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David Robertson: “Bonfire Of Money” & The Distortion Of Capital

The "Bonfire Of Money" and the distortion of capital and markets.
Coming to the end of a great year, investors ponder how much longer the stock market can rally. Abundant liquidity and low-interest rates have almost forced investors into risk assets….

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3 years ago

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The “Bonfire Of Money” and the distortion of capital and markets.

Coming to the end of a great year, investors ponder how much longer the stock market can rally. Abundant liquidity and low-interest rates have almost forced investors into risk assets. The big question is, “How much longer can this go on?”

Part of the answer may lie in a shift that occurred in capital markets during the year. For many years, the market’s characterization for equity capital was massive share repurchases, mostly funded with debt. However, the tide turned this year as companies cranked up the issuance of new shares and dialed down repurchases. This change in net equity issuance has important implications for investors.

Capital Raising Records

An exciting and essential part of the story of returns in capital markets for the year was the rapid reversal of sentiment in March. After the Fed and Government launched a massive monetary and fiscal policy response to stanch the crisis, investors immediately flipped from “fear” to “greed.”

Shortly after that happened, another interesting phenomenon occurred. Companies began issuing new capital at a record-breaking pace. The Economist reports on the veritable feeding frenzy that ensued:

“According to Refinitiv, a data provider, this year the world’s non-financial firms have raised an eye-popping $3.6trn in capital from public investors (see chart 1). Issuance of both investment-grade and riskier junk bonds set records, of $2.4trn and $426bn, respectively. So did the $538bn in secondary stock sales by listed stalwarts, which leapt by 70% from last year, reversing a recent trend to buy back shares rather than issue new ones.“

A new wrinkle in the wave of capital raising was the increasing prominence of equity. Not only did secondary sales shoot up, but the IPO market also sprung wide open:

“Initial public offerings (ipos), too, are flirting with all-time highs, as startups hope to cash in on rich valuations lest stockmarkets lose their frothiness, and venture capitalists (vcs) patience with loss-making business models.”

Part of the zeal to raise debt was low rates and partly due to the Fed’s backstop of corporate credit. These factors provide ample rationale for the increase in debt issuance.

The Cost Of Equity Capital

The case for raising equity is a bit different, though. For one, there is no backstop for stocks, at least not at this time. There is no actual, explicit number that investors can refer to as a cost of equity capital like there is an interest rate for the cost of debt.

Of course, there are various analytical formulas for determining the cost of equity capital, but most are backward-looking and therefore provide only general approximations.

Because the cost of equity capital has more significant ambiguity, any additional insight into this vital metric can be useful. To this point, company actions reveal helpful information content. When a company issues new stock, its management team judges that the cost of equity capital is attractive.

Two Sides Of A Coin

The cost of capital for a company is the same as an investor’s expected return. If a company has a low cost of capital, it also has low expected returns.

Valuations are another way of looking at the same thing. A high valuation implies a low expected return, which means a low cost of capital. Some recent estimates of expected returns confirm that the equity cost of capital is currently attractive.

For example, GMO’s latest forecast presents expected annual returns of -5.8% for large-cap US stocks and -7.1% for small caps. Similarly, John Hussman’s latest forecast calls for expected returns of -3.6% for the S&P 500.

The negative expected returns imply that the cost of equity capital is currently better than attractive for companies. It means investors are paying companies for the privilege of giving them capital. As such, it is no surprise that companies are taking them up on the offer by increasing the supply of equity capital.

Reality Checks

If this conclusion seems stretched, the supply and demand of economics is a corroborative reality check. All else equal, if you increase the supply relative to demand, the price goes down. As such, when the supply of capital goes up, its price comes down.

It is possible to argue that all else is not equal. After all, growth opportunities are emerging from the disruption of the pandemic that arguably is best served by equity capital. While this is true in some instances, it is much less compelling in aggregate. The bigger picture shows the economy is still operating at a lower level than when the pandemic struck.

Another piece of evidence for the excessive supply of equity capital is the IPO market. While there is always some sense of opportunism with IPOs because they create liquid currency for founders, a new and different type of opportunism seems to be emerging this time around.

