Market Analysis

Random Musings on Markets XVI: A Musing in Hiding

The latest installment in our not-weekly roundup of riffs on financial news from the prior seven days.

In this Friday’s not-every-Friday roundup of fun financial news, we bring you a glimpse[i] into the far-flung future to put Sears’ bankruptcy into perspective, the US Treasury’s wacky position on currency manipulation, Los Angeles’s attempt to solve a non-existent problem, more political news from Down Under and our public plea for less jargon everywhere.

Back From the Future

As we sifted through the many discussions of Sears’ slow decline and bankruptcy filing this week, we thought of Montgomery Ward, Service Merchandise, Best Products and all the rest of the 20th century’s late, great catalogue giants. Then we thought of Woolworth’s, Kress and other departed retail behemoths. We thought of Kresge, which later morphed into K-Mart, and smiled before remembering that K-Mart, too, is collateral damage in Sears’ downfall. And we thought of channeling all this nostalgia into a bit on how nothing is forever and even stores with long, storied histories come and go. (See also: Emporium Capwell, Foley’s, Bullocks, Gimbels, Kaufmann’s, Filene’s, I. Magnin and a few hundred others.) Elisabeth spent a few seconds wondering whether we should pair it with her photo of the old Kress building in Charleston or the terrazzo Woolworth’s entryway in Savannah. But then we time-traveled 200 years in the future,[ii] found an interesting news clip and decided to share it instead.

New Seattle, Lunar Colony V—October 19, 2218. Venerated retailer Amazon filed for bankruptcy Monday morning, potentially bringing its storied history to an end over 230 years after Jeffrey Bezos founded the firm on Earth in the 1990s. In a brief statement to reporters, Chairperson Colin U. Serseven cited food replicators and the rise of interstellar commerce as insurmountable challenges. “Though we invested heavily in distribution networks on the Moon and Mars, this wasn’t a match for the instant gratification available through matter replicators and heavy competition from vendors in other star systems.”[iii]

It is an ironic finish for the company widely blamed for killing off historical Terran retailers, including Sears. Like Sears, Amazon began as an Internet version of a 19th century mail-order business, offering a world of products to rural people at affordable prices before expanding into physical storefronts in the early 21st century. During the Lunar colonization, Amazon took another page from Sears’ book, selling kit homes to new Lunar residents, vastly reducing home construction time and costs—much as Sears did on Earth in the early 20th century. But a change in Lunar development policy ended that business prematurely, forcing Amazon to regroup. As Interstellar Securities analyst Christof Wongowski put it in a research note this morning, this was the beginning of Amazon’s downfall: “If it weren’t for that regulatory shift, Amazon would have had the infrastructure necessary to play a greater role in Martian development. They never caught up after that.”

But in the end, it was a technological disruption that ended Amazon—much as another disruption, the Internet, enabled its initial existence. “Matter replicators were a boon for Amazon at first,” explained Wongowski. “But once there was a replicator in every home, Amazon’s product sales tanked past the point of no return. Their moat dried up. The additional competition from Proxima Centauri B, Luyten B and Mintaka 3 was the final nail in the coffin. In the end, Terran products were no match for trendy goods from other systems, and Amazon couldn’t match Virgin Galactic’s near-universal sales capabilities.”

Bankruptcy lawyers say there is a chance some aspect of Amazon’s business could survive, though creditors may opt to liquidate and shutter all operations—adding Amazon to a long list of retail giants that couldn’t adapt to a new age.

Now, as Doctor Who reminds us regularly, time can be rewritten, so we do not recommend you base any trading decisions on this. Moreover, it could very well be from the 23rd century equivalent of The Onion—pure satire.[iv] But we still think it illustrates a key point: The more things change, the more they stay the same.

Selective Angst Over Currency Manipulation

In a widely watched statement Thursday, the US Treasury yet again defied President Donald Trump’s rhetoric and declined to label China a currency manipulator. It seems the Treasury doesn’t believe the country is actively monkeying around with the yuan’s value.

Which is fine. Really, we wonder why anybody paid this much mind. Considering the US administration has already enacted tariffs on over half of Chinese imports[v]—and has threatened tariffs on the entirety—this seems like a totally feckless debate. Symbolic, maybe. But, frankly, we don’t have much time for feckless symbolism.

