RealClearMarkets Articles

I often hear investors say they want to wait for clarity about some issue before investing. Of course, once clarity is achieved it is too late to profit from it and those investors will inevitably be waiting for clarity on some other issue. One thing I can tell you for certain is that certainty and high returns are incompatible. If you want a return that is better than average, you’re going to have to make decisions before you get the clarity you want.

I may not have answers – clarity – but I have lots of questions. Here are some I’ve been pondering lately:

 

How long will it take for the unemployment rate to fall to single digits? At least for now, restaurants and other hospitality businesses are operating at reduced capacity. And we know a lot of them have closed their doors forever. So how many of the people who have filed for unemployment benefits will be offered their old jobs back? 75%? 50%? 25%? I don’t know but I’d be shocked if it was any higher than my first guess. Of course, new jobs will be created too, even for unskilled or low skill workers. But how many contact tracers, temperature takers and extra cleaning crew will we need?

What is the real impact of the extra $600/week unemployment benefit provided by the Feds? I’ve read article after article about companies saying they can’t get workers to come back because they are making more on unemployment. I thought that if they were offered their old job they had to accept or lose benefits but I’ve heard that some states aren’t enforcing that. Is that true? If so, who makes that decision and when might they decide to force people off benefits and back to work?

How many people applied for unemployment benefits because of the Federal bonus who would have normally not filed? I know plenty of people who have lost jobs in past recessions who never bothered to file for benefits due to pride or stigma or something. But when the total adds up to $1000/week, pride and stigma may take a back seat to cold hard cash.

Has government spending been permanently expanded? Every time I write about my disdain for deficits John Tamny reminds me that it isn’t the deficits that matter but the rather the spending. He’s right, of course, but I still hate deficits and I’ll probably have plenty of reason to bitch in coming years. Government spending this year (Federal, State and Local), assuming another “stimulus” package, will be roughly 50% of GDP. How much will long term economic growth be reduced if government spending stays that high?

Are people buying stocks today because they believe the US economy will have a “V” shaped recovery? Or are they betting on continued government support? If it is the latter, I can’t believe they won’t be disappointed. Not that they won’t get another package of government spending measures. I’m pretty confident they’ll get that. But anyone who believes that government spending, so called stimulus, will be effective in creating economic growth doesn’t know history. As for the “V” shaped recovery, I would think that we’ll see a surge of activity coming out of lockdown but after that, if people don't have a regular income other than government benefits with an unknown end date, will they spend?

How many families discovered during the lockdown/layoffs that they really don’t need that second income? That second income is so tempting but in a lot of cases it really doesn’t make economic sense after you factor in commuting and child care costs. I keep seeing articles about the drop in the labor force participation rate and they all frame it as a negative. But maybe, from a societal standpoint, a lower participation rate that allows more family time is the better option.

How many people discovered that they really could save a lot if forced? Will they continue to do so voluntarily? What are the implications for consumption and overall economic growth? Will people save more now that they realize how fragile things can be?

Has MMT been normalized? The federal government is spending large sums and the Federal Reserve is buying large amounts of government bonds. Isn’t that essentially MMT in a nutshell? Since I do not believe in free lunches, I wonder what the consequences will be. What price will we pay for essentially monetizing the government deficit? My gut says inflation but that was the fear when the Fed first started QE and it hasn’t happened. Will this time be different?

Will we really see big changes in where people live and work? There is an expectation that fear of the virus will push people – and companies presumably – out of cities and into the suburbs or smaller cities. That trend was already in place – the fastest growing cities are all small and mid-sized cities in the Midwest and the South – but the idea is that the virus will accelerate the trend. In addition, remote working, especially tech workers, makes this an easier transition. Maybe, but will people give up the convenience and amenities that cities offer?

 

I don’t know the answers to these questions yet but I think they could have big implications for the US economy and therefore on your investments. How you answer them will shape your portfolio but I’d suggest maintaining a lot of flexibility. One thing I can guarantee is that if you answer all of them, you’ll be wrong about, at least, some of them. One other thing I can guarantee is that this isn’t an exhaustive list. There are lots of questions right now and I’ll be back soon with another list.

