December 09, 2021
Welcome to the penultimate Axios Capital of 2021. After next week, I'll be gone for a while — I'm about to head off to Ireland for three months of book leave. Which is a special treat for you, because it means the great Neil Irwin will be filling in for me while, starting January 20.
- For next week's newsletter, please ask me all the questions you'd like me to answer. For this week, I'm zooming back a bit to take stock of where the markets find themselves at the end of an insanely tumultuous 22 months. Also in the 1,696 words (a 6.5-minute read): The debt ceiling, the antiquities trade, T+1 settlement, and much more.
1 big thing: The fever hasn't broken
A feeling of unreality still pervades financial markets. Investors who take fiduciary duties seriously still exist — but they're seemingly outnumbered by people who see investing as a fun get-rich-quick game.
Why it matters: The post-pandemic return to some kind of pre-pandemic "normal" has yet to arrive, and as a result there's a lot of worry about the disruption and volatility that could accompany such a transition. The markets, so far, have done an excellent job of climbing that wall of worry.
The big picture: The defining characteristic of the pandemic era has been feverishness. The initial weeks of uncertainty and isolation felt like a fever dream, with time dilating and reality warping. After that, the whole country entered a particularly febrile state, as the Black Lives Matter movement and the 2020 presidential election ratcheted up the nation's emotional temperature to unsustainable levels.
- Markets have not been immune. In some ways, they're the last bastion of delirium, in a country where vaccines and a boring president have allowed much of the country to feel some semblance of normality.
- Money has become something to play with for fun and profit. There are even now hundreds of play currencies, some of which are worth hundreds of billions of dollars, for people who find government-issued money too constrained.
- The decadence is increasingly offensive to anybody living paycheck to paycheck, or even just people brought up to respect the value of a dollar.
Be smart: The strength of the economic rebound from the March 2020 recession came as a surprise to almost everyone — and helped to create windfall gains in everything from NFTs to mega-cap stocks.
- Get-rich-quick fever has reached unprecedented levels over the past 18 months, encompassing everything from GameStop and Dogecoin to SPACs and even Spider-Man tickets. One company became a unicorn by persuading individual investors to buy securitized art.
Financial shenanigans are everywhere you look; Bloomberg's Matt Levine, for instance, has a masterful dissection of the $1 billion private investment in Donald Trump's barely-existent new social-media company — a classic greater-fool trade which doesn't need to be based on any underlying value at all.
What they're saying: Pollster Bruce Mehlman cites "extreme expectations" as the number one risk facing the U.S. in 2022 . "Lack of realism and perspective is itself a major risk," he tells Axios. "It undermines the rationality-based cooperation essential for the nation and its institutions to succeed as designed."
The bottom line: The occasional crypto crash doesn't mean the fever has broken. It just means the game is still exciting.
2. The era of the mega-caps
By the numbers: Apple, Alphabet, Microsoft, and Amazon have between them gained $5.5 trillion of value since their March 2020 lows. Apple alone has risen in value by an astonishing $1.85 trillion in just 433 trading sessions — an average increase of well over $4 billion per day.
- In just 118 days between May 6 and September 1 last year, Apple increased its valuation by $1 trillion.
- Before 2018, no company had ever even been worth $1 trillion. Now, Apple will be worth more than $3.3 trillion if it rises from its current level of $175 and hits Morgan Stanley analyst Katy Huberty's target of $200 per share.
3. The debt ceiling gets raised
Congress has found a shortcut to raise the debt limit, reports Axios' Alayna Treene.
Driving the news: The House voted 222-to-212 Tuesday night to create a one-time, fast-track process for the Senate to raise the debt ceiling with just 51 votes — the 50 Democratic Senators, plus Vice President Kamala Harris as the tie-breaker.
- It's a huge victory for congressional leaders, given most in the Capitol expected the process to be brutal and messy.
Details: On Tuesday, the House passed a package that would delay Medicare sequestration cuts. Tucked into the bill is a one-time provision allowing the Senate to raise the debt limit with only a simple majority vote.
- This measure needs 60 votes to pass in the Senate. Senate Minority Leader Mitch McConnell is confident at least 10 Republicans will vote for the expedited process.
- The measure requires that Democrats specify the dollar amount by which they want to raise the limit, and the expedited procedure would expire after Jan. 16, 2022.
Be smart: Democrats could make a good-faith effort to end debt-ceiling brinkmanship once and for all, were they simply to raise the debt ceiling by some astronomical amount — $1 quintillion, say. But that's not going to happen.
- Expectations are that the ceiling will end up rising by between $1.5 trillion and $2.5 trillion — not even enough to get to the end of the current Biden administration.
Our thought bubble, from Alayna: Many Democrats think the debt limit is stupid and should be eliminated altogether, but others, particularly at the moderate end of the spectrum, worry about being labeled as signing off on endless spending.