Byrne Hobart describes in his newsletter “The Diff,” how Roblox and Affirm have delayed their IPOs because they “are both worried that the market is too good.” Hobart hypothesizes that the strategy is something like, “wait a while, figure out what else they can spend on, and then sell significantly more stock at a higher valuation than planned.” In other words, they’ll have to do some serious thinking about how to spend all of the money they can raise in such a benign environment. Such is not an indicator that capital is scarce.

Card Sharks Or Suckers?

The emergence of significant equity capital issuance facilitates an interesting perspective on the market. One line of thinking advocates investors should have more aggressive participation. It applies the poker analogy of “playing the player” and recognizes the Fed (and other central banks) will not let the markets fall for any length of time. As a result, investors should buy dips and apply leverage liberally. After all, how else can you earn returns?

Another line of thinking, however, recognizes this view as incomplete. Yes, the Fed (and other central banks) are players in the game, but corporate CFOs have also joined the game. Further, those CFOs also happen to know their businesses better than anyone else and are privy to material nonpublic information.

This development radically changes the competitive dynamics. Before, aggressive investors were competing against less aggressive investors for return/risk opportunities. Such investors could fancy themselves cleaning up at the poker table at the expense of overly timid investors.

Now, aggressive investors are also competing against well-informed corporate CFOs. As these new players have entered the game, aggressive investors look more like unsuspecting suckers at the poker table.

Pandemic Policy Parallel

The continued runup in stocks amid substantial increases in new stock issuance has an interesting parallel to one of the pandemics related policy measures. Specifically, PPP loans were designed to assist small businesses in the US, and “bounce back” loans served a similar purpose in the UK. In both cases, there were significant flaws. The FT highlights problems in the UK:

“Launched by chancellor Rishi Sunak in May, it [the bounce back loan program] was designed to provide cash quickly for struggling businesses, but its loose rules were immediately exposed with some estimates suggesting as much as £26bn [of £43.5bn total] will be lost to defaults and fraud.”

The widespread evidence of fraud and misappropriation of funds compelled the FT to headline the story as “A giant bonfire of taxpayers’ money.” The situation is essentially the same in equity markets. With money being thrown around with little scrutiny or oversight, it is fair to expect a similar result – there will be significant losses.

The Economist arrives at a similar conclusion, albeit in more modest terms:

“In a world of near-zero interest rates, it appears, investors will bankroll just about anyone with a shot at outliving covid-19. Some of that money will go up in smoke, with or without the corona-crisis.“

Conclusion

To a significant extent, you can forgive investors for wondering how much longer the rally in stocks can continue. With low rates and ample liquidity, there are little holding stock prices back. There is just no way to know when the rally will end.

What is much less forgivable is overlooking how capital markets have changed through the course of the year. Namely, the increasing issuance of stock sends an important signal to investors. Such suggests an upper limit to where stocks can go because companies will continue to issue new stock at desirable rates until those rates become less attractive. Increasingly, the benefits of the current environment will accrue to corporations at the expense of outside investors. Keeping this in mind will go a long way in preventing your giant bonfire of money.

The post David Robertson: “Bonfire Of Money” & The Distortion Of Capital appeared first on RIA.

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International

United Airlines adds new flights to faraway destinations

The airline said that it has been working hard to "find hidden gem destinations."

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2 hours ago

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March 8, 2024

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Since countries started opening up after the pandemic in 2021 and 2022, airlines have been seeing demand soar not just for major global cities and popular routes but also for farther-away destinations.

Numerous reports, including a recent TripAdvisor survey of trending destinations, showed that there has been a rise in U.S. traveler interest in Asian countries such as Japan, South Korea and Vietnam as well as growing tourism traction in off-the-beaten-path European countries such as Slovenia, Estonia and Montenegro.

Related: 'No more flying for you': Travel agency sounds alarm over risk of 'carbon passports'

As a result, airlines have been looking at their networks to include more faraway destinations as well as smaller cities that are growing increasingly popular with tourists and may not be served by their competitors.

The Philippines has been popular among tourists in recent years.

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United brings back more routes, says it is committed to 'finding hidden gems'

This week, United Airlines  (UAL)  announced that it will be launching a new route from Newark Liberty International Airport (EWR) to Morocco's Marrakesh. While it is only the country's fourth-largest city, Marrakesh is a particularly popular place for tourists to seek out the sights and experiences that many associate with the country — colorful souks, gardens with ornate architecture and mosques from the Moorish period.