But also, the Treasury is wrong? It seems to us China is manipulating the yuan, just not in the way anybody really cares about. They seem to be propping the yuan up. Currency manipulation is a little like stock market volatility, we guess. Folks only call stocks volatile when they are negative, despite the fact a 1% gain is just as volatile as a -1% loss. It seems officials only care about currency “manipulation” when it depresses a currency’s value, ostensibly to make exports artificially cheap, goosing sales and stimulating the exporter’s economy.[vi]

With China selling Treasurys the past three months and frequently setting the yuan’s official daily exchange rate above the prior close, it appears China is propping up the currency. The recent weakness against the dollar—which is a fully global currency market trend—comes despite intervention. This is still manipulation! That is supposed to be bad! The Treasury just decided it doesn’t care for some reason, even though the artificially strong yuan could lower Chinese firms’ input costs.

Further, we feel compelled to note that the Treasury’s list of possible currency manipulators has some real oddities. For example, Germany is on watch. But Germany doesn’t even have a currency of its own to manipulate. It is in the euro. Also, Switzerland. The Swiss definitively were manipulating the franc during the period 2011 – 2015. Openly. Like, the central bank said they were pegging it to keep it from appreciating versus the euro too much. Yet the Treasury never named the dastardly Swiss a currency manipulator (not that we advocate this nor actually think the Swiss are dastardly). Anyway, they stopped doing this three and a half years ago, so we wonder why they are still cited. We guess our error here is that we are applying logic to political matters. That is a silly mistake on our part. Sorry.

Bank Runner, or Do Public Banks Dream of Repossessing Assets?

Here is a problem Los Angeles thinks it has: about $11 billion of revenue from sales taxes and parking tickets, “deposited with or managed by the country’s biggest banks, which use the capital for their own needs and ultimately their own profit,” as Bloomberg puts it. The solution, according to some engaged citizens, is a citywide referendum on the establishment of a public bank “that would support investment within city limits, backing such things as small-business loans and affordable housing instead of sending the money out.”

We will set aside the typical questions about government stepping into the private sector’s traditional domain, and we won’t belabor the observation that state-run businesses typically end up being vehicles for corruption (See: Brazilian state-run oil firm Petrobras and the recent Car Wash scandal.) That same point is why we won’t pose a city equivalent of a sovereign wealth fund as an alternative. (See: Malaysia and the 1MDB scandal.) Instead, we are just going to ask some questions:

  • If the goal is to use city funds to support local businesses, why not deposit money with community banks or credit unions based in Los Angeles and let their loan officers dole them out according to the market’s needs—and use the power of fractional reserve banking to multiply that $11 billion in deposits into nearly $100 billion in local loans?
  • If a business defaults on a loan from the hypothetical Public Bank of Los Angeles, will the bank seize its assets?
  • If a homeowner defaults on a mortgage from the hypothetical Public Bank of Los Angeles, will the bank foreclose and seize the home?
  • Will the public bank take retail deposits?
  • If not, and it lends out all of the city’s deposits, what happens when the city needs to make a withdrawal?
  • What happens if a public bank lends to unviable projects, takes big loan losses and fails?
  • Is there evidence that a lack of below-market-rate housing construction in some neighborhoods stems from developers’ inability to secure funding? Or might there be alternative explanations—issues a public funding source can’t solve?
  • Do city leaders have a fiduciary duty to taxpayers to place surplus tax revenue in investments with optimal risk/return characteristics? If so, do their stated investment plans fulfill this?
  • Relatedly, if the bank is created by voters, should all subsequent lending decisions also be subject to a public referendum?

We aren’t inherently for or against this—or any other ballot measure, as it happens. We have seen the arguments against it, and we have seen the many odes written to North Dakota’s public bank. In the end, it is up to voters to make their own pro/con lists and make the decision they believe is best, for whatever reason. That is the beauty of democracy! But if Elisabeth still lived in Los Angeles, these are the questions she would be asking, so we figured, why not ask them here? 

Is Australia’s Revolving Door Preparing Another Spin?

Back in Random Musings IX—a mere seven Fridays ago—the ouster of then-Australian Prime Minister Malcolm Turnbull led us to highlight the extreme variety of gridlock practiced Down Under. Heading the Lucky Country seems to be a very unlucky role indeed, as no Aussie PM has finished his or her full term since 2007. Don’t look now, but it appears the Aussie political ejector seat may be getting ready to launch once more.