“I’d rather be an owner of something besides money that can disappear at any time in the bank.” That’s what Robert T. recently communicated to Wall Street Journal reporters Dion Nissenbaum and Nazih Osseiran.

T. is a Beirut-based businessman who, according to Nissenbaum and Osseiran, recently “drained his family bank accounts to buy a ski chalet, an apartment in Dubai and two places in one of Beirut’s upscale neighborhoods.” With Beirut’s economy in serious trouble, its citizens are in the midst of a consumption binge.

The deteriorating relationship between China and the United States will have profound impacts on the global markets. Nationalism was already on the rise on both sides of the Pacific when the COVID-19 crisis exposed vulnerabilities to the global supply chain. As global trade reorients, certain countries will prove to be better aligned to capture relocating U.S. manufacturing. Investors should watch closely for the forerunning signals of which countries will benefit.

The global economic shock of COVID-19 has prompted commensurate fiscal and monetary responses from governments and central banks. For investors in global securities markets, recovery in growth and employment are the key variables to watch.

A British woman by the name of Sally Challen just inherited 1 million pounds. At first glance this is happy news, but there’s a backstory.

In 2011 she was found guilty in the murder of her husband. Last year the charges were reduced to manslaughter on account of years of emotional abuse from the now deceased. While her late husband's estate was initially assigned to the couple’s two sons, Elian Peltier of the New York Times reports that the funds were re-assigned based on the new information about the case.

“A lot of people don’t know the blood, sweat and tears that go into being a business owner and the type of sacrifice we had to go through to get to where we’re at right now.” Those are the words of Atlanta businessman Kris Shelby to Caitlin Dickerson of the New York Times. Shelby is the co-owner of Attom, a luxury brand store that was looted over the weekend.

It’s a simple reminder that you entrepreneurs did build that. Politicians so frequently want to shrink the accomplishments of business owners by saying they couldn’t have grown their concept without community help, without others, that entrepreneurial creations are a consequence of many. Nonsense. Where there’s entrepreneurialism that leads to success, the success was preceded by endless amounts of skepticism, massive amounts of work, countless near-death experiences (for the business), on the way to the slim possibility of making it. Entrepreneurs almost by definition “built that” precisely because the definition of the entrepreneur is someone who believes deeply in something that most don’t. Again, you did build that.

Before the heads of any readers explode, it should be made clear that what’s about to be read is not a defense of Social Security. Social Security was always a terrible idea for countless reasons. While in the real world our individual savings add to the capital base on the way to innovative new companies and jobs that don’t feel like work, Social Security amounts to an extraction of wealth from employees and employers that redounds to immediate government consumption of wealth.

It’s also useful to point out that Social Security is superfluous. As evidenced by abundant American savings reflected in the enormous valuations placed on asset managers and investment banks, Americans plainly don’t need a law to save for when they’re not working. The retirement “crisis” floated by those for whom everything is a crisis is yet another one of those ridiculous myths.

Saddled with $15 billion of debt, the satellite operator Intelsat recently announced a Chapter 11 bankruptcy.

To those who aren’t telecom industry observers, this situation might seem puzzling.  Intelsat holds satellite licenses around the world, including many here in the U.S.  Many of them are in the C-band, an area of mid-band spectrum widely seen as critical for 5G network coverage outside major cities.  Indeed, mid-band spectrum is so valuable for wireless networks that it was a major impetus behind the recent T-Mobile-Sprint merger.

So then, how did Intelsat go bankrupt?  Some analysts suggest that Intelsat, along with other satellite companies, could have avoided this fate by selling their C-band spectrum in a private auction to mid-band spectrum-hungry wireless carriers like AT&T or Verizon.  By holding such a private auction, so the theory goes, the companies could have raked in billions of dollars.  Consequently, they could have avoided bankruptcy.