More Travel:

"We have consistently been ahead of the curve in finding hidden gem destinations for our customers to explore and remain committed to providing the most unique slate of travel options for their adventures abroad," United's SVP of Global Network Planning Patrick Quayle, said in a press statement.

The new route will launch on Oct. 24 and take place three times a week on a Boeing 767-300ER  (BA)  plane that is equipped with 46 Polaris business class and 22 Premium Plus seats. The plane choice was a way to reach a luxury customer customer looking to start their holiday in Marrakesh in the plane.

Along with the new Morocco route, United is also launching a flight between Houston (IAH) and Colombia's Medellín on Oct. 27 as well as a route between Tokyo and Cebu in the Philippines on July 31 — the latter is known as a "fifth freedom" flight in which the airline flies to the larger hub from the mainland U.S. and then goes on to smaller Asian city popular with tourists after some travelers get off (and others get on) in Tokyo.

United's network expansion includes new 'fifth freedom' flight

In the fall of 2023, United became the first U.S. airline to fly to the Philippines with a new Manila-San Francisco flight. It has expanded its service to Asia from different U.S. cities earlier last year. Cebu has been on its radar amid growing tourist interest in the region known for marine parks, rainforests and Spanish-style architecture.

With the summer coming up, United also announced that it plans to run its current flights to Hong Kong, Seoul, and Portugal's Porto more frequently at different points of the week and reach four weekly flights between Los Angeles and Shanghai by August 29.

"This is your normal, exciting network planning team back in action," Quayle told travel website The Points Guy of the airline's plans for the new routes.

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International

Walmart launches clever answer to Target’s new membership program

The retail superstore is adding a new feature to its Walmart+ plan — and customers will be happy.

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2 hours ago

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March 8, 2024

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It's just been a few days since Target  (TGT)  launched its new Target Circle 360 paid membership plan. 

The plan offers free and fast shipping on many products to customers, initially for $49 a year and then $99 after the initial promotional signup period. It promises to be a success, since many Target customers are loyal to the brand and will go out of their way to shop at one instead of at its two larger peers, Walmart and Amazon.

Related: Walmart makes a major price cut that will delight customers

And stop us if this sounds familiar: Target will rely on its more than 2,000 stores to act as fulfillment hubs. 

This model is a proven winner; Walmart also uses its more than 4,600 stores as fulfillment and shipping locations to get orders to customers as soon as possible.

Sometimes, this means shipping goods from the nearest warehouse. But if a desired product is in-store and closer to a customer, it reduces miles on the road and delivery time. It's a kind of logistical magic that makes any efficiency lover's (or retail nerd's) heart go pitter patter. 

Walmart rolls out answer to Target's new membership tier

Walmart has certainly had more time than Target to develop and work out the kinks in Walmart+. It first launched the paid membership in 2020 during the height of the pandemic, when many shoppers sheltered at home but still required many staples they might ordinarily pick up at a Walmart, like cleaning supplies, personal-care products, pantry goods and, of course, toilet paper. 

It also undercut Amazon  (AMZN)  Prime, which costs customers $139 a year for free and fast shipping (plus several other benefits including access to its streaming service, Amazon Prime Video). 

Walmart+ costs $98 a year, which also gets you free and speedy delivery, plus access to a Paramount+ streaming subscription, fuel savings, and more. 

An employee at a Merida, Mexico, Walmart. (Photo by Jeffrey Greenberg/Universal Images Group via Getty Images)

Jeff Greenberg/Getty Images

If that's not enough to tempt you, however, Walmart+ just added a new benefit to its membership program, ostensibly to compete directly with something Target now has: ultrafast delivery. 

Target Circle 360 particularly attracts customers with free same-day delivery for select orders over $35 and as little as one-hour delivery on select items. Target executes this through its Shipt subsidiary.

We've seen this lightning-fast delivery speed only in snippets from Amazon, the king of delivery efficiency. Who better to take on Target, though, than Walmart, which is using a similar store-as-fulfillment-center model? 

"Walmart is stepping up to save our customers even more time with our latest delivery offering: Express On-Demand Early Morning Delivery," Walmart said in a statement, just a day after Target Circle 360 launched. "Starting at 6 a.m., earlier than ever before, customers can enjoy the convenience of On-Demand delivery."