4. The shady world of illegal cash transactions
Unique, non-fungible objects are traded for huge amounts of liquid tender in an industry that's famous for opacity and the ability of rich bidders to evade regulation. That might sound like crypto — but it's much older than any blockchain.
Why it matters: The very rich have been buying assets like antiquities and real estate with de facto impunity for centuries. But now they find themselves on the back foot.
Driving the news: The Treasury Department plans to tell the real estate industry that it's going to have to start checking the identity of buyers paying in cash, just as it currently checks the identity of buyers who need a mortgage.
- By the numbers: $2.3 billion was laundered through U.S. real estate transactions between 2015 and 2020, per Treasury.
The intrigue: Even well-known buyers can engage in shady transactions. Hedge fund manager Michael Steinhardt, for instance, was this week forced to surrender 180 looted antiquities he had bought over the years for some $27 million.
- Those antiquities are now valued at $70 million, giving an indication of how hard it is to crack down on the trade in stolen material.
- The antiquities industry is bracing for new know-your-customer regulations, even though those might not have helped in this particular case.
Between the lines: While the art world generally embraces art collectors, most of the antiquities world is deeply suspicious of antiquities collectors. Nearly all important antiquities collections either deliberately or inadvertently include looted material.
- According to the statement of facts in the Steinhardt case, 45 of the items had dirt on them at the time of purchase. (All objects from legally authorized excavations are thoroughly cleaned following their discovery.)
- Steinhardt purchased 171 of the 180 items from "individuals who law-enforcement authorities later determined to be antiquities traffickers— some of whom have been convicted of antiquities trafficking."
For the record: "Mr. Steinhardt is pleased that the District Attorney’s years-long investigation has concluded without any charges, and that items wrongfully taken by others will be returned to their native countries," said the billionaire's lawyers in a statement.
The bottom line: Real estate, art and antiquities are being dragged slowly into the sunlight. NFTs, not so much.
5. Wall Street speeds up, slowly
The machinery of U.S. markets is — eventually — going to move a lot more quickly, with settlement times getting slashed in half from two days to one day. But it's going to take a while to get there.
Why it matters: The current plan is for the new settlement cycle to go live in the first half of 2024.
The big picture: Currently, most capital-markets transactions, like buying stocks or even converting currency, settle on a T+2 basis. If the exchange is agreed on a Monday, then the seller receives the cash on the Wednesday.
- Driving the news: The most important industry bodies just agreed to reduce that settlement time to T+1 — meaning that if you enter into a contract to sell a stock on Monday, you'll receive the money on Tuesday.
Between the lines: Getting there from here won't be easy. After all, it took about five years, from 2012 to 2017, to move to T+2 from T+3.
- What's next: Eventually, the agencies anticipate a move from T+1 to T+0.5, with trades settling the same day, although there's no timetable for that.
- What's not next: Real-time settlement, as proposed by Robinhood, is unlikely to happen in the foreseeable future. It would require extremely expensive and unnecessary changes to almost all market infrastructure, including repo, prime brokerage, and funding requirements for retail investors.
Be smart: Real-time settlement would destroy most of the current benefits of securities netting, where Wall Street firms only transfer the small net amount owed at the end of the day, rather than the enormous gross amount owed.
Flashback: Robinhood was forced to restrict trade in meme stocks like GameStop in February, and put up $3 billion in cash, in large part because of the way the current T+2 system is structured. A move to T+1 would cut those collateral calls in half.
The bottom line: A glance at the 169-page "implementation playbook" for the move to T+2 in 2017 gives a hint of the complexities involved in this change. The move to T+1 is in many ways even gnarlier.
6. Coming up: The Fed meets
The Federal Open Market Committee is expected to announce that it will pick up the pace on tapering after its meeting next Tuesday and Wednesday, Axios’ Hope King reports.
Why it matters: With the unemployment rate now down to 4.2%, Fed officials have become focused on combating inflation, which, according to the consumer price index, shot up to 6.2% in October — the fastest yearly pace in more than three decades.
- November CPI, due out on Friday, is expected to show another uptick.
What to watch: The Fed's quantitative easing program is now likely to end in March, rather than June. The next step after that would be rate hikes.
7. Building of the week: 19M, Paris
19M is the new home, designed by French architect Rudy Ricciotti, for 11 of Chanel's most storied specialists — embroiderers, pleaters, goldsmiths, milliners, and the like, most of whom also work for other fashion houses.
- A central garden is surrounded by three buildings totaling 270,000 square feet. In turn, the buildings are surrounded by 75-foot tall concrete supports.
- Workers can walk between the supports and the exterior windows, along walkways that act as shortcuts between the ateliers.