The FCC didn’t permit Intelsat’s permit private auction.  But contrary to what you might think, this decision had little to do with Intelsat’s bankruptcy.  Here’s why:

1. Intelsat took on a substantial amount of debt, without corresponding revenues or cashflows.

Intelsat was the world’s first global commercial satellite company, launching its first satellite in 1965.  The company took part in some of the most important moments in global history, including transmitting live images from the 1969 moon landing.  But over the years, the company took on substantial amounts of debt, without corresponding increases in revenue or cashflow.  Its financial statements in recent years have depicted a company with significant losses and negative shareholder equity.  This holds true even when one considers the value of its licenses in the secondary marketplace, which, as part of Intelsat’s nonamortizable intangible assets and goodwill were valued at approximately $5 billion in 2018 and 2019. 

2. Intelsat’s C-band licenses aren’t exclusive, and thus are of little value.

Assets only have market value if the rights to them are exclusive.  This is the very idea behind private property rights.  A plot of land in Manhattan assigned to an individual or a company has substantial market value because its use is exclusive.  But the public sidewalk in front of the plot of land has no market value.  Anyone can use it, and thus no one can legitimately claim exclusive use.  No one owns it.

Alas, Intelsat’s C-band licenses resemble more the Manhattan sidewalk than the Manhattan plot of land.  All C-band satellite licensees share 500 MHz of spectrum; nothing is exclusive.  Indeed, satellite licensees share most of this spectrum with countless earth stations.  Until June 2018, anyone could apply—without cost—for a space station license, granting them the right to shared use of the 500 MHz of C-band spectrum.  Many businesses had already done so, and eight companies had dozens of satellites in service.  Thus, new space station licenses had no particular economic value.

Economists have a term for this: the tragedy of the commons.  Without exclusive property rights, “commons” are overused and poorly maintained, much like the Manhattan sidewalk.  Intelsat may have used the C-band satellite spectrum more than any other company, but intensive use of a thing does not by itself confer ownership of that thing.  Nor does it create corresponding economic value.

3. Because C-band licenses aren’t exclusive, a “private auction” would have been impossible.

In recent years, the best and highest-valued use of the C-band spectrum has become 5G mobile broadband.  Recognizing this, despite not having exclusive rights to the spectrum, Intelsat and other C-Band satellite operators proposed to sell their C-Band “rights” to wireless carriers—much like a group of people trying to hold an auction for certain sidewalks in Manhattan.  Under this proposal, some satellite operators and all of the countless earth station operators would have received nothing in exchange for relinquishing their existing licenses.

To the extent that C-band spectrum would be used for higher value 5G purposes, the proposal was sensible.  That the would-be auctioneers had no exclusive rights to the spectrum made it anything but sensible.

Nonetheless, the FCC paid Intelsat’s proposal serious attention.  Carving out more spectrum for 5G use promised substantial benefits—perhaps outweighing the obvious problem that existing licensees had no exclusive rights to their licenses.  But lawsuits were certain to follow, and risks abounded in any courtroom where the judge would certainly discover that the would-be auctioneers had no provenance or exclusivity to sell licenses.

4. Instead, the FCC promised Intelsat billions of dollars.  But even that wasn’t enough.

Rather than allow Intelsat’s private auction, the FCC decided to supervise its own public auction—one where the legitimacy of the licenses at auction would be undisputed.  The FCC promised to give Intelsat and three other companies billions of dollars from the auction—perhaps a form of a finder’s fee.  Intelsat alone could receive as much as $4.865 billion.  The FCC creatively labeled these fees as various forms of compensation for relocation costs and expedited relocation.  The meaning of these terms will almost certainly be challenged in court, on the basis that the FCC has been overly generous in payments to certain satellite companies such as Intelsat.

In the end, the causes of Intelsat’s bankruptcy are likely many.  But the FCC is clearly not one of them.  The FCC spared Intelsat from the disaster of attempting an unworkable private auction for spectrum Intelsat and others did not exclusively, and therefore actually, own.  Instead, the FCC promised Intelsat billions of dollars in a public auction, possibly beyond its legal authority.  Yet despite doing everything within, and perhaps beyond, its power, the FCC’s help ultimately wasn’t enough to head off Intelsat’s bankruptcy.