Walmart  (WMT)  clearly sees consumers' desire for near-instant delivery, which obviously saves time and trips to the store. Rather than waiting a day for your order to show up, it might be on your doorstep when you wake up. 

Consumers also tend to spend more money when they shop online, and they remain stickier as paying annual members. So, to a growing number of retail giants, almost instant gratification like this seems like something worth striving for.

Related: Veteran fund manager picks favorite stocks for 2024

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President Biden Delivers The “Darkest, Most Un-American Speech Given By A President”

President Biden Delivers The "Darkest, Most Un-American Speech Given By A President"

Having successfully raged, ranted, lied, and yelled through…

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4 hours ago

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March 8, 2024

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President Biden Delivers The "Darkest, Most Un-American Speech Given By A President"

Having successfully raged, ranted, lied, and yelled through the State of The Union, President Biden can go back to his crypt now.

Whatever 'they' gave Biden, every American man, woman, and the other should be allowed to take it - though it seems the cocktail brings out 'dark Brandon'?

Tl;dw: Biden's Speech tonight ...

  • Fund Ukraine.

  • Trump is threat to democracy and America itself.

  • Abortion is good.

  • American Economy is stronger than ever.

  • Inflation wasn't Biden's fault.

  • Illegals are Americans too.

  • Republicans are responsible for the border crisis.

  • Trump is bad.

  • Biden stands with trans-children.

  • J6 was the worst insurrection since the Civil War.

(h/t @TCDMS99)

Tucker Carlson's response sums it all up perfectly:

"that was possibly the darkest, most un-American speech given by an American president. It wasn't a speech, it was a rant..."

Carlson continued: "The true measure of a nation's greatness lies within its capacity to control borders, yet Bid refuses to do it."

"In a fair election, Joe Biden cannot win"

And concluded:

“There was not a meaningful word for the entire duration about the things that actually matter to people who live here.”

Victor Davis Hanson added some excellent color, but this was probably the best line on Biden:

"he doesn't care... he lives in an alternative reality."

*  *  *

Watch SOTU Live here...

*   *   *

Mises' Connor O'Keeffe, warns: "Be on the Lookout for These Lies in Biden's State of the Union Address." 

On Thursday evening, President Joe Biden is set to give his third State of the Union address. The political press has been buzzing with speculation over what the president will say. That speculation, however, is focused more on how Biden will perform, and which issues he will prioritize. Much of the speech is expected to be familiar.

The story Biden will tell about what he has done as president and where the country finds itself as a result will be the same dishonest story he's been telling since at least the summer.

He'll cite government statistics to say the economy is growing, unemployment is low, and inflation is down.

Something that has been frustrating Biden, his team, and his allies in the media is that the American people do not feel as economically well off as the official data says they are. Despite what the White House and establishment-friendly journalists say, the problem lies with the data, not the American people's ability to perceive their own well-being.

As I wrote back in January, the reason for the discrepancy is the lack of distinction made between private economic activity and government spending in the most frequently cited economic indicators. There is an important difference between the two:

  • Government, unlike any other entity in the economy, can simply take money and resources from others to spend on things and hire people. Whether or not the spending brings people value is irrelevant

  • It's the private sector that's responsible for producing goods and services that actually meet people's needs and wants. So, the private components of the economy have the most significant effect on people's economic well-being.

Recently, government spending and hiring has accounted for a larger than normal share of both economic activity and employment. This means the government is propping up these traditional measures, making the economy appear better than it actually is. Also, many of the jobs Biden and his allies take credit for creating will quickly go away once it becomes clear that consumers don't actually want whatever the government encouraged these companies to produce.

On top of all that, the administration is dealing with the consequences of their chosen inflation rhetoric.

Since its peak in the summer of 2022, the president's team has talked about inflation "coming back down," which can easily give the impression that it's prices that will eventually come back down.

But that's not what that phrase means. It would be more honest to say that price increases are slowing down.

Americans are finally waking up to the fact that the cost of living will not return to prepandemic levels, and they're not happy about it.

The president has made some clumsy attempts at damage control, such as a Super Bowl Sunday video attacking food companies for "shrinkflation"—selling smaller portions at the same price instead of simply raising prices.

In his speech Thursday, Biden is expected to play up his desire to crack down on the "corporate greed" he's blaming for high prices.

