Random Musings on Markets 2019: Definitely Musings

This week, our certainly-not-an-every-Friday-thing roundup of strange financial news brings you another look at CEO virtue-signaling, the latest in fads, a peek at ultra-long bonds, strange stimulus ideas and what some pundits suspect is new (and very old) leverage in Trump’s tiff with China. Please enjoy the read!

Virtuous CEOs Feel Left Out, Signal Own Virtues

Last week, we poked a bit of fun at the notion of a big Tech company serving its community stakeholders—potentially by shutting down in order to relieve traffic and a housing crisis. But there is one group who took the Business Roundtable’s pledge to serve “stakeholders” as well as shareholders a little bit more seriously: CEOs of Certified B Corporations. Thirty of them joined forces on a full-page ad in The New York Times to send an open letter to the Business Roundtable, which in addition to being a coded we did it first scream for attention, basically encouraged the nearly 200 Business Roundtable CEOs to walk the walk by … becoming B Corporations.

For those who have better things to do with their time than explore the inner workings of corporate structure, the B Corporation designation is not a legal designation like C Corporation, S Corporation, Limited Liability Company or what have you. It has no bearing on tax filings, and we reckon the IRS and business regulators consider it irrelevant. Rather, it is a third-party certification offered by a private non-profit called B Lab. You get their fancy seal if you score enough points on their arbitrary questionnaire on “social and environmental performance,” put some stuff about serving stakeholders into corporate bylaws, pass inspection and—crucially—pay an annual fee of up to $50,000.

In other words, it looks a lot like pay-to-play marketing spin! The corporate equivalent of that outfit that lets brokers pay to be designated “Certified Financial Fiduciaries.” That seems … a little meaningless? No wonder the Business Roundtable decided to slide away with an eloquent equivalent of “interesting … thanks.” Funny thing is, when you are actually walking the walk, you don’t feel the need to run out and pay tens of thousands of dollars (which could go to, we dunno, salaries?) and jump through bureaucratic hoops to get some arbitrary seal of approval. You can just let the results speak for themselves.

Anyway, we look forward to some good old-fashioned competition between the B Corps and the Business Roundtable. Who will win the great Virtue Signaling Sweepstakes of 2019? Whose employees will get the biggest raises? Whose communities will be the happiest hosts? Whose vendors will get the best contracts? Whose profits will be the fattest? Let the games begin!

And This Year’s Tickle Me Elmo Is …

This week, there was a mad, nationwide rush for a spanking new product. As its cult following mushroomed, its purveyors burned through inventory they thought would last till September. Soon this “sold out” product was appearing on eBay, in its original packaging, for hundreds of dollars.

This product was … a Popeye’s chicken sandwich.

Not to be outdone, KFC launched a non-meat fried “chicken” sandwich in Atlanta, which sold out in hours. Wendy’s started taunting Popeye’s on Twitter to remind the world of its own fried chicken sandwich. McDonald’s franchisees started lobbying the mothership for its first fried chicken sandwich in years, which will launch in September. Chick-fil-A, whose chicken sandwiches have satisfied the masses for decades, mostly just pointed and laughed at everyone. The Wall Street Journal pondered whether we had reached Peak Chicken. We got a business idea for a tastes-like-fried-chicken sandwich made of various locally sourced^[i] meats and fried in CBD-infused oil, and we are now in the process of establishing our company and getting a B Corp certification.

We also thought, this is just like investment fads! First Bitcoin makes a splash, and next thing you know, you have a bazillion cryptos. Everyone falls in love with Beyond Meat, then Tyson’s gets in on the fun. Pot startups lose out to black market dealers while Big Beer and Big Soda ride the cannabis-infused drink gravy train. Now a ubiquitous burger joint is trying to win the fried chicken wars.

Anyway, we are sure fried chicken sandwiches will soon go the way of the Tickle Me Elmo, Beanie Babies, froyo, cupcakes and other fads. The craze will warrant perhaps 45 seconds in the 2010s documentary series that NatGeo or The History Channel will inevitably produce in 23 years. It will be a footnote to summer 2019, along with something called “Old Town Road,” which we are told is this year’s “song of summer” or “summer jam.”

Our tastes-like-fried-chicken sandwich, however, will live forever.

The Joy of Ultra-Long Treasurys

After the 30-year US Treasury yield dipped below 2%, we saw a lot of articles asking questions like, why doesn’t the US issue an ultra-long bond? If Argentina, Mexico, Austria, Ireland and even Italy could sell 50-year or 100-year debt, why not Uncle Sam? Turns out the Treasury has been asking itself that very question, and Treasury Secretary Steve Mnuchin said the answer is definitely maybe!^[ii]

Look, we are politically agnostic and aren’t in the business of endorsing fiscal policy, but like we can’t help but think this is a really good idea? One, issuing more debt at longer maturities might help steepen the yield curve. Two, when the CBO released its updated long-term forecast this week, everyone got all up in arms about far-future deficit projections—well, what better way to keep debt service costs manageable than to extend the average maturity and lock in low funding costs for decades? Three, watching a 100-year bond fluctuate would be hugely entertaining, if Austria’s century bond due in 2117 is any indication—that sucker is up roughly 70% year to date! Four, if a 100-year bond became a regular US Treasury offering, the headlines on the occasional not-oversubscribed auction could be really entertaining. Like, “The ‘Smart Money’ Bets Uncle Sam Will Be Bankrupt in a Century!” Five, we would have actual fun debunking those articles in our Headlines space and explaining that no, actually, sometimes investors are just wary of duration risk regardless of the bond issuer, and that a super long-term bond is anything but a “safe haven.”