On March 18^th FedEx founder & CEO Fred Smith was interviewed by Fox’s Bret Baier about the new coronavirus. Smith’s entrepreneurial brilliance makes him an insightful interview at any time, but the one referenced on the 18^th was particularly important.

That’s the case because FedEx has 907 employees based in Wuhan. Wuhan is an increasingly prominent city when it comes to production, and as FedEx moves production and packages around the world, it was only logical that Smith’s company would have a big presence there.

Even as the coronavirus wreaks havoc on the U.S. economy, we are not alone in feeling the ripple effects of a pandemic. Countries around the world are witnessing economic contractions—and China is chief among them.

Simply put, the Chinese economy is reeling. For the first time in decades, the Chinese government has not set a growth target for its economy. At the same time, China’s communist government recently pledged $500 billion in extra stimulus measures, in hope of creating nine million new jobs. That reeks of desperation.

Back in 1991, and while on a Semester at Sea (SAS) voyage as a student, SAS's S.S. Universe ship docked in Hong Kong’s Victoria Harbor. Notable about Hong Kong is that SAS was founded by a prominent businessman from there by the name of C.Y. Tung. His goal with this highly unique semester abroad program was to promote greater global understanding among young people from around the world.

Hong Kong on its own was a revelation. Everywhere you looked you saw gleaming, extraordinarily tall buildings. This formerly depressed city had morphed into the financial capital of Asia. Crucial about the why behind Hong Kong was that it was a wholly free city. No red tape. Other than tariffs on cars and tobacco, the city was a completely duty-free zone. Which at least partially explained its staggering wealth.

Companies in the US as well as around the world have participated in an all-out debt binge. This hasn’t been because of the Federal Reserve’s actions; on the contrary, the huge surge in borrowing has been in spite of Jay Powell’s “heroic” efforts. As nearly forty-one million American workers have filed initial claims for unemployment compensation over the last ten weeks, an unfathomable one-quarter of the entire workforce, it’s more than worth the exercise of trying to figure out why.

COVID-19, sure, but is that all that there is lurking underneath?

“If you are under 65, in reasonably good health and do not have a Vitamin D deficiency, you only have a tiny chance of dying from COVID-19. And if you are younger than 34, your chances of dying from the virus are so small as to almost be statistically undetectable.” Those are the words of my good friend Richard Rahn in his latest column for the Washington Times.

Rahn very skillfully explodes the alarmism that has surrounded the spread of the new coronavirus. As of now, it’s quite simply not much of a threat unless you’re 85 or older, live “in a nursing home, [and] have serious health problems including a Vitamin D deficiency.” Rahn thankfully notes that only “a tiny portion of the population is in such a condition.”

In order to combat the pandemic that has left tens of thousands of Americans dead and millions more out of work, many government agencies have suspended regulations and restrictions that harm our ability to respond effectively to the crisis. Now, the Trump administration is wisely moving to try to preserve deregulation efforts where they have proven successful.

As part of the Executive Order on Regulatory Relief to Support Economic Recovery, President Trump directs agency heads to review regulatory standards that have been temporarily set aside or modified in response to the coronavirus. They are then directed to report which changes would improve economic recovery if made permanent — so long as those changes would be consistent with protecting public health and safety.

That’s an important step towards cementing this administration’s legacy as the first in years to take meaningful steps towards arresting the steady growth of the administrative state. One 2016 study by the Mercatus Center found that the economy would have been 25 percent, or $4 trillion, larger had the size of the administrative state remained where it was in 1980. Through 2016, the steady growth of the bureaucracy and its continued encroachment on the workings of the economy appeared inevitable.

However, the Trump administration has made deregulation a cornerstone of economic growth. Through the end of 2019, the administration had eliminated $50.9 billion in regulatory costs, and was ending nearly twice as many significant regulations as it was implementing.