In the name of "bringing down costs for Americans," the administration wants to implement targeted price ceilings - something anyone who has taken even a single economics class could tell you does more harm than good. Biden would never place the blame for the dramatic price increases we've experienced during his term where it actually belongs—on all the government spending that he and President Donald Trump oversaw during the pandemic, funded by the creation of $6 trillion out of thin air - because that kind of spending is precisely what he hopes to kick back up in a second term.

If reelected, the president wants to "revive" parts of his so-called Build Back Better agenda, which he tried and failed to pass in his first year. That would bring a significant expansion of domestic spending. And Biden remains committed to the idea that Americans must be forced to continue funding the war in Ukraine. That's another topic Biden is expected to highlight in the State of the Union, likely accompanied by the lie that Ukraine spending is good for the American economy. It isn't.

It's not possible to predict all the ways President Biden will exaggerate, mislead, and outright lie in his speech on Thursday. But we can be sure of two things. The "state of the Union" is not as strong as Biden will say it is. And his policy ambitions risk making it much worse.

*  *  *

The American people will be tuning in on their smartphones, laptops, and televisions on Thursday evening to see if 'sloppy joe' 81-year-old President Joe Biden can coherently put together more than two sentences (even with a teleprompter) as he gives his third State of the Union in front of a divided Congress. 

President Biden will speak on various topics to convince voters why he shouldn't be sent to a retirement home.

According to CNN sources, here are some of the topics Biden will discuss tonight:

  • Economic issues: Biden and his team have been drafting a speech heavy on economic populism, aides said, with calls for higher taxes on corporations and the wealthy – an attempt to draw a sharp contrast with Republicans and their likely presidential nominee, Donald Trump.

  • Health care expenses: Biden will also push for lowering health care costs and discuss his efforts to go after drug manufacturers to lower the cost of prescription medications — all issues his advisers believe can help buoy what have been sagging economic approval ratings.

  • Israel's war with Hamas: Also looming large over Biden's primetime address is the ongoing Israel-Hamas war, which has consumed much of the president's time and attention over the past few months. The president's top national security advisers have been working around the clock to try to finalize a ceasefire-hostages release deal by Ramadan, the Muslim holy month that begins next week.

  • An argument for reelection: Aides view Thursday's speech as a critical opportunity for the president to tout his accomplishments in office and lay out his plans for another four years in the nation's top job. Even though viewership has declined over the years, the yearly speech reliably draws tens of millions of households.

Sources provided more color on Biden's SOTU address: 

The speech is expected to be heavy on economic populism. The president will talk about raising taxes on corporations and the wealthy. He'll highlight efforts to cut costs for the American people, including pushing Congress to help make prescription drugs more affordable.

Biden will talk about the need to preserve democracy and freedom, a cornerstone of his re-election bid. That includes protecting and bolstering reproductive rights, an issue Democrats believe will energize voters in November. Biden is also expected to promote his unity agenda, a key feature of each of his addresses to Congress while in office.

Biden is also expected to give remarks on border security while the invasion of illegals has become one of the most heated topics among American voters. A majority of voters are frustrated with radical progressives in the White House facilitating the illegal migrant invasion. 

It is probable that the president will attribute the failure of the Senate border bill to the Republicans, a claim many voters view as unfounded. This is because the White House has the option to issue an executive order to restore border security, yet opts not to do so

Maybe this is why? 

While Biden addresses the nation, the Biden administration will be armed with a social media team to pump propaganda to at least 100 million Americans. 

"The White House hosted about 70 creators, digital publishers, and influencers across three separate events" on Wednesday and Thursday, a White House official told CNN. 

Not a very capable social media team... 

The administration's move to ramp up social media operations comes as users on X are mostly free from government censorship with Elon Musk at the helm. This infuriates Democrats, who can no longer censor their political enemies on X. 

Meanwhile, Democratic lawmakers tell Axios that the president's SOTU performance will be critical as he tries to dispel voter concerns about his elderly age. The address reached as many as 27 million people in 2023. 

"We are all nervous," said one House Democrat, citing concerns about the president's "ability to speak without blowing things."

The SOTU address comes as Biden's polling data is in the dumps. 

BetOnline has created several money-making opportunities for gamblers tonight, such as betting on what word Biden mentions the most. 

As well as...

We will update you when Tucker Carlson's live feed of SOTU is published. 

Tyler Durden Fri, 03/08/2024 - 07:44

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