The Capital Letter

GameStop: Markets Adjust, Politicians Frown

(Dado Ruvic/Illustration/Reuters)
The week of February 22: GameStop, again, a poor choice for Interior, China’s rare-earths play, and much, much more, including the latest in our new podcast series, the Capital Record.

A   slightly calmer day in the markets yesterday after Thursday’s wild ride, although GameStop — back in the news again after taking off again earlier in the week — stepped up to fill the gap for those who needed a little more volatility in their lives.

But while politicians and lawyers circle, it was revealing to see that markets themselves (or at least the professional end of them) are adjusting to the reality that a Reddit mob might make a mess of their shorting strategies.

From the Wall Street Journal:

Firms across the hedge-fund industry unloaded short positions that gain when stock prices fall, after a handful of stocks touted on Reddit and other social media platforms surged in January. They feared other stocks might experience the same meteoric rise.

The result: U.S. stock-picking hedge funds, which bet on and against stocks, are more tilted toward bullish bets than in any other period since 2010, Morgan Stanley’s prime brokerage unit said in a note this week.

Short interest relative to the shares available to trade for stocks in the broad Russell 3000 index fell to 5.6% on Feb. 22 from 7.5% on Jan. 19, according to S3 Partners, a data-analytics firm. That follows a year-long pattern of hedge funds reducing their short bets as markets soared after March.

“This is the equivalent of the hack on Sony, ” said Bob Sloan, managing partner of S3, referencing the 2014 hack of the Hollywood studio that brought down its email and leaked sensitive data. “Everyone has looked around and said, ‘Wow, this could be me.’” . . .

To protect themselves, hedge funds have gravitated toward bets that spread out their risk, said managers and their clients. Some are following new internal rules to close out short positions before they lose too much money. Others are finding ways to take positions without having to disclose them to the market.

Short interest on U.S. exchange-traded funds has ticked up to 21.4% from 20.3% from mid January, according to the S3 data, a sign that some investors are switching out of single-name shorts into shorts on indexes instead . . .

Some firms are weeding out their portfolios and avoiding crowded trades or small stocks that could get swept up in retail mania . . .

Another lesson from GameStop is to avoid disclosing certain holdings so as to not attract attention from opposite-minded investors. One strategy is to use so-called total return swaps, in which investors pay a bank a fee to earn returns on certain securities but don’t actually own those securities, eliminating the need for disclosure . . .

A hedge-fund manager with $2.5 billion in assets under management said he now uses total return swaps 80% of the time, up from 50% before GameStop.

Given politicians’ perennial desire to be seen to do something, and, among many of them, a distaste for the very idea of shorting (often caricatured as making money out of misery), I wouldn’t be surprised to see total return swaps coming under more scrutiny, and some sort of effort made to increase disclosure.

In the interim, I would expect to see much tougher enforcement of the rules against “naked” short selling, something that is less exciting than it sounds, although, as we saw in the case of GameStop, under certain circumstances, its effect on share prices can be dramatic. Oh yes, it is also illegal in the U.S.

As explained over at MSN Money, in the case of a legal short sale “an investor borrows shares, sells them and then tries to buy them back at a lower price to profit from the difference.” In the case of a naked short, there is no borrow. The seller sells shares to which he simply has no access — at least at the time of sale.


On Jan. 28, the day after GameStop Corp. mania hit its crescendo on the back of a short squeeze for the record books, about $359 million worth of shares were caught in limbo. More than 1 million shares were deemed failed-to-deliver that day due either to buyers lacking cash to complete purchases or sellers not having the shares to settle trades, according to U.S. Securities and Exchange Commission data. . .

While the SEC’s list highlights the extent of the short squeeze, on Reddit’s WallStreetBets forum, where the GameStop trade was galvanized, it’s evidence of something else: the unproven theory that hedge funds were engaged in naked short-selling of the shares.

Short sales — when an investor borrows shares, sells them and then tries to buy them back at a lower price to profit from the difference — are an everyday market occurrence. Naked short selling, the illegal practice of selling shares that aren’t known to exist, is just one possible cause of a failure-to-deliver, with more quotidian reasons being human error and administrative delays.

“Fails-to-deliver can occur for a number of reasons on both long and short sales,” reads a disclaimer on the SEC website. “Therefore, fails-to-deliver are not necessarily the result of short selling, and are not evidence of abusive short selling or ‘naked’ short selling.”