That’s excellent progress, but there’s a reason deregulation is politically difficult — deregulatory efforts are easy to pillory as dangerous, with supporters of a stronger regulatory state conjuring images of environmental devastation or rats in peoples’ food. These characterizations are deeply misleading — just 14 percent of significant regulations are environmental, and many existing regulations make their way into the Federal Register with a very limited justification process.

As government agencies have temporarily suspended regulations to respond to the crisis at hand, Americans have had an opportunity to see just how unnecessary and harmful many suspended regulations are. Many of these changes have drastically increased the speed at which medical supplies and treatments can be produced.

Take the example of telemedicine, the practice of consulting with medical professionals via video chat and other technologies. These services, previously subjected to onerous licensing requirements across a patchwork of state regimes among other regulatory burdens, has seen explosive growth as states and the federal government have relaxed requirements. Telemedicine has the potential to benefit rural patients, those without easy access to transportation, and doctors facing less in-person exposure to sick patients should these eased requirements remain in place.

Other, more mundane coronavirus deregulations have had a profound impact on peoples’ daily lives. The advent of to-go cocktails and cocktail delivery is hardly life-changing (outside of pandemic-imposed quarantines, at least) but it does beg the question of why these restrictions existed in the first place.

Directing the federal government to review suspended regulations that can stand to be eliminated permanently is an excellent way to salvage some minor structural economic improvements out of a thoroughly negative situation. States and local governments should consider doing the same. 

A new think tank by the name of American Compass recently made headlines as a “conservative” foe of private equity by launching its new “Returns Counter.” This project purports to compare the returns of private equity against public capital markets, and was launched with a politicized primer on mergers and acquisitions, private equity, and hedge fund investments.

Wells King, research director at American Compass, opens his post by casting aspersion at private capital markets, asserting that: “the buying and selling of companies, the mergers and divestments, the hedging and leveraging, are not themselves valuable activity. They invent, create, build, and provide nothing. Their claim to value is purely derivative—by improving the allocation of capital and configuration of assets, they are supposed to make everyone operating in the real economy more productive.”

For those out there “sheltering in place for humanity,” and who think skepticism about what you’re doing is the stuff of anti-science mouth breathers, stop and think for a minute or two. What would all of you self-proclaimed humanitarians have done if the new coronavirus reared its head in 2000 instead of 2020? How strident would your reverence for science and the “experts” have been then?

It’s a question worth asking simply because “sheltering in place” in 2000 would have been an entirely different concept. Some would argue that it was an impossibility.

Since the outbreak of COVID-19 and the restrictions implemented to stop its spread, a huge number of US businesses – from large to small – have been left reeling. Others, with the capacity to withstand the impact of the pandemic or fortunate enough to be insulated from the worst effects, have been putting forth an effort to fight the pandemic and then help stabilize society and the economy.

As the lockdowns are eased and the economy transitions to the “new normal,” public companies will be expected to play a leading role in reigniting the economy and getting Americans back to work. However, before helping to turn the world’s largest economy around and reemploying millions of people, those businesses must first run the gauntlet of politically motivated pronouncements and voting practices from some of the world’s largest activist investors during proxy season.

One of these days, the economy will get back up on its feet. But will the recovery resemble a V, with a sharp upward thrust, or a flat U shape, keeping us in the doldrums interminably?

It depends upon public policy to a great degree. If the government keeps unemployment insurance payments higher than available wages, the prognostication is not very positive. Few people will rush back to work, even when it is safe to do so. If our politicians continue to demand that entrepreneurs who accept government largesse adhere to a minimum wage of $15 per hour, again the economic future does not look too bright. Let us consider, then, the case against this type of interference with the free enterprise system.

Demand curves slope in a downward direction. This means that the higher the price charged for something, the less of it will be purchased, other things equal. And the lower the terms of trade, again ceteris paribus, the more that will be bought and sold.

Progressives are absolutely clear on this matter when it comes to protecting the planet against carbon footprints, cleaning up the air, ridding the economy of plastics and Styrofoam, promoting electronic cars, reducing the use of tobacco products, and a whole host of other such initiatives.

