose income depended so much on being published, even more so after his crippling deafness gradually put an end to his career as a performer and to some extent as a teacher as well. . . .

Royalties were unheard of then; the publisher bought a work for a flat fee and would then hope to sell as many copies as possible. It was important to sell as quickly as possible because piracy was a very real threat. As there was no copyright, any successful composer’s hit work was highly susceptible to piracy. The pirate could even be the copyist, who could clandestinely make another copy, spirit it out to another publisher, sometimes even before the legitimate one. The threat was so serious that Mozart had his copyists work only in his apartments, under his watchful eye.

Beethoven railed and ranted when he encountered pirated versions of his music. Since he didn’t have the finance for lawsuits, which could end up nowhere – piracy, plagiarism and forgery were regarded as reprehensible, but not against the law – he resorted to sending spluttering, threatening letters to errant publishers and getting public notices published in newspapers. To be pirated was almost a back-handed index of one’s popularity and success.

As payments for compositions were small (for instance, Beethoven settled for 100 florins for his First Symphony, a shockingly low price), a composer had to churn out a lot of music. This gives us a new perspective on the prodigious output of composers of that era: it was driven not just by creative juices but by the need to put food on the table. Ironically, short piano works would fetch a better price than, say, a symphony, concerto or bigger works, for purely commercial reasons. . . .

[One] ploy Beethoven resorted to was to offer a piece to the person who commissioned it and pocketing the fee. He would then defer publication but give that patron exclusive rights to the work in manuscript for a given time (usually six months, as he did with Prince Lobkowitz for his Third Symphony). Once that period was over, he could plug and sell it afresh.

Beethoven’s decision to appoint his brother Karl as his go-between with publishers was ill-advised, as Karl was arrogant and tactless. His letters to publishers (about which many complained) have to be read to be believed – it is a testament to their regard for Beethoven that they didn’t sever their contracts. One notable example of Karl’s unprofessionalism was when he sold his brother’s three piano sonatas (Opus 31) to a Leipzig publisher, despite Beethoven having promised them to another publisher, Nägeli. The brothers apparently “came to blows” in the street over the incident. Beethoven eventually forgave him (“After all, he’s my brother”) but gradually relieved Karl of that duty. . . .

— A.S.

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