So come on Steve-o, whaddaya say? Will you folks start giving us some long bonds to write about? Pretty please? We will give you all the tastes-like-fried-chicken sandwiches you want!

A Von Schlieffen Stimulus?

As many readers likely know, the ECB is set to shuffle its staff this fall, with IMF head Christine Lagarde taking the helm and several other Monetary Policy Committee officials turning over. Once such official who is on his way out: Oesterreichische Nationalbank (Austria’s central bank) Governor Ewald Nowotny.

On the eve of his departure, the 75-year old Nowotny gave an interview to Vienna’s Wiener Zeitung that spawned quotes around the world. The one garnering the most attention was his statement central bank officials “must sometimes disappoint markets,” a boring viewpoint assuming the ECB’s negative rates and quantitative easing are market-friendly policies. (We disagree, but that is a column for another time.) In our view, the more interesting comment was this (via Google Translate):^[iii]

But the fortune of a now 74-year peace period has inevitably led to the problem of a tremendous accumulation of wealth on one side and debts on the other. That is undeniable. In the past, wars or high inflation virtually eliminated this problem. How we solve this without these two factors is still open.

So the fact there hasn’t been a major European war or hyperinflation since 1945 is behind gaps in wealth, which is … a problem? Folks, to use an overworked corporate cliché, that is out-of-the-box thinking! Look, we are aware of the historical fallacy arguing World War II ended the Great Depression, but even most who buy that don’t advocate for the world to go Weimar or France to launch its own von Schlieffen plan^[iv] and invade Germany as economic policy prescriptions to fix rather benign economic “problems.”

We are sure the explanation here is rather vanilla, but Nowotny didn’t elaborate. However, he did conclude the statement by noting that since he is leaving his post and returning to academia, he will be able to think “wilder.” He also hinted that he may write a book about his views and experiences. If he does—and we hope so!—may we please request he include a detailed look at this unorthodox view of war as economic fix? We will even give him a title! “War: What Is It Good For? Fixing Inequality!”^[v]

The Trade Tiff’s Weird Twist

Thursday, Bloomberg BusinessWeek published an entertaining piece regarding what it dubbed, “President Donald Trump’s next move in an increasingly fraught trade war.” Now, we aren’t here to joke around about tariffs. As readers of this website know, we assess that matter quite seriously with regularity. Though we don’t think tariffs and reciprocation presently threatened or enacted are big enough to cause stocks material harm, we know they carry some detrimental impact and hit investor sentiment in the near term.

However, the article wasn’t about tariffs. It wasn’t about non-tariff barriers either. It alleges the Trump administration is planning to press China to repay £6 million of defaulted 5%, 40-year Hukuang Railway bonds issued in 1911. If so, we think this would constitute the most bizarre shot ever fired in a “trade war.”^[vi]

Consider, first, the history (in rapid-fire form). In 1911—two Chinese governments ago—the Qing Dynasty floated these bonds to raise foreign capital to build a national railway.^[vii] But the imperial government lasted less than a year after their issuance, with the Republic of China (RoC) replacing it. The RoC stated it would honor the debt. But then came the little matters of worldwide depression, Sino-Japanese War, massive loss of life, Chinese Civil War, more massive loss of life, China went communist. The RoC’s government fled to Taiwan. Yada, yada, yada default.

By now, you may wonder which country is on the hook for this debt. Taiwan? The People’s Republic of China? Should Japan share the load? International legal tradition argues that a revolution doesn’t invalidate debt. However, the People’s Republic of China’s communist government rejects this. Hence these bonds are locked in legal limbo, with no payments since the RoC made two partial ones under a 1937 restructuring.

Between then and now, missed interest and currency exchange oddities have compounded the value bondholders claim they are due. Bloomberg BusinessWeek quotes one as saying the Chinese government owes as much as $1 trillion. However, there is very little chance that figure is right. We mean, the article doesn’t share the calculation, but it states this is inflation-adjusted—a very odd thing to do, considering the bonds were fixed rate. Our math—based on terms used in a 1982 lawsuit—suggests something in the ballpark of $134 billion.

Here is how we got there: We averaged the prewar (defined as between 1900 and 1940) pound to dollar exchange rate. Back then, one British pound equaled roughly four to five US dollars. Further, the terms of the bond allow for repayment in gold dollars versus paper money. A gold dollar was worth 1/20^th of a Troy ounce of gold. Apply that today’s gold prices, and you get $76.86. Eighty-eight years’ missed interest, a prewar exchange rate and gold dollar values balloon that £6 million into $134 billion.

Thinking of snapping up a slice? We counsel against it. For one, there are oodles of fraudulent Hukuang Railway bonds floating around. But also, China is highly unlikely to pay anywhere near this amount—whether Trump gets involved or not. Further, even if China elects to settle, precedent suggests the math in the prior paragraph likely overstates the results massively. The Soviet Union and subsequent Russian Federation have never repaid pre-Bolshevik debt. Bulgaria reached a settlement with creditors for just 40% of pre-WWII debt’s face value and no interest. Poland paid 36.5%. Others settled for even less. Finally, there have been multiple times—like Nixon’s visit to China in the 1970s—when optimism about these bonds’ repayment perked. Never happened. So our sense is you can safely chalk these up in the same category you would tales of the super-valuable Iraqi dinar.

Enjoy the long Labor Day weekend!