For the moment, it appears Aussie Prime Minister and Liberal Party leader Scott Morrison (whom the kids call “ScoMo”) is safe in his post leading the coalition government. (Although the key words there are, “for the moment.”) However, this week The Sydney Morning Herald reported ScoMo’s second-in-command, Deputy Prime Minister Michael McCormack, is threatened by a leadership spill not terribly dissimilar from the one that ushered his boss into power. (And his boss’s predecessor, and his boss’s predecessor’s predecessor.) Members of the junior coalition party, the National Party, are rumored to have considered voting to oust McCormack and replace him with former Deputy Prime Minister Barnaby Joyce, who resigned after a scandal broke … in February. Anyway, the National Party denied the rumored plans, and that may be true. But we have our doubts. Still others claim the party is attempting to create chaos within the administration,[vii] which might be a prelude to an ouster of ScoMo himself. This all has us thinking a few things about Australian politics:

  1. If you think big Aussie legislation—for good or ill—will pass, think again.
  2. If you are an Australian politician, under no circumstances should you order a lot of business cards.
  3. If (or maybe when) ScoMo gets the heave-ho, we figure someone ought to create a flowchart of Aussie PMs, you know, just to keep everybody straight and on the same page with how we got here.
  4. If you bought a “DITCH THE SINGLE USE PRIME MINISTER” handbag like Elisabeth did, maybe consider having it at the ready.
  5. If you wonder why we seem to enjoy Aussie politics so much, it is largely because Todd is strangely entertained by all this, which he considers the gridlock professional tour.
  6. Australia hasn’t had a recession in 27 years, despite all these theatrics. Keep that in mind when you hear folks bemoan potential negative economic fallout from gridlock, as we suspect may happen on November 7 in America.

Also in Australia, it appears the US Embassy took a decidedly softer approach to diplomacy than President Donald Trump’s frequently tough talk. It appears the embassy sent an e-vite to an unknown number of foreign officials and other US emissaries inviting them to a “Cat Pyjama-Jam,” with the note featuring a feline clad in a Cookie Monster get-up. Of course, this was a mistake. No, the US Embassy wasn’t hacked. It appears this was a training exercise gone wrong and, as we all know, the way to train new diplomatic staffers to send invitations is by way of cat pic. The embassy apologized for the error, although we don’t see why. To us, this is a delightful palate cleanser versus typically heavy geopolitical discussion in an industry that we daresay takes itself a skosh too seriously. Or maybe this is a trial balloon for a new Trump administration foreign policy tack! Either way, enjoy.

What Would Paul Romer Do?

Last Friday’s Wall Street Journal included a grim factoid: “One in 10 young adults want regulators to ban dihydrogen monoxide from food and beverages.” Why is this bad? Dihydrogen monoxide “would be H2O, also known as water.” Yes, the craze for natural food has gone so far that people want to ban water simply because they can’t cut through the jargon and don’t know it is actually water.[viii] Also falling out of favor with clean-types? Cyanocobalamin, better known as vitamin B12. It reminds us of the red M&Ms scare of the 1980s, only crazier.

Water and vitamins get funky, chemical-sounding names due to some FDA food labeling requirements that we don’t have time to read. We are sure they have their reasons, but also, we can’t help but think everyone would benefit from clearer, simpler language—in finance as well as food! Why babble about “efficient frontiers” when you can just say, “different assets have different risks and return”? “Smart-beta ETF” means little if you don’t have the background knowledge to know it is a mutual fund that holds stocks that fit some arbitrary criteria, and you can buy and sell the fund as easily as you would buy and sell a stock. “Quantitative easing” sounds like a game of Balderdash gone wrong, not a program through which a central bank buys long-term government bonds in hopes of reducing long-term interest rates so we can all get cheaper loans. A “non-autocorrelated” asset might sound scary, but that just means its past performance isn’t predictive.

Paul Romer—former World Bank Chief Economist and 2018 Nobel Prizewinner—once famously called clear and concise writing “a commitment to integrity.” As he wrote in an internal World Bank memo that he later released: “The problem with vague writing is that it lets an author convey a false impression yet retain plausible deniability when someone tries to verify a claim.” We agree! So we are reiterating our pledge to keep MarketMinder a jargon-free zone. We won’t talk about post-neoclassical endogenous growth theory unless we are making a good-natured joke about Gordon Brown. We won’t drown you with passive voice and overuse of “and.” If we quote other people’s jargon, we will translate it into everyday words.

Who’s with us?

Anyway, we hope your weekend is a jargon-free delight. Have a great one!

[i] A fictional glimpse. Do not panic over this the way people did Orson Welles’ War of the Worlds performance in 1938.

[ii] Disclosure: We cannot actually time travel.

[iii] Not an actual quote, come on, people.

[iv] Or fake news, which we figure is almost certain to still be around 200 years from now.

[v] To little economic or market effect.

[vi] This theory is very, very, very overrated by most, in our view.

[vii] We really don’t think this would be all that hard, given the recent history. Even typing the word “create” here is generous.

[viii] Alas, there is no data on the overlap between young folks who drink raw water and who want to ban dihydrogen monoxide.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.