Failed-to-deliver is a polite way of saying that the buyer did not get the share he or she was expecting to receive.

At one point, the short interest in GameStop was reportedly 140 percent of the share’s “free float” (technically, those of its shares that are freely available to trade, although there are narrower definitions) which, on the face of it, might be prima facie evidence of naked shorting. As one hedge-fund manager put it to me, “I can only lend out a share once.”

That is true enough, but the story does not end there. The story is not as simple as that.

The Motley Fool explains:

Even without a naked short sale, it’s theoretically possible for short interest to exceed 100%. The reason has to do with the nature of the short-sale transaction itself.

As an example, take a situation involving four investors. Annie owns shares of GameStop, and Annie and her broker have an agreement that allows the broker to lend Annie’s shares to short-sellers. It lends them to Bob, who subsequently sells those borrowed shares short in hopes that GameStop’s share price will fall.

An investor named Chris ends up buying those borrowed shares from Bob. However, Chris has no way of knowing that those shares have been borrowed from Annie. To Chris, they’re just like any other shares.

More importantly, if Chris has the same kind of agreement, then Chris’s broker can lend out those shares to yet another investor. Diane, another GameStop bear, can borrow those shares and sell them short.

In this example, the same shares end up getting borrowed and sold twice. The short interest volume these transactions add to the total is twice the number of shares actually involved. You can therefore see that if this happened throughout the market, total short interest would eventually exceed the number of shares outstanding and approach 200%.

This still might seem impossible, and in a sense, it is. But part of the answer lies in the fact that there are investors that don’t currently possess actual shares of GameStop but who have the same economic interest as shareholders. They have the right to get back the shares they lent at any time. When you add together the actual shares plus these “synthetic” positions in the stock, the short interest can’t exceed 100% of that larger total.

All clear?

That said, I would not be shocked, shocked to discover that some naked shorting had been going on.

As to the future, and as discussed above, hedge funds, the most active short sellers (notwithstanding, I assume, inverse ETFs), are likely to be a lot more cagey about shorting heavily shorted stocks, particularly smaller stocks). Nevertheless, I would not be surprised if tougher enforcement (and possibly new regulation) on the nature of the confirmation required from a short seller that he or she does indeed have access to borrowed stock before entering an order to sell short will be forthcoming. Whether it is even feasible (or, now necessary: this experience has left some burnt fingers) to put an absolute limit on shorts as a percentage of the shares outstanding is a different question.

It is important, however, that the bear is not thrown out with the bathwater. As I mentioned above short sellers are not popular with politicians. Despite or because of that they can fulfill a highly useful role.

I wrote a bit about this in June. Here’s an extract:

Selling a security short has rarely been a way to make friends, whether with investors, companies, regulators, or even governments. If the Fed’s job included (in more disciplined times) taking “away the punch bowl just as the party gets going,” the short seller was and is the person who tells partygoers that the punch they are so enjoying is, in fact, poison. No one wants to hear that . . .

Short sellers do not always get it right, nor are they philanthropists. They (obviously) aim to make money. But to those who believe that financial markets work best when different investment views are, so to speak, left free to fight it out, short sellers play an invaluable role in helping investors form an accurate picture of what a stock should be worth.

Taking a step back from GameStop itself, I read in the Wall Street Journal that Charlie Munger, Warren Buffett’s long-time business partner, has taken a run at Robinhood, the online brokerage that has played such a key role in the GameStop saga:

“I hate this luring of people into engaging in speculative orgies,” Mr. Munger told The Wall Street Journal from his Los Angeles home. Robinhood “may call it investing, but that’s all bullsh*t.”  [puritanical asterisk added by us].

The snarky response would be to say that if anyone is luring anyone into “speculative orgies” at the moment, it is the Fed, but I understand what Munger means, and he is not entirely wrong about this:

“It’s really just wild speculation, like casino gambling or racetrack betting. There’s a long history of destructive capitalism, these trading orgies whooped up by the people who profit from them.”

But people play the market for many, many reasons, and “wild speculation” has long been one of them. And it still is. SPACs anyone? The idea that the market is entirely made up of wise, careful investors, carefully doing their due diligence and building up detailed models on their spreadsheets before putting their money to work is nonsense, and Munger knows it. Not only that, the mad mix of investor motives is what makes markets work. For every buyer, there must be a seller. And no one has a monopoly on wisdom.