For example, a recent New York Times article was titled “Raise gas prices for the climate.” In it, support was offered for a plan by several governors in the northeast, particularly Republican Charlie Baker of Massachusetts, to tax gasoline to the tune of “perhaps 8 or 9 cents a gallon.” Why? So as to reduce the usage of this fuel. This is based on the insight, wait for it, that the higher its price the less of it will be purchased. Similarly, when plastic straws, shopping bags, plates, are not banned outright, left wing environmentalists want to raise the prices of these items, in order to discourage their usages. This can be done by taxing them, not subsidizing them.  If Mayor Mike Bloomberg of New York City couldn’t outright ban sweet drinks of greater than16 ounces, he would have called for increasing, not decreasing, their prices

Again, the law of downward sloping demand is in operation, and widely appreciated for the work it does.

Similarly, when liberal intellectuals want to encourage the use of something or other, they call for a lowering of the costs imposed upon buyers. Examples include electric cars, wind, water, solar and thermal power, and vegetables.

This is not a column on environmentalism. I make no comment on the wisdom or otherwise of these goals. I claim, only, that the means employed, raising prices for unfavored goods and lowering them for favored ones, is compatible with what economists know about these matters. Did they employ the very opposite means to these ends, these environmental activists would have been proposing policies contradictory to their own espoused goals.

Rather, this is an op ed on economic schizophrenia.

The point is, these writers take the exact opposite viewpoint when it comes to the minimum wage law. They so clearly and correctly appreciate that the demand curve slopes in a downward direction when environmental issues are on the table, but forget all about the elemental fact that high prices reduce consumption when it comes to employing unskilled labor. Then, all of their splendid economic sense flies out the window. In psychology, this is sometimes characterized as “compartmentalization” or an “ideé fixe.”

To wit, we know for sure that liberals do not relish an increase in unemployment for vulnerable low skilled workers who are disproportionately black and brown. Yet, there is not a single solitary Democratic politician who does not favor an almost doubling of the national minimum wage law from its present $7.25 to $15 per hour. Bernie is most vociferous about this, but several others such as Bloomberg and Buttigieg, who have business backgrounds and really ought to know better, are also supporters.

But the demand curve for labor, too, is downward sloping. The higher it is pegged, the fewer the number of workers who will be hired. A simple mental experiment ought to clarify this matter. Suppose the level were raised not to $15 per hour, but to an hourly $150 or $1,500. Does anyone really think, in their heart of hearts, that this would actually help any employee? Why oh why do not Bernie and all these others not favor such a stratospheric raise?  After all, according to their “logic”, the higher the wage is pegged, the better off will be the economic welfare of the poor and unskilled. Common sense alone indicates this would be a total and utter disaster. Firms paying anything like the latter wage would soon go broke and not be able to hire anyone. If this is not a reduction ad absurdum, then nothing is.

Those with a superficial knowledge of economics will object at the point on the ground of monopsony. This is why, they will aver, a minimum wage level of $15 per hour would be reasonable, but not one of $150 or $1,500. But monopsony implies that there are only one or at most a very few firms that can hire workers.

Hershey, Pennsylvania is the poster boy for the monopsonistic argument. In this town, virtually everyone works for that one firm. But if this chocolate company reduces wages below productivity levels, apart from the coronavirus which has played havoc with labor mobility, employees can move to another town. As well, other firms can move in to take advantage of low-paid workers, by bidding them away from the Hershey company.

Yet, in the U.S. there are an estimated 5.6 million business firms, all bidding for labor. The monopsony objection is dead from the neck up.

 

It’s not even a revelation anymore to say that “travel blogger” is a job. Amazing is that even the bloggers with limited followings are said to rate free travel, accommodations, and tours once on the road.

Such is life in modern times. With enormous strides in productivity having freed tens of millions from work related to producing life’s necessities (think food, clothing, basic shelter), more and more people can do work that increasingly doesn’t sound like work. For all too many, travel is pleasure. So is the chronicling of the travel experience a joy for millions as evidenced by the nature of Facebook and Instragram posts.