Treasuries as a political weapon
If you don’t have the right model of the economy and markets in your head, you can lose lots of money. Case in point is ‘The Widowmaker Trade’ in Japan where speculators misunderstood the limits of monetary freedom enjoyed by the Bank of Japan and the Japanese government. Not only did people lose their shirts on a bet against JGBs, they also got killed on the currency as disinflation and deflation caused the Yen to maintain value and even appreciate.
I mention this because of an annoying article in the FT today, headlined in the most egregious of scaremongering ways as “China dumps US Treasuries at fastest pace in two years“. The authors get right to the point in the first paragraph:
China sold the most Treasuries in more than two years in March, magnifying concerns that the country might weaponise its position as the US government’s largest foreign creditor in the trade dispute between the two countries.
This is complete bollocks, of course. As I wrote in 2010, “Beijing is not Washington’s banker“. And I feel like I’ve covered this 100 times. But people still adhere to the view that China has some sort of leverage in its Treasury holdings.
The most recent version of this post was a year ago: “China cannot use its Treasury holdings as leverage. Here’s why“. Read the whole piece. But here’s the crux:
if the Chinese really want to use Treasury bonds as a weapon, they will need to either float their currency or revalue it. And that is not at all what they want to do. Revaluation would reduce Chinese exports and slow economic growth. I don’t see this happening.
Please don’t fall for this China weaponization trap. You will lose money.
My view of deficits
On a different note, I think I’ve told you that I prefer augmented automatic stabilizers as a way to combat recessions more than overactive fiscal or monetary policy. I see Neil Irwin has a post up on this. And while I have yet to read it, I look forward to doing so today. Here’s the link.
My view here is simple. Fiscal waste needs to be avoided irrespective of the state of the economy. And ‘Cash for clunkers’ schemes are not the way to boost the economy durably. At the same time, there is no need for the Fed to go into overdrive by taking rates to zero and doing quantitative easing unless something in the credit markets says this is the right policy stance. Monetary policy should not be predicated on boosting the real economy but on maintaining financial stability.
So, when the economy turns down and deficits soar, the government should accommodate that outcome by simply doing nothing. That is a neutral policy stance. And to the degree fiscal policy has automatic stabilizers built in that adjust in aggregate amount with the state of the economy – on payroll taxes, unemployment insurance, public works – then we have policy on autopilot that is relatively free from political interference.
What we want to see is the public sector meet a private sector’s deleveraging with deficits that are targeted at projects and outlays that are pre-approved but adjust based on the state of the economy. More public works, higher and longer unemployment benefits, reduced payroll taxes for business and individuals. In good times, it should work in the opposite direction, building a buffer for weak times.
Lastly, remember that if the government deficit is below the growth in nominal GDP in percentage terms you can have an average deficit across the business cycle and still see government debt to GDP ratios decline. There is no need for a balanced budget amendment either in hard form or soft form.
WeWork to zero?
The last thing on my agenda is to flag WeWork’s poor economics, because this is a company I think will eventually go to zero.
In an interview with CNBC to discuss the company’s first-quarter financials, CFO Artie Minson urged investors to view losses as “investments.”
“We really want to emphasize the difference between losing money and investing money,” Minson said on Wednesday. “You can lose money or you can invest money. At the end of this quarter, we have these cash flow-generating assets.”
This is ridiculous. ANY company can make this claim – including Lyft and Uber – despite the fact that WeWork’s CFO tries to make a distinction:
When asked if he was trying to differentiate WeWork’s losses from the capital the ride-hailing companies spend on subsidies and discounts, Minson said, “that’s a fair differentiator.” Renting out work space is “a proven business model,” he said.
WeWork lost $1.9 billion last year. That’s more than Uber.
Caveat Emptor
Here’s how the NY Times describes the Uber IPO in an article today:
Last September, Uber’s top executives were pitched by some of Wall Street’s biggest banks, Morgan Stanley and Goldman Sachs.
The bankers’ presentations calculated Uber’s valuation almost identically, hovering around one particular number: $120 billion.
That was the figure the bankers said they could convince investors Uber was worth when it listed its shares on the stock market, according to three people with knowledge of the talks. Uber’s chief executive, Dara Khosrowshahi, and chief financial officer, Nelson Chai, listened and discussed the presentations, these people said. Then they hired Morgan Stanley as lead underwriter, along with Goldman Sachs and others, to take the company public — and to effectively make the $120 billion valuation a reality.
Nine months later, Uber is worth about half that figure. The ride-hailing firm went public last week at $45 a share and has since dropped to around $41, pegging Uber’s market capitalization at $69 billion — and officially crowning it as the stock market debut that lost more in dollar terms than any other American initial public offering since 1975.
Here’s the important bit. I will bold part of it too. So watch for that.
The slowing growth led to lukewarm investor demand for Uber’s shares, according to two of the people involved in the matter. Some investors argued that Uber needed to price its offering lower, these people said.
Some investors were also resisting because they had earlier invested in Uber at cheaper prices. Since its founding in 2009, Uber has taken in more than $10 billion from mutual fund firms, private equity investors and others, meaning that its stock was already widely held among those institutions that traditionally buy shares in an I.P.O. So the I.P.O. essentially became an exercise in getting existing investors to purchase more shares — a tough sell, especially at a higher price.
Uber’s IPO, in a nutshell, was a way for existing shareholders to ‘cash in’. They wanted to monetize their investment — and at the same time, raise more cash for the cash-bleeding company. But their were competing interests because the lofty valuation meant some private investors were destined to lose money — just as public market investors have done.
The same dynamics are at stake with WeWork. But, because of Uber and Lyft, people are onto this now. I don’t care what story the CFO of WeWork tells to differentiate the company. And so, the private investors may end up getting stuffed.