After all, with the borrow standing at 140 percent there was a purely technical case for buying GameStop (I have no views on the company), a case that grew stronger the more people joined in the rush to pick up the stock.

To quote the legendary stock speculator Jesse Livermore (h/t Bloomberg’s John Authers) on what should have been a spectacularly profitable cornering of the coffee market, “There wasn’t any cleverness about it; it was simply that I wasn’t blind.” In the end, that trade did not work out, but only because the rules of the game were suddenly changed:

I added a new one to the long list of hazards of speculation that I must always keep before me. It was simply that the fellows who had sold me the coffee, the shorts, knew what was in store for them, and in their efforts to squirm out of the position into which they had sold themselves, devised a new way of welshing. They rushed to Washington for help, and got it.

I should stress that, on the basis of what we know to date, no analogy can be drawn with Robinhood’s decision to briefly restrict trading in GameStop and other meme stocks, a decision that appears to have been driven by prudence rather than any nefarious motives (Daniel Tenreiro discussed this in two editions of the Capital Note earlier this year).

What’s more, distressing as it may be to the followers of Benjamin Graham (and my own instincts are firmly in the value camp), there is a time when jumping onto the bandwagon is the way to go. And if, in addition, some other people just view the markets as another online casino where they can roll the dice and have some fun, particularly during a time of lockdown, well, that is up to them.

But other, I suspect, than (at some level) a belief that the market ought to be left to professionals (a spokeswoman for Robinhood described Munger’s comments as “disappointing and elitist”), Munger may also be concerned by the financial damage that some meme-stock investors (who also play, even more dangerously, in meme-stock derivatives) may inflict upon themselves. That is a reasonable concern, but in a society with at least some respect for the individual there must be a limit on how far we should go to protect people from themselves.

In a January Capital Letter which included an extensive write-up of the GameStop saga, I wrote this:

Meme stocks will eventually crash back to earth, however close to the moon they get. And when they do, there will be tears, and calls for much tighter regulation. If the relatively recent past is any precedent, that regulation will be heavy-handed, and will result in a market that is far less “democratic” than the Reddit bros would like to see. In the absence of any actionable malpractice, those who have lost out — adults all — will be left to pay the price of their gambling. That experience will be a teaching moment far more compatible with the preservation of free, relatively open markets than anything that our current crop of legislators could dream up. Somehow, I suspect that the opportunity for that teaching moment will be lost, as the rule-setters move in. More clear-eyed investors (large and small) are right to be concerned about what the consequences of that might be.

That should not be read as meaning that investors should be left to fend for themselves. In an article earlier this month, I wrote:

There is a strong argument to be made that investors sometimes need to be protected from themselves. A significant portion of our regulatory structure is designed to do just that, and rightly so. If I were looking at how to improve it, I’d focus on hacking away at the verbiage found in “disclosure” statements. These are often written in language so dense that the only thing that they disclose is their authors’ mastery of obfuscation. Levine’s “clearer and starker and scarier warnings” sound as if they would do the trick. But based on what we have discovered up to now, that is as far as any rule changes flowing from GameStop’s wild run should go.

Well, now that I come to think of it, there are also some helpful technological fixes that might be applied more widely. As someone who has, in the past, dabbled in leveraged ETFs, I was both amused by, and appreciative of, the way that a pop-up would appear whenever I was entering an order for one of these treacherous little instruments with my online broker. Effectively, the brokerage would ask, “Are you sure”? When I went ahead, and those investments turned sour (which might just occasionally have occurred), I knew that I had only myself to blame. And, yes, since you ask, lessons have been learned.

And now the EU is getting in on the act and, needless to say, looks to be getting it wrong.

The Financial Times:

The EU markets watchdog has said it will scrutinise the business models of platforms that have sprung up to offer commission-free trading after the GameStop debacle in the US.

Companies such as Trade Republic in Germany, Bux in the Netherlands, eToro in Israel and Trading 212 in the UK have attracted hundreds of thousands of customers in the EU by offering them a cheaper way to invest in the stock market.

These “neo-brokers” aim to undercut the high commissions that European banks often charge retail investors to buy shares. But their business models now face scrutiny after a surge in fee-free day trading in the US stirred up controversy.

One of the key questions surrounds payment for order flow, in which market makers pay brokers to route trades to them. US brokers earned almost $3bn last year from the practice and while it is a much more limited business in Europe, it has begun to attract more attention.

In an earlier Capital Letter, I quoted Bloomberg’s Matt Levine’s take on this topic. It is a technical (but very worthwhile) read. To understand how payment for order flow works, these paragraphs are key:

Retail brokers send their customer orders to wholesalers. The wholesalers fill the orders at a price better than the “national best bid and offer” on the stock exchange: If the stock is quoted at $58 bid, $58.25 offered on the exchange, the wholesaler might pay $58.10 to buy it and charge $58.15 to sell it. This is called “price improvement.” The wholesaler pockets the rest of the spread (the 5 cents), but it also writes a check to the broker for the broker’s trouble (the 2 cents in my example). This is called “payment for order flow,” …The numbers I am using here are fake, and the breakdown will depend on the stock involved, the brokerage, etc. But we can very roughly assume that, of the value that the wholesaler provides, about 80% is paid to customers in the form of price improvement and about 20% is paid to the broker in the form of payment for order flow . . .

I feel like most of what I read about payment for order flow is insane? Otherwise normal people will start out mainstream explainer articles by saying, like, “Robinhood sells your order to Citadel so Citadel can front-run it.” No! First of all, it is illegal to front-run your order, and the Securities and Exchange Commission does, you know, keep an eye on this stuff. Second, the wholesaler is ordinarily filling your order at a price that is better than what’s available in the public market, so “front-running”—going out and buying on the stock exchange and then turning around and selling to you at a profit—doesn’t work. Third, because retail orders are generally uninformative, the wholesaler is not rubbing its hands together being like “bwahahaha now I know that Matt Levine is buying GameStop, it will definitely go up, I must buy a ton of it before he gets any!”  The whole story is widely accepted but also completely transparent nonsense . . .

That has never stopped Brussels in the past.

Meanwhile, GameStop closed some 7 percent down on Friday afternoon, closing at $101.74, very comfortably over twice where it had closed on the previous Friday. This week, it peaked at over $177 on Thursday.

Yahoo!Finance that same Thursday:

GameStop shares exploded once again…Traders have speculated that the resignation of GameStop’s CFO Jim Bell on Wednesday suggests big changes are in the works at the struggling retailer. Those changes may be driven by Chewy founder Ryan Cohen, who recently won three seats on GameStop’s board and owns more than 12% of the stock.

Then again there was this from the Wall Street Journal today: “One fund manager wondered if a short might be problematic because of its catchy ticker, which could draw Redditors’ attention.”

Reader, I laughed.

The Capital Record

We recently launched a new series of podcasts, the Capital Record. Follow the link to see how to subscribe (it’s free!). The Capital Record, which will appear weekly, is designed to make use another of medium to deliver Capital Matters’ defense of free markets. Financier and NRI trustee David L. Bahnsen hosts discussions on economics and finance in this National Review Capital Matters podcast, sponsored by National Review Institute. Episodes feature interviews with the nation’s top business leaders, entrepreneurs, investment professionals, and financial commentators.

In the sixth episode, our very own Ramesh Ponnuru joined David on a deep dive into all things monetary policy, with a fascinating conversation about what a truly “conservative” view of the Fed looks like in 2021. The views are not what you expect.

Sound and Vision

New Mexico’s Rio Grande Foundation President Paul Gessing joined National Review Institute’s Stephanie Cates and Kevin Hassett, senior adviser to Capital Matters, to discuss President Biden’s energy policy and how it will affect the Southwest and New Mexico.

Spoiler: Not well.

And the Capital Matters week that was . . .

The week began early, on Sunday February 21, with Kevin Williamson asking some engineers about the chaos in Texas’s electrical grid during the previous week’s wintry weather:

Would things have worked out better in Texas if it weren’t on an electrical grid that is separate from the rest of the country?

Probably not, says Professor Wei-jen Lee of the University of Texas at Arlington, who answered questions with several of his colleagues in a panel discussion organized by the Institute of Electrical and Electronics Engineers (IEEE). Lee, the director of the university’s highly regarded Energy Systems Research Center, notes that there was not enough capacity in the surrounding grids to have prevented the Texas blackouts even if the grids had been connected.

Doug Houseman, a grid-modernization expert at engineering-and-construction firm Burns & McDonnell, agreed. “Even if it had been connected, there would have been blackouts, because SPP [the Southwest Power Pool] and MISO [the Midcontinent Independent System Operator] had no excess [capacity], and Southwest [which is distinct from SPP] had only four to six gigawatts, but we were turning off ten-and-a-half gigawatts at that point.” Far from having spare power to share, adjacent grids were experiencing rolling blackouts of their own.

Steve Hanke and Stephen Walters discussed the discrimination against Asian-American college applicants and the way that the market, not the law, is providing an answer:

A prime example is the California Institute of Technology, which is highly meritocratic in its admissions policies. As Asian-Americans have encountered admissions barriers at other elite schools, they now are 43 percent of Caltech’s student body. But Caltech’s failure to pursue demographic “balance” hasn’t harmed its international reputation: The Times Higher Education’s 2020 rankings rated it second in the world — ahead of Harvard (seventh) and every other Ivy. A decade ago, Harvard and Caltech were ranked first and second respectively. Employers have caught on: According to PayScale, early career earnings for alumni of Caltech exceed those for Harvard by 16 percent….

Markets work to penalize bias and reward virtue: Schools that become excessively devoted to identity politics and underweight merit will find their competition gaining on them. Rankings will shift and applicant enthusiasm and alumni support will wax or wane accordingly. In response, all are likely to do a better job shedding their biases — or those that do not will struggle until they see the error of their ways.

Mike Hunter praised the benefits of the Keystone Pipeline for the U.S.:

The president justified revoking the pipeline’s permit on the grounds that the status quo undermined U.S. climate leadership. Yet in addition to the cancellation’s adverse economic consequences, it also negatively affects health and human safety. (A pipeline is a far better and safer way to transport crude oil than freight is.) It also ignores the painstaking measures that the Keystone developers have taken to enforce environmental-safety rules.

Also, despite the president’s supposed priorities, the executive order would lead to the destruction of 10,000 union jobs, as well as the $500 million allocated for indigenous suppliers and a $10 million fund for green-jobs training.

Under President Barack Obama, the State Department published an environmental impact report in 2014 that posited that the pipeline expansion would not have a serious or even substantial impact on greenhouse-gas emissions.

In fact, the impact report stated that the State Department expected extraction of oil in Canada and changes to the environment “regardless of any potential effects” from the Keystone XL project.

Crushing the pipeline-expansion project will instead force companies to adopt riskier modes of transporting crude oil, such as trucks and rail service — an unwelcome prospect to West Virginians especially, who remember the 14 tankers that derailed six years ago. These forms of transportation also increase emissions.

Kevin Hassett proposed a compromise on appointments to the Biden administration:

It might be tempting to obstruct President Biden’s policies by opposing all of his personnel, but our Founding Fathers envisioned a world where the victor gets to govern, and if his policies fail, the voters can hold him accountable. Nominees with controversial positions and statements should, by all means, be rejected. But the assistant secretary of this or that office is necessary to make the government work.

So, even though I am quite confident that President Biden’s regulatory plans are mostly a disaster, if I were in the Senate, here is the deal I would offer my moderate Democratic colleagues: If they promised to be especially tough on the top-level political appointees, and not rally around the most controversial ones, I would agree to allow the ones that are confirmed to build their teams as quickly as possible.

This path will likely not be taken, and many on the right will celebrate that. But if we don’t correct course, few will be foolish enough to try to serve the country.

Robert VerBruggen on another compromise:

Senators Tom Cotton and Mitt Romney are offering a compromise. Under their new proposal, the minimum wage would rise to $10 by 2025, phasing in gradually once the pandemic ended. In addition, businesses would be required to use the “E-Verify” system to ensure their workers were in the country legally and eligible to work.

It’s something that should resonate with the public. Minimum-wage hikes, including big ones, are unfailingly popular; E-Verify has lopsided support in opinion polls as well. And it’s a good deal for immigration-restrictionist conservatives, because the wage hike is relatively modest while the immigration reform is substantial. The haunting questions are how many Democrats could support this without major changes and just how furious the business wing of the GOP will be.

On the minimum-wage side of the equation, $10 by 2025 is a decent-sized hike, but it’s not too ambitious. Indeed, it would be historically typical. The last time we hiked the minimum wage, we gradually phased it up to $7.25 in 2009, from $5.15; if that had been pegged to inflation, it likely would have ended up somewhere around $9.50 to $10 after 16 years. Ten dollars is also about half the nationwide median wage ($19.14 in 2019), a level at which job losses should be minimal or even nonexistent, depending on which academic studies you believe. And if nothing else, $10 is much less crazy than $15 . . .

Paul Gessing warned that the nomination of New Mexico congresswoman Deb Haaland for secretary of the Interior was not good news:

At Interior, Deb Haaland would be a cheerleader for Biden’s early anti-energy policies and would likely look for opportunities to expand upon them. She has taken radically anti-fossil-fuel positions throughout her political career. In 2016, prior to being elected to Congress, Haaland traveled to North Dakota to cook food for the protesters demonstrating against the Dakota Access Pipeline. She stayed in the camps for four days that September.

In May 2019, the newly minted congresswoman told The Guardian, “I am wholeheartedly against fracking and drilling on public land.” . . .

Are Haaland’s positions and opinions based on sound science and history? In a 2019 Los Alamos Monitor story, Haaland claimed that “climate change in the U.S. started when Europeans arrived and started killing the buffalo.” Considering the numerous, dramatic changes that were a feature of the climate in prehistoric North America (and everywhere else on this planet), Haaland’s understanding of environmental forces is a bit off.

Given her radical views, it is not surprising that Haaland has been a strong supporter of the Green New Deal. The ambitious plan put forth by Representative Alexandria Ocasio-Cortez (D., N.Y.) and others would cost trillions in subsidies and lost economic activity. Among the plan’s radical proposals is a mandated shift to 100 percent renewable electricity by 2030 and an increase in the top marginal tax rate to 70 percent.

Travis Nix proposed a tax tweak:

A slight tax change in the way firms deduct losses could help small businesses survive, while having no impact on the deficit over the long run.

Joe Biden could help thousands of small businesses survive the pandemic by allowing them to accelerate their Net Operating Loss (NOLs) deductions, using it now rather than having to wait and carry them forward to future tax years. This policy would allow businesses to monetize the losses they incur and receive a tax rebate based on their tax rate. For example, a corporation that incurs $100,000 in losses gets a rebate of $21,000 since the corporate tax rate is 21 percent. To provide the maximum benefit to pass-through firms — that is, business owners that choose to pay their business taxes on their individual taxes — the tax refund should be set at the top individual tax rate of 37 percent. This change would provide a desperately needed cash cushion to thousands of businesses that cannot take advantage of the NOL deduction this year.

The NOL deduction is critical to helping firms survive economic downturns by smoothing out their tax expenses. It allows businesses to carry forward their losses to future tax years and deduct them from their future profits, or, thanks to the CARES Act, to temporarily carry them back to previous tax years and get a tax refund on previously paid taxes.

Ramesh Ponnuru examined the possible political consequences of indexing the minimum wage:

I wouldn’t be so quick to dismiss the idea that indexing would reduce the political pressure for legislation to raise the minimum wage. Supporters of a higher minimum wage emphasize that the law hasn’t kept up with inflation, presumably because they think it’s one of their strongest arguments. Indexing would largely deprive them of it. (I say “largely” because they could still say the adjustment used too stingy a measure of inflation.)

And while raising the minimum wage is always popular, as Strain writes, it’s not so popular that it happens frequently. The last three times Congress passed legislation to raise it came in 1989, 1996, and 2007. We got through the Obama administration without an increase.

But which direction does this fact cut? Maybe it means that we don’t need to tie the minimum wage to inflation to fend off legislated increases — they’re being fended off pretty well as it is. Or maybe they would happen even less frequently with indexing . . .

Robert VerBruggen looked at Josh Hawley’s wage proposal:

Basically, for the next three years, workers making less than $16.50 an hour (rising with inflation) would receive a refundable tax credit worth one-half of the difference between their hourly wages and that number, up to 40 hours per week. So someone making $10 an hour would get a credit worth $3.25 an hour.

In my writing on the minimum wage, I’ve often made the point that if we want workers to be paid more, we should do that with taxpayer dollars — not by killing jobs, interfering with the contracts between workers and their employers, and driving up prices for customers as well. Hawley’s idea is one way of doing this.

There are some legitimate concerns about the plan too, though . . .

Steve Hanke warned about the way that China could take advantage of its key position in rare earths:

The Financial Times broke an important story on February 16 in which it detailed how China is drawing up plans to disrupt the U.S. defense industry. Not for the first time, it seems that China is considering using its control over rare-earth metals that are crucial for the production of many weapons, including the F-35 fighter jet, to cause difficulties for the U.S. To put this in context, an F-35 contains 417 kilograms of valuable rare earths — minerals over which China has a virtual choke hold. Just what are rare earths? They cover 17 important elements in the periodic table, including many elements that are not household names, such as Dysprosium, Praseodymium, and Ytterbium.

And that’s not all. China has an outsized dominance in what I term the Three Ms: 1) Mining and Mineral Engineering, 2) Metallurgical Engineering, and 3) Materials Science and Engineering. When it comes to rare earths and the Three Ms, China is fully aware of just how strategically important their position is.

As the Global Times, a state-owned Chinese newspaper, put it: Rare earths are “an ace in Beijing’s hand.” As far back as 1992, Deng Xiaoping stressed that “the Middle East has oil; China has rare earths.” Importantly, China knows that rare earths can be weaponized. In May 2019, China’s Natural Development and Reform Commission, a body that oversees Chinese policy shifts, pointedly brought up rare earths in a question-and-answer bulletin regarding the prospects of a rare-earths-export ban. The notice read: “Will rare earths become China’s counter-weapon against the US’s unwarranted suppression? What I can tell you is that if anyone wants to use products made from rare earth to curb the development of China, then the people of the revolutionary soviet base and the whole Chinese people will not be happy.” And now we learn from the FT that the Ministry of Industry and Information Technology is refining China’s rare-earths-weaponization strategy . . .

Ramesh returned to write about the Fed and asset values:

I think the main way that Fed policy has increased asset values is by raising expectations of future spending levels throughout the economy — that is, expectations of nominal spending and nominal income — which also boosts wages and employment. Those latter effects are particularly helpful to people with little income or wealth. A tighter policy would have kept stock owners from making the gains attendant on expectations of a healthier economy in the future, but the trade-off would have been not getting that healthier economy. So the increase in inequality seems to me to be worth it.

A few caveats though. First, I don’t care much about economic inequality per se. If households at the 20th and 50th percentiles of income are making progress, it doesn’t bother me that households at the 90th percentile are making even faster progress. Not everyone thinks this way. Second, if your view of the mechanism by which Fed policy has affected asset values and the economy is different, you may well reach different conclusions. If, for example, you think that the Fed has been holding interest rates below their natural levels for years and thus “artificially” boosting asset prices, the picture will look a lot worse. But I don’t think that’s correct.

James Broughel picked his way through yet more the wreckage of Biden’s claims that he would be a unifier:

There were many who hoped that after the partisan divisions of the Trump years, President Biden would try to bring the country together by governing from the center. Given a recent spate of executive actions, however, Biden seems more focused on undoing Trump’s policies, including some that were sensible and bipartisan. Biden campaigned on bringing a different approach to American politics, but so far he has stuck to a script that owes more to ideology and partisanship than to “unity.”

A case in point comes from Biden’s recent executive order, “Revocation of Certain Executive Orders Concerning Federal Regulation.” Signed on the president’s first day in office, it repealed six of Trump’s executive orders in one fell swoop, such as the famous “2-for-1” requirement that two regulations be eliminated for each new one.

The 2-for-1 order was never likely to survive the arrival of a Democrat in the Oval Office, but several other changes were more surprising, such as the repeal of a 2019 executive order on “Promoting the Rule of Law Through Improved Agency Guidance Documents.” This one included some fairly uncontroversial and bipartisan elements . . .

Finally, we produced the Capital Note, our “daily” (well, Tuesday–Friday, anyway, except when it’s not: one day mysteriously went astray this week). Topics covered included: a defense of macroeconomics, inflation expectations rising, tech-stock tumbling, a look at Paul Romer’s 1990 paper on technological progress, inflation jitters, the Reddit/Tesla connection, taxes and their consequences, Mars rewards, The Dictatorship of Woke Capital, inflation fears deflate stocks, from pipeline to railroad, China’s (latest) green-jobs threat, working from the office, and crime and the minimum